Item 1: Business
Our Company
808 Renewable Energy Corporation (the "Company", "we", "our") was formed as a Nevada corporation in May 2009 for the purpose of acquiring, developing, owning and managing renewable and efficient energy projects throughout the United States. Before forming 808 Renewable Energy Corporation, we operated 808 Energy 3, LLC, a Nevada limited liability company formed in January 2009 for the purpose of acquiring, re-commissioning and operating distributed generation ("DG") energy facilities, also known as combined heat and power ("CHP") plants. On August 20, 2010, 808 Renewable acquired all of the then-outstanding units of membership interest of 808 Energy 3, LLC not then already owned by 808 Renewable, thereby making 808 Energy 3, LLC a wholly-owned subsidiary of 808 Renewable. We also acquired 808 Energy 2, LLC, a Nevada limited liability company formed in August 2008 to acquire the CHP plant located at Pacific Clay Products, Inc. in Lake Elsinore, California. Effective as of June 30, 2011, 808 Renewable acquired all of the then-outstanding units of membership interest of 808 Energy 2, LLC not then already owned by 808 Renewable, thereby making 808 Energy 2, LLC a wholly-owned subsidiary of 808 Renewable.
Being wholly-owned subsidiaries of 808 Renewable immediately before such event, both 808 Energy 3, LLC and 808 Energy 2, LLC were dissolved as of April 23, 2012, at which time all property, rights, privileges, powers and franchises of 808 Energy 3, LLC and 808 Energy 2, LLC vested in 808 Renewable, and all debts, liabilities and duties of 808 Energy 3, LLC and 808 Energy 2, LLC became the debts, liabilities and duties of 808 Renewable.
Our principal executive offices are located at 13888 Harbor Boulevard, Suite 8A, Garden Grove, California 92843. Our telephone number is (714) 891-8282, and our website address is www.808RenewableEnergy.com.
808 Renewable Energy, or the Company, distributes, owns and operates clean, on-site energy systems that produce electricity, hot water, heat and cooling. Our business model includes ownership of the equipment that we install at customers' facilities and the sale of the energy produced by these systems to the customers on a long-term contractual basis. We also provide engineering and other professional services to clients who own their own on-site energy systems, but require assistance in their operation and maintenance.
We offer natural gas powered cogeneration systems that are highly reliable and energy efficient. Our cogeneration systems produce electricity from an internal combustion engine driving a generator, while the heat from the engine and exhaust is recovered and typically used to produce heat and hot water for use at the site. We also distribute and operate water chiller systems for building cooling applications that operate in a similar manner, except that the engine's power drives a large air-conditioning compressor while recovering heat for hot water. Cogeneration systems reduce the amount of electricity that the customer must purchase from the local utility and produce valuable heat and hot water for the site to use as required. By simultaneously providing electricity, hot water and heat, cogeneration systems also have a significant, positive impact on the environment by reducing the carbon or CO 2 produced by offsetting the traditional energy supplied by the electric grid and conventional hot water boilers.
Our customers pay us for energy produced on site at a rate that is a certain percentage below the rate at which the utility companies provide them electrical and natural gas services. We measure the actual amount of electrical and thermal energy produced and charge our customers accordingly. We agree to install, operate, maintain and repair our energy systems at our sole cost and expense. We also agree to obtain any necessary permits or regulatory approvals at our sole expense. Our agreements are generally for a term of up to 15 years, with renewable provisions upon the mutual agreement of the parties
For the customers that want to own their CHP system, we offer our "turn-key" option whereby we provide equipment, systems engineering, installation, interconnect approvals, on-site labor and startup services needed to bring the complete CHP system on-line. For some customers, we are also paid a fee to operate the systems and charge for those systems on a negotiated basis.
During 2014, the Company had seven revenue producing operational energy systems, one of which was operational for the month of January 2014, but due to a change of ownership at that location, ceased to be revenue producing at January 31, 2014.
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Item 1A:
Item 1A: Risk Factors.
Our business faces many risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results. If any of the events or circumstances described in the following risks occurs, our business, financial condition or results of operations could suffer and the trading price of our common stock could decline. Investors and prospective investors should consider the following risks and the information contained under the heading ''Warning Concerning Forward-Looking Statements'' before deciding whether to invest in our securities.
We are at an emerging operational stage, and our success is subject to the substantial risks inherent in the operation of an emerging business venture.
The execution of our business strategy is in an emerging stage. We have invested in, acquired and developed a limited number of CHP plants and have operated such CHP plants for a limited time. Our business and operations should be considered to be in an emerging stage and subject to all of the risks inherent in the operation of an emerging business venture. Our intended business and operations may not prove to be successful in the future, if at all. Any future success that we might enjoy will depend on many factors, several of which may be beyond our control, or which cannot be predicted at this time, and which could have a material adverse effect on our financial condition, business prospects and operations and the value of an investment in our company.
The sale of cogeneration and cooling equipment has been successfully carried out for more than a decade. Our On-Site Utility concept (i.e., the sale of on-site energy services, rather than equipment) is still in an early stage of implementation. Unresolved issues include the pricing of energy services and the structuring of contracts to provide cost savings to customers and optimum financial returns to us. There is no assurance that we will be successful in developing a profitable On-Site Utility business model, and failure to do so would have a material adverse effect on our business and financial performance. The economic viability of our projects depends on the price spread between fuel and electricity, and the variability of the prices of these components creates a risk that our projects will be uneconomic. Volatility in one component of the spread, the cost of natural gas could affect our ability to be profitable.
Each additional customer site for our services requires the initial installation and subsequent maintenance and service of equipment to be provided by a team of technicians skilled in a broad range of technologies, including combustion, instrumentation, heat transfer, information processing, microprocessor controls, fluid systems and other elements of DG. If we are unable to recruit, train, motivate, sub-contract, and retain such personnel in each of the regional markets where our business operates we will be unable to grow our business in those markets.
We have incurred losses, and these losses may continue. Our success depends on the viability of our business model, which is unproven and may be unfeasible.
Our revenue and income potential are unproven, and our business model is still emerging. 808 Renewable was formed in May 2009. Our business model is based on a variety of assumptions relating to the costs to re-commission the plants, our operating costs and prospective revenue sources, which may not reflect the business and market conditions that we actually face. As a result, our operating results could differ materially from those projected under our business model, and our business model may prove to be unprofitable.
We have incurred losses in each year, since 2009, totaling $15,034,301 through December 31, 2013 and $19,583,832 through December 31, 2014. There is no assurance that profitability will be achieved in the near term, if at all.
We may have to increase our operating expenses substantially as we pursue our current business strategy. Because we will incur these increased operating expenses before we receive any significant revenue from our efforts, our losses will be greater than the losses we would incur if we developed our business more slowly. In addition, we may find that our efforts are more expensive than we currently anticipate which would further increase our losses. Also, if our revenue growth is slower than we anticipate or our operating expenses exceed our expectations, then our losses will increase significantly. We are unable to provide any assurance or guarantee that our company will become profitable or generate positive cash flow at any time in the future. Even if we were to achieve profitability, we may be unable to sustain or increase profitability on a quarterly or annual basis.
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Our success depends on our ability to maintain and expand our operational and maintenance capabilities.
Our success largely depends on our ability to maintain and expand our ability to re-commission plants and then operate and maintain the projects we acquire or develop. Our in-house capabilities are limited by our small number of employees and limited experience. If we are unable to hire and train qualified employees to successfully re-commission and operate our facilities, we may not be able to efficiently operate the projects. Failure to operate efficiently may result in losses and ultimately the failure of the business and the loss of our stockholders' entire investment in our company.
Future technology changes may render obsolete various elements of equipment comprising our On-Site Utility installations.
We must select equipment for our projects so as to achieve attractive operating efficiencies, while avoiding excessive downtimes from the failure of unproven technologies. If we are unable to achieve a proper balance between the cost, efficiency and reliability of equipment selected for our projects, our growth and profitability will be adversely impacted.
We are subject to increased costs of production due to rising natural gas prices.
Our operating revenue and profits depend in significant part on our ability to generate energy at prices below those available from larger public utility companies. A significant cost component of CHP energy is the cost of natural gas, which has experienced substantial price fluctuations during recent years. Natural gas prices are affected by a number of factors, most of which are beyond the control of our company. Fluctuations in natural gas prices may be caused by prolonged or severe weather, constraints in pipeline or delivery systems, diminished reserves and other unforeseen interruptions in supply or increases in demand. Additionally, natural gas prices may correlate to oil prices, and changes in the price of oil may result in corresponding increases or decreases in natural gas prices. If we are unable to purchase natural gas at reasonable prices and control the cost of such prices, our gross margins from the sale of energy will be reduced, and we may sustain losses. Controlling natural gas prices will be an operational expense and will reduce net income and profits.
Decreases in electricity prices will reduce our revenue and could result in losses.
Our revenue is generated primarily from the sale of electricity. Our power purchase agreements generally price electricity at a fixed discount to the price the customer would otherwise pay to its local utility. If the utility company lowers its price of electricity, the price we charge our customers automatically decreases, and our revenue will decrease accordingly. Because our contracts do not contain a fixed or minimum price for electricity, substantial reductions in electricity prices by the utilities serving our customers could result in losses as the price declines below our cost of production.
Systems failures and delays could harm our financial performance and expose us to liability.
Our systems and operations are vulnerable to damage or interruption from mechanical failure, human error, natural disasters, power loss, intentional acts of vandalism and similar events. Mechanical or other failures could result in substantial periods of time during which no power is being produced, and no revenue is generated from energy sales. However, during such periods of time we would continue to incur the costs relating to the CHP plant, including (in many cases) rent and maintenance costs.
