Item 1:
Description of Business
Overview
Nacel Energy Corporation (“Nacel” or the “Company” or “us” or “our”) is a Wyoming corporation incorporated on February 6, 2006, with our principal executive office located at 9375 E. Shea Blvd., Suite 100, Scottsdale, Arizona 85260. We are a development stage wind power generation company engaged in the business of developing wind power generation facilities from “green field” (or blank state) up to and including operation. Our domestic development efforts are primarily focused upon wind power generation facilities in the 10 MW to 30 MW range. We have not ruled out the possibility of larger projects including internationally.
As discussed in greater detail below, we currently have six (6) wind energy projects totaling 185 MW or more of potential capacity located on approximately 8,437 acres of land located in the Panhandle area of Texas and northern Arizona. We are also engaged in efforts to locate and evaluate other “green field” sites for development of additional wind power generation facilities. We do not have any wind energy projects in operation currently and it is estimated that it will be up to 18 to 24 months before any of our projects may become operational, which requires that we obtain substantial additional financing and/or equity. There are no assurances that we will be able to obtain any additional financing and/or equity and, even if obtained, that any of our wind power generation facilities will ultimately become operational or generate sufficient revenues to be profitable.
Corporate Information and History.
We have incurred losses since our inception and have relied upon the sale of our securities, loans provided by management and recent convertible debt financings to cover our costs and expenses.
On June 7, 2007, the Securities and Exchange Commission (“SEC”) declared effective the Company's Registration Statement on Form SB-2 relating to the offer and sale of 8,000,000 shares of common stock, at a price of $0.005 per share and 2,400,000 shares of common stock underlying a warrant issued to a third party in April, 2007, at an exercise price of $0.50. In late September, 2007, all 8,000,000 common shares under the Registration Statement had been sold to 50 investors in exchange for sale proceeds of $40,000. On October 20, 2007, a 1:20 forward split of our capital stock was authorized which resulted in total issued and outstanding post-split common shares of 21,400,000. There was no change to the warrant exercise price of $0.50. On November 19, 2007, all 2,400,000 post-split shares underlying the warrant were delivered and the warrant-holder entered into a promissory note of $1,200,000. Through the period ending March 31, 2008, we received $509,627 of the total $1,200,000 proceeds related to the warrant exercise and the balance was recorded as a subscription receivable. On April 10, 2008, the remaining $690,373 was received from the warrant-holder and the subscription receivable was retired.
On December 23, 2008, we sold 1,000,000 shares of restricted common stock to a third party. These shares were sold under the terms of a non-brokered private placement agreement in exchange for $750,000 in sale proceeds. In order to prevent dilution in connection with this transaction, Brian Lavery, our then CEO and a director, returned 1,000,000 of his founders’ shares for cancellation and without any consideration being paid to him. These shares have been returned and cancelled based on their par value of $.001 per share.
On March 13, 2008, we acquired from Murray S. Fleming, an officer, director and principal shareholder, four (4) development stage wind energy projects known as Blue Creek, Channing Flats, Kansas and the Dominican Republic. The transaction also included wind data collected from anemometers at various locations over a period of years in the States of Texas, Kansas, Wyoming, Colorado and New Mexico. Each of these wind energy projects are discussed in greater detail below.
Development Strategy and Steps.
Our strategy focuses upon developing our wind power generation facilities from “green field” (or blank state) to operation. Prior to generating revenue from our operations, several phases and steps must be completed, with the potential value of our wind power generations facilities increasing through the steps of the process. Key parts of the development stage, such as acceptable wind data, an interconnection agreement and an off take or power purchase agreement, generally add the most value to the development process.
Under our wind energy development business model, we must complete many of the following steps:
1.
Detailed survey of regional wind data, topography, power market, transmission and permitting characteristics to determine area of interest
2.
Project fatal flaw analysis
3.
Identification of land owner(s)
4.
Secure wind development rights option agreement(s)
5.
Create project legal structure
6.
Procure anemometer and related equipment for the collection of site specific wind data
7.
Environmental assessment, archeological assessment, avian study, ALTA survey
8.
Transmission and interconnection review
9.
Pre-construction review
10.
Electrical engineering review, civil engineering review
11.
Preliminary turbine site plan
12.
Utility transmission study
13.
Secure turbine supply agreement
14.
Final project construction estimates & scheduling
15.
Final permitting for project
16.
Power purchase agreement
17.
Project financing analysis
18.
Tax partner identification (if applicable)
19.
Equity partner identification (if applicable)
20.
Complete power purchase agreement
21.
Complete project financing agreement
22.
Commence project construction
23.
Operations & maintenance selection
24.
Complete project construction
25.
