ITEM 1. BUSINESS
Organizational History
IX Energy Holdings, Inc. (the “Company”) was incorporated pursuant to the laws of the State of Delaware under the name Yoo Inc. on October 31, 2007. Our initial business plan was to market and sell a natural energy drink derived from coconut water to distributors of soft drinks in Israel.
On December 30, 2008, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with IX Energy, Inc., a Delaware corporation (“IX Energy”), and IX Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Yoo Inc. (the “Acquisition Sub”). Pursuant to the Merger Agreement, the Acquisition Sub merged with and into IX Energy and IX Energy became a wholly-owned subsidiary of Yoo Inc. On January 13, 2009, the Company’s name was changed to IX Energy Holdings, Inc. In connection with this reverse merger, we discontinued our former business and succeeded to the business of IX Energy as our sole line of business. As a result, we are now engaged in the development and financing of solar power and other renewable energy solutions systems.
Overview
Since its inception, IX Energy’s operations have principally involved the integration and installation of solar power systems manufactured by third parties. However, in an effort to become a vertically integrated solar products and services company that manufactures, designs, markets and installs its own solar power systems, we have recently entered into an agreement with Federal Prison Industries, Inc. ("UNICOR") to manufacture solar modules, using components supplied by us that will be marketed primarily to federal military and civilian agencies. The Company began generating revenue from operations in 2007. Currently, its principal customer is Federal Prison Industries, Inc. ("UNICOR").
As a turnkey solutions provided in the renewable energy sector IX Energy is developing integrated capabilities such as a solar integrated ground source system to deliver a closed loop solar-geothermal application for government, military and commercial customers.
SOLAR SOLUTIONS
A solar power system generally includes companies specializing in the following:
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Silicon Refiners - companies that produce refined silicon, a material that has historically been used as the primary ingredient for solar panels. In light of the current shortage of silicon, it is possible that other materials may be used as the primary ingredient in the future.
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Wafer and Cell Manufacturers - companies that manufacture the electricity generating solar cells.
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Panel Manufacturers - companies that assemble solar cells into solar panels, generally laminating the cells between glass and plastic film, and attaching the wires and panel frame.
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Distributors - companies that purchase from manufacturers and resell to designers/ integrators and other equipment resellers.
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Designer/Installers - companies that sell products to end user customers.
We deliver solar power systems taking into account the customer's location, site conditions and energy needs. During the preliminary design phase, we conduct a site audit and building assessment for onsite generation feasibility and identify energy efficiency savings opportunities. We model a proposed system design based on variables including local weather patterns, utility rates and other relevant factors at the customer's location. We also identify necessary permits and design our systems to comply with applicable building codes and other regulations.
We offer general contracting services and employ project managers to oversee all aspects of system installation, including securing necessary permits and approvals. Subcontractors, typically electricians and roofers, usually provide the construction labor, tools and heavy equipment for solar system installation. We have also served as a subcontractor for Johnson Controls, Inc. ("Johnson Controls"), a heating, ventilating and air conditioning company, in connection with the installation of a roof mounted solar power system for one of its customers.
Our U.S. Government and Military Focus:
We are distinguished from other solar developers in that we have the experience and background to solve the complex aspects of technology evaluation, economic impact, systems engineering, system integration, project execution, financing and more. We understand federal customers and can provide them with the systems and solutions they need to meet renewable energy requirements while reducing cost and their environmental impact.
STRATEGY
Our strategy is to leverage our foundation as a turnkey solar solutions provider to the U.S. government agencies, the U.S. military and commercial customers and deliver comprehensive energy conservation and renewable energy solutions through strategic partners, teaming agreements and direct integration of technologies into IX Energy. The partnership between ix energy and Unicor intends to position the company to be able to offer a vertically integrated solar solutions company. Unicor currently manufactures and intends to supply panels to the market, while IX energy can provide design, sales representation and engineering expertise to market and install solar power systems. Once Unicor solar panel achieves completed UL listing (underwriters laboratory) we anticipate positioning ourselves to assist customers to achieve their federally mandated renewable energy standards by integrating turnkey solutions or unicor product sales.
It will be necessary for Unicor to achieve the UL listing for the solar panel product. Until such time IX Energy will not be able to sell or solicite the product in the market place. Until the certification is received the product will not be applicable for government grant funding, state rebate programs, or interconnected to the grid under typical utility guidelines.
UNICOR Sales and Marketing Agreement
In 2008 we entered into a five year sales and marketing agreement with UNICOR pursuant to which IX Energy provides sales and marketing for the UNICOR assembled solar panels at its facility in Otisville, New York and other UNICOR facilities that it may be deemed appropriate. The agreement grants us the right to market and sell to U.S. governmental customers any solar panels and related products assembled and manufactured under this agreement.
The UNICOR agreement provides for two different sales and marketing programs. Under the first program, UNICOR will assemble and produce solar panels and we will actively market to and solicit customers, prepare customer proposals and assist customers in obtaining project financing. The customers will pay us directly and we will pay UNICOR an amount equal to the cost of the solar cells plus a below-market fee for panel fabrication. We will notify UNICOR of all opportunities for pursuing contracts with federal government agencies. If UNICOR decides not to pursue or contract for a federal job, we may notify another manufacturer of the proposed project and pursue the federal job with that manufacturer.
Under the second program, we act as a sales agent for UNICOR. UNICOR will identify potential customers to us and we will work with UNICOR to prepare customer proposals and aid customers in obtaining project financing. UNICOR will sell the products directly to the customers and pay us a service fee equal to 25% of the net earnings per project for projects that are under 5 megawatts. We will negotiate the service fees for projects that are over 5 megawatts on a project-by-project basis.
Installation
We utilize experienced general and electrical subcontractors to install solar panel projects. The subcontractors are responsible for obtaining licenses, carrying appropriate insurance and adhering to the local labor and payroll requirements.
CUSTOMERS
We expect to target federal civilian and military agencies and institutional commercial customers including large corporations, non-governmental organizations, universities and solar powered electric generating stations. We anticipate that the federal government will be a key customer as a result of government mandates that require federal agencies to improve their energy efficiency. Historically, however, we have principally designed and installed solar power systems for commercial and residential customers and public schools, both directly and as a subcontractor.
Federal Mandates
Federal agencies must meet energy management and renewable energy guidelines set forth in the Energy Policy Act of 2005 ("EPACT"), Executive Order 13423 "Strengthening Federal Environmental, Energy and Transportation Management" ("EO 13423") and related regulations. In particular, EPACT directs that the following percentages of an agency's energy consumption come from renewable energy sources:
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3% or more in fiscal years 2007 through 2009
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5% or more in fiscal years 2010 through 2012, and
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7.5% or more by 2013.
EO 13423, on the other hand, orders federal agencies to improve energy efficiency and reduce greenhouse gas emissions by 3% annually through fiscal year 2015 or by 30% by fiscal year 2015, relative to their energy use and emissions in fiscal year 2003. EO 13423 also mandates that federal agencies use sustainable practices when purchasing products and services. Implementing instructions issued by the Department of Energy require that agencies give preference in their procurement and acquisition programs to energy produced from renewable sources. At least half of the renewable energy consumed by an agency must come from renewable power sources placed into service after January 1, 1999.
Industry
Electric power is used to operate businesses and industries, provides the power needed for homes and offices, and provides the power for our communications, entertainment, transportation and medical needs. As our energy supply and distribution mix changes, electricity is likely to be used more for local transportation (electric vehicles) and space/water heating needs. According to the Edison Electric Institute, the electric power industry in the U.S. is over $218 billion in size, and will continue to grow with our economy.
According to the U.S. Department of Energy, electricity is generated from the following: coal -51%, nuclear -21%, gas - 16%, hydro - 6%, and oil - 3%, with renewable energy contributing 3%. "Renewable Energy" typically refers to non-traditional energy sources, including solar energy. Due to continuously increasing energy demands, we believe the electric power industry faces the following challenges:
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Limited Energy Supplies . The primary fuels that have supplied this industry, fossil fuels in the form of oil, coal and natural gas, are limited. Worldwide demand is increasing at a time that industry experts have concluded that supply is limited. Therefore, the increased demand will probably result in increased prices, making it more likely that long-term average costs for electricity will continue to increase.
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Generation, Transmission and Distribution Infrastructure Costs . Historically, electricity has been generated in centralized power plants transmitted over high voltage lines, and distributed locally through lower voltage transmission lines and transformer equipment. As electricity needs increase, these systems will need to be expanded. Without further investments in this infrastructure, the likelihood of power shortages ("brownouts" and "blackouts") may increase.
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Stability of Suppliers . Since many of the major countries who supply fossil fuel are located in unstable regions of the world, purchasing oil and natural gas from these countries may increase the risk of supply shortages and cost increases.
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Environmental Concerns and Climate Change . Concerns about global warming and greenhouse gas emissions have resulted in the Kyoto Protocol, various states enacting stricter emissions control laws and utilities in several states being required to comply with renewable portfolio standards, which require the purchase of a certain amount of power from renewable sources.
Solar energy is the underlying energy source for renewable fuel sources, including biomass fuels and hydroelectric energy. By extracting energy directly from the sun and converting it into an immediately usable form, either as heat or electricity, intermediate steps are eliminated. We believe, in this sense, solar energy is one of the most direct and unlimited energy sources.
Solar energy can be converted into usable forms of energy either through the photovoltaic effect (generating electricity from photons) or by generating heat (solar thermal energy). Solar thermal systems include traditional domestic hot water collectors (DHW), swimming pool collectors, and high temperature thermal collectors (used to generate electricity in central generating systems). DHW thermal systems are typically distributed on rooftops so that they generate heat for the building on which they are situated. High temperature thermal collectors typically use concentrating mirror systems and are typically located in remote sites.
ANATOMY OF A SOLAR POWER SYSTEM
Solar power systems convert the energy in sunlight directly into electrical energy within solar cells based on the photovoltaic effect. Multiple solar cells, which produce direct current, or DC, power, are electrically interconnected into solar panels. A typical 180 watt solar panel may have 72 individual solar cells. Multiple solar panels are electrically wired together. The number of solar panels installed on a building are generally selected to meet that building's annual electrical usage, or selected to fill available unshaded roof or ground space. Solar panels are electrically wired to an inverter, which converts the power from DC to alternate current, or AC, and interconnects with the utility grid.
Solar Electric Cells . Solar electric cells convert light energy into electricity at the atomic level. The conversion efficiency of a solar electric cell is defined as the ratio of the sunlight energy that hits the cell divided by the electrical energy that is produced by the cell. By improving this efficiency, we believe solar electric energy becomes competitive with fossil fuel sources. The earliest solar electric devices converted about 1%-2% of sunlight energy into electric energy. Current solar electric devices convert 5%25% of light energy into electric energy (the overall efficiency for solar panels is lower than solar cells because of the panel frame and gaps between solar cells), and current mass produced panel systems are substantially less expensive than earlier systems. Effort in the industry is currently being directed towards the development of new solar cell technology to reduce per watt costs and increase area efficiencies.
Solar Panels . Solar electric panels are composed of multiple solar cells, along with the necessary internal wiring, aluminum and glass framework, and external electrical connections. Although panels are usually installed on top of a roof or on an external structure, certain designs include the solar electric cells as part of traditional building materials, such as shingles and rolled out roofing. Solar electric cells integrated with traditional shingles is usually most compatible with masonry roofs and, while it may offset costs for other building materials and be aesthetically appealing, it is generally more expensive than traditional panels.
Inverters . Inverters convert the DC power from solar panels to the AC power used in buildings. Grid-tie inverters synchronize to utility voltage and frequency and only operate when utility power is stable (in the case of a power failure these grid-tie inverters shut down to safeguard utility personnel from possible harm during repairs). Inverters also operate to maximize the power extracted from the solar panels, regulating the voltage and current output of the solar array based on sun intensity.
Monitoring . There are two basic approaches to access information on the performance of a solar power system. One approach is to collect the solar power performance data locally from the inverter with a hard-wired connection and then transmit that data via the Internet to a centralized database. Data on the performance of a system can then be accessed from any device with a web browser, including personal computers and cell phones. As an alternative to web-based remote monitoring, most commercial inverters have a digital display on the inverter itself that shows performance data and can also display this data on a nearby personal computer with a hard-wired or wireless connection.
Net Metering . The owner of a grid-connected solar electric system may not only buy, but may also sell, electricity each month. This is because electricity generated by the solar electric system can be used on-site or fed through a meter into the utility grid. Utilities are required to buy power from owners of solar electric systems (and other independent producers of electricity) under the Public Utilities Regulatory Policy Act of 1978 (PURPA). For instance, California's net metering law provides that all utilities must allow customers with solar electric systems rated up to 1.5 megawatts to interconnect with the local utility grid and receive retail value for the electricity produced. When a home or business requires more electricity than the solar power array is generating (for example, in the evening), the need is automatically met by power from the utility grid. When a home or business requires less electricity than the solar electric system is generating, the excess is fed (or sold) back to the utility and the electric meter actually spins backwards. Used this way, the utility serves as a backup to the solar electric similar to the way in which batteries serve as a backup in stand-alone systems.
Solar Power Benefits
The direct conversion of light into energy offers the following benefits compared to conventional energy sources:
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Economic - Once a solar power system is installed, the cost of generating electricity is fixed over the lifespan of the system. There are no risks that fuel prices will escalate or fuel shortages will develop. In addition, cash paybacks for systems range from 5 to 25 years, depending on the level of state and federal incentives, electric rates, annualized sun intensity and installation costs. Solar power systems at customer sites generally qualify for net metering to offset a customer's highest electric rate tiers, at the retail, as opposed to the wholesale, electric rate.
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Convenience - Solar power systems can be installed on a wide range of sites, including small residential roofs, the ground, covered parking structures and large industrial buildings. Solar power systems also have few, if any, moving parts and are generally guaranteed to operate for 25 years resulting, we believe, in low maintenance and operating costs and reliability compared to other forms of power generation.
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Environmental - We believe solar power systems are one of the most environmentally friendly ways of generating electricity. There are no harmful greenhouse gas emissions, no wasted water, no noise, no waste generation and no particulates. Such benefits continue for the life of the system.