Our business is geographically concentrated in one area.
To date we have acquired CHP plants located only in California. To the extent that we may acquire additional CHP plants, we currently intend to acquire them only if they are located in California. As a result, our business will not be geographically diversified, and our business may be adversely impacted by economic and demographic factors in the immediately surrounding area, regardless of the economic condition in the nation as a whole.
We are exposed to risks associated with the recent worldwide economic slowdown and related uncertainties.
We plan to expand our level of operations. Slower economic activity, concerns about inflation or deflation, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the general economy and recent international conflicts and terrorist and military activity have resulted in a downturn in worldwide economic conditions, especially in the United States. Recent political and social turmoil related to international conflicts and terrorist acts can be expected to place further pressure on economic conditions in the United States and worldwide. These political, social and economic conditions make it extremely difficult for us to accurately forecast and plan future business activities. If such conditions continue or worsen, our business, financial condition and results of operations could be materially and adversely affected.
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If our energy generation products, services, capabilities and systems do not gain market acceptance, we may be prevented from achieving increased revenues and market share, and our business may fail.
The development of a successful market for our environmentally-friendly energy generation products, services, capabilities and systems may be adversely affected by a number of factors, many of which are beyond our control, including:
● our failure to create or acquire energy generation products, services, capabilities and systems that compete favorably against other energy generation products, services, capabilities and systems on the basis of cost, quality and performance;
● our failure to generate environmentally-friendly energy that competes favorably against conventional energy sources on the basis of cost, quality and performance;
● whether or not customers will accept our environmentally-friendly alternatives for energy; and
● our failure to develop and maintain successful relationships with distributors, system integrators, facility and project developers, resellers (if any) and strategic partners.
If we are unable to integrate effectively and efficiently any energy generation facility or project (or any business or operation) that we may acquire in the future, our business may ultimately fail.
Our business strategy includes acquiring energy generation facilities and projects (and possibly energy generation businesses and operations) that provide energy from environmentally-friendly sources. Our capitalization and results of operations may change significantly as a result of future acquisitions, and you will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in connection with any future acquisition. Unexpected costs or challenges may arise whenever energy generation facilities or projects (or businesses or operations) with different management and technologies are combined. Inefficiencies and difficulties may arise because of unfamiliarity with new assets and new geographic areas of acquired facilities or projects (or businesses or operations). Successful acquisitions will require our management and other personnel to devote significant amounts of time to integrating the acquired facilities or projects (or businesses or operations) with our pre-existing operations. These efforts may temporarily distract their attention from day-to-day operations, the development or acquisition of new energy generation facilities or projects and other business opportunities. In addition, the management of any acquired business or operation may not join our management team. Any change in management may make it more difficult to integrate an acquired business or operation with our existing operations. Following an acquisition, we may discover previously unknown liabilities associated with the acquired facility or project (or business or operation) for which we may have no recourse under applicable indemnification provisions.
We also may acquire various products, services or technologies to carry out our business strategy. If we acquire products, services or technologies, we could have difficulty in assimilating them into our operations. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses.
The capital requirements necessary to implement our strategic initiatives could pose additional risks to our business.
The purchase price of possible acquisitions and/or the costs of other strategic initiatives could require additional debt or equity financing on our part. Since the terms and availability of such financing depend to a large degree on general economic conditions and third parties over which we have no control, we can give no assurance that we will obtain the needed financing or that we will obtain such financing on attractive terms. In addition, our ability to obtain financing depends on a number of other factors, many of which also are beyond our control, such as interest rates and national and local economic conditions. If the cost of obtaining needed financing is too high or the terms of such financing otherwise are unacceptable in relation to the strategic opportunity we are presented with, then we may decide to forego that opportunity. Additional indebtedness could increase our leverage and make us more vulnerable to economic downturns and may limit our ability to withstand competitive pressures. Additional equity financing could result in dilution to our stockholders.
Potential investments in or acquisitions of businesses or operations could require the use of a significant amount of our available cash, result in dilution to our stockholders and adversely affect our results of operations.
We may make investments in or acquire businesses and operations. Effecting such investments and acquisitions could require the use of a significant amount of our available cash. Furthermore, we may have to issue equity or equity-linked securities to pay for future acquisitions, and any such issuance could dilute the percentage ownership interest in our company of our existing and future stockholders. In addition, investments and acquisitions may have negative effects on our results of operations due to acquisition-related charges and the amortization of acquired technology and other intangibles. Any of such investment-related and acquisition-related risks or costs could harm our business, operating results and financial condition.
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Additional financings will be required to implement our overall business plan. We will need additional capital. Equity financings will dilute the percentage ownership of our existing stockholders. Our ability to raise an adequate amount of capital and the terms of any capital that we are able to raise will be dependent upon our progress in implementing demonstration projects and related marketing service development activities. If we do not make adequate progress, we may be unable to raise adequate funds, which will limit our ability to expand our business. If the terms of any equity financings are unfavorable, the dilutive impact on our stockholders might be severe.
Because environmental protection laws may expose us to significant costs and liabilities, our business may be significantly adversely affected by unexpected environmental and regulatory costs.
Our current and planned operations are and will be subject to federal, state and local laws and regulations relating to the protection of the environment. Although we believe that our operations will comply with applicable environmental regulations, risks of substantial costs and liabilities in connection with environmental matters are inherent in our business. We cannot assure you that we will not incur substantial costs and liabilities. Increasingly strict environmental laws, regulations and enforcement policies and claims for damages and other similar developments could result in substantial costs and liabilities. Stricter laws, regulations or enforcement policies could significantly increase our compliance costs and the costs of any remediation that may become necessary. We may not have sufficient insurance to cover all environmental risks and costs in the event that an environmental claim is made against us.
If existing regulations and policies and future changes to these regulations and policies present technical, regulatory or economic barriers to the use of alternative energy sources, which we are unable to overcome, our business may fail.
The market for energy generation is heavily influenced by foreign and United States federal, state and local government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies are being modified and may continue to be modified. Further investment in the research and development of alternative energy sources could be deterred by these regulations and policies, which could result in a significant reduction in the number of environmentally-friendly energy generation facilities or projects (or businesses or operations) available for investment or acquisition.
We anticipate that energy generation facilities and projects will be subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, and environmental protection, utility interconnection and metering and related matters. It is difficult to track the requirements of individual states and to comply with the varying standards. New government regulations or utility policies pertaining to our industry may result in significant additional expenses to us and our customers and resellers (if any) and their customers and, as a result, could cause a significant reduction in demand for our energy generation products, services, capabilities and systems.
If technological changes in the renewable or efficient energy industry render our energy generation products, services, capabilities and systems uncompetitive or obsolete, our market share may decline and cause our business to fail.
The renewable and efficient energy market is characterized by continually changing technology requiring improved features, such as higher quality, increased efficiency, higher energy output and lower price. Our failure to further refine our technology and develop and introduce new energy generation products, services, capabilities and systems could cause our energy generation products, services, capabilities and systems to become uncompetitive or obsolete, which could reduce our market share and cause our revenues to decline. The renewable and efficient energy industry is rapidly evolving and competitive. We may need to invest significant financial resources in research and development to keep pace with technological advances in the alternative energy industry and to effectively compete in the future. We believe that a variety of competing technologies are under development by other companies that could result in lower costs or higher performance than those expected for our energy generation products, services, capabilities and systems. Our development efforts may be rendered obsolete by the technological advances of others, and other technologies may prove more advantageous for the commercialization of alternative energy generation products, services, capabilities and systems.
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Because the effects of some events are unforeseeable, we may be adversely affected by the occurrence of extraordinary events, such as terrorist attacks.
The occurrence of extraordinary events, such as terrorist attacks, intentional or unintentional mass casualty incidents or similar events, may substantially decrease the use of and demand for energy generation products, services, capabilities and systems and energy generation facilities and projects, which may decrease our revenues or expose us to substantial liability. We do not have any insurance policy to cover the occurrence of any of such extraordinary events. The occurrence of future terrorist attacks, military actions by the United States, contagious disease outbreaks or similar events cannot be predicted, and their occurrence can be expected to further negatively affect the economy of the United States. Again, we do not have any insurance policy to cover the occurrence of any of such extraordinary events.
If our business is unsuccessful, our stockholders may lose their entire investment.
Although our stockholders will not be bound by or be personally liable for our expenses, liabilities or obligations beyond their total original investments in our common stock, if we suffer a deficiency in funds with which to satisfy our obligations, our stockholders as a whole may lose their entire investment in our company.
The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market or the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate and thus inhibit our ability to raise additional capital when it is needed.
We will need to raise additional capital for our business, which will dilute existing stockholders.
Additional financings will be required to implement our overall business plan. We will need additional capital. Equity financings will dilute the percentage ownership of our existing stockholders. Our ability to raise an adequate amount of capital and the terms of any capital that we are able to raise will be dependent upon our progress in implementing demonstration projects and related marketing service development activities. If we do not make adequate progress, we may be unable to raise adequate funds, which will limit our ability to expand our business. If the terms of any equity financings are unfavorable, the dilutive impact on our stockholders might be severe.
Our ability to continue to access capital could be impacted by various factors including general market conditions, interest rates, the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans to us and any deterioration in the financial position of lenders that might make them unable to meet their obligations to us.
We may be forced to curtail or discontinue operations if we are unable to obtain, on commercially acceptable terms, additional capital that we may require from time to time in the future to finance our operations and growth.