Final commissioning
Development and completion of the foregoing steps carries significant risks. In total, the process of development can take up to two years and cost $500,000 to $1,000,000 or more, before construction and project finance. Many steps in the development process must be met precisely to prevent project failure. Wind power generation facilities in development require significant capital expenditures. We will need substantial additional financing and/or equity in the future in order to fund development, operating and maintenance costs and expenses. There is no assurance that we will be able to obtain sufficient additional financing and/or equity, or that the terms thereof will be favorable. If we are unable to obtain additional financing and/or equity on a timely basis, we may have to curtail our development activities or be forced to sell assets, which could have a material adverse effect on our business, financial condition and results of operation.
Current Wind Project Developments
We are currently involved in the development of six (6) separate wind projects having 185 MW, or more, of total potential generating capacity. Pertinent information concerning each of these wind projects is summarized in greater detail below.
Blue Creek Wind Energy Facility LLC. The Blue Creek project is located in Moore County, Texas and has an estimated generating capacity of 40 MW or more when completed. In connection with this project, Blue Creek Wind Facility LLC, a Texas limited liability company was formed, with Nacel being the sole managing member and 100% owner. The various aspects of the Blue Creek project are summarized below.
Agreement and Land Rights. In October, 2008, we entered into a Wind Project Agreement covering 2,082 acres of land located in Moore County, Texas, which pertains to the development of our Blue Creek wind energy project. In addition, we entered into a Right of First Refusal Agreement whereby we can lease an additional 1,413 acres of land located in Moore County, Texas, which pertains to the development of our Channing Flat wind energy project. For more information concerning the terms of the Wind Project Agreement, see discussion in “Description of Properties” below.
Project summary. Blue Creek will be developed in phases with total potential capacity at build out of 40 MW or more of electrical production. Each phase at Blue Creek is expected to be approximately 10 MW and comprised of clusters of 5-7 wind turbines. The Company intends to complete the build-out of the phases over 24 to 48 months.
Recent Developments. In June, 2009, we filed an Application for Interconnection with Southwestern Public Service Company (SPS), a subsidiary of XCEL Energy, for the Blue Creek project. In October, 2009, after considering our submission, SPS provided us with a scope of work, including a detailed cost estimate of the transmission equipment and engineering resources required to accommodate the Blue Creek project. Following an internal review, we formally executed the necessary document from SPS, accepting the scope of work without revision, and additionally forwarded $135,000 for the immediate commencement of the work to be performed by SPS. On March 9, 2010, we placed a stop work order with SPS citing adverse market conditions for wind power in the Texas-SPP market and requested a refund of any balance remaining from the $135,000 deposit. Subsequest to March 31, 2010, on June 9, 2010, we obtained a refund of $105,50412. We must now re-evaluate the timetable for the development and completion process for this project. We will likely shift out immediate focus and efforts to the development and completion of milestones relating to our other wind energy projects in Texas and Arizona.
In September, 2009, we completed our environmental assessment work, significant pre-construction work and other efforts at Blue Creek. We also received FAA permits covering the placement of 27 turbines at the Blue Creek project.
Capital investment. In order to fully implement and complete this project, Blue Creek Wind Facility LLC will be required to invest approximately $2.0 million dollars of capital per megawatt for a total cost of $80 million dollars or more at build out.
Implementation. We have initiated and/or completed work on items one through nine of our wind energy project development model. Work will begin as soon as practicable on the other items of our wind energy project development business model.
Channing Flats Wind Energy Facility LLC. The Channing Flats project is located in Moore County, Texas and has an estimated generating capacity of 30 MW or more when completed. In connection with this project, Channing Flats Wind Facility LLC, a Texas limited liability company was formed, with Nacel being the sole managing member and 100% owner. The various aspects of the Channing Flats project are summarized below.
Agreement and Land Rights. In October, 2008, we entered into a Wind Project Agreement covering 2,082 acres of land located in Moore County, Texas, which pertains to the development of our Blue Creek wind energy project. In addition, we entered into a Right of First Refusal Agreement whereby we can lease an additional 1,413 acres of land located in Moore County, Texas, which pertains to the development of our Channing Flat wind energy project. For more information concerning the terms of the Wind Project Agreement, see discussion in “Description of Properties” below.
Project summary. Channing Flats will be developed in phases with total potential capacity at build out of 30 MW or more of electrical production. Each phase at Channing Flats is expected to be approximately 10 MW and comprised of clusters of 5-7 wind turbines. The Company intends to complete the build-out of the phases over 24 to 48 months.
Recent Developments. In July, 2009, we filed an Application for Interconnection with Southwestern Public Service Company, a subsidiary of XCEL Energy, for the Channing Flats project. In September, 2009, we completed our environmental assessment work, significant pre-construction work and other efforts at Channing Flats project.. We also received FAA permits covering the placement of 18 turbines at the Channing Flats Creek project.