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Security - Producing solar power improves energy security both on an international level (by reducing fossil energy purchases from hostile countries) and a local level (by reducing power strains on local electrical transmission and distribution systems).
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Infrastructure - Solar power systems can be installed at the site where the power is to be used, thereby reducing electrical transmission and distribution costs. Solar power systems installed and operating at customer sites may also save the cost of construction of additional energy infrastructure including power plants, transmission lines, distribution systems and operating costs.
We believe the volatility of fuel costs, environmental concerns and national energy security concerns make it likely that the demand for solar and renewable energy solutions will grow geometrically given federal mandates, the recent stimulus package and. The federal government, and several states (primarily California and New Jersey), have put a variety of incentive programs in place that directly spur the installation of grid-tied solar power systems, so that customers will "purchase" their own power generating system rather than "renting" power from a local utility. These programs include:
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Rebates - to customers (or to installers) to reduce the initial cost of the solar power system, generally based on the size of the system. California, New Jersey, New York, Connecticut and other states have rebates that can substantially reduce initial costs.
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Tax Credits - federal and state income tax offsets, directly reducing ordinary income tax. New York and California currently offer state tax credits. There is currently a 10% federal tax credit up to $2,000 for residential systems, and a 30% federal tax credit (with no cap) for business systems.
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Accelerated Depreciation - solar power systems installed for businesses (including applicable home offices) are generally eligible for accelerated depreciation.
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Net Metering - provides a full retail credit for energy generated.
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Feed-in Tariffs - are additional credits to consumers based on how much energy their solar power system generates. Feed-in Tariffs set at appropriate rates have been successfully used in Europe to accelerate growth.
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Renewable Portfolio Standards - require utilities to deliver a certain percentage of power generated from renewable energy sources.
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Renewable Energy Credits (RECs) - are additional credits provided to customers based on the amount of renewable energy they produce.
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Solar Rights Acts - state laws to prevent unreasonable restrictions on solar power systems. California's Solar Rights Act has been updated several times in past years to make it easier for customers of all types and in all locations to install a solar power system.
According to PV News, California and New Jersey account for approximately 90% of the U.S. residential market. We believe this is largely attributable to the fact that they currently have the most attractive incentive programs. The California Solar Initiative provides $3.2 billion of incentives toward solar development over 11 years. In addition, recently approved regulations in New Jersey require solar photovoltaic power to provide 2% of New Jersey's electricity needs by 2020, requiring the installation of 1,500 megawatts of solar electric power. According to DSIRE (the Database of State Incentives for Renewable Energy) at least 18 other states also have incentive programs. We expect that such programs, as well as federal tax rebates and other incentives, will continue to drive growth in the solar power market for the near future.
SALES AND MARKETING
Historically, we have generated sales through the direct efforts of management and its preexisting relationships. However, as we expand the breadth of our operations, our sales and marketing program will entail our participation in industry trade shows, individual consultations with prospective customers, hiring additional sales personnel and direct marketing.
COMPETITION
We face intense competition in the manufacture, design, marketing and installation of solar power systems. We believe that we have less than 5% of the market as compared to our principal competitors. Our principal competitors include SunPower Corporation, another vertically integrated solar products and services company, SunEdison LLC, an installer and integrator, and Evergreen Solar, Inc., United Solar Ovonic LLC, Schott Solar Inc. and Kyocera Corporation, solar panel and solar cell manufacturers. A significant number of our competitors are developing or currently producing products based on the more advanced photovoltaic technologies, including thin film solar module, amorphous silicon, string ribbon and nano technologies, which may eventually offer cost advantages over the crystalline polysilicon technologies currently used by us. However, we believe our solar systems will provide the following benefits compared with competitors' systems:
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superior performance delivered by maximizing energy delivery and financial return through systems technology design;
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superior systems design to meet customer needs and reduce cost;
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superior channel breadth and delivery capability including turnkey systems; and
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significant cost savings due to our vertically integrated structure that enables us to source our own high quality, low-cost solar cells directly from suppliers and avoid paying brokers' fees on the cells.
We also compete against other power generation sources including conventional fossil fuels supplied by utilities, other alternative energy sources such as wind, biomass, concentrated solar power and emerging distributed generation technologies such as micro-turbines, sterling engines and fuel cells. We believe solar power has certain advantages when compared to these other power generating technologies. We believe solar power offers a stable power price compared to utility network power, which typically increases as fossil fuel prices increase. In addition, solar power systems are deployed in many sizes and configurations and do not produce air, water and noise emissions. Most other distributed generation technologies create environmental impacts of some sort. However, due to the relatively high manufacturing costs compared to most other energy sources, solar energy is generally not competitive without government incentive programs.
Competition is intense, and many of our competitors have significantly greater access to financial, technical, manufacturing, marketing, management and other resources than we do. Many also have greater name recognition, a more established distribution network and a larger base of customers. In addition, many of our competitors have well-established relationships with our current and potential suppliers, manufacturing partners and customers and have extensive knowledge of our target markets. As a result, our competitors may be able to devote
greater resources to the research, development, promotion and sale of their products and respond more quickly to evolving industry standards and changing customer requirements than we can. Consolidation or strategic alliances among our competitors may strengthen these advantages and may provide them greater access to customers or new technologies. In addition to facing competition from other solar power system providers, our competitors may enter into strategic relationships with or be acquired by our customers. To the extent that government funding for research and development grants, customer tax rebates and other programs that promote the use of solar and other renewable forms of energy are limited, we compete for such funds, both directly and indirectly, with other renewable energy providers and with current and potential customers.
ENVIRONMENTAL, HEALTH AND SAFETY REGULATIONS
We are subject to a variety of federal, state and local governmental laws and regulations related to the purchase, storage, use and disposal of hazardous materials. We are also subject to occupational health and safety regulations designed to protect worker health and safety from injuries and adverse health effects from exposure to hazardous chemicals and working conditions. If we fail to comply with present or future environmental laws and regulations, we could be subject to fines, or a cessation of operations. In addition, under some federal, state and local statutes and regulations, a governmental agency may seek recovery and response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for the release or otherwise was not at fault.
Any failure by us to control the use of, or to restrict adequately the discharge of, hazardous substances could subject us to substantial financial liabilities, operational interruptions and adverse publicity, any of which could materially and adversely affect our business, results of operations and financial condition.
Solar Energy Industry
We believe that economic and national security issues, technological advances, environmental regulations seeking to limit emissions by fossil fuel, air pollution regulations restricting the release of greenhouse gasses, aging electricity transmission infrastructure and depletion and limited supply of fossil fuels, has made reliance on traditional sources of fuel for generating electricity less attractive. Government policies, in the form of both regulation and incentives, have accelerated the adoption of solar technologies by businesses and consumers. For example, in the U.S., EPACT enacted a 30% investment tax credit for solar, and in January 2006 California approved the largest solar program in the country's history that provides for long term subsidies in the form of rebates to encourage use of solar energy where possible.
Government Subsidies and Incentives
Various subsidies and tax incentive programs exist at the federal and state level to encourage the adoption of solar power including capital cost rebates, performance-based incentives, feed-in tariffs, tax credits and net metering. Capital cost rebates provide funds to customers based on the cost of size of a customer's solar power system. Performance-based incentives provide funding to a customer based on the energy produced by their solar system. Under a feed-in tariff subsidy, the government sets prices that regulated utilities are required to pay for renewable electricity generated by end-users. The prices are set above market rates and may be differentiated based on system size or application. Feed-in tariffs pay customers for solar power system generation based on kilowatt-hours produced, at a rate generally guaranteed for a period of time. Tax credits reduce a customer's taxes at the time the taxes are due. Under net metering programs, a customer can generate more energy than used, during which periods the electricity meter will spin backwards. During these periods, the customer "lends" electricity to the grid, retrieving an equal amount of power at a later Net time metering programs enable end-users to sell excess solar electricity to their local utility in exchange for a credit against their utility bills. Net metering programs are usually combined with rebates, and do not provide cash payments if delivered solar electricity exceeds their utility bills. In addition, several states have adopted renewable portfolio standards, which mandate that a certain portion of electricity delivered to customers come from a set of eligible renewable energy resources. Under a renewable portfolio standard, the government requires regulated utilities to supply a portion of their total electricity in the form of renewable electricity. Some programs further specify that a portion of the renewable energy quota must be from solar electricity.
Despite the benefits of solar power, there are also certain risks and challenges faced by solar power. Solar power is heavily dependent on government subsidies to promote acceptance by mass markets. We believe that the near-term growth in the solar energy industry depends significantly on the availability and size of these government subsidies and on the ability of the industry to reduce the cost of generating solar electricity. The market for solar energy products is, and will continue to be, heavily dependent on public policies that support growth of solar energy. There can be no assurances that such policies will continue. Decrease in the level of rebates, incentives or other governmental support for solar energy would have an adverse affect on our ability to sell our products.
Building Codes
We are required to obtain building permits and comply with local ordinances and building codes for each project, the cost of which is included in our estimated costs for each proposal.
Employees
As of March 31, 2010 we have 3 full time employees. We have also engaged 3 consultants, which we anticipate will become full-time employees.
ITEM 1A.
ITEM 1A. RISK FACTORS
Risks Relating to Our Business
Since we lack a meaningful operating history, it is difficult for potential investors to evaluate our business.
Our limited operating history makes it difficult for potential investors to evaluate our business or prospective operations. Since our formation, we have generated only limited revenues. As a startup, we are subject to all the risks inherent in the initial organization, financing, expenditures, complications and delays inherent in a new business. Investors should evaluate an investment in us in light of the uncertainties encountered by start-up companies in a competitive environment. Our business is dependent upon the implementation of our business plan, as well as our ability to enter into agreements with suppliers, customers or integral service providers on commercially favorable terms. There can be no assurance that our efforts will be successful or that we will ultimately be able to attain profitability.
We will need additional financing to execute our business plan and fund operations, which additional financing may not be available on reasonable terms or at all.
Although in December 2008 and February 2009 we raised an aggregate of $3.475 million in a private placement, our ultimate success may depend upon our ability to raise additional capital. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us.
We may be required to pursue sources of additional capital through various means, including joint venture projects and debt or equity financings. Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and the issuances of incentive awards under equity employee incentive plans, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition.
Our ability to obtain needed financing may be impaired by such factors as the capital markets, both generally and specifically in the renewable energy industry, and the fact that we are not profitable, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.
We are dependent upon key personnel whose loss may adversely impact our business.
We rely heavily on the expertise, experience and continued services of our senior management, especially Steven Hoffmann, our Chairman and Chief Executive Officer. The loss of Mr. Hoffmann, or an inability to attract or retain other key individuals, could materially adversely affect us. We seek to compensate and motivate our executives, as well as other employees, through competitive salaries and bonus plans, but there can be no assurance that these programs will allow us to retain key employees or hire new key employees. As a result, if Mr. Hoffmann left us, we could face substantial difficulty in hiring a qualified successor and could experience a loss in productivity while any such successor obtains
the necessary training and experience. In connection with the Merger, we assumed an employment agreement with Mr. Hoffmann. However, there can be no assurance that the terms of this employment agreement will be sufficient to retain Mr. Hoffmann.
We may be unable to complete our development, manufacturing and commercialization plans, and the failure to do so will significantly harm our business plans, prospects, results of operations and financial condition.
Commercializing our planned solar modules and processes depends on a number of factors, including but not limited to:
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further product and manufacturing process development;
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development of certain critical tools;
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completion, refinement and management of our supply chain;
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completion, refinement, and management of our distribution channels;
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demonstration of efficiencies that will make our products attractively priced; and
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developing an adequate sales force and sales channels necessary to distribute our products and achieve our desired revenue goals.
We do not have any experience in carrying out any of the foregoing tasks, and, as such, we cannot assure investors that the strategies we intend to employ will enable us to support the large-scale manufacturing of commercially desirable solar modules.
We may not be able to effectively control and manage our growth.
Our strategy envisions a period of potentially rapid growth. We currently maintain nominal administrative and personnel capacity due to the startup nature of our business, and our expected growth may impose a significant burden on our future planned administrative and operational resources. The growth of our business may require significant investments of capital and increased demands on our management, workforce and facilities. We will be required to substantially expand our administrative and operational resources and attract, train, manage and retain qualified management and other personnel. Failure to do so or satisfy such increased demands would interrupt or would have a material adverse effect on our business and results of operations.
Our products have never been sold on a mass market commercial basis, and we do not know whether they will be accepted by the market.
The solar energy market is at a relatively early stage of development and the extent to which solar modules will be widely adopted is uncertain. If our products are not accepted by the market, our business plans, prospects, results of operations and financial condition will suffer. Moreover, demand for solar modules in our targeted markets may not develop or may develop to a lesser extent than we anticipate. The development of a successful market for our proposed products and our ability to sell our products at a lower price per watt may be affected by a number of factors, many of which are beyond our control, including, but not limited to:
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failure to produce solar power products that compete favorably against other solar power products on the basis of cost, quality and performance;
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competition from conventional energy sources and alternative distributed generation technologies, such as wind energy;
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failure to develop and maintain successful relationships with suppliers, distributors and strategic partners; and
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customer acceptance of our products.
If our proposed products fail to gain sufficient market acceptance, our business plans, prospects, results of operations and financial condition will suffer.
We could become involved in intellectual property disputes that create a drain on our resources and could ultimately impair our assets.
We rely on trade secrets and our industry expertise and know how. We do not knowingly infringe on patents, copyrights or other intellectual property rights owned by other parties; however, in the event of an infringement claim, we may be required to spend a significant amount of money to defend a claim, develop a non-infringing alternative or to obtain licenses. We may not be successful in developing such an alternative or obtaining licenses on reasonable terms, if at all. Any litigation, even if without merit, could result in substantial costs and diversion of our resources and could materially and adversely affect our business and operating results.
Upon commencement of manufacturing with UNICOR, we will be dependent upon a limited number of third party suppliers, some of whom will be located in foreign countries, for key materials, and any disruption from such suppliers or fluctuations in foreign currency and exchange rates could prevent us from manufacturing and selling cost-effective products.