We will need additional capital to continue and expand our operations and to implement our business strategy. If our operations expand faster or at a higher rate than currently anticipated, we may require additional capital sooner than we expect. We also may need to raise additional funds sooner to fund more rapid expansion or the development or enhancement of our existing energy generation products, services, capabilities and systems. We are unable to provide any assurance or guarantee that additional capital will be available when needed by our company or that such capital will be available under terms acceptable to our company or on a timely basis. If additional funds are raised through the issuance of equity, convertible debt or similar securities of our company, the percentage of ownership of our company by our company's stockholders will be reduced, our company's stockholders may experience additional dilution, and such securities may have rights or preferences senior to those of our common stock. We are unable to provide any assurance that additional financing will be available on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of potential opportunities, develop or enhance energy generation products, services, capabilities and systems or otherwise respond to competitive pressures would be limited significantly. This limitation could, substantially, harm our business, results of operations and financial condition.
Our limited operating history creates substantial uncertainty about future results.
We have limited operating history and operations on which to base expectations regarding our future results and performance. In order to succeed, we must do most, if not all, of the following:
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· raise corporate equity or debt;
· identify prospective energy generation facilities and projects, negotiate investment or acquisition agreements and raise sufficient capital to consummate the transactions;
· re-commission non-operating plants, which may require third party engineering services;
· obtain all required licenses and permits in the states, counties and countries in which we will operate;
· attract, integrate, retain and motivate qualified management and personnel;
· successfully execute our business strategies
· respond appropriately and timely to competitive developments;
· develop, enhance, promote and carefully manage our identity.
Our business will suffer if we are unable to accomplish these and other important business objectives. We are uncertain as to when, or whether, we will fully implement our contemplated business strategy or become profitable.
Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern, and, if we are unable to continue our business, our shares may have little or no value.
In its audit opinion issued in connection with our balance sheets as of December 31, 2014 and 2013 and our statements of operations, stockholders' equity and cash flows for the years then ended, our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern given our recurring losses and negative operating cash flows. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The financial statements do not include adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should we be unable to continue in existence. Our ability to become a profitable operating company is dependent on obtaining financing adequate to fulfill our research and market introduction activities and achieving a level of revenues adequate to support our cost structure. We intend to obtain capital primarily through issuances of debt or equity or entering into collaborative arrangements with corporate partners. There can be no assurance that we will be successful in completing additional financing or collaboration transactions or, if financing is available, that it can be obtained on commercially reasonable terms. The doubts relating to our ability to continue as a going concern may make our shares an unattractive investment for potential investors. These factors, among others, may make it difficult to raise the necessary amount of capital.
The Company operates in highly competitive markets and may be unable to successfully compete against competitors having significantly greater resources and experience.
Our business may be limited by competition from energy services companies arising from the breakup of conventional regulated electric utilities. Such competitors, both in the equipment and energy services sectors, are likely to have far greater financial and other resources than us, and could possess specialized market knowledge with existing channels of access to prospective customer locations. We may be unable to successfully compete against those competitors.
Our business may be limited by competition from energy services companies arising from the breakup of conventional regulated electric utilities. Such competitors, both in the equipment and energy services sectors, are likely to have far greater financial and other resources than us, and could possess specialized market knowledge with existing channels of access to prospective customer locations. We may be unable to successfully compete against those competitors.
Item 1B:
Item 1B: Unresolved Staff Comments.
None
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Item 2:
Item 2: Properties.
Our leased office and warehouse facility, of 5,486 square feet, is located in Garden Grove CA. Rent is $8,000 per month, on a 15 year lease, from our Chairman, Patrick Carter. We believe that our facilities are appropriate and adequate for our current needs.
Item 3:
Item 3: Legal Proceedings.
We are not currently a party to any material litigation, and we are not aware of any pending or threatened litigation against us that could have a material adverse effect on our business, operating results or financial condition.
In January 2015, we were notified that the U.S. Securities and Exchange Commission (SEC) had commenced an investigation of our Company and certain of our officers and directors. We have received and responded to numerous subpoenas directed to us and to Patrick S. Carter, our CEO. We are informed that Thomas Grainger, a director, and several employees have also received subpoenas and are responding thereto. The SEC is investigating alleged violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC has also issued numerous subpoenas to banks and financial institutions at which we or our officers and directors maintain accounts. The investigation is, at this point, merely fact finding and no formal proceedings have been instituted against us or any related person.
Item 4:
Item 4: Mine Safety Disclosures.
Not applicable.
PART II
Item 5:
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a) The United States Security and Exchange Commission declared the Company's registration statement effective as of January 24, 2014. The Company listed its common stock on the OTCQX exchange and was available for trading on July 22, 2014.
The OTC Pink is the bottom tier of the OTC market. OTC Pink is a speculative trading marketplace that helps broker dealers get the best prices for investors. OTC Pink has no financial standards or reporting requirements, but companies in this tier choose the level of information they provide to investors and may have current, limited or no public disclosure.
The reported high and low bid and ask prices for our common stock are shown below for the period from July 22, 2014 through June 30, 2015.
Our common stock is subject to rules adopted by the Commission regulating broker dealer practices in connection with transactions in "penny stocks." Those disclosure rules applicable to "penny stocks" require a broker dealer, before a transaction in a "penny stock" not otherwise exempt from the rules, to deliver a standardized list disclosure document prepared by the Securities and Exchange Commission. That disclosure document advises an investor that investment in "penny stocks" can be very risky and that the investor's salesperson or broker is not an impartial advisor but rather paid to sell the shares. The disclosure contains further warnings for the investor to exercise caution in connection with an investment in "penny stocks," to independently investigate the security, as well as the salesperson with whom the investor is working and to understand the risky nature of an investment in this security. The broker dealer also must provide the customer with certain other information and must make a special written determination that the "penny stock" is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Further, the rules require that, following the proposed transaction, the broker provide the customer with monthly account statements containing market information about the prices of the securities.
These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common stock. Many brokers may be unwilling to engage in transactions in our common stock because of the added disclosure requirements, thereby making it more difficult for stockholders to dispose of their shares.
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As of July 2, 2015, there were 547 holders of our common stock, 0 holder of Series B Preferred Stock, 0 holders of our Series C Preferred Stock and 3 holders of our Series D preferred stock
Dividends
During 2013 and 2014 we have not paid any cash dividends on our common stock since inception nor have we paid any dividends on the Series A Preferred Stock or the Series D Preferred Stock. There are no plans to pay cash dividends on common shares. The Series D Preferred shares will be entitled to a dividend of $0.15 per share, to be paid quarterly.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth all common stock available for issuance under equity compensation plans approved by the shareholders. There are no plans that have not been approved by the shareholders and no other class of equity securities is subject to any plan.
Item 6:
Item 6: Selected Financial Data.
Not applicable.
Item 7:
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review "Item 1A. Risk Factors" of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We derive sales from selling energy in the form of electricity, heat, hot water and cooling to our customers under long-term energy sales agreements (with a typical term of 10 to 15 years). The energy systems are owned by us and are installed in our customers' buildings. Each month we obtain readings from our energy meters to determine the amount of energy produced for each customer. We multiply these readings by the appropriate published price of energy (electricity, natural gas or oil) from our customers' local energy utility, to derive the value of our monthly energy sale, less the applicable negotiated discount. Our revenues per customer on a monthly basis vary based on the amount of energy produced by our energy systems and the published price of energy (electricity, natural gas or oil) from our customers' local energy utility that month. Our revenues commence as new energy systems become operational. During 2014 and 2013, we had seven and eight, respectively, energy systems that were operational and revenue producing during the year. On December 31, 2014 two of the sites were rendered non-operational as a result of maintenance issues and one was non-operational at the owners' request. On December 31, 2013, two of the sites were non-operational due to maintenance issues.
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Revenues from operation and maintenance services are recorded when provided and verified.
We have experienced total net losses since inception of approximately $19,583,832 for the year ended December 31, 2014 and $15,034,301 for the year ended December 31, 2013. For the foreseeable future, we expect to experience continuing operating losses and negative cash flows from operations as our management executes our current business plan. The cash and cash equivalents available at December 31, 2014 will provide sufficient working capital to meet our anticipated expenditures including installations of new equipment for the ensuing twelve months; however, as we continue to grow our business by adding more energy systems, the cash requirements will increase. We believe that our cash and cash equivalents available at December 31, 2014 and our ability to control certain costs, including those related to general and administrative expenses, will enable us to meet our anticipated cash expenditures through September 30, 2015. Beyond September 30, 2015, we may need to raise additional capital through a debt financing or equity offering to meet our operating and capital needs. There can be no assurance, however, that we will be successful in our fundraising efforts or that additional funds will be available on acceptable terms, if at all.
If we are unable to raise additional capital in 2015 we may need to terminate and/or adjust our current business plan. Financial considerations may cause us to modify planned deployment of new energy systems and we may decide to suspend installations until we are able to secure additional working capital. We will evaluate possible acquisitions of, or investments in, businesses, technologies and products that are complementary to our business; however, we are not currently engaged in such discussions.
The Company's operations are comprised of several business segments. The selling of energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements; the sale of professional services to clients that own their own distributed generating and CHP plants.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Management believes the following critical accounting policies involve more significant judgments and estimates used in the preparation of our consolidated financial statements.