Capital investment. In order to fully implement the project, Channing Flats Wind Facility LLC will be required to invest approximately $2.0 million dollars of capital per megawatt for a total cost of $60 million dollars or more at build out.
Implementation. We have initiated and/or completed work on items one through nine of our wind energy project development model. Work will begin as soon as practicable on the other items of our wind energy project development business model.
Swisher Wind Energy Facility LLC. The Swisher Wind project is located in Swisher County, Texas and has an estimated generating capacity of 40 MW or more when completed. In connection with this project, Swisher Wind Facility LLC, a Texas limited liability company was formed, with Nacel being the sole managing member and 100% owner. The various aspects of the Swisher Wind project are summarized below.
Agreement and Land Rights. In mid-January, 2009, we entered into a Wind Project Agreement covering 1,573 acres of land located in Swisher County, Texas, which pertains to the development of our Swisher wind energy project. For more information concerning the terms of the Wind Project Agreement, see discussion in “Description of Properties” below.
Project summary. Swisher will be developed in phases with total potential capacity at build out of 40 MW or more of electrical production. Each phase at Swisher is expected to be approximately 10 MW and comprised of clusters of 5-7 wind turbines. The Company intends to complete the build-out of the phases over 24 to 48 months.
Recent Developments. In July, 2009 we submitted an Application for Operation of Customer Owned Generation to Swisher Energy Cooperative, Inc. for the Swisher project. In September, 2009, we completed our environmental assessment work, significant pre-construction work and other efforts at the Swisher project. We also received FAA permits covering the placement of 18 turbines at the Blue Creek project.
Capital investment. In order to fully implement the project, Swisher Wind Facility LLC will be required to invest approximately $2.0 million dollars of capital per megawatt for a total cost of $80 million dollars or more at build out.
Implementation. We have initiated and/or completed work on items one through nine of our wind energy project development model. Work will begin as soon as practicable on the other items of our wind energy project development business model.
Hedley Pointe Wind Energy Facility LLC. The Hedley Pointe project is located in Donley County, Texas and has an estimated generating capacity of approximately 5 MW or more when completed. In connection with this project, Hedley Pointe Wind Facility LLC, a Texas limited liability company was formed, with Nacel being the sole managing member and 100% owner. The various aspects of the Blue Creek project are summarized below.
Agreement and Land Rights. In late January, 2009, we entered into a Wind Project Agreement covering 636 acres of land located in Donley County, Texas, which pertains to the development of our Hedley Pointe wind energy project. For more information concerning the terms of the Wind Project Agreement, see discussion in “Description of Properties” below.
Project summary. Hedley Pointe will be developed with total potential capacity at build out of 5 MW or more of electrical production. Hedley Pointe is anticipated to comprise a cluster of 3-5 wind turbines. The Company intends to complete the build-out of Hedley Pointe over 24 to 48 months.
Recent Developments. In September, 2009, we submitted a Request for Small Generator Interconnection to Golden Spread Electric Cooperative, Inc., acting as agent for Swisher Electric Cooperative, Inc., for our Headley Pointe project.
Capital investment. In order to fully implement the project, Hedley Pointe Wind Facility LLC will be required to invest approximately $2.0 million dollars of capital per megawatt for a total cost of $10 million dollars or more at build out.
Implementation. We have initiated and/or completed work on items one through nine of our wind energy project development model. Work will begin as soon as practicable on the other items of our wind energy project development business model.
Leila Lakes Wind Energy Facility LLC. The Leila Lakes project is located in Donley County, Texas and has an estimated generating capacity of approximately 40 MW or more when completed. In connection with this project, Leila Lakes Wind Facility LLC, a Texas limited liability company was formed, with Nacel being the sole managing member and 100% owner. The various aspects of the Leila Lakes project are summarized below.
Agreement and Land Rights. In January, 2009, we entered into four (4) separate Wind Project Agreement covering an aggregate of 1,025 acres of land located in Donley County, Texas. In August, 2009, we entered into an additional three (3) Wind Project Agreements covering an aggregate of 1,032 acres of land located in Donley County, Texas. These lands comprise the development of our Leila Lakes wind energy project.
Project summary. Leila Lakes will be developed with total potential capacity at build out of 40 MW or more of electrical production. Each phase at Leila Lakes is expected to be approximately 10 MW and comprised of clusters of 5-7 wind turbines. The Company intends to complete the build-out of Leila Lakes over 24 to 48 months.
Recent Developments. In January, 2010, we submitted to American Electric Power Service Corporation (AEPSC), a comprehensive bid, with input of a tier-one wind turbine manufacturer, for the supply of 20 MW of renewable energy, from our Leila Lake wind project. The bid was submitted in connection with a Request for Proposals (RFP) for the provision of 1100 MW of new renewable energy to seven utility subsidiaries of AEP, including Southwestern Electric, which serves east Texas. On March 2, 2010, we received written notification that our Leila Lake Project would not be considered in AEPSC’s evaluation process of wind projects capable of being on line by December 2011. We must now re-evaluate the timetable for the development and completion process for this project. We will likely shift our immediate focus and efforts to the development and completion of milestones relating to our other wind energy projects in Texas and Arizona.