We anticipate manufacturing our products with UNICOR using materials and components procured from a limited number of third-party suppliers. If we fail to maintain our relationships with these suppliers, or fail to secure additional supply sources from other solar cell suppliers, UNICOR may be unable to manufacture our products or our products may be available only at a higher cost or after a long delay. Any of these factors could prevent us from delivering our products to our customers within required timeframes, resulting in potential order cancellations and lost revenue. Further, we intend to purchase solar cells for our solar modules from suppliers located in foreign countries. We will therefore be subject to risks associated with fluctuations in foreign currency and exchange rates. As a result, we may not be able to manufacture our products with UNICOR at competitive prices and may not achieve our expected margins or cover our costs.
As our business plan contemplates the federal government becoming a principal customer of ours, any reduction in anticipated orders from the federal government could significantly reduce our sales and operating results.
Currently we anticipate selling our solar modules and integration services principally to agencies of the federal government, in addition to projects that unicor product is able to be purchased and sold under unicor guidelines. Should the federal government fail to materialize as a substantial customer or should the federal government cut back orders following commencement of sales, it could significantly reduce our revenues and harm our operating results. Our customer relationships with the federal government are in their infancy and we cannot guarantee investors that we will ultimately receive significant revenues from this customer over the long term. Any loss of business with the federal government will be particularly damaging unless we are able to diversify our customer base and substantially expand sales to other customers.
We recognize revenue on system installations on a "percentage of completion" basis and payments are due upon the achievement of contractual milestones and any delay or cancellation of a project could adversely affect our business.
We recognize revenue on our system installations on a "percentage of completion" basis and, as a result, our revenue from these installations is driven by the performance of our contractual obligations, which is generally driven by time-lines for the installation of our solar power systems at customer sites. This could result in unpredictability of revenue and, in the near term, a revenue decrease. As with any project-related business, there is the potential for delays within any particular customer project. Variation of project time-lines and estimates may impact our ability to recognize revenue in a particular period. In addition, certain customer contracts may include payment milestones due at specified points during a project. Because we must invest substantial time and incur significant expense in advance of achieving milestones and the receipt of payment, failure to achieve milestones could adversely affect our business and results of operations.
We are exposed to risks associated with product liability claims in the event that the use or installation of our products results in injury or damage, and we have limited insurance coverage to protect against such claims.
Since our products are electricity-producing devices, it is possible that users could be injured or killed by our products, whether by product malfunctions, defects, improper installation or other causes. As a planned manufacturer, distributor, and installer of products that will be used by consumers, we will face an inherent risk of exposure to product liability claims or class action suits in the event that the use of the solar power products we sell or install results in injury or damage. We are unable to predict whether product liability claims will be brought against us in the future or the effect of any resulting adverse publicity on our business. Moreover, to the extent that a claim is brought against us we may not have adequate resources in the event of a successful claim against us. We rely on our general liability insurance to cover product liability claims and have not obtained separate product liability insurance. The successful assertion of product liability claims against us could result in potentially significant monetary damages and, if our insurance protection is inadequate, could require us to make significant payments, which could have a materially adverse effect on our financial results.
We sometimes act as the general contractor for our customers in connection with the installation of solar power systems and are subject to risks associated with construction, bonding, cost overruns, delays and other contingencies, which could have a material adverse effect on our business and results of operations
We sometimes act as the general contractor for our customers in connection with the installation of solar power systems. All essential costs are estimated at the time of entering into the sales contract for a particular project, and these are reflected in the overall price that we charge our customers for the project. These cost estimates are preliminary and may or may not be covered by contracts between us or the other project developers, subcontractors, suppliers and other parties to the project. In addition, we require qualified, licensed subcontractors to install most of our systems. Shortages of such skilled labor could significantly delay a projector otherwise increase our costs. Should miscalculations in planning a projector defective or late execution occur, we might not achieve our expected margins or cover our costs. Also, most systems customers require performance bonds issued by a bonding agency. Due to the general performance risk inherent in construction activities, it has become increasingly difficult recently to secure suitable bonding agencies willing to provide performance bonding. In the event we are unable to obtain bonding, we will be unable to bid on, or enter into, sales contracts requiring such bonding.
Delays in solar panel or other supply shipments, other construction delays, unexpected performance problems in electricity generation or other events could cause us to fail to meet these performance criteria, resulting in unanticipated and severe revenue and earnings losses and financial penalties. Construction delays are often caused by inclement weather, failure to timely receive necessary approvals and permits, or delays in obtaining necessary solar panels, inverters or other materials. The occurrence of any of these events could have a material adverse effect on our business and results of operations.
Our business requires us to place our employees and technicians in our customers’ properties, which could give rise to claims against us.
If we are unsuccessful in our installation of products and provision of services to customers, we could damage or cause a material adverse change to their premises or property, which could give rise to claims against us. Any such claims could be material in dollar amount and/or could significantly damage our reputation. In addition, we are exposed to various risks and liabilities associated with placing our employees and technicians in the homes and workplaces of others, including possible claims of errors and omissions based on the alleged actions of our personnel, including harassment, theft of client property, criminal activity and other claims.
The execution of our growth strategy is dependent upon the continued availability of third-party financing arrangements for our customers.
For many of our projects, our customers will have entered into agreements with third parties to pay for solar energy over an extended period of time based on energy savings generated by our solar power systems, rather than paying us to purchase our solar power systems. For these types of projects, most of our customers will choose to purchase solar electricity under a power purchase agreement with a financing company that purchases the system from us. These structured finance arrangements are complex and may not be feasible in many situations. In addition, customers opting to finance a solar power system may forgo certain tax advantages associated with an outright purchase on an accelerated basis which may make this alternative less attractive for certain potential customers. If financing companies are unwilling or unable to finance the cost of our products, or if the parties that have historically provided this financing cease to do so, or only do so on terms that are substantially less favorable for these customers, or us our growth will be adversely affected.
Environmental obligations and liabilities could have a substantial negative impact on our financial condition, cash flows and profitability.
We are subject to a variety of federal, state, local and foreign laws and regulations relating to the protection of the environment, including those governing the use, handling, generation, processing, storage, transportation and disposal of, or human exposure to, hazardous and toxic materials, the discharge of pollutants into the air and water, and occupational health and safety. We are also subject to environmental laws that allow regulatory authorities to compel, or seek reimbursement for, cleanup of environmental contamination at sites now or formerly owned or operated by us and at facilities where our waste is or has been disposed. We may incur significant costs and capital expenditures in complying with these laws and regulations. In addition, violations of, or liabilities under, environmental laws or permits may result in restrictions being imposed on our operating activities or in our being subjected to substantial fines, penalties, criminal proceedings, third party property damage or personal injury claims, cleanup costs or other costs. Also, future developments such as more aggressive enforcement policies, the implementation of new, more stringent laws and regulations, or the discovery of presently unknown environmental conditions or non-compliance may require expenditures that could have a material adverse effect on our business, results of operations and financial condition. Further, greenhouse gas emissions have increasingly become the subject of international, national, state and local attention. Although fixture regulations could potentially lead to an increased use of alternative energy, there can be no guarantee that such future regulations will encourage solar technology. Given our limited history of operations, it is difficult to predict future environmental expenses.
If we do not achieve satisfactory yields or quality in manufacturing our solar modules with UNICOR or if our suppliers furnish us with defective solar cells, our sales could decrease and our relationships with our customers and our reputation maybe harmed.
The success of our business depends upon our ability to incorporate high quality and yield solar cells into our products. We anticipate testing the quality and yield of our solar products and the solar cells that we incorporate into our solar products, and we intend to source our solar cells from manufacturers we believe are reputable. Nonetheless, our solar modules may contain defects that are not detected until after they are shipped or are installed because we cannot test for all possible scenarios. These defects could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from product development efforts and significantly affect our customer relations and business reputation. In addition, we may not be able to fulfill our purchase orders if we purchase a large number of defective solar cells. The number of solar cells that we purchase at any time is based upon expected demand for our products and an assumed ratio of defective to non-defective solar cells. If this ratio is greater than expected, we may not have an adequate number of non-defective solar cells to allow us to fulfill our purchase orders on time. If we do not fulfill orders for our products because we have a shortage of non-defective solar cells or deliver modules with errors or defects, or if there is a perception that these solar cells or solar modules contain errors or defects, our credibility and the market acceptance and sales of our products could be harmed.
We face risks associated with our anticipated international business.
We expect to establish, and to expand over time, international commercial operations and activities. Such international business operations will be subject to a variety of risks associated with conducting business internationally, including the following:
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Changes in or interpretations of foreign regulations that may adversely affect our ability to sell our products, perform services or repatriate profits to the United States;
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the imposition of tariffs;
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economic or political instability in foreign countries;
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imposition of limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures;
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conducting business in places where business practices and customs are unfamiliar and unknown;
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the imposition of restrictive trade policies;
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the existence of inconsistent laws or regulations;
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the imposition or increase of investment requirements and other restrictions or requirements by foreign governments;
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uncertainties relating to foreign laws and legal proceedings;
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fluctuations in foreign currency and exchange rates; and
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compliance with a variety of federal laws, including the Foreign Corrupt Practices Act.
We do not know the impact that these regulatory, geopolitical and other factors may have on our international business in the future.
Risks Relating to Our Industry
The reduction or elimination of government subsidies and economic incentives for on-grid solar electricity applications could reduce demand for our solar modules, lead to a reduction in our net sales and harm our operating results .
The reduction, elimination or expiration of government subsidies and economic incentives for solar electricity could result in the diminished competitiveness of solar energy relative to conventional and non-solar renewable sources of energy, which would negatively affect the growth of the solar energy industry overall and our net sales specifically. We believe that the near-term growth of the market for on-grid applications, where solar energy is used to supplement the electricity a consumer purchases from the utility network, depends significantly on the availability and size of government and economic incentives. Currently the cost of solar electricity substantially exceeds the retail price of electricity in every significant market in the world. As a result, federal, state and local governmental bodies in many countries have provided subsidies in the form of tariffs, rebates, tax write-offs and other incentives to end-users, distributors, systems integrators and manufacturers of photovoltaic products. Many of these government incentives could expire, phase-out over time, exhaust the allocated funding or require renewal by the applicable authority. A reduction, elimination or expiration of government subsidies and economic incentives for solar electricity could result in the diminished competitiveness of solar energy, which would in turn hurt our sales and financial condition.
Technological changes in the solar power industry could render our solar power products uncompetitive or obsolete, which could reduce our market share and cause our revenues to decline.
The solar power market is characterized by continually changing technology requiring improved features, such as increased efficiency, higher power output and lower price. Our failure to further refine our technology and develop and introduce new solar power products could cause our products to become uncompetitive or obsolete, which could reduce our market share and cause our revenues to decline. The solar power industry is rapidly evolving and competitive. We will need to invest significant financial resources in research and development to keep pace with technological advances in the solar power industry and to effectively compete in the future. A variety of competing solar power technologies are under development by other companies that could result in lower manufacturing costs or higher product performance than those expected for our solar power products. Our development efforts may be rendered obsolete by the technological advances of others, and other technologies may prove more advantageous for the commercialization of solar power products.
The solar power industry experiences industry-wide shortage of polysilicon. Shortage and oversupply pose several risks to our business, including possible constraints on revenue growth and possible decreases in our gross margins and profitability.
There is currently an industry-wide shortage of polysilicon, which has resulted in significant price increases in solar cells. Polysilicon is an essential raw material used in the production of solar cells. We expect that the average spot price of polysilicon will continue to increase in the near-term. Increases in polysilicon prices could increase the price we pay for solar cells, which could impact our manufacturing costs and our net income. Even with these price increases, demand for solar cells has increased, and many of our principal competitors have announced plans to add additional manufacturing capacity. As this manufacturing capacity becomes operational, it may increase the demand for polysilicon in the near-term and further exacerbate the current shortage. Polysilicon is also used in the semiconductor industry generally and any increase in demand from that sector will compound the shortage. The production of polysilicon is capital intensive and adding additional capacity requires significant lead time. While we are aware that several new facilities for the manufacture of polysilicon are under construction, we do not believe that the supply imbalance will be remedied in the near-term, which could lead to higher prices for, and reduced availability of, solar cells.
As polysilicon supply increases, the corresponding increase in the global supply of so/ar ce//s and panels may cause substantial downward pressure on the prices of our products, resulting in lower revenues and earnings.
The scarcity of polysilicon has resulted in the underutilization of solar panel manufacturing capacity at many of our competitors and potential competitors, particularly in China. As additional polysilicon becomes available, we expect solar panel production globally to increase. Decreases in polysilicon pricing and increases in solar panel production could each result in substantial downward pressure on the price of solar cells and panels, including our products. Such price reductions could have a negative impact on our revenue and earnings, and materially adversely affect our business and financial condition.
If solar power technology is not suitable for widespread adoption or sufficient demand for solar power products does not develop or takes longer to develop than we anticipate, our revenues would not significantly increase and we would be unable to achieve or sustain profitability.
The market for solar power products is emerging and rapidly evolving, and its future success is uncertain. If solar power technology proves unsuitable for widespread commercial deployment or if demand for solar power products fails to develop sufficiently, we would be unable to generate enough revenues to achieve and sustain profitability. In addition, demand for solar power products in the markets and geographic regions we target may not develop or may develop more slowly than we anticipate. Many factors will influence the widespread adoption of solar power technology and demand for solar power products, including:
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cost-effectiveness of solar power technologies as compared with conventional and non-solar alternative energy technologies;
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performance and reliability of solar power products as compared with conventional and non-solar alternative energy products;
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success of alternative distributed generation technologies such as fuel cells, wind power and micro turbines;
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fluctuations in economic and market conditions that impact the viability of conventional and non-solar alternative energy sources, such as increases or decreases in the prices of oil and other fossil fuels;
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capital expenditures by customers that tend to decrease when the United States or global economy slows;
•
continued deregulation of the electric power industry and broader energy industry; and
•
availability of government subsidies and incentives.