On August 8, 2013 the Company entered into a one year revolving line of credit agreement with Patrick Carter the Company's Chief Executive Officer. Under the terms of the agreement, Mr. Carter agreed to lend to the Company on a revolving line of credit basis a principal amount up to $1,000,000. All sums advanced pursuant to this agreement bear interest, at the rate of 10%, from the date of each advance until repaid in full. The contract is secured by corporate assets. All advances loaned during the 2014 and 2013 fiscal years were repaid previous to each December 31 year end.
Property and Equipment and Depreciation and Amortization
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method at rates sufficient to write off the cost of the applicable assets over their estimated useful lives. Repairs and maintenance are expensed as incurred.
Project assets consist of costs of materials, direct labor, outside contract services and project development costs incurred in connection with the construction of the small-scale renewable energy plants that the Company owns. Depreciation is, generally, recorded on a straight line basis beginning in the month that operations commence over the assets estimated useful lives ranging from 10 to 20 years. Routine maintenance costs, to the extent that they do not extend the life of the asset, are expensed in the year they are incurred.
The Company evaluates the recoverability of its long-lived assets if circumstances indicate impairment may have occurred. This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review, the Company recognized impairment expense of $1,684,334 and $0 for the years ended December 31, 2014 and 2013, respectively.
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Revenue Recognition
The Company derives revenue from energy efficiency and renewable energy products and services, which includes the design, engineering, and construction of energy systems that produce electricity, heat or cooling from renewable sources of energy. The Company enters into long-term energy sales agreements (with a typical term of 10 to 15 years) with customers, whereby these energy systems are owned by the Company and are installed in customers' buildings. As of December 31, 2014 and 2013 the Company had 4 and 6 operating energy systems, respectively.
Each month, the Company obtains readings from its energy meters to determine the amount of energy produced for each customer. The Company multiplies these readings by the appropriate published price of energy (electricity) from its customers' local energy utility, and the energy services agreement entered into with each customer, to derive the value of the monthly energy sales, less the applicable negotiated discount. The Company's revenues per customer, on a monthly basis, will vary based on the amount of energy produced by its energy systems and the published price of energy (electricity, natural gas or oil) obtained from its customers' local energy utility.
The Company recognizes revenue when it is realized or realizable and earned, and therefore only recognizes revenue on energy systems once those systems become operational. The Company recognizes revenue from the sale of equipment upon installation and recognizes revenue on professional services in accordance with the contract entered into with the customer.
The Company must meet all of the following four criteria in order to recognize revenue:
· Persuasive evidence of an arrangement exists
· Delivery has occurred
· The sales price is fixed or determinable
· Collection is reasonably assured
Payments received in advance of satisfaction of the relevant criteria for revenue recognition are recorded as advances from customers.
Impact of New Accounting Pronouncements
The Company does not expect the impact of recently issued accounting pronouncements to have a material impact on the Company's results of operations, financial position or cash flows.
Results of Operations
Fiscal Year Ended December 31, 2014 Compared with Fiscal Year Ended December 31, 2013
Revenues, from the delivery and sale of electricity and related products, including professional services, in the full year of 2014 were $415,333 compared to $1,060,423 for the same period in 2013, a decrease of $645,090 or 61%. In addition, during 2013 the Company earned $196,261 from the sale of a project asset. The decrease in revenues was primarily due to a decrease in the number of operational hours of installed CHP systems operating compared to the same period in 2013. Our CHP Energy Production Revenue in 2014 was $409,012 compared to $997,302 for the same period in 2013, a decrease of $588,290 or 59%. However our Energy Services revenue in 2014 was $6,321 compared to $63,121 for the same period in 2013. For the first time, during 2013, the Company performed billable services and recorded revenue from the maintenance of energy systems which it did not itself own. Our Energy Developer revenue in 2014 decreased to $6,321 compared to $63,121 for the same period in 2013. The revenue from our Energy Developer projects will vary substantially per period. Although the service has been available and has been offered throughout 2014, no new contracts were consummated.
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Throughout the full year of 2014, the Company operated energy systems, at seven locations, representing 4,519,030 kWh of total energy sold. On December 31, 2014, two of those systems were off line for maintenance and were not revenue producing at that time, and one of those locations changed ownership during 2014 and the system on that building was abandoned in February 2015. The Company does not anticipate any recovery or future liability as a result of that transaction. In 2013 the Company operated eight energy systems representing 7,690,959 kWh of total energy sold, a decrease of 41%. Two of those systems were revenue producing for portions of the entire year. The Energy Production revenue per customer on a monthly basis is based on the sum of the amount of energy produced by Company's energy systems and the prevailing price of energy (electricity, natural gas or oil) from its customers' local energy utility that month, less the discounts the Company provides its customers. The Company's Energy Production revenues commence as new energy systems become operational, and the Company typically sells energy in the form of electricity, heat, hot water and cooling.
Cost of Sales
Cost of sales, including depreciation, for the full year of 2014 was $863,167 compared to $1,441,967 compared for the same period in 2013. Included in the cost of sales was depreciation expense of $326,865 for the full year of 2014 compared to $343,410 for the full year of 2013, a decrease of $16,545, or 5%. The cost of fuel was $212,774 for the year ended December 31, 2014 as compared to $521,916 in the full year of 2013, a decrease of $309,142 or 59% primarily due to lower run hours at our CHP plants.
During the full year of 2014 our gross margin was -107.8%, compared to -14.7% for the year ended 2013, primarily due to the decrease in our CHP plant revenue and the stubbornly high fuel prices during the year. Our CHP energy margins excluding depreciation were at -29.1% for the year ended December 31, 2014 as compared to 14.9% in the full year of 2013.
Operating Expenses
Our general and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. Our general and administrative expenses in the full year of 2014 were $4,077,270 which included stock based compensation of $1,125,000; impairment expense of $1,684,334 and depreciation of $47,744, compared to $1,011,351, which included no charges for stock based compensation or impairment expense and depreciation of $51,640 for the same period in 2013, an increase of $3,065,919 or 303.2%. The increase was also due to an increase in management salary of $360,000, increases in payroll costs and increased fees related to the public company financial report preparation and filings.
Loss from Operations
The loss attributable to common shareholders in the full year of 2014 was $9,985,500 compared to $1,200,496 for the same period in 2013, an increase of $8,785,004 or 731.8%. Included in the loss attributable to common shareholders, for the year ended December 31, 2014, is a deemed dividend, arising from the sale of series D preferred shares. After removing that item the increase in the operating loss was due to payment of a management salary of $360,000; non-cash expense of $1,125,000 for stock based compensation; and impairment cost of $1,684,334 to fully impair non-producing facilities.
Liquidity and Capital Resources
Total current assets at December 31, 2014 were $4,141,211, an increase of $3,769,115 compared to $372,096 at December 31, 2013. Included in current assets were cash and cash equivalents of $4,006,824, an increase of $3,809,439 compared to $197,385 at December 31, 2013. The increase in cash was due to the sale of Series D preferred shares and the receipt of the proceeds derived therefrom. As the result of reduced revenue generation, accounts receivable at December 31, 2014 compared to December 31, 2013 were $44,111 and $126,223, a reduction of $82,112.
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Cash used in operating activities was $1,277,619 in the 12 months ended December 31, 2014 compared to $349,925 in the twelve months ended December 31, 2013, an increase of $927,694. The increase is mainly due to an increase in the operating loss for the year ended December 31, 2014, to $1,365,588 after removing non-cash expenses of $3,183.943, compared to the net loss of $679,541 for the year ended December 31, 2013, after removing non-cash expenses of $520,955. The company's accounts receivable balance, on December 31, 2014, decreased to $44,111 from $126,223 as of December 31, 2013 after writing off $89,594 in uncollectible accounts. Likewise, prepaid expenses increased as of December 31, 2014 by $26,212. Accounts payable decreased to $479,740 for the year ended December 31, 2014 compared to $549,777 in the year ended December 31, 2013 utilizing an additional $20,355 cash.
The Company made no changes that would result in cash used for investing activities during the year ended December 31, 2014 other than $28,986 worth of enhancements to existing facilities. During 2013, the investing activities of the company's operations were for expenditures of $177,176, to enhance the value of project assets, which after the sale of a plant with a net value of $239,989, resulted in cash creation of $436,250 and the expenditure of $108,750 to purchase property and equipment.
During the year ended December 31, 2014 the Company sold 4,416,000 Series D Preferred shares for a total of $5,520,000. There was no comparable financing activity during the year ended December 31, 2013. During the year ended December 31, 2014 the Company paid $250,122 to purchase, in the open market, 716,990 shares of the Company's common stock and $104,161 to reduce the balance of a finance contract as compared to $71,095 for the year ended December 31, 2013.
Our CHP plants allow our customers to reduce both their energy costs and site carbon production by deploying combined heat and power technology on our customers' premises at no cost. Therefore, our company is capital intensive. Our company believes that its existing resources, including cash and cash equivalents and future cash flow from operations, are sufficient to meet the working capital requirements of its existing business for the foreseeable future, including the next 9 months; however, as our company continues to grow its business by adding more CHP plants, the cash requirements will increase. Beyond August 31, 2014, we may need to raise additional capital through a debt financing or an equity offering to meet our company's operating and capital needs for future growth. There can be no assurance, however, that we will be successful in our fundraising efforts or that additional funds will be available on acceptable terms, if at all.