Capital investment. In order to fully implement the project, Leila Lakes Wind Facility LLC will be required to invest approximately $2.0 million of capital per megawatt for a total cost of $80 million or more at build out.
Implementation. We have initiated and/or completed work on items one through nine of our wind energy project development model. Work will begin as soon as practicable on the other items of our wind energy project development business model.
Snowflake Wind Energy Facility LLC. The Snowflake project is located in Navajo County, Arizona and has an estimated generating capacity of approximately 30 MW or more when completed. In connection with this project, Snowflake Wind Facility LLC, an Arizona limited liability company was formed, with Nacel being the sole managing member and 100% owner. The various aspects of the Snowflake project are summarized below.
Agreement and Land Rights. In July, 2009, we entered into a Wind Project Agreement covering 640 acres of land located in Navajo County, Arizona, which pertains to the development of our Snowflake wind energy project.
Project summary. Snowflake will be developed with total potential capacity at build out of 30 MW or more of electrical production. Each phase at Snowflake is expected to be approximately 10-15 MW and comprised of clusters of 5-10 wind turbines. The Company intends to complete the build-out of Snowflake over 24 to 48 months.
Recent Developments. On January 27, 2010, Arizona Public Service Co. (APS) issued a formal solicitation for new wind power generated from utility scale facilities of between 15 and 100 megawatts, located entirely within the borders of Arizona.. APS requested that all bids be submitted by April 14, 2010.
Subsequent to March 31, 2010, on April 14, 2010, we submitted a comprehensive bid with the assistance of a tier-one wind turbine manufacturer to Arizona Public Service Co. (APS) for the supply of 19.5 megawatts of clean, renewable wind energy to be sourced from our Snowflake wind project. A preliminary decision is expected to be announced by APS on or about June 4, 2010, regarding the utility’s request for proposals for the delivery of utility scale wind power.
Subsequent to March 31, 2010, on May 26, 2010, we received written notification from APS that our Snowflake Project was not shortlisted among the projects which would be considered in APS’s detailed evaluation process of wind projects which might thereafter result in selection for final negotiation and possible contract execution and regulatory approval.
Subsequent to March 31, 2010, on June 24, 2010, we submitted a comprehensive bid with the assistance of a tier-one wind turbine manufacturer to Arizona Public Service Co. (APS) for the supply of 15 megawatts of clean, renewable wind energy to be sourced from our Snowflake wind project with a commercial operation date of December 31, 2012. A preliminary decision is expected to be announced by APS on or about August 26, 2010, regarding whether a bidder would be included on a short list or project to thereafter be considered in APS’s detailed evaluation process of wind projects which might thereafter result in selection for final negotiation and possible contract execution.
Capital investment. In order to fully implement the project, Snowflake Wind Facility LLC will be required to invest approximately $2.0 million of capital per megawatt for a total cost of $60 million or more at build out.
Implementation. We have initiated and/or completed work on items one through nine of our wind energy project development model. Work will begin as soon as practicable on the other items of our wind energy project development business model.
Other Wind Energy Projects
Our operations team is constantly assessing new opportunities in areas with strong and dependable wind speeds and which offer affordable land arrangements with property owners, accessible power transmission and proximity to construction resources. The following describes the status of other wind energy projects.
Other Projects in the United States. We have initiated and/or completed steps one and two of our wind energy project development model with regard to four potential wind energy projects to be located in Texas, Arizona, Kansas and Illinois. Work will begin as soon as practicable on the other items of our wind project development business model with respect to each of these potential projects.
Dominican Republic. On May 19, 2008, the Company signed an agreement encompassing terms for a proposed joint venture wind power project with Ridge Partners Dominicano (Norte), S.A to be located in the Dominican Republic. Ridge Partners Dominicano (Norte) S.A. is a Dominican corporation that has entered into a lease agreement with Instituto Agrario Dominicano (IAD) for the use of up to 300,000 hectares of land for the purpose of renewable energy development. The proposed location, on approximately 2200 hectares of land south of the town of Monte Cristi in the province of Monte Cristi, has been determined by the Company to be unsuitable for commercial utility scale wind power generation due to insufficient wind resources. Accordingly, the Company has elected not to proceed with further development at the proposed location and the agreement with Ridge Partners Dominicano (Norte), SA has terminated and expired.
The Company has identified potential sites to the southwest of the previous proposed location on various ridge lines in the province of Monte Cristi, as well as an additional coastal site in the province of Pedernales, each with