We face intense competition, and many of our competitors have substantially greater resources than we do.
We operate in a competitive environment that is characterized by price fluctuation and technological change. We compete with major international and domestic companies. Some of our current and potential competitors have greater market recognition and customer bases, longer operating histories and substantially greater financial, technical, marketing, distribution, purchasing, manufacturing, personnel and other resources than we do. In addition, many of our competitors are developing and are currently producing products based on new solar power technologies that may ultimately have costs similar to, or lower than, our projected costs. As a result, they may be able to respond more quickly to changing customer demands or to devote greater resources to the development, promotion and sales of solar and solar-related products than we can.
Our business plan relies on sales of our solar power products and our competitors with more diversified product offerings may be better positioned to withstand a decline in the demand for solar power products. Some of our competitors own, partner with, have longer term or stronger relationships with solar cell providers that could result in them being able to obtain solar cells on a more favorable basis than us. It is possible that new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share, which would harm our business. If we fail to compete successfully, our business would suffer and we may lose or be unable to gain market share.
Because our industry is highly competitive and has low barriers to entry, we may lose market share to larger companies that are better equipped to weather a deterioration in market conditions due to increased competition.
Our industry is highly competitive and fragmented, subject to rapid change and has low barriers to entry. We may in the future compete for potential customers with solar and heating, ventilating, and air conditioning, or HVAC, systems installers and servicers, electricians, utilities and other providers of solar power equipment or electric power. Some of these competitors may have significantly greater financial, technical and marketing resources and greater name recognition than we have.
We believe that our ability to compete depends in part on a number of factors outside of our control, including:
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the ability of our competitors to hire, retain and motivate qualified personnel;
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the ownership by competitors of proprietary tools to customize systems to the needs of a particular customer;
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the price at which others offer comparable services and equipment;
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the extent of our competitors’ responsiveness to customer needs; and
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installation technology.
Competition in the solar power services industry may increase in the future, partly due to low barriers to entry, as well as from other alternative energy resources now in existence or developed in the future. Increased competition could result in price reductions, reduced margins or loss of market share and greater competition for qualified personnel. There can be no assurance that we will be able to compete successfully against current and future competitors. If we are unable to compete effectively, or if competition results in a deterioration of market conditions, our business and results of operations would be adversely affected.
We may be vulnerable to the efforts of electric utility companies lobbying to protect their revenue streams am/from competition from solar power systems.
Electric utility companies could lobby for a change in the relevant legislation in their markets to protect their current revenue streams. Any adverse changes to the regulations and policies of the solar energy industry could deter end-user purchases of solar power products and investment in the research and development of solar power technology. In addition, electricity generated by solar power systems mostly competes with expensive peak hour electricity, rather than the less expensive average price of electricity. Modifications to the peak hour pricing policies of utilities such as flat rate pricing, would require solar power systems to achieve lower prices in order to compete with the price of electricity. Any changes to government regulations or utility policies that favor electric utility companies could reduce our competitiveness and cause a significant reduction in demand for our products.
A drop in the retail price of conventional energy or non-solar alternative energy sources may negatively impact our profitability.
We believe that a customer’s decision to purchase or install solar power capabilities is primarily driven by the cost of electricity from other sources and their anticipated return on investment resulting from solar power systems. Fluctuations in economic and market conditions that impact the prices of conventional and non-solar alternative energy sources, such as decreases in the prices of oil and other fossil fuels, could cause the demand for solar power systems to decline, which would have a negative impact on our profitability. Changes in utility electric rates or net metering policies could also have a negative effect on our business.
Existing regulations and changes to such regulations concerning the electrical utility industry may present technical, regulatory and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products.
The market for electricity generation products is heavily influenced by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as internal policies and regulations promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the U.S. and in a number of other countries, these regulations and policies are being modified and may continue to be modified. Customer purchases of~ or further investment in the research and development of; alternative energy sources, including solar power technology, could be deterred by these regulations and policies, which could result in a significant reduction in the potential demand for our solar power products. For example, utility companies commonly charge fees to larger, industrial customers for disconnecting from the electric gild or for having the capacity to use power from the electric ~id for back-up purposes. These fees could increase the cost to our customers of using our solar power products and make them less desirable, thereby harming our business, prospects, results of operations and financial condition.
We anticipate that our solar power products and their installation will be subject to oversight and regulation in accordance with national, state and local laws and ordinances relating to building codes, safely, environmental protection, utility interconnection and metering and related matters. There is also a burden in having to track the requirements of individual states and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to our solar power products may result in significant additional expenses to us and our resellers and their customers and, as a result, could cause a significant reduction in demand for our solar power products.
Risks Relating to Our Organization and Our Common Stock
We are subject to the reporting requirements of federal securities laws, which can be expensive and may divert resources from other projects, thus impairing our ability to grow.
We are subject to the information and reporting requirements of the Exchange Act and other federal securities laws, including compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC (including reporting of the Merger) and furnishing audited reports to stockholders will cause our expenses to be higher than they would have been if we remained privately held and did not consummate the Merger.
It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance personnel in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, then we may not be able to obtain the independent accountant certifications required by such act, which may preclude us from keeping our filings with the SEC current.
If we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.
Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operation and access to capital. We have not performed an in-depth analysis to determine if historical un-discovered failures of internal controls exist, and may in the future discover areas of our internal control that need improvement.
Public company compliance may make it more difficult for us to attract and retain officers and directors.
The Sarbanes-Oxley Act and new rules subsequently implemented by the SEC have required changes in corporate governance practices of public companies. As a public company, we expect these new rules and regulations to increase our compliance costs in 2008 and beyond and to make certain activities more time consuming and costly. As a public company, we also expect that these new rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance in the future and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.
Because we became public by means of a reverse merger, we may not be able to attract the attention of major brokerage firms.
There may be risks associated with us becoming public through a reverse merger.” Securities analysts of major brokerage firms may not provide coverage of us since there is no incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will, in the future, want to conduct any secondary offerings on behalf of our post-Merger company.
Our stock price is volatile
The market price of our common stock is highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:
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changes in our industry;
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competitive pricing pressures;
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our ability to obtain working capital financing;
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additions or departures of key personnel;
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limited “public float” in the bands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for our common stock;
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sales of our common stock (particularly following effectiveness of the resale registration statement required to be filed in connection with the Private Placement);
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our ability to execute our business plan;
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operating results that fall below expectations;
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loss of any strategic relationship;
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regulatory developments;
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economic and other external factors; and
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period-to-period fluctuations in our financial results
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.
Because there is a limited market in our common stock, stockholders May Have Difficulty In Selling Our Common Stock And Our Common Stock May Be Subject To Significant Price Swings.
There is a very limited market for our common stock. There has been little activity in our common stock and on some days there is no trading in our common stock. Because of the limited market for our common stock, the purchase or sale of a relatively small number of shares may have an exaggerated effect on the market price for our common stock. We cannot assure stockholders that they will be able to sell common stock or, that if they are able to sell their shares, that they will be able to sell the shares in any significant quantity at the quoted price.
Our common stock is subject to “penny stock,” rules of the Securities and Exchange Commission which would make it more difficult for our investors to sell their shares.
Our common stock is subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act. The penny stock rules generally apply to companies whose common stock is not listed on The Nasdaq Stock Market or other national securities exchange and trades at less than $4.00 per share, other than companies that have had average revenue of at least $6,000,000 for the last three years or that have tangible net worth of at least $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.
Because our directors and executive officers are among our largest stockholders, they can exert significant control over our business and affairs and have actual or potential interests that may depart from those of our other stockholders.
Our directors and executive officers own or control a significant percentage of our common stock. As of April 14, 2010, our directors and executive officers may be deemed beneficially to own an aggregate of approximately 24,090,416 shares of our common stock, representing 35.2 % of the outstanding shares of our common stock. Additionally, these figures do not reflect any increase in beneficial ownership that such persons may experience in the future upon vesting or other maturation of exercise rights under any of the options or warrants they may hold or in the future be granted or if they otherwise acquire additional shares of our common stock. The interests of such persons may differ from the interests of our other stockholders. As a result, in addition to their board seats and offices, such persons will have significant influence over and control all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the following actions:
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to elector defeat the election of our directors;
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to amend or prevent amendment of our Certificate of Incorporation or By-laws;
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to effect or prevent a merger, sale of assets or other corporate transaction; and
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to control the outcome of any other matter submitted to our stockholders for vote
Such persons’ stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
N/A
ITEM 2.
ITEM 2. PROPERTIES.
We lease approximately 800 square feet of office space in New York, New York for approximately $2,582 per month on a month-to-month basis, which does not include additional services. This facility serves as our corporate headquarters.
We believe that our current facilities are adequate for our immediate and near-term needs. Additional space may be required as we expand our activities. We do not currently foresee any significant difficulties in obtaining any required additional facilities. In the opinion of the management, our property is adequately covered by insurance.
We are not dependent on a specific location for the operation of our business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Action was brought against the Company in the Supreme Court of the State of New York, County of New York by several of its bridge note holders seeking to recover amounts loaned to the Company pursuant to promissory notes issued in July 2008. The actions were discontinued in March 2010 and the parties have entered into settlement negotiations.
Action was brought against the Company by a former recruiter in the Civil Court of the County of New York for breach of contract. The Company is currently defending this action and cannot estimate what the outcome of the case may be.
Action was brought in the Civil Court of the County of New York against the Company for breach of contract by an attorney who previously rendered services to the Company. The Company is currently defending this action and cannot estimate what the outcome of the case may be. The plaintiff also separately received an arbitration award against the Company before the Joint Committee on Fee Disputes, New York County.
Action was brought against the Company by former officer of the Company in the Superior Court of the State of California, County of San Diego for breach of contract. The matter is scheduled for arbitration on April 30, 2010. The Company cannot currently estimate what the outcome of the case may be.
ITEM 4.
ITEM 4. RESERVED
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION
Our common stock was initially quoted on the OTC Bulletin Board on September 5, 2008 under the symbol “YOOO”. During the year ended December 31, 2008, there was no trading activity. On January 27, 2009, following our name change to IX Energy Holdings, Inc., our common stock began trading under the symbol “IXEH”. The following table sets forth the quarterly high and low bid information for our common stock during the fiscal year ended December 31, 2009.
As of April 14, 2010, we had 66,773,635 shares of common stock issued and outstanding and approximately 49 stockholders of record of our common stock.
Dividend Policy
As of the date of hereof, we have not paid any cash dividends to stockholders. The declaration of any future cash dividend will be at the discretion of our Board of Directors and will depend upon our earnings, if any, our capital requirements and financial position, our general economic and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, into our business.
Equity Compensation Plan Information
In February 2009, our board of directors adopted an incentive stock option plan (the “2009 Option Plan”). Pursuant to this plan, incentive stock options or non-qualified options to purchase an aggregate of 12,000,000 shares of common stock may be issued. The plan may be administered by our board of directors or by a committee to which administration of the plan, or part of the plan, may be delegated by our board of directors. Options granted under this plan are not generally transferable by the optionee except by will, the laws of descent and distribution or pursuant to a qualified domestic relations order, and are exercisable during the lifetime of the optionee only by such optionee. Options granted under the plan vest in such increments as is determined by our board of directors or designated committee. To the extent that options are vested, they must be exercised within a maximum of thirty days of the end of the optionee's status as an employee, director or consultant, or within a maximum of 12 months after such optionee's termination or by death or disability, but in no event later than the expiration of the option term. The exercise price of all stock options granted under the plan will be determined by our board of directors or designated committee. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of our outstanding capital stock, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date.
Our board of directors believes in order to attract and retain the services of executives and other key employees, it is necessary for us to have the ability and flexibility to provide a compensation package which compares favorably with those offered by other companies and, accordingly, voted unanimously to adopt the 2009 Option Plan.
The following table shows information with respect to each equity compensation plan under which our common stock is authorized for issuance at December 31, 2009:
RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
N/A
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.
The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
GENERAL
Since its inception, IX Energy’s operations have principally involved the integration and installation of solar power systems manufactured by third parties. However, in an effort to become a vertically integrated solar and renewable energy solutions company that markets, designs, engineers, installs and finances solar systems today, IX Energy, entered into an agreement with Federal Prison Industries, Inc. ("UNICOR") to manufacture solar modules that will be marketed primarily to federal military and civilian agencies. We are currently in negotiations with various manufacturing partners to set up a solar panel manufacturing joint venture where we will provide the equipment and sales and marketing and our joint venture partner will provide operating capital for a the joint venture.
Recent Events
Prior to December 30, 2008, we were a development stage company that sought to market and sell a natural energy drink derived from coconut water to distributors of soft drinks in Israel. On December 30, 2008, we completed a reverse merger, pursuant to which we merged with and into a private company, IX Energy, with IX Energy being the surviving company. In connection with this reverse merger, we discontinued our former business and succeeded to the business of IX Energy as our sole line of business. Since IX Energy acquired a controlling voting interest, it was deemed the accounting acquirer, while we were deemed the legal acquirer. The historical financial statements of the Company are those of IX Energy and of the consolidated entities from the date of merger and subsequent.
Results of Operations
Year Ended December 31, 2009 Compared to the year ended December 31, 2008.
Revenues . During the year ended December 31, 2009, we recorded revenues of approximately $2,182,000 as compared to revenue of approximately $10,832,000 for the year ended December 31, 2008. Approximately $10,612,000 of the revenues in 2008 was primarily due to the fulfillment of our UNICOR Government Agreement and sales to one commercial customer to supply solar panels. In 2009 we had solar panel sales with five customers, however, 92% or approximately $1,911,000 of our revenues were related to our fulfillment contract above.
Cost of Sales . During the year ended December 31, 2009, we recorded cost of sales of approximately $1,687,000 as compared to cost of sales of approximately $10,399,000 for the year ended December 31, 2008. Approximately $10,235,000 of the cost of sales in 2008 was related to the sale of solar panels pertaining to the fulfillment discussed above.