We anticipate completing the re-commissioning of three additional facilities during the 2015 calendar year.. The capital cost to refurbish the existing equipment, replace parts, update the controls and commence operation for all three plants is estimated to be approximately $900,000. We do not currently have sufficient capital resources or revenue from operations to accomplish the re-commissioning and will be required to raise additional capital through debt or equity offerings. The Company has been exploring various methods of raising additional capital, including the sale of common stock and the sale of partial ownership interests in one or more of its existing facilities. We will re-commission these plants only as capital is raised to pay the capital costs. However, if we undertake to re-commission one or more of the plants, but the costs are more than anticipated, we could experience a shortage of cash flow to sustain operations, in which case the need for additional capital will occur earlier than anticipated and could force us to reduce or curtail certain operations. We have, from time to time, relied upon loans from affiliates, particularly our CEO Patrick S. Carter and a director Thomas Grainger, to meet our requirements for operating capital. We do not expect such loans to be available to us in the future.
Our ability to continue to access capital could be impacted by various factors including general market conditions, interest rates, the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans to us and any deterioration in the financial position of lenders that might make them unable to meet their obligations to us. If these conditions continue and we cannot raise funds through a public or private debt financing, or an equity offering, our ability to grow our business may be negatively affected. In such case, our company may need to suspend any installation of new CHP plants and significantly reduce its operating costs until market conditions improve.
Seasonality
Our customers generally use additional energy during periods of more extreme temperatures. Accordingly, our revenue generally tends to increase during the summer. The majority of our heating systems sales are in the winter and the majority of our chilling systems sales are in the summer.
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Inflation
Inflation will generally cause conventional utility suppliers to increase their rates, and since we bill our customers based on the electric utility rates, our pricing will increase in tandem and positively affect our revenue. However, inflation might cause both our investment and cost of goods sold to increase, thereby lowering our return on investment and depressing our gross margins.
Off Balance Sheet Arrangements
Our company has no off balance sheet arrangements.
Item 7A:
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8:
Item 8: Financial Statements and Supplementary Data.
The information required by this item is included in Item 15 of this Annual Report on Form 10-K.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
808 Renewable Energy Corporation
Garden Grove, California
We have audited the accompanying balance sheets of 808 Renewable Energy Corporation (the "Company") as of December 31, 2014 and 2013 and the related statements of operations, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit 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 consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 808 Renewable Energy Corporation as of December 31, 2014 and 2013 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations and negative cash flows from operations. These raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ MaloneBailey, LLP
www.malone-bailey.com
Houston, Texas
July 13, 2015
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808 Renewable Energy Corporation
Balance Sheets
See accompanying notes to financial statements
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808 Renewable Energy Corporation
Statements of Operations
See accompanying notes to financial statements
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See accompanying notes to financial statements
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808 Renewable Energy Corporation
Statements of Cash Flow
See accompanying notes to financial statements
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808 Renewable Energy Corporation
Notes to Financial Statements
December 31, 2014 and 2013
NOTE 1 - ORGANIZATION AND OPERATIONS
808 Renewable Energy Corporation, (the "Company", "808 Renewable", "we", or "us"), located in Garden Grove, California, was incorporated, on May 13, 2009, in Nevada as Tri-Energy, Inc. for the purpose of acquiring and managing combined heat and power renewable energy products, also referred to as distributed generation energy facilities. The Company is also engaged in the business of purchase and sale of power generation equipment, and in the operation, repair, and maintenance of same, for itself, as well as for other energy facility owners.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cost of Sales
Cost of sales is the direct cost associated with the earning of revenue and predominantly includes the cost and transportation of natural gas commodity, cost of obtaining the air permits, licenses, payroll and payroll related costs and the rent of the sites where the energy producing plants are located.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash equivalents include all highly liquid investments with original maturities of three months or less which are not securing any corporate obligations. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Accounts receivable as of December 31, 2014 and December 31, 2013, includes amounts for energy and other services provided to customers. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectable based on historical experience and management's evaluation of outstanding accounts receivable at the end of the period. Bad debts are written off against the allowance when identified. The Company determined that $20,918 was required at December 31, 2013 and no allowance was required as at December 31, 2014.
Prepaid Expenses
Prepaid expenses consist primarily of short-term prepaid expenditures that will amortize within one year.
Property and Equipment
Property and equipment consists primarily of leasehold improvements, office equipment and computer equipment, and is recorded at historical cost. Major additions and improvements are capitalized as additions to the property and equipment accounts, while replacements, maintenance and repairs that do not improve or extend the life of the respective assets, are expensed as incurred. Depreciation and amortization of property and equipment are computed on a straight-line basis over the following estimated useful lives:
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808 Renewable Energy Corporation
Notes to Financial Statements
December 31, 2014 and 2013
Project Assets
Project assets consist of costs of materials, direct labor, outside contract services and project development costs incurred in connection with the construction of the small-scale renewable energy plants that the Company owns. Depreciation is, generally, recorded on a straight line basis beginning in the month that operations commence over the assets estimated useful lives ranging from 10 to 20 years. Routine maintenance costs, to the extent that they do not extend the life of the asset, are expensed in the year they are incurred.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets if circumstances indicate impairment may have occurred. This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review, the Company recognized impairment expense of $1,684,334 and $0 for the years ended December 31, 2014 and 2013, respectively.
Revenue Recognition
The Company derives revenue from energy efficiency and renewable energy products and services, which includes the design, engineering, and construction of energy systems that produce electricity, heat or cooling from renewable sources of energy. The Company enters into long-term energy sales agreements (with a typical term of 10 to 15 years) with customers, whereby these energy systems are owned by the Company and are installed in customers' buildings. As of December 31, 2014 and 2013, the Company had four and six operating energy systems, respectively.
Each month, the Company obtains readings from its energy meters to determine the amount of energy produced for each customer. The Company multiplies these readings by the appropriate published price of energy (electricity) from its customers' local energy utility, and the energy services agreement entered into with each customer, to derive the value of the monthly energy sales, less the applicable negotiated discount. The Company's revenues per customer, on a monthly basis, will vary based on the amount of energy produced by its energy systems and the published price of energy (electricity, natural gas or oil) obtained from its customers' local energy utility.
The Company recognizes revenue when it is realized or realizable and earned, and therefore only recognizes revenue on energy systems once those systems become operational. The Company recognizes revenue from the sale of equipment upon installation and recognizes revenue on professional services in accordance with the contract entered into with the customer.
The Company must meet all of the following four criteria in order to recognize revenue:
· Persuasive evidence of an arrangement exists
· Delivery has occurred
· The sales price is fixed or determinable
· Collection is reasonably assured
Payments received in advance of satisfaction of the relevant criteria for revenue recognition are recorded as advances from customers.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
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808 Renewable Energy Corporation
Notes to Financial Statements
December 31, 2014 and 2013
The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. No liability for unrecognized tax benefits was recorded as of December 31, 2014 and 2013.
Stock-Based Compensation
The Company records stock-based compensation at fair value as of the date of grant and recognizes the corresponding expense over the requisite service period (usually the vesting period), utilizing the Black-Scholes option-pricing model. The volatility component of the calculation is based on the historic volatility of the Company's stock or the expected future volatility. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Derivative Accounting
The Company evaluates any long-term energy purchase contracts pursuant to ASC 815 to determine whether they qualify for derivative accounting. In May 2012 the Company entered into a 24 month fixed price natural gas supply agreement with a major vendor. This contract met the normal sales and purchases exception provided for under ASC 815. As such, related transactions under this contract are not marked to market and are reflected in results of operations when the underlying transactions settle.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for accounts receivable and payables, inventory and debt are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and, if applicable, the stated rate of interest is equivalent to rates currently available.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a three-level valuation hierarchy for disclosures of fair value measurements, defined as follows:
Level 1:
inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2:
inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3:
inputs to the valuation methodology are unobservable and significant to the fair value
The Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.
Loss per Common Share
Basic earnings per share are calculated dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share are based on the assumption that all dilutive convertible shares and stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, warrants and options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. There were no dilutive shares, options or warrants outstanding as of December 31, 2014 and December 31, 2013.
Recently Adopted Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.
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808 Renewable Energy Corporation
Notes to Financial Statements
December 31, 2014 and 2013
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, during the year ended December 31, 2014 the Company incurred a net loss attributable to common shareholders of $9,985,500, which included a deduction for a deemed dividend to Preferred D Stockholders of $5,375,969; a deduction for stock based compensation of $1,125,000; and a deduction for impairment of long term assets of $1,684,334, compared to a net loss of $1,200,496, for the year ended December 31, 2013. The Company's accumulated deficit was $19,583,832 and $15,034,301 as of December 31, 2014 and December 31, 2013, respectively. If the Company is unable to generate profits and is unable to continue to obtain financing for its working capital requirements, it may have to curtail its business sharply or cease business altogether. These factors raise substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustment relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company is taking certain steps to provide the necessary capital to continue its operations. These steps included, but are not limited to: 1) focus on sales to minimize the need for capital at this stage; 2) converting part of the outstanding accounts payable to equity; 3) raising equity financing; 4) continuous focus on reductions in cost where possible.
NOTE 4 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the unamortized Directors and Officers liability insurance premium and the unamortized portion of the general liability insurance premium.
NOTE 5 - PROJECT ASSETS
Project assets consisted of the following as of:
Depreciation expense for project assets for the years ended December 31, 2014 and 2013 was $326,865 and $343,410, respectively. These amounts are included in cost of goods sold in the statements of operations.
During the years ended December 31, 2014 and 2013 the Company recognized impairment expense on co-generation equipment of $1,684,334 and $0, respectively. The impairment was recognized due to the termination of several energy service contracts related to the co-generation equipment in those locations.