Operating Expenses . During the year ended December 31, 2009, we recorded operating expenses of approximately $8,109,000, as compared to operating expenses of approximately $1,604,000 for the year ended December 31, 2008, representing an increase of approximately $6,505,000. Approximately $5,294,000 of our operating expenses in 2009 relate to stock-based compensation, which represented approximately 62% of our operating expenses during 2009. Stock-based compensation during 2008 was approximately $68,000. This represents an increase of approximately $5,226,000, and reflects the significant amount of common stock and common stock options and warrants granted in 2009 relative to 2008. Additionally, consulting, legal and salary and payroll taxes expenses were approximately $712,000, $364,000 and $758,000, respectively or approximately 56% of total operating expenses in 2009 after stock-based compensation. During 2008, consulting, legal, and salary expenses were approximately $307,000, $242,000 and $410,000, respectively or approximately 62% of total operating expenses after stock-based compensation.
Other income (expense). During the year ended December 31, 2009 and 2008, we recorded approximately $472,000 and $(1,649,000) in other income and expense, respectively. During 2009, we granted certain warrants to investors (see Note 8 to the consolidated financial statements) that we determined to be derivative liabilities. At the inception date, we recorded approximately $1,423,000 in derivative expense related to the fair value of the warrants. We utilize the Black Scholes pricing model to value the warrants. A significant input into the model, and ultimate driver of the fair value of the warrants, is the Company’s stock price. Significant increases or decreases in our stock price would increase or decrease the value of the derivative liability, respectively. At inception or the date we initially recorded the derivative liability (February 25, 2009) our stock price was $1.03 per share. At December 31, 2009, our stock price was $.037 per share. As a result of the significant decrease in our stock price, we recorded approximately $2,482,000 in unrealized gain on derivative liability. During 2008, we had no derivative liabilities. Other expense in 2008 relates primarily to the letter of credit of approximately $1,503,000 associated with personal guarantees of our management for certain letters of credit. The expense represented the fair value of the common stock issued related to our guarantees. There were no such guarantees in 2009.
Loss from Operations . During the year ended December 31, 2009, we recorded an operating loss of approximately $7,614,000, as compared to an operating loss of approximately $1,172,000 for the year ended December 31, 2008, representing an increase of approximately $6,442 ,000. This increase in loss from operations was primarily due to increases in stock-based compensation discussed above, as well as significant increases in salaries, consulting and legal expenses.
Provision for Income Taxes . We did not recognize any provisions for income taxes during the year ended December 31, 2009 and the year ended December 31, 2008 due to our net losses during these periods and the valuation allowances on the resulting deferred tax assets.
Liquidity and Capital Resources
We have historically met our liquidity requirements from a variety of sources, including the sale of equity and debt securities to related parties and institutional investors. Based on our strategy and the anticipated growth in our business, we believe that our liquidity needs will increase. The amount of such increase will depend on many factors, including building out our management team, the costs associated with the fulfillment of our projects, whether we upgrade our technology, and the amount of inventory required for our expanding business.
Although we raised an aggregate of $725,000 and $2.6 million in a private placement in 2009 and 2008, respectively our ultimate success will depend upon our ability to raise additional capital going forward. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us.
We may be required to pursue sources of additional capital through various means, including joint venture projects and debt or equity financings. Future financings through equity investments are likely to be dilutive to existing stockholders.
Our ability to obtain needed financing may be impaired by such factors as the capital markets, both generally and specifically in the renewable energy industry, and the fact that we are not profitable, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.
Cash and Cash Equivalents. As of December 31, 2009, we had cash of approximately $108,000, as compared to cash and cash equivalents of approximately $4,737,000 as of December 31, 2008.
Net Cash (Used In) Provided By Operating Activities. Net cash used in operating activities totaled approximately $(4,220,000) for the year ended December 31, 2009, as compared to cash provided by operating activities of approximately $2,071,000 for the year ended December 31, 2008. This decrease was primarily due to our increase in losses, decrease in deferred revenues of approximately $(1,884,000), and changes in the fair value of the derivative liability of approximately $(2,482,000) offset by increases in common stock issued for services to employees of approximately $3,675,000, common stock issued for services to consultants of approximately $784,000, stock-based compensation to employees of approximately $758,000, derivative liability expense of approximately $1,423,000, and registration rights liability of approximately $348,000.
Net Cash Used in Investing Activities. Net cash used in investing activities totaled approximately $(259,000) during the year ended December 31, 2009, as compared to net cash used in investing activities of $(1,327,000) during the year ended December 31, 2008. Cash used in investing activities during the year ended December 31, 2009 was primarily comprised of purchases of property and equipment for approximately $(271,000), offset by property and equipment proceeds of $13,000. For the year ended December 31, 2008, our net cash used in investing activities was comprised of approximately $(1,334,000) in property and equipment purchases.
Net Cash (Used in) Provided By Financing Activities. Net cash used in financing activities totaled approximately $(150,000) during the year ended December 31, 2009, as compared to net cash provided by financing activities of approximately $3,816,000 during the year ended December 31, 2008. The proceeds for 2009 were derived from the issuance of $725,000 in common stock with warrants, offset by approximately $(202,000) in offering costs related to the issuance. This was offset by payments of $(523,000) and $(150,000), respectively in related party notes and notes payable to others. During 2008, we had proceeds from common stock with warrants of $2,750,000, offset by $(123,000) in related direct offering costs. In Addition, we had proceeds of approximately $938,000 from the issuance of related party notes, as well as $500,000 in proceeds from the issuance of notes payable to others. This was offset by repayments of $(250,000) in related party notes during 2008.
Critical Accounting Policies and Estimates
We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are disclosed throughout this section where such policies affect our reported and expected financial results. Our preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Going Concern
As reflected in the accompanying financial statements, the Company has a net loss of $7,141,767 and net cash used in operations of $4,220,300 for the year ended December 31, 2009; and had a working capital deficit of $1,076,841 and a stockholders’ deficit of $903,227 at December 31, 2009.
The Company believes its current available cash, along with anticipated revenues, may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. The Company may require additional funding to finance the growth of its current and expected future operations, as well as to achieve its strategic objectives. The Company believes that the further implementation of its business plan will provide future positive cash flows. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
The ability of the Company to continue its operations is dependent on management’s plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements.
Use of Estimates. 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 and disclosure of contingent assets and liabilities at the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates for the year ended December 31, 2009 and 2008 included management’s estimate for recording costs and estimated earnings in excess of billings, estimating the loss on uncompleted contracts in the period when known, and a 100% valuation allowance for deferred taxes due to the Company’s continuing and expected future losses.
Cash and Cash Equivalents. For the purpose of reporting cash flows, we consider all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. At December 31, 2009 and 2008, the balance exceeded the federally insured limit by $-0- and $4,736,812, respectively.
Accounts Receivable. Accounts receivable represents trade obligations from customers that are subject to normal trade collection terms, without discounts, however, in certain cases we are entitled to rebates upon the completion of certain jobs post installation. The Company periodically evaluates the collectability of its accounts receivable and considers the need to adjust an allowance for doubtful accounts based upon historical collection experience and specific customer information. Actual amounts could vary from the recorded estimates. We have determined that as of December 31, 2009 and 2008 no allowance was required.
At both December 31, 2009 and 2008, the Company had a concentration of accounts receivable from one customer totaling 100%. For the year ended December 31, 2009, the Company had a concentration of sales with two customers totaling 92% and 8%, respectively. For the year ended December 31, 2008, the Company had a concentration of sales with two customers totaling 46% and 43%.
Revenue Recognition. We follow the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" ("SAB 104") for revenue recognition and we record revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the product is delivered and installed, (3) the sales price to the customer is fixed or determinable and (4) collectability of the related customer receivable is reasonably assured. We have two methods of revenue recognition. For our construction contracts, we record revenues based upon the use of the percentage of completion method. For certain energy products that we resell to third parties, we record revenue based upon the shipment date.
Share-Based Compensation. We follow U.S. GAAP, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including grants of employee stock options based on estimated fair values. We have used the Black-Scholes option pricing model to estimate grant date fair value for all option grants. The assumptions we use in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As such, as we use different assumptions based on a change in factors, our stock-based compensation expense could be materially different in the future.
Income Taxes. Significant management judgment is required in developing the provision for income taxes, including the determination of foreign tax liabilities, deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. Our management evaluates our ability to realize our deferred tax assets on a quarterly basis and adjusts our valuation allowance when we believe that it is more likely than not that the asset will not be realized in accordance with U.S. GAAP.
Under U.S. GAAP, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized. U.S. GAAP addresses the accounting and disclosure of uncertain tax positions. U.S GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken. At December 31, 2009 and 2008, the Company did not record any liabilities for uncertain tax positions.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial information required by this Item is attached hereto at the end of this report beginning on page and is hereby incorporated by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9(T). CONTROLS AND PROCEDURES.
Management’s Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management's Annual Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Our management -evaluated the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, our management used the COSO framework, an integrated framework for the evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon the evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2009 because of material weaknesses in our internal control over financial reporting. A material weakness is a control deficiency that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by employees in the normal course of their assigned functions. Our management concluded that we have several material weaknesses in our internal control over financial reporting because of inadequate segregation of duties over authorization, review and recording of transactions as well as the financial reporting of such transactions. Due to the Company's limited resources, management has not developed as plan to mitigate the above material weaknesses. Despite the existence of these material weaknesses, we believe the financial information presented herein is materially correct and in accordance with the generally accepted accounting principles.
Changes in Internal Control Over Financial Reporting.
During the most recent quarter ended December 31, 2009, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Auditor Attestation
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit the company to provide only management's report in this annual report .
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
Effective November 30, 2009, the Company entered into a purchase and sale agreement (the “Agreement”) with Tynsolar Corporation (“Tynsolar”). The Agreement provides for the sale of certain solar panel manufacturing equipment by the Company to Tynsolar. Pursuant to the terms of the Agreement, the consideration for the equipment is USD$1,400,000 which shall be payable as follows: (i) the elimination of $800,000 credit to Tynsolar; (ii) an irrevocable Letter of Credit in the amount of $600,000(which shall provide that $480,000 will be released to the Company FOB the Port of New York-New Jersey); and (ii) $120,000 payable within 30days of the arrival of the Equipment in Taiwan.
The Agreement also provides for the termination of the certain OEM Agreement between the parties dated as of November 28, 2008 and the release of all possible claims either party may have against each other in connection with the OEM Agreement.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth the names and ages of the members of our Board of Directors and our executive officers and the positions held by each as of April 14, 2010. There are no family relationships among any of our Directors and Executive Officers.
Executive Biographies
Steven Hoffmann, Chief Executive Officer, Chief Financial Officer and Director. Steven Hoffmann was appointed as our Chief Executive Officer, Chief Financial Officer and as a director on December 30, 2008. He founded IX Energy in 2006 and has served as its Chief Executive Officer and Chairman since inception. He has served as IX Energy’s Chief Financial Officer since November 2008. From 2004 until 2006, Mr. Hoffmann served as the east coast regional sales manager of Solar Integrated Technologies, Inc., a designer, manufacturer, marketer and installer of solar roofing and power generation systems. From 2002 until 2004, Mr. Hoffmann was a sales manager with Turtle & Hughes Inc., a distributor of electrical and industrial equipment. Additionally, Mr. Hoffman’s family has been a leading provider of institutional steam power and heating generation systems for primarily East Coast companies and institutions for the last thirty years. Mr. Hoffmann has had ten years experience with the institutional production, manufacturing, marketing and sales of these systems. The Board of Directors believes Mr. Hoffman is qualified to serve as a Director based on his extensive experience in the solar energy industry.
George Weiner, Chief Technology Officer. Mr. Weiner was appointed Chief Technology Officer on March 23, 2009. Mr. Weiner has more than 34 years experience in the energy industry, including serving as President and sole owner of GALE Associates, AKA GALE Architectural Services, from 1986 to 2009, and as Director of Energy Conservation for the City of New York from 1979 to 1980. Mr. Weiner has overseen numerous energy conservation grant projects for schools and hospitals in addition to designing numerous RFPs for solar projects. Mr. Weiner is a member of the American Institute of Architecture, and serves as a director for FIRST (Fully Independent Residential Solar Technologies). He earned a Masters in Architecture from M.I.T. and an M.B.A. from Pace University.
Robert Lynch, Jr., Director. Robert Lynch was appointed to our board of directors on February 5, 2009. Mr. Lynch served as a Director of IX Energy, Inc. from May 2007 through December 2008. Mr. Lynch has been President of American & Foreign Enterprises, Inc. (“AFE”), an investment firm, for the last 20 years. Among its many enterprises, AFE is partnered with Hochtief AG and has worked with international investment banks including Goldman Sachs & Co., BV Bank of Munich and Citibank.. Mr. Lynch has been a director of many public companies in various industries, including AMASYS, Dames & Moore (environmental/geotechnical engineering), Data Broadcasting Corporation (real-time financial market data) and Turner Construction Company. Mr. Lynch currently serves as a director of Comtex News Network, Inc., a leading provider of business-related electronic real time news, content and SmarTrend® market products. The Board of Directors believes that Mr. Lynch is qualified to serve on the Board because of his extensive experience as a director on the boards of directors of both domestic and international corporations for over 30 years.
Board of Directors
Our Directors are elected by the vote of a majority in interest of the holders of our voting stock and hold office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified.
A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board individually or collectively consent in writing to the action.
Directors may receive compensation for their services and reimbursement for their expenses as shall be determined from time to time by resolution of the Board. Each of our directors currently receives no cash compensation for their service on the Board of Directors, but do receive a small amount of stock options.
Board Leadership Structure and Role in Risk Oversight
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in the best interests of the Company and its shareholders to combine these roles.
Our Board of Directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensure that risks undertaken by our Company are consistent with the Board’s appetite for risk. While the Board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our Board leadership structure supports this approach.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
To our knowledge, during the past ten years, none of our directors, executive officers, promoters, control persons, or nominees has been:
· the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
· convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
· subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any Federal or State authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;
· found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law.
· the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (a) any Federal or State securities or commodities law or regulation; (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
· the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Audit Committee
We do not have a separately designated standing audit committee.