During the year ended December 31, 2013, the Company sold the co-generation equipment in the 50 Beale Street location to a third party for $2 million with an initial payment of $463,250. The buyer issued a note on the remaining amount of $1,563,750 which is subject to annual interest of 3% and required quarterly payments of $11,526 beginning on May 1, 2014 and will continue for an additional 20 quarters at which time the balance shall be due and payable. In accordance with ASC605-10-25, the Company recognized revenue on the sale in accordance with the cost recovery method. As such, only the excess of the initial payment over the net book value of the asset of $196,261 was recognized into income during the year ended December 31, 2013. No profit is recognized on the principal and interest due to the Company until cash payments are received from the buyer. No additional payments have been received to-date.
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808 Renewable Energy Corporation
Notes to Financial Statements
December 31, 2014 and 2013
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
Depreciation expense for the years ended December 31, 2014 and 2013 was $47,744 and $51,640 respectively. These amounts are included in general and administrative expenses in the statements of operations.
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of:
NOTE 8 - FINANCE CONTRACTS PAYABLE
During 2014, the Company financed the acquisition of its directors and officers insurance through a finance contract in the amounts of $68,000 plus interest at an annual rate of 4% requiring nine equal monthly payments of $7,698. As of December 31, 2014, the balance on this loan amounted to $7,698. During 2013, the Company financed the acquisition of, both, its liability and directors and officers insurance through finance contracts in the amounts of $44,000 and $13,515 , respectively. The loans bore annual interest of 9.78% and 10.53% and each required nine equal monthly payments of $5,090 and $1,568, respectively. As of December 31, 2013, the balance on these loans amounted to $43,859.
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808 Renewable Energy Corporation
Notes to Financial Statements
December 31, 2014 and 2013
NOTE 9 - RELATED PARTY TRANSACTIONS
On August 8, 2013, the Company entered into a revolving note agreement with the CEO, Patrick S. Carter, pursuant to which the Company may borrow up to $1,000,000. The revolving note bears annual interest of 10%, matures on August 7, 2014 and is secured by the assets of the Company. The Company had drawn $550,100 from the revolving note. The CEO also paid, on behalf of the Company, $49,673 of its outstanding payables. The total liability to the CEO of $599,773 was fully paid as of December 31, 2014.
Commencing August 1, 2013 the Company entered into a fifteen year lease agreement, with Patrick S. Carter, our CEO and his wife Parvaneh Carter, to lease the Company's office and warehouse facility on a gross lease of $8,000 per month.
On September 30, 2014, a member of our Board of Directors subscribed to 1,600,000 preferred shares at a cost of $1.25 per share for total proceeds of $2 million. On December 31, 2014, the same director subscribed to an additional 2,800,000 preferred shares on the same terms and conditions as the previous transaction for total proceeds of $3.5 million.
NOTE 10 - STOCKHOLDERS' EQUITY
Common stock
During the year ended December 31, 2013, the Company recorded the cancelation of 12,849 common shares that had been erroneously issued. There were no issuances of common stock for the years ended December 31, 2014 and December 31, 2013.
During the year ended December 31, 2014, the Company issued 1,650,000 fully vested shares to the CEO, the board of directors and two individuals for services provided. The shares have a fair value of $1,125,000 which was recognized as stock based compensation for the year ended December 31, 2014.
During the fourth quarter the Company paid $250,122 to purchase 716,990 of its common shares. As of December 31, 2014 the certificates were held in the Company's brokerage account and had not been returned to the transfer agent for cancelation. Therefore they were carried on the Company's balance sheet as treasury stock.
Redeemable Series A Preferred Stock
The Company is authorized to issue 5,500,000 shares of Series A preferred stock.
The holders of Series A preferred stock have no dividend rights, no voting rights and no conversion rights. The Corporation has the right, but not the obligation, to the extent it may lawfully do so, at any time and from time to time to repurchase and redeem from the holders all or any portion of the then outstanding shares of Series A preferred stock at $1 per share.
There were no issuances of the Redeemable Series A preferred stock for the years ended December 31, 2014 and 2013.
Convertible Series B Preferred Stock
The Company is authorized to issue 5,000,000 shares of Series B preferred stock.
The holders of Series B preferred stock shall have the right to receive dividends at the rate of $0.12 per share, when and if declared by the board. These dividends will be cumulative. Each share of Series B shall be convertible into common stock at the option of the holder at any time after the date of issuance.
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808 Renewable Energy Corporation
Notes to Financial Statements
December 31, 2014 and 2013
There were no issuances of the Convertible Series B preferred stock for the year ended December 31, 2013.
Convertible Series D Preferred Stock
On September 29, 2014, the Board of Directors established the Series D Preferred Stock, consisting of 8,000,000 shares with no par value. The Series D Preferred shareholders are entitled to receive cumulative quarterly dividends at the rate of $0.15 per share per annum and will share in any liquidation, or dissolution, preference to any other distribution to the holders of common shares, an amount equal to $1.25 for each outstanding share. The holders of the Series D Preferred Stock shall have the right to convert, at their option, 24 months after the date of issuance, into common shares at a price equivalent to 40% of the Company's average market price for ten trading days prior to conversion. The Series D Preferred Stock will automatically convert to common stock upon the earlier of (i) 24 months from the purchase date or (ii) the date specified by written consent or agreement of the holders of a majority of the outstanding shares of Series D Preferred Stock.
On September 30, 2014, a member of our Board of Directors subscribed to 1,600,000 preferred shares at a cost of $1.25 per share. On December 31, 2014, the same director subscribed to an additional 2,800,000 preferred shares on the same terms and conditions as the previous transaction. On November 3, 2014 and November 19, 2014 an unrelated investor purchased 16,000 Series D preferred shares at a per share cost of $1.25 for total proceeds of $20,000. The Company has determined that the Series D Preferred Stock is convertible because of the "automatic conversion" feature in the stock. The Company evaluated the embedded conversion option of the preferred stock under FASB ASC 815-15 and determined that it is clearly and closely related to the host contract, the preferred stock, and does not require to be bifurcated. The Company evaluated the preferred stock for a beneficial conversion feature under FASB ASC 470-20 and determined that a beneficial conversion feature of $5,375,969 existed which has been fully recognized as a deemed dividend to the preferred shareholder.
NOTE 11 - STOCK INCENTIVE PLAN
The Company maintains an Incentive and Non-Statutory Stock Option Plan ("Plan") for its employees and consultants. Options granted under this Plan to an employee of the Company become exercisable over a period of no longer than ten (10) years and no less than twenty percent (20%) of the shares are exercisable annually. Options are not exercisable, in whole or in part, prior to one (1) year from the date of grant unless the Board specifically determines otherwise, as provided.
Two types of options may be granted under these Plans: (1) Incentive Stock Options (also known as Qualified Stock Options) which may only be issued to employees of the Company and whereby the exercise price of the option is not less than the fair market value of the common stock on the date it was reserved for issuance under the Plan; and (2) Non-statutory Stock Options which may be issued to either employees or consultants of the Company and whereby the exercise price of the option is less than the fair market value of the common stock on the date it was reserved for issuance under the plan. Grants of options may be made to employees and consultants without regard to any performance measures. All options issued pursuant to the Plan are nontransferable and subject to forfeiture.
There were no stock options granted in 2014 or 2013.
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808 Renewable Energy Corporation
Notes to Financial Statements
December 31, 2014 and 2013
NOTE 12- INCOME TAXES
Income taxes for the years ended December 31, 2014and December 31, 2013 are summarized as follows:
Through December 31, 2014 and December 31, 2013, the Company incurred net operating losses for tax purposes of approximately $7,084,218 and $5,699,542 respectively.
The net operating loss carry forward for federal and state purposes may be used to reduce taxable income through the year 2034. The availability of the Company's net operating loss carry forward is subject to limitation if there is a 50% or more positive change in the ownership of the Company's stock.
Components of the deferred tax assets are limited to the Company's net operating loss carry forwards, and are presented in the table below. A 100% valuation allowance has been established against the deferred tax assets, as the utilization of the loss carry forward cannot reasonably be assured.
Differences between the benefit from income taxes and income taxes at the statutory federal income tax rate are as follows for the years ended December 31, 2014 and 2013:
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808 Renewable Energy Corporation
Notes to Financial Statements
December 31, 2014 and 2013
NOTE 13-COMMITMENTS and CONTINGENCIES
Operation, Monitoring and Maintenance Agreement with 50 Beale Street Energy, LLC - On November 8, 2013 the Company, as an independent contractor, entered into an agreement, with 50 Beale Street Energy, LLC, to operate, monitor and maintain the facility located at 50 Beale Street, San Francisco, for a fee of $2,000 per month plus reimbursable expenses, payable quarterly for 120 months plus, by agreement of the parties, additional terms of three periods of 60 months each.
701 B Street, San Diego, California
On December 22, 2000, Proxima 701, LLC and 808 Energy 3, LLC entered into a lease of approximately 172 square feet on the roof of the building located at 701 B Street, San Diego, CA, (the "premises"). As a result of a dispute arising out of the Lease, on April 23, 2014, Lessor filed an unlawful detainer action to recover possession of the premises. This matter was resolved by way of Lessee's surrender of the premises to Lessor, and the parties thereafter executed an Acknowledgment of Surrender effective July 15, 2014, in favor of Lessor. Subsequent to the resolution of the unlawful detainer action set forth above, Lessee was to pick up equipment located at the premises but elected to abandon the equipment because to do so was cost prohibitive. Lessor served notices of abandonment related to Lessee's equipment, which Lessee did not respond to. The potential liability related to the abandonment is for Lessor's cost of removal of the equipment, which is potentially offset by Lessee's claim for breach of an energy supply agreement between the parties. To date, there has been no attempt by Lessor to recover any expenses related to the equipment removal.