Code of Ethics
We have not adopted a formal Code of Business Conduct and Ethics.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth all compensation earned in respect of our Chief Executive Officer and those individuals who received compensation in excess of $100,000 per year, collectively referred to as the named executive officers, for our last three completed fiscal years.
Summary Compensation Table
(1)
Mr. Hoffmann was appointed as our Chief Executive Officer, Chief Financial Officer and as a Director on December 30, 2008.
(2)
Mr. Bopp was appointed as our President on December 30, 2008. Effective January 31, 2009, Mr. Bopp is no longer serving as the Company’s President and Chief Operating Officer.
(3)
Mr. Weinstein served as the Company’s CFO through December 31, 2009.
(4)
Ms. Morgan resigned as President on October 22, 2009.
(A) Amounts represents the aggregated grant date fair value of awards computed in accordance with ASC Topic 718
Employment Agreements with Executive Officers
On May 1, 2008, the Company’s wholly-owned subsidiary, IX Energy, Inc. entered into an employment agreement with Steven Hoffmann, pursuant to which Mr. Hoffmann agreed to serve as Chief Executive Officer of IX Energy, Inc. Mr. Hoffman’s employment agreement is for a term of 2 years. Pursuant to his employment agreement, Mr. Hoffman is entitled to an annual base salary of $225,000. In addition, Mr. Hoffman was entitled to receive compensation of $80,000 for unpaid salary and expenses for 2008 upon the Company’s sale of debt and/or equity securities in one or more transactions that result in gross proceeds to the Company of at least $2.5 million. Mr. Hoffman is also entitled to an annual bonus in an amount to be determined by the Company’s compensation committee or by the independent members of the Company’s board of directors, if no such committee exists. Pursuant to his employment agreement, Mr. Hoffmann is also eligible to participate in incentive, saving, retirement and other welfare benefit plans of the Company. In addition, Mr. Hoffman is entitled to receive a multi-year grant of non-qualified stock options in an amount equal to 6% of the total common shares of the Company following the reverse merger, vesting at a rate of 1/3 per year commencing on May 1, 2008.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table sets forth information with respect to grants of options to purchase our common stock to the named executive officers at December 31, 2009.
Director Compensation
The directors of the Company did not receive any compensation during the fiscal year ended December 31, 2009.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of April 14, 2010 with respect to the beneficial ownership of the outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of our executive officers and directors; and (iii) our directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.
* Less than 1%
(1)
Except as otherwise indicated, the address of each beneficial owner is c/o IX Energy Holdings, Inc., 711 Third Ave., New York, NY 10017
(2)
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to the shares shown. Except where indicated by footnote and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of voting securities shown as beneficially owned by them. Based upon 66,773,635 shares of common stock issued and outstanding as of March ___, 2010
(3)
Mr. Hoffman was appointed as our Chief Executive Officer, Chief Financial Officer and as a director on December 30, 2008.
(4)
Includes (i) 21,868,639 shares of common stock and (ii) options to purchase 1,721,777 shares of common stock.
(5)
Mr. Lynch was appointed as a Director of the Company on February 5, 2009. Does not include 534,572 shares held by Mr. Lynch’s wife, which Mr. Lynch disclaims beneficial ownership.
(6)
Includes warrants to purchase 3,250,000 shares of common stock of the Company which are exercisable at a price of $0.01.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Board Determination of Independence
Our board of directors has determined that Robert lynch, Jr.is “independent” as that term is defined by the National Association of Securities Dealers Automated Quotations (“NASDAQ”), but that Steven Hoffmann cannot be deemed “independent” in light of his employment as our Chief Executive Officer and Chief Financial Officer.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed by our principal accountant for the audit of our annual financial statements, review of financial statements included in the quarterly reports and other fees that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2009 and 2008 were $66,673 and $45,478, respectively. In addition, we were billed fees $15,625 for audit related work for 2009.
Tax Fees
The aggregate fees billed for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2009 and 2008 were $0 and $0, respectively. These fees related to the preparation of federal income and state franchise tax returns.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The Company currently does not have a designated Audit Committee, and accordingly, the Company’s Board of Directors’ policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Company’s Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.
ITEM 15.
ITEM 15. EXHIBITS.
* Filed herewith.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
IX ENERGY HOLDINGS INC.
Date
By:
/s/
Steven Hoffmann
Chief Executive Officer, Chief Financial Officer and Director
(Principal Executive Officer,Principal Accounting Officer and
Principal Financial Officer)
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
Chief Executive Officer, Acting Chief Financial Officer and Director (Principal Executive Officer,
April 15, 2010
Steven Hoffmann
Principal Accounting Officer and
Principal Financial Officer)
Director
April 15, 2010
Robert Lynch, Jr.
IX ENERGY HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders: IX Energy Holdings, Inc.
We have audited the accompanying consolidated balance sheets of LX Energy Holdings, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related statements of operations, changes in stockholders' equity (deficit) 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting, Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of IX Energy Holdings, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders' (deficit) equity and cash flows for the years ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a net loss of $7,141,767 and net cash used in operations of $4,220,300 for the year ended December 31, 2009; and has a working capital deficit of $1,076,841, and a stockholders' deficit of $903,227 at December 31, 2009. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in regards to these matters is also described in Note 2.
/s/ Berman & Company, P.A.
Berman & Company, P.A.
Boca Raton, Florida April 15, 2010
551 NW 77th Street Suite 107 • Boca Raton, FL 33487
Phone: (561) 864-4444 • Fax: (561) 892-3715
www.bermancpas.com • infobermancpas.com
Registered with the PCAOB • Member A1CPA Center for Audit Quality
Member American Institute of Certified Public Accountants
Member Florida Institute of Certified Public Accountants
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IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 1 - Organization, Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
IX Energy Holdings, Inc. (“IX Energy” or the “Company”) was incorporated on March 3, 2006 under the laws of the State of Delaware. The Company is a renewable energy company primarily focused on solar power project development and integration. In an effort to become a vertically integrated solar products and services company that designs, markets and installs its own solar power systems, the Company plans to design solar modules that will be marketed primarily to federal military and civilian agencies.
On March 25, 2009, the Company incorporated IX Geo, LLC (“IX Geo”) under the laws of Delaware as a wholly owned subsidiary of IX Energy. This entity is inactive.
On March 25, 2009, the Company formed IX Legatus6, LLC under the laws of Delaware as a wholly owned subsidiary of IX Energy. On July 21, 2009, the Company changed the name of IX Legatus6, LLC to IX Energy Solutions, LLC (“IX Solutions”). This entity is inactive.
IX Solutions became operational on August 26, 2009. Under the terms of a Joint Venture agreement (“JV”), the company contributed $5,000 in cash; however, the other venturer did not contribute their $5,000. During 2009, the Company wrote off $17,238 in advances made under the JV, as the Company determined that the JV would not become operational.
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IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Going Concern
As reflected in the accompanying financial statements, the Company has a net loss of $7,141,767 and net cash used in operations of $4,220,300 for the year ended December 31, 2009; and had a working capital deficit of $1,076,841 and a stockholders’ deficit of $903,227 at December 31, 2009.
The Company believes its current available cash, along with anticipated revenues, may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. The Company may require additional funding to finance the growth of its current and expected future operations, as well as to achieve its strategic objectives. The Company believes that the further implementation of its business plan will provide future positive cash flows. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
The ability of the Company to continue its operations is dependent on management’s plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates included management’s estimate for recording costs and estimated earnings in excess of billings, estimating the loss on uncompleted contracts in the period when known, depreciable lives of property, valuation of warrants and stock options granted for services or compensation, estimates of the probability and potential magnitude of contingent liabilities, and a 100% valuation allowance for deferred taxes due to the Company’s continuing and expected future losses.
Risks and Uncertainties
The Company operates in an industry that is subject to intense competition and rapid technological change, and is in a state of fluctuation as a result of the credit crisis occurring in the United States. The Company's operations are subject to significant risk and uncertainties including financial, operational, technological, and regulatory risks including the potential risk of business failure.
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IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. At December 31, 2009 and 2008, the balance exceeded the federally insured limit by $0 and $4,249,256 respectively.
Accounts Receivable and Concentrations
Accounts receivable represents trade obligations from customers that are subject to normal trade collection terms, without discounts. In certain cases the Company is entitled to rebates upon the completion of certain jobs post installation. For percentage of completion installation projects, the amounts are rebates and they are factored into the total estimated contract price when doing percentage of completion to recognize revenue on each project. At December 31, 2009, and 2008 the Company recognized a rebate for $0 and $95,000, respectively related to completed projects. These rebates are not a part of every installation contract. The Company periodically evaluates the collectability of its accounts receivable and considers the need to adjust an allowance for doubtful accounts based upon historical collection experience and specific customer information. Actual amounts could vary from the recorded estimates. The Company determined that as of December 31, 2009 and 2008, respectively, no allowance was required.
At December 31, 2009 and 2008, respectively, the Company had a concentration of accounts receivable from one customer totaling 100%.
For the year ended December 31, 2009, the Company had a concentration of sales with two customers totaling 92% and 8%, respectively. For the year ended December 31, 2008, the Company had a concentration of sales with two customers totaling 46% and 43%, respectively.
Equipment
Property and equipment are stated at cost. Maintenance and repairs are charged to operations as incurred. Betterments or renewals are capitalized when incurred. Depreciation is provided using the straight line method over the estimated useful lives of the asset.
Long Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. There were no impairment charges taken during the years ended December 31, 2009 and 2008, respectively.
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IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Basic and Diluted Loss Per Share
Basic earnings per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.
The computation of basic and diluted loss per share for the years ended December 31, 2009 and 2008 excludes the following potentially dilutive securities because their inclusion would be anti-dilutive:
As a result of the reverse acquisition and recapitalization (see Note 9) and stock dividend (see Note 8(B)), all share and per share amounts have been retroactively restated.
Revenue Recognition
The Company follows the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 for revenue recognition and records revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the product is delivered and installed, (3) the sales price to the customer is fixed or determinable, and (4) collectability of the related customer receivable is reasonably assured.
The Company has two methods of revenue recognition:
(1) Energy Product Reseller
The Company purchases product from suppliers and resells them to third parties. The Company records the revenue from the buyer and related cost paid to the suppliers on these types of arrangements.
In 2009, the Company entered into similar arrangements wherein the Company had no installation responsibility and no further obligation after delivery was made to the customers. Payments from the customers are received in advance of delivery of solar panels and are treated as deferred revenue. Payments are then made to the suppliers and cost of materials is recorded. A pro-rata portion of the deferred revenue from the customers is recognized as shipments are made.
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IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Revenues from these arrangements are recognized upon shipment from the supplier to these third parties. In addition, the Company has reviewed U.S. GAAP to ascertain the relevance of gross versus net reporting. Upon the Company’s review of this guidance, as well as SAB No. 104, the Company has determined that it is subject to gross reporting as it bears the risk of physical loss of inventory in each of these arrangements, takes title to the inventory, is the primary obligor in the arrangements, establishes the pricing with customers, has discretion in the selection of suppliers, determines product specifications with customers and suppliers and it has credit risk on all sales.
For the years ended December 31, 2009 and 2008, respectively, approximately 100% and 98% of revenues were earned under this method.
(2) Percentage of Completion
Revenue from construction contracts are reported under the percentage-of-completion method for financial statement purposes. The estimated revenue for each contract reflected in the financial statements represent that percentage of estimated total revenue that costs incurred to date bear to estimated total costs, based on the Company’s current estimates. With respect to contracts that extend over one or more accounting periods, revisions in costs and revenue estimates during the course of the work are reflected in the period the revisions become known. When current estimates of total contract costs indicate a loss, provision is made for the entire estimated loss.
The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in excess of amounts billed. The liability, “Estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.
Billing practices for these projects are governed by the contract terms of each project based upon actual costs incurred, achievement of milestones, or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized under the percentage-of-completion method of accounting. With the exception of claims and change orders that are in the process of being negotiated with customers, unbilled work is usually billed during normal billing processes following achievement of the contractual requirements.
For the years ended December 31, 2009 and 2008, respectively, approximately 3% and 2% of revenues were earned under this method.
Cost of Sales
Cost of sales, including contract costs represents costs directly related to the purchasing and installation of the Company’s solar panel products. Primary costs include direct materials and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs.
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IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Shipping and Handling Costs
Shipping and handling costs associated with inbound freight are included in cost of sales. Amounts billed to customers for shipping and handling is recorded as revenue. For the years ended December 31, 2009 and 2008, respectively, the Company had no such revenues or expenses.
Foreign Currency Transactions
The Company’s functional currency is the U.S. dollar. In those instances where the Company has foreign currency transactions, the financial statements are translated to U.S. dollars in accordance with U.S. GAAP. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the date of settlement. Gains and losses arising on settlement of foreign-currency-denominated transactions or balances are included in the determination of income. The Company’s primary foreign currency transactions are in Euros. The Company has not entered into derivative instruments to offset the impact of foreign currency fluctuations. The Company had foreign currency transaction losses of $0 and $35,875 for the years ended December 31, 2009 and 2008, respectively.
Derivative Financial Instruments
We review any common stock purchase warrants and other freestanding derivative financial instruments at each balance sheet date and classify them on our balance sheet as:
a)
Equity if they (i) require physical settlement or net-share settlement, or (ii) gives us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement), or as
b)
Assets or liabilities if they (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
We assess classification of our common stock purchase warrants and other freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model. Finally, the Company has applied the related guidance when determining the existence of liquidated damage provisions. At December 31, 2009, the Company had recorded a liquidated damages provision due to the failure to file and have declared effective a registration statement.
Share-Based Payments
Generally, all forms of share-based payments, including stock option grants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expense resulting from share-based payments are recorded in cost of goods sold or general and administrative expense in the consolidated statement of operations, depending on the nature of the services provided.
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IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Income Taxes
The Company accounts for income taxes in accordance with accounting guidance now codified as FASB ASC Topic 740, “Income Taxes,” which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.