Although the Company believes that there should not be a future liability with regard to the abandonment of the equipment, referenced above, there is no certainty as to the probability of the property owners' motives. If the Company is forced, at some future date, to remove the equipment from the building, the estimated cost of removal and repair could be $250,000.
NOTE 14 - SUBSEQUENT EVENTS
On January 14, 2015, the Company paid Patrick Carter $2,215,259 to redeem the 2,215,259 series A preferred shares which he owned, and cancelled them.
On February 9, 2015, the Company paid Patrick Carter $99,313 to acquire 222,390 common shares which Carter had purchased on behalf of the Company for subsequent cancelation. On April 6 and April 20, 2015 the Company paid additional amounts of $24,349 and $11,719 to Patrick Carter to reimburse him for 160,714 common shares which he purchased on behalf of the Company, also for cancelation.
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Item 9:
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A:
Item 9A: Controls and Procedures.
As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Securities Exchange Act of 1934, our management, with the participation of our principal executive officer and principal financial officer evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report on Form 10-K. Based on this evaluation, management concluded that as of the end of the period covered by this transition report on Form 10-K, these disclosure controls and procedures were ineffective. The ineffectiveness of our disclosure controls and procedures was due to material weaknesses identified in our internal control over financial reporting, described below. Because of the inherent limitations in all control systems, our management believes that no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, our management, with the participation of our principal executive officer and principal financial officer has conducted an assessment., Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our management, including our principal executive officer and our principal financial officer, conducted an evaluation of the design and operation of our internal control over financial reporting as of December 31, 2014. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, our management concluded our internal control over financial reporting was not effective as at December 31, 2014. The ineffectiveness of our internal control over financial reporting was due to the following material weaknesses which are indicative of many small companies with small staff: (i) inadequate segregation of duties and ineffective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.
Our company plans to take steps to enhance and improve the design of our internal control over financial reporting. During the period covered by this report on Form 10-K, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes during our fiscal year ending December 31, 2015: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out in (i) is largely dependent upon our company securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of our fiscal year ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This Annual Report on Form 10-K does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this Annual Report on Form 10-K.
Item 9B:
Item 9B: Other Information.
None
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Part III
Item 10:
Item 10: Directors, Executive Officers and Corporate Governance.
The following table sets forth information about our executive officers and directors as of the date of this prospectus:
Executive Officers
Patrick S. Carter is the founder of our company and has served as our Chairman of the Board, CEO, President, CFO and Secretary and as a director since our inception, except that Mr. Carter did not serve as our CEO from September 20, 2010 to November 29, 2011, during which time Pascal Lorthioir served as our CEO. See "Executive Compensation-Summary Compensation Table." From August 19, 2008 to April 23, 2012, Mr. Carter was the managing member of 808 Energy 2, LLC. Mr. Carter has held Series 3, Series 7 and Series 66 securities licenses, Health, Life, Disability and Annuity licenses and a Futures and Options Principal license. Mr. Carter also is a Certified Wealth Management Expert.
We believe that Mr. Carter possesses specific attributes that qualify him to serve as a member of our board of directors, including his extensive experience as a commodities broker, his knowledge and experience in raising capital and his experience in the CHP industry.
Peter Kirkbride has served as our Chief Operating Officer and as a director since August 2012. From May 2010 to July 2012, Mr. Kirkbride served as Director of Finance for our company and for 808 Energy 3, LLC. From August 2009 to April 2010, Mr. Kirkbride was a Series 7 & 66 registered representative with BrokersXpress. From April 2008 to August 2009, Mr. Kirkbride served as a registered representative for Bank of America's Premier Bank. From December 2004 to April 2008, Mr. Kirkbride served as a financial advisor with UBS Financial Services. Mr. Kirkbride received his BA in Liberal Arts from the University of California, Santa Barbara. Mr. Kirkbride has held Series 3, Series 7 and Series 66 securities licenses as well as a California insurance license.
We believe that Mr. Kirkbride possesses specific attributes that qualify him to serve as a member of our board of directors, including his extensive experience operating our company's CHP plants, his knowledge of the alternative energy industry and his knowledge and experience in financing activities.
Directors
Thomas P. Grainger has served as a director of our company since August 2012. Since December 1989, Mr. Grainger has directed operations for the sporting consultancy, Silvertip Adventures, LLC, which Mr. Grainger founded.
We believe that Mr. Grainger possesses specific attributes that qualify him to serve as a member of our board of directors, including his extensive experience as an investor in emerging growth companies and as a board member and his knowledge about growth strategies for developing businesses. Mr. Grainger is a business owner and investor with strong ties to the business world. We believe that Mr. Grainger's experience with corporate governance practices also will help our company comply with legal and industry standards.
Michael Gustason has served as a director of our company since October 9, 2012. Since April 1995, Mr. Gustason has owned and operated a successful furniture gallery located in Santa Barbara, California, which he founded. Mr. Gustason's furniture gallery is one of the leading retail stores in Santa Barbara County, furnishing local residents, hotels, County facilities and other large corporate accounts, such as University of California Santa Barbara, Colburn School of Music and Vandenberg Air Force Base.
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We believe that Mr. Gustason possesses specific attributes that qualify him to serve as a member of our board of directors, including his extensive experience as a business owner and as a board member. As a business owner, Mr. Gustason founded and developed a successful marketing network in California. We believe that Mr. Gustason's experience will help our company develop better marketing networks and competitive marketing strategies.
J. David Likens has served as a director of our company since October 9, 2012. Mr. Likens is a member of the State Bar of California. Since March 2012, Mr. Likens has been a named partner with Jeong & Likens, LC, a full service corporate law firm in Los Angeles, California. Before joining Jeong & Likens, LC, from September 2009, Mr. Likens engaged in private practice as an attorney. Since September 2011, Mr. Likens has been an adjunct professor at California Desert Trial Academy College of Law. Since February 2009, Mr. Likens has been an adjunct professor at Mt. San Antonio College in Walnut, California. Since December 2007, Mr. Likens has been the CEO of ABC Recovery Center in Indio, California. Mr. Likens received his JD from Southwestern School of Law, his BS in Business with an emphasis on Organizational Management from University of La Verne and an AA in liberal studies and an AA in addiction treatment from Mt. San Antonio College.
We believe that Mr. Likens possesses specific attributes that qualify him to serve as a member of our board of directors, including his undergraduate degree with an emphasis on Organizational Management as well as his law degree and his experience serving as a director of a public company.
Item 11:
Item 11: Executive Compensation.
Mr. Carter's employment agreement with us, effective as of August 1, 2010, provides that our company will pay Mr. Carter an annual base salary of not less than $375,000. Mr. Carter elected not to receive the annual base salary otherwise payable to Mr. Carter in 2012 under his employment agreement with us, as amended in March 2011. In March 2011, our company and Mr. Carter entered into an amendment to our employment agreement with Mr. Carter, pursuant to which the term of his employment agreement commenced effective as of January 1, 2012 and will continue for a period of five consecutive years, unless earlier terminated. Pursuant to the employment agreement, as amended by this amendment, Mr. Carter will be entitled to compensation in addition to his base salary then in effect in the nature of a cash bonus that will be payable every quarter, at the rate of 25% of the annual rate for his base salary then in effect. Because Mr. Carter declined to receive the compensation and bonuses as required by the contract, the total amounts of compensation and bonuses were treated as contributed to the Company.
On January 1, 2013, the August 1, 2010 employment agreement was further amended to reduce the compensation and bonuses to $1.00 for the 2013 fiscal year.
During the year ended December 31, 2014 Mr. Carter was paid $360,000.
Mr. Kirkbride was paid total compensation of $150,000 for each of the years ended December 31, 2014 and 2013 respectively.
Employment Agreements
Patrick S. Carter. In August 2010, we entered into an employment agreement with Mr. Patrick S. Carter, our founder, Chairman of the Board, CEO, President, CFO and Secretary. Under our employment agreement with Mr. Carter, Mr. Carter is required to perform the duties and function of his office and capacity under the supervisory authority of our board of directors. The employment agreement provides for an initial term of five years (commencing on August 1, 2010) and automatic one-year renewals thereafter, unless the employment agreement is terminated by advance written notice of either party. Under the terms of the employment agreement, Mr. Carter is entitled to receive a base salary in the amount of $375,000 per annum, subject to such adjustments as our board of directors may approve from time to time, and Mr. Carter also is entitled to participate in and receive such other benefits and compensation (including, without limitation, any profit sharing or stock option plan) that our company may furnish to other management personnel or employees generally. The employment agreement further provides that Mr. Carter is entitled to 20 vacation days per fiscal year and reimbursement of all reasonable expenses incurred in connection with the performance of his duties under the employment agreement.
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In March 2011, our company and Mr. Carter entered into an amendment to our employment agreement with Mr. Carter, pursuant to which the term of his employment agreement commenced effective as of January 1, 2012 and will continue for a period of five consecutive years, unless earlier terminated. Pursuant to the employment agreement, as amended by this amendment, Mr. Carter will be entitled to compensation in addition to his base salary then in effect in the nature of a cash bonus that will be payable every quarter, at the rate of 25% of the annual rate for his base salary then in effect. In connection with entering into this amendment to our employment agreement with Mr. Carter, Mr. Carter agreed to relinquish all remuneration that otherwise would have accrued under his employment agreement with us from April 1, 2011 to December 31, 2011. For the period of January 1, 2011 through March 31, 2011, we paid an aggregate amount of $105,000 to Mr. Carter under his employment agreement with us. For the period of January 1, 2012 through December 31, 2012, we paid no compensation to Mr. Carter under our employment agreement with Mr. Carter pursuant to Mr. Carter's election not to receive amounts otherwise payable to Mr. Carter there under for that period.
In January 2013, our company and Mr. Carter entered into an additional amendment to our employment agreement with Mr. Carter, pursuant to which, under our employment agreement with Mr. Carter as amended by this amendment, Mr. Carter agreed to a salary and cash bonus of one dollar ($1.00) for the year commencing as of January 1, 2013 and ending December 31, 2013, and Mr. Carter irrevocably waived all right, title and interest in and to any amounts that would be owed or otherwise payable to Mr. Carter by our company under our employment agreement with Mr. Carter for the period commencing as of January 1, 2013 through December 31, 2013. In addition, pursuant to this amendment to our employment agreement with Mr. Carter, Mr. Carter acknowledged that, as of January 1, 2013, our company owed no additional compensation to Mr. Carter under our employment agreement with Mr. Carter for any period that precedes January 1, 2013 or for the period commencing January 1, 2013 through December 31, 2013. Also pursuant to this amendment to our employment agreement with Mr. Carter, the term of Mr. Carter's employment agreement commenced effective as of January 1, 2013 and will continue for a period of five years, unless earlier terminated.
We may terminate the employment agreement with Mr. Carter for cause or by reason of his death or disability. Mr. Carter may terminate the employment agreement for any reason by advance written notice. If the employment agreement is terminated by reason of death or disability, then our company will be required to pay to Mr. Carter or his spouse, heirs or representatives a severance amount equal to 12 months' base salary plus all reimbursable expenses incurred through the date of termination. If we terminate the employment agreement for cause or if Mr. Carter terminates the employment agreement other than for good reason, then Mr. Carter will be entitled to the base salary earned and payment of any unused accrued vacation through and including the date of termination. If Mr. Carter terminates the employment agreement for good reason or if we terminate the employment agreement for any reason not specified above, then Mr. Carter will be entitled to remaining base salary otherwise payable during the initial term (but not less than 12 months) and expenses incurred through the date of termination.
Under the terms of the employment agreement with Mr. Carter, we are required to purchase directors' and officers' liability insurance if we provide such insurance to our other executives and such insurance is available at commercially reasonable rates. If our company merges with or is acquired by another company, the acquiring company will be required to assume our rights and obligations under the employment agreement with Mr. Carter.
Additionally, as a condition to the enforceability of the employment agreement, Mr. Carter and our company entered into a Proprietary Information and Invention Assignment Agreement in substantially the same form as has been or will be executed by our other key employees.
Peter Kirkbride. We entered into an unwritten employment arrangement with Mr. Peter Kirkbride, our Chief Operating Officer. Mr. Kirkbride is required to perform the duties and function of his office and capacity under the supervisory authority of our board of directors. Our employment arrangement with Mr. Kirkbride is an at-will employment arrangement. Under the terms of the employment arrangement, Mr. Kirkbride is entitled to receive a base salary in the minimum amount of $120,000 per annum, subject to such adjustments as our board of directors may approve from time to time. Mr. Kirkbride also is entitled to an annual discretionary cash bonus as determined by the compensation committee or our board of directors. Mr. Kirkbride also is entitled to participate in and receive such other benefits and compensation (including, without limitation, any profit sharing or stock option plan) that our company may furnish to other management personnel or employees generally. Pursuant to our employment arrangement with Mr. Kirkbride, Mr. Kirkbride is entitled to 20 vacation days per fiscal year and reimbursement of all reasonable expenses incurred in connection with the performance of his duties for us. We may terminate our employment arrangement with Mr. Kirkbride at any time for any reason or no reason, and Mr. Kirkbride may terminate our employment arrangement with him at any time for any reason or no reason, by advance written notice. The employment arrangement with Mr. Kirkbride does not provide for or contemplate any severance benefit in connection with any such termination, except that Mr. Kirkbride will be entitled to receive reimbursement of reasonable expenses incurred in connection with the performance of his duties for us before and through the date of termination.
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Pension Benefits
We do not maintain any pension plan or arrangement under which our named executive officers are entitled to participate or receive post-retirement benefits.
Non-Qualified Deferred Compensation
We do not maintain any nonqualified deferred compensation plans or arrangements under which our named executive officers are entitled to participate.
Employee Benefit Plans
2009 Stock Incentive Plan
In May 2009, our board of directors adopted, with stockholder approval, our company's 2009 Stock Incentive Plan. In March 2010 and in September 2010, in each case with stockholder approval, our board of directors amended our company's 2009 Stock Incentive Plan. In what follows below, our company's 2009 Stock Incentive Plan, as so amended, is referred to herein as the 2009 Plan.
Under the 2009 Plan, options and other rights to purchase up to an aggregate of 9,800,000 shares of common stock have been reserved for issuance upon exercise of options and other rights granted to our employees, directors and consultants. All options and other rights issued or granted under the 2009 Plan will have and be subject to the terms and conditions set forth in the 2009 Plan and the respective agreements governing such options and other rights.
At the date of this filing there are no options outstanding to purchase shares of our common stock under our company's 2009 Stock Incentive Plan.
If an option granted under the 2009 Plan expires or terminates, the shares subject to any unexercised portion of that option will become available again for the grant of additional options under the 2009 Plan. Options may be granted under the 2009 Plan that are intended to qualify as "incentive stock options" under Section 422 of the Internal Revenue Code or, alternatively, as options that will not so qualify, commonly referred to as non statutory options. The 2009 Plan will terminate automatically on May 21, 2019, and our company will not be able to grant more options under the 2009 Plan after it has terminated.
Our board of directors or a committee designated by our board of directors is authorized under the 2009 Plan to determine the terms and conditions of each option granted under the 2009 Plan. Nonetheless, the exercise price of an incentive stock option cannot be less than the fair market value of the common stock on the date of grant (110.0% if granted to an employee who owns 10.0% or more of the outstanding common stock), and the exercise price of a non statutory option cannot be less than 85.0% of the fair market value of the common stock on the date of grant. No option can have a term in excess of 10 years (five years if granted to an employee owning 10.0% or more of our outstanding common stock), and no incentive stock option can be granted to anyone other than a full-time employee of our company or its subsidiaries.
Our board of directors or a committee designated by our board of directors also is authorized under the 2009 Plan to award or sell shares of common stock reserved under the 2009 Plan pursuant to a stock purchase agreement that must be adopted and approved by our board of directors or a committee designated by our board of directors. Every such award or sale will be subject to all applicable terms and conditions of the 2009 Plan and may be subject to other terms and conditions that are not inconsistent with the 2009 Plan and that our board of directors or the committee appointed by our board of directors deems appropriate for inclusion in such stock purchase agreement. The provisions of such stock purchase agreements entered into under the 2009 Plan need not be identical.
In the event that our company is a party to a merger or reorganization, outstanding stock options granted under the 2009 Plan will be subject to the agreement of merger or reorganization.
Our board of directors may amend the 2009 Plan at any time and may terminate the 2009 Plan at any time before its automatic termination on May 21, 2019. Rights and obligations under any right or stock option granted before amendment of the 2009 Plan may not be materially altered or impaired adversely by such amendment, except with consent of the person to whom such right or stock option was granted.
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Compensation of Directors
Our company's directors currently do not receive any cash compensation for service on our company's board of directors or any committee thereof, but they may be reimbursed for certain expenses in connection with attendance at meetings of our company's board of directors and committees thereof. During the year ended December 31, 2014, each director was issued 100,000 restricted common shares for past services. From time to time, we may grant to our directors options to purchase shares of our company's capital stock and provide them with other incentive-based forms of compensation payable in our company's securities.
Peter Kirkbride, our Chief Operating Officer, received compensation, for carrying out those duties, of $150,000 and $150,000 for the 2014 and 2013 years respectively.
Item 12:
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Security Ownership
The following table sets forth, as of July 6, 2015, certain information known to us with respect to the beneficial ownership of our common stock by (i) each of our directors, (ii) each of our named executive officers, (iii) all of our directors and current executive officers as a group, and (iv) each shareholder known by us to be the beneficial owner of more than five percent (5%) of our common stock.
Changes in Control
We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change of control of our company.
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Item 13:
Item 13: Certain Relationships and Related Transactions, and Director Independence.
On August 8, 2013, the Company entered into a revolving note agreement with the CEO, Patrick S. Carter, pursuant to which the Company may borrow up to $1,000,000. The revolving note bears annual interest of 10%, matures on August 7, 2014 and is secured by the assets of the Company. During the year ended December 31, 2014 the Company, at various times, borrowed $599,773 from Mr. Carter and repaid the entire amount on October 7, 2014.
Commencing August 1, 2013 the Company entered into a fifteen year lease agreement, with Patrick S. Carter, our CEO and his wife Parvaneh Carter, to lease the Company's office and warehouse facility on a gross lease of $8,000 per month.
Subsequent to December 31, 2014 the Company reimbursed Patrick Carter $135,381 for the purchase of common shares which he undertook on behalf of the Company.
Item 14:
Item 14: Principal Accountant Fees and Services.
The fees billed for professional services rendered by our principal accountants, MaloneBailey, LLP for audit services are as follows:
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PART IV
Item 15:
Item 15: Exhibits
* XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacity and on the date indicated.
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