Accounting guidance now codified as FASB ASC Topic 740-20, “Income Taxes - Intraperiod Tax Allocation,” clarifies the accounting for uncertainties in income taxes recognized in accordance with FASB ASC Topic 740-20 by prescribing guidance for the recognition, de-recognition and measurement in financial statements of income tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns, including a decision whether to file or not to file in a particular jurisdiction. FASB ASC Topic 740-20 requires that any liability created for unrecognized tax benefits is disclosed. The application of FASB ASC Topic 740-20 may also affect the tax bases of assets and liabilities and therefore may change or create deferred tax liabilities or assets. The Company would recognize interest and penalties related to unrecognized tax benefits in income tax expense. At December 31, 2009 and 2008, respectively, the Company did not record any liabilities for uncertain tax positions.
Segment Information
During 2009 and 2008, the Company only operated in one segment; therefore, segment information has not been presented.
Recent Accounting Pronouncements
In April 2009, the FASB issued guidance now codified as FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” which amends previous guidance to require disclosures about fair value of financial instruments in interim as well as annual financial statements in the current economic environment. This pronouncement was effective for periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on the Company’s business, financial condition or results of operations; however, these provisions of FASB ASC Topic 820 resulted in additional disclosures with respect to the fair value of the Company’s financial instruments.
In May 2009, the FASB issued guidance now codified as FASB ASC Topic 855, “Subsequent Events,” which establishes general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This pronouncement was effective for interim or fiscal periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on the Company’s business, results of operations or financial position; however, the provisions of FASB ASC Topic 855 resulted in additional disclosures with respect to subsequent events.
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IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
In June 2009, the Financial Accounting Standards Board (FASB) issued guidance now codified as FASB Accounting Standards Codification (ASC) Topic 105, “Generally Accepted Accounting Principles,” as the single source of authoritative non-governmental U.S. GAAP. FASB ASC Topic 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the FASB Codification will be considered non-authoritative. These provisions of FASB ASC Topic 105 were effective for interim and annual periods ending after September 15, 2009 and, accordingly, were effective for the Company for the current fiscal reporting period. The adoption of this pronouncement did not have an impact on the Company’s business, financial condition or results of operations, but will impact the Company’s financial reporting process by eliminating all references to pre-codification standards. On the effective date of FASB ASC Topic 105, the Codification superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative.
In January 2010, the Financial Accounting Standards Board ("FASB") issued updated guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. This update requires new disclosures on significant transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy (including the reasons for these transfers) and the reasons for any transfers in or out of Level 3. This update also requires a reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure requirements, this update clarifies certain existing disclosure requirements. For example, this update clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities rather than each major category of assets and liabilities. This update also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. This update will become effective for the Company with the interim and annual reporting period beginning January 1, 2010, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will become effective for the Company with the interim and annual reporting period beginning January 1, 2011. The Company will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. Other than requiring additional disclosures, adoption of this update will not have a material effect on the Company's consolidated financial statements.
Note 2 - Fair Value
We have categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy specified by GAAP.
The levels of fair value hierarchy are as follows:

Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access;

Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals; and

Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, we categorize such financial asset or liability based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.
The following are the major categories of assets and liabilities measured at fair value on a recurring basis during the year ended December 31, 2009, using quoted prices in active markets for identical assets and liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
On a recurring basis, the Company utilizes the Black Scholes pricing model to value certain derivative liability warrants. The inputs into the model on a recurring basis include the exercise price of the Company’s common stock, the market price of the Company’s common stock, expected volatility of the Company’s common stock, expected life of the warrants, and the risk-free interest rate.
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IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 3 - Construction and Energy Reseller Contracts
Information with respect to uncompleted contracts is summarized below for the years ended December 31, 2009 and December 31, 2008:
Energy Reseller Contracts
In June 2008, the Company entered into an agreement with Federal Prison Industries, Inc. ("UNICOR"), under which UNICOR provides the labor for assembly and production of solar panels to the Company, and the Company sells the solar panels to Federal, civilian and military government customers of both the Company and this customer. The agreement has a term of five years. Under the UNICOR contract, the Company is obligated to perform sales under two separate sales and marketing programs: 1) IX shall actively market to and solicit customers, prepare customer proposals and aid customers in obtaining project financing while UNICOR assembles and produces solar panels and fabricates and assembles the product. Pricing is $0.55 per watt for panel fabrication plus the price of photovoltaic cells that will be added to the price per unit. 2) IX may act as a sales agent for UNICOR. UNICOR may identify potential customers and refer them to IX. In this program, IX and UNICOR may work together to prepare customer proposals and to aid customers in obtaining project financing. Since UNICOR will sell directly to customers in this program, pricing is such that UNICOR will pay a service fee of 25% of the net earnings on the project to IX when payment is received from customers.
In June 2008, the Company received $6,800,000 from UNICOR for the supply of solar cells. This amount was initially recorded as deferred revenue. Shipment of these solar cells began in October 2008. At December 31, 2008, the Company recognized revenue based on shipments under this agreement of $5,003,762. The balance, of $1,796,238, was recognized in revenue during 2009.
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IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
In June 2008, the Company entered into an agreement, under which a supplier provides the labor for the assembly and production of solar panels to the Company, and the Company sells the solar panels to a third party. The agreement has a term of one year. In July and September 2008, the Company received $1,897,335 from this customer for the shipment of solar panels. This amount was initially recorded as deferred revenue. At December 31, 2008, the Company recognized $1,009,740 of revenue. During 2009, the Company sold $1,400,000 of solar panel equipment (see Note 5) to the supplier, and the supplier forgave $800,000 of certain performance obligations included as deferred revenue to the supplier. As of December 31, 2009, related to the sale, the Company has recorded an other receivable for $600,000 due from the supplier.
During the year ended December 31, 2009, in connection with the sale of equipment, the remaining balance associated with deferred revenues totaling approximately $87,000 was recorded as additional revenue since the Company had no further obligation to perform under the terms of this contract with its customer.
Note 4 - Affiliate Charge to Equity
In 2008, a Company related to the Company’s Chief Executive Officer collected certain funds on contracts entered into by the Company. The affiliated entity did not have the ability to repay these funds. As a result, the Company recorded a charge to additional paid in capital of $44,325 to reflect the uncollectible receivable from this related party.
Note 5 - Property and Equipment
At December 31, 2009 and 2008, property and equipment consists of the following:
The solar panel equipment is not in service at December 31, 2009.
Note 6 - Guarantee Letter of Credit
On May 27, 2008 the Company entered in to a standby letter of credit with a bank for $1,600,000. The letter of credit acts as a performance bond, with a customer being the beneficiary, if the Company defaults on their monthly delivery agreement. The Company’s Chief Executive Officer provided a personal guarantee of $800,000 on behalf of the Company for the letter of credit. In exchange for the personal guarantee, the Company issued 2,031,030 shares of the Company’s common stock, having a fair value of $ 751,481 ($0. 37 /share) based upon the fair value of stock issued to a third party for services rendered . During 2009 the letter of credit was released by the Bank, and is not outstanding at December 31, 2009.
On June 30, 2008, two third party shareholders also provided personal guarantees, of $400,000 each, for the letter of credit. In exchange for the personal guarantee, the Company issued 1,015,494 shares of the Company’s common stock to each stockholder, having a total fair value of $ 751,465 ($0. 37 /share), based upon the fair value of stock issued to a third party for services rendered.
The letter of credit was released in February 2009, as the Company fulfilled its obligation under the terms of its government contract with UNICOR.
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IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 7 - Loans, Notes and Accrued Interest Payable
(A) Notes Payable & Accrued Interest Payable - Related Party
On July 21, 2008, the Company issued a note payable, of $900,000, to an affiliate of a stockholder. The note bears interest at 18%, is unsecured, has a default interest rate of 24% and is due 3 business days after the Company receives the cash proceeds from a solar panel installation job. In October and November 2008, the Company repaid $250,000 of principal and $15,622 of accrued interest. During 2009, the Company paid $523,000 of principal and $16,964 of accrued interest, respectively. As of December 31, 2009 and 2008, notes payable to related party is $350,000 and $873,000, respectively. As of December 31, 2009 and 2008, accrued interest to related party is $142,957 and $76,217, respectively. The Company has classified the notes as a current liability as of December 31, 2009, as payment is expected in the next twelve months.
(B) Notes Payable - Other, Conversion to Equity & Accrued Interest Payable - Other
In July 2008, the Company entered into eight promissory note agreements for aggregate principal of $500,000 with various third parties. The notes bear interest at 5%, and the principal and interest is due and payable on the earlier of July 1, 2009 or when the Company completes the sale of any debt securities, common stock or common stock equivalents in a single transaction or series of related transactions resulting in gross proceeds of $3,500,000. In October 2009, the Company paid $150,000 of principal and $9,082 in accrued interest related to these notes (see Note 11(A)2). The Company is currently negotiating the payment terms with the other borrowers, and the $350,000 of principal is classified as current as of December 31, 2009. At December 31, 2008 the balance was $500,000. As of December 31, 2009 and 2008, there is $26,097 and $12,071, respectively of accrued interest related to these notes. (See Note 10A )
In July 2008, the Company entered into a Securities Purchase agreement with all eight of the note holders listed above. The Company issued a total of 270,800 shares to the note holders in connection with these promissory notes. The number of shares each note holder received was in direct proportion to the amount of their promissory notes. The fair value of the common shares are valued at $ 100,195 ($0. 37 /share) based upon the fair value of stock issued to a third party for services rendered. This amount is treated as a debt issue cost and is being amortized to interest expense over the life of the underlying promissory notes.
For the years ended December 31, 2009 and 2008, the Company recorded amortization of debt issue costs to interest expense of $51,816 and $48,379, respectively.
Note 8 - Stockholders’ Equity (Deficit)
Missing 2008*********************ERIC to put in
(A)
Share Issuances
On February 5, 2009, the Company issued 2,646,310 shares of common stock to employees for services rendered, having a fair value of $3,440,203 ($1.30/share), based upon the quoted closing trading price.
On February 5, 2009, the Company issued 26,738 shares of common stock to a consultant for services rendered, having a fair value of $34,760 ($1.30/share), based upon the quoted closing trading price.
On February 12, 2009, the Company issued 150,000 shares of common stock to a former employee for services rendered, having a fair value of $225,000 ($1.50/share), based upon the quoted closing trading price.
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IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
On February 27, 2009, the Company issued 500,000 shares of common stock to a consultant for services rendered, having a fair value of $505,000 ($1.01/share), based upon the quoted closing trading price.
On March 9, 2009, the Company issued 10,000 shares of common stock to an employee for services rendered, having a fair value of $10,100 ($1.01/share), based upon the quoted closing trading price.
On May 12, 2009, the Company issued 135,303 shares of common stock to a consultant for services rendered in full settlement of amounts due of $54,121 ($0.44/share), based upon the price per share paid by investors in the private placement as agreed upon by the Company and the consultant (See Note 9(D)). In connection with this issuance, the Company recorded a loss on settlement of accounts payable of $5,412.
On May 26, 2009, the Company issued 20,000 shares of common stock to a consultant for services rendered as payment for past services due to this consultant. The shares have a fair value of $6,600 ($0.33/share), based upon the quoted closing trading price.
On May 26, 2009, the Company issued 22,500 shares of common stock to a consultant for services rendered pursuant to an agreement dated February 16, 2009. The shares have a fair value of $7,425 ($0.33/share), based upon the quoted closing trading price. In addition, the Company issued 3,000 shares of common stock to this same consultant as payment towards unpaid amounts, having a fair value of $990 ($0.33/share), based upon the quoted closing trading price.
On May 26, 2009, the Company issued 470,000 shares of common stock to a consultant for services rendered pursuant to an agreement dated April 1, 2009 in settlement of $50,000. The fair value of the stock issuance was $155,100 ($0.33/share), based upon the quoted closing trading price. The Company recorded an additional expense for stock issued for services of $108,100. The balance of $47,000 has been capitalized as a prepaid asset that is being amortized ratably through March 31, 2010. During 2009, the Company recognized $35,250 of consulting expense related to the agreement, and the prepaid asset was $11,750 as of December 31, 2009.
Pursuant to an amended agreement dated May 26, 2009 with a consultant to provide legal services, on May 26, 2009, the Company issued 100,000 shares of common stock, having a fair value of $33,000 ($0.33/share), based upon the quoted closing trading price.
On May 29, 2009, the Company issued 10,000 shares of common stock to a consultant for services pursuant to an agreement on the same date, having a fair value of $3,200 ($0.32/share), based upon the quoted closing trading price. On June 29, 2009, the Company issued an additional 50,000 shares of common stock, having a fair value of $15,000 ($0.30/share), based upon the quoted closing trading price.
On July 26, 2009 and September 26, 2009, the Company issued 8,333 and 8,333 shares of common stock, respectively to a consultant for services rendered pursuant to an agreement dated February 16, 2009. The shares have a fair value of $917 and $750 ($0.11/share and $0.09/share), respectively, based upon the quoted closing trading price.
F - 18
IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
On July 31, 2009, the Company issued 25,000 shares of common stock to a consultant for services rendered pursuant to an agreement dated July 31, 2009. The shares have a fair value of $4,000 ($0.16/share) based upon the quoted closing trading price. In addition, the Company issued 105,682 and 112,500 shares of common stock on August 31, 2009 and September 30, 2009 to this same consultant as a monthly payment pursuant to his consulting agreement, having a fair value of $11,625 and $11,250 ($0.11/share and $0.10/share), respectively, based upon the quoted closing trading price.
On August 10, 2009 and September 30, 2009, the Company issued 200,000 and 150,000 shares of common stock to a consultant for services rendered. The shares have a fair value of $26,000 and $15,000 ($0.13/share and $0.10/share), based upon the quoted closing trading price.
On August 13, 2009 and September 27, 2009, the Company issued 334,000 and 333,000 shares of common stock to a consultant for services rendered pursuant to an agreement dated August 13, 2009. The shares have a fair value of $43,420 and $29,970 ($0.13/share and $0.09/share), respectively, based upon the quoted closing trading price.
On August 27, 2009, the Company issued 55,000 shares of common stock to its Chief Financial Officer for services rendered pursuant to an employment agreement dated August 27, 2009. The shares have a fair value of $6,765 ($0.12/share), based upon the quoted closing trading price. In addition, the Company issued 76,660 shares of common stock on September 30, 2009 to this officer as a monthly payment pursuant to his employment agreement, having a fair value of $7,666 ($0.10/share), respectively, based upon the quoted closing trading price.
On October 15, 2009, the Company issued 300,000 shares of common stock to a consultant for services pursuant to an agreement dated October 15, 2009. The shares have a fair value of $27,000 ($.09/share) as of the October 15, 2009 commitment date based on the quoted closing trading price at this date.
In connection with this agreement, on January 15, 2010, the Company issued an additional 1,250,000 shares of common stock. The shares have a fair value of $25,000 ($.02/share) based upon the quoted closing price.
(B) Stock Dividend
In January 2009, the Company affected a stock dividend. Each stockholder of record as of January 12, 2009 received 1.75 shares of common stock for each share of common stock they owned.
(C) 2009 Stock Option Plan
On February 17, 2009, the Company adopted the 2009 Incentive Stock Plan (“the Plan”). The total number of shares of stock which may be purchased or granted directly by options, stock awards or restricted stock purchase offers, or purchased indirectly through exercise of options granted under the Plan shall not exceed 12,000,000. The Plan indicates that the exercise price of an award is equivalent to the market value of the Company’s common stock on the grant date.
On March 23, 2009, the Company entered into a one-year agreement with a consultant to provide services. In addition to monthly fees of $5,000, the Company will issue stock options in the amount of 5,000 per month, vesting immediately upon the date of grant of each issuance. From May 2009 to December 2009, the Company granted 45,000 options to this individual having a fair value of $6,602. The Black-Scholes assumptions used are as follows:
F - 19
IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
On July 6, 2009, the Company granted 100,000 options due to an employee pursuant to an employment agreement dated May 25, 2009, having a fair value of $15,136. The Black-Scholes assumptions used are as follows:
On July 6, 2009, the Company also granted 100,000 options due to a consultant to provide legal services pursuant to an amended consulting agreement dated May 26, 2009, having a fair value of $15,136. The Black-Scholes assumptions used are as follows:
The following is a summary of the Company’s stock option activity:
F - 20
IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
At December 31, 2009 and 2008, the total intrinsic value of options outstanding and exercisable was $0.
For the years ended December 31, 2009 and 2008, the Company recognized stock based compensation of $757,708 and $0, respectively.
The fair value of options vested for the years ended December 31, 2009 and 2008 was $686,294 and $0, respectively.
Total unrecognized share-based compensation expense from non-vested stock options at December 31, 2009 was $696,085 which is expected to be recognized over a weighted average period of 2.03 years.
(D) Private Placement and Registration Rights Agreement
During 2009, the Company sold 7.25 units at $100,000 per unit. Each unit consisted of 250,000 shares of common stock and a detachable three-year warrant to purchase 250,000 shares of common stock for an exercise price of $0.50 per share. Gross proceeds from these units were $725,000 and the Company paid direct offering costs of $201,775. As a result of the offering, the Company issued 1,812,500 shares of common stock and 1,952,500 warrants, inclusive of 140,000 warrants paid to a placement agent as a direct offering cost. The total warrants of 490,000 that were paid as a direct offering cost have a net effect of zero on the statement of equity and had a fair value of $48,975 (See Note 8(E) for additional detail). Eric, pls review disclosure on page
The Company also granted the investors registration rights for the common stock and common stock underlying the warrants. The Company can be assessed liquidated damages, as defined in the agreement, for the failure to file a registration statement within 180 days from the termination from the offering as well as to have the registration statement declared effective. The termination date was February 25, 2009. Penalties will be assessed at 1% per month, payable in cash, for every 30 day period under which the Company is in default under the terms of the registration rights agreement, up to a maximum of 10%. In assessing the likelihood and amount of possible liability for liquidated damages, the Company has passed the 180 day period and the registration statement has still not gone effective. As a result, the Company will accrue the maximum 10% liquidated damages which is equivalent to:
F - 21
IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Liquidated damages are as follows:
(E) Warrants & Derivative Liability
The following is a summary of the Company’s warrant activity:
Fair Value and Assessment of Derivative Financial Instruments
The Company had two offerings of equity based financing. The first was on December 30, 2008, and the second was on February 25, 2009.
As a result of the offering on December 30, 2008, the Company issued 7,225,000 warrants, inclusive of 350,000 warrants paid to a placement agent as a direct offering cost. The warrants have a 3 year term. The exercise price is $0.50. The warrants paid as a direct offering cost have a net effect of zero on the statement of equity and had a fair value of $63,993 at December 31, 2008.
F - 22
IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
During the two year anniversary from the issuance date, if the Company issues or grants any shares of common stock or any warrants or other convertible securities pursuant to which shares of common stock may be acquired at a per share price less than $0.50 (subject to certain customary exceptions, including where shares are issued in connection with employment arrangements or business combinations in which a portion of the consideration may be payable in shares or convertible securities with a business in substantially the same line of business as the Company), then the exercise price of the Warrants shall be reduced to the Lower Price. Finally, should the Company fail to achieve at least $17.5 million of consolidated gross revenue within one year of the final closing of the Private Placement, the exercise price shall be reduced to $0.01 per share. The private placement closed on February 25, 2009. As a result of this provision, the Company adjusted the exercise price of the warrants to $0.01 per share at December 31, 2009 to determine the fair value of the derivative warrants.
If at any time following the one year anniversary of the reverse merger (See Note 1) there is no effective registration statement registering the resale of the shares of common stock underlying the Warrants, the holders of the Warrants have the right to exercise the Warrants by means of a cashless exercise.
On January 1, 2009, the Company determined that the embedded conversion feature in the warrants is not indexed to the Company’s own stock and, therefore, is an embedded derivative financial liability (the “Embedded Derivative”), which requires bifurcation and to be separately accounted for pursuant to Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company, due to both provisions, concluded that neither embedded feature (ratchet down of exercise price or contingent revenue) is indexed to its own stock.
The Company measured the fair value of these warrants using a Black-Scholes valuation model on January 1, 2009, since this represents the effective commitment date since these warrants were not indexed to the Company’s own stock. The fair value of the 7,225,000 warrants was determined to be $1,320,954 based upon the following management assumptions:
The Black-Scholes assumptions used are as follows:
The fair value of these warrants was charged to accumulated deficit on January 1, 2009, as a cumulative adjustment due to a change in accounting principle.
F - 23
IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
On February 25, 2009, the date of the closing of the second offering, the Company granted 1,952,500 warrants, having a fair value of $1,422,917. The warrants have a 3 year term. The exercise price is $0.50. These warrants were inclusive of 140,000 warrants paid to a placement agent as a direct offering cost. The warrants paid as a direct offering cost have a net effect of zero on the statement of equity and had a fair value of $102,027 at February 25, 2009. The fair value of these warrants was determined to be $1,422,917 based upon the following management assumptions:
The Black-Scholes assumptions used are as follows:
The fair value of these warrants was recorded on February 25, 2009 as derivative expense.
Mark to Market
At December 31, 2009, the Company re-measured these warrants and recorded a fair value of $261,745. As a result of the re-measurement, the Company recorded a change in fair value associated with these warrants as income totaling $2,482,167 for the year ended December 31, 2009. The following management assumptions were considered:
The Black-Scholes assumptions used are as follows:
(F) Consulting Agreements
On March 20, 2009, the Company entered into a one-year agreement with a consultant to provide investor relation services. In addition to monthly fees of $5,500, the Company issued a five-year warrant to purchase 200,000 shares of common stock, having a fair value of $69,708 ($0.35/share).
The Black-Scholes assumptions used are as follows:
F - 24
IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
In September 2009, the agreement was terminated, and the Company recognized $37,050 of expense.
Note 9 - Reverse Acquisition and Recapitalization
On December 30, 2008, Yoo, Inc. (“Yoo”), a then shell corporation, merged with IX Energy, and IX Energy became the surviving corporation. This transaction was accounted for as a reverse acquisition. Yoo did not have any operations and majority-voting control was transferred to IX Energy. The transaction also required a recapitalization of IX Energy. Since IX Energy acquired a controlling voting interest, it was deemed the accounting acquirer, while Yoo was deemed the legal acquirer. The historical financial statements of the Company are those of IX Energy and of the consolidated entities from the date of merger and subsequent.
Since the transaction is considered a reverse acquisition and recapitalization presenting pro-forma financial information is not required.
Pursuant to the Merger, Yoo’s majority stockholders cancelled 4,000,000 shares of common stock and the Company concurrently issued 46,153,284 shares of common stock to IX Energy. Upon the closing of the reverse acquisition, IX Energy stockholders held 89% of the issued and outstanding shares of common stock at the date of the transaction. Yoo retained 5,500,000 shares of common stock upon the closing of the reverse acquisition.
Note 10 - Commitments and Contingencies
(A)
Litigations, Claims and Assessments
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise that may harm its business.
1.
A complaint was filed in the Supreme Court of the State of New York by a vendor seeking to recover costs and disbursements. The arbitrators awarded a judgment of $33,000 and the Company paid this amount as of December 31, 2009. And additional $51,640.
2.
A complaint was filed in the Supreme Court of the State of New York by the holder of a promissory note issued by the Company, seeking summary judgment for repayment of the principal amount of the Note in the amount of $150,000 plus accrued interest. On September 30, 2009, the court awarded a judgment against the Company for a total amount of $177,846 inclusive of interest and legal fees. In October 2009 (see Note 7), the Company paid the $177,846, which included $150,000 of principal and $27,846 in accrued interest and legal fees. The Company is currently negotiating a settlement with the other note holders, and expects to settle the notes in full with cash and common stock.
3.
In September 2009, a former employee, served the Company with a claim for breach of contract, breach of implied covenant of good faith and fair dealing and a breach of guarantee in the Superior Court of the State of California, County of San Diego. The amount claimed in the complaint is $175,000. The Company cannot estimate the amount or range of loss in connection with this matter.
F - 25
IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(B)
Employment agreements
(1)
Chief Executive Officer
On May 1, 2008, the Company entered into a two-year employment agreement with an individual to serve as the Company’s CEO and Chairman of the Board. The agreement provides for an annual salary of $225,000 and $80,000 as a bonus, paid in February 2009, for services rendered prior to this agreement. The individual is also eligible for a multi-year grant of the Company’s non-qualified options that will be equal to 6% of the total common shares outstanding after the reverse merger.
On March 19, 2009, the Company granted 1,033,066 stock options to this individual, having a fair value of $284,259. On May 12, 2009, the Company granted the 2nd one-third of total options due to this individual in the amount of 1,033,066 options, having a fair value of $288,073.
These options vested upon grant and were immediately expensed and monthly over a year. The Company expensed the full amount of the fair value to stock option expense on the date of grant.
The Black-Scholes assumptions used are as follows:
(2)
Former President
February 12, 2009, the Company entered into a three-year employment agreement its former President of the Company. Effective October 22, 2009, this individual resigned. In February 2009, the Company paid $25,000 as s sign-on bonus. The Company agreed to issue 150,000 shares of common stock as additional compensation, having a fair value of $225,000 ($1.50/share) based upon the closing price on the date of the employment agreement (See Note 9(A)). Also, the Company granted 2,500,000 of the Company’s non-qualified options vesting quarterly. Under the terms of the plan, these stock options are subject to board approval.
On May 12, 2009, the Company granted 2,500,000 options to this individual, having a fair value of $715,900.
The Black-Scholes assumptions used are as follows:
F - 26
IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(3)
Former Chief Financial Officer
Effective August 27, 2009, this individual received monthly compensation of $8,500 and $7,666 in shares of the Company’s common stock. The agreement was terminated in December 2009. The Company agreed to grant a signing bonus of 55,000 shares of common stock, having a fair value of $6,765 ($0.12/share), based upon the quoted closing trading price; of the Company’s common stock and a cash payment of $7,500
(4)
Others
In March 2009, the Company entered into two separate two-year employment agreements to serve as executives. Annual salary ranged from $87,000 - $120,000 plus entitlement to an annual bonus based upon the Company’s performance during each year of employment. The Company agreed to issue 10,000 shares of common stock as additional compensation to one individual, having a fair value of $10,100 ($1.01/share) based upon the closing price on the date of the employment agreement.
On May 12, 2009, the Company granted 320,000 options to these individuals, having a fair value of $91,635.
The Black-Scholes assumptions used are as follows:
In July 2009, one individual, who was granted 120,000 options was terminated. As of December 31, 2009, none of the options were vested.
Note 11 - Income Taxes
The Company recognizes deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. The Company will establish a valuation allowance to reflect the likelihood of realization of deferred tax assets.
F - 27
IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
The Company has a net operating loss carryforward for tax purposes totaling approximately $3,683,000 at December 31, 2009 expiring through the year 2029. Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than a 50% change in ownership). Temporary differences, which give rise to a net deferred tax asset, are approximately as follows:
Significant deferred tax assets at December 31, 2009 and 2008 are approximately as follows:
The valuation allowance at December 31, 2008 was approximately $524,000. The net change in valuation allowance during the year ended December 31, 2009 was an increase of approximately $186,000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of December 31, 2009.
The actual tax benefit differs from the expected tax benefit for the years ended December 31, 2009 and 2008, respectively, (computed by applying the U.S. Federal corporate tax rate of 35% to income before taxes and 16.72% for New York state and city income taxes, a blended rate of 45.86%) as follows:
F - 28
IX Energy Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 12 - Subsequent Events
The Company has evaluated for subsequent events between the balance sheet date of December 31, 2009 and April 13, 2010, the date the financial statements were issued.
Consulting agreement
On January 29, 2010, the Company entered into an agreement with a consultant to provide certain investor relations services. The term of the agreement is for six months, and the Company has agreed to pay a non refundable retainer fee of $5,000 upon signing, $5,000 on March 31, 2010 and $7,500 on April 30, 2010. Furthermore, the Company shall issue 3,000,000 shares of common stock ratably over three months. The fair value of the shares is $30,000 ($0.01/share), based upon the quoted closing trading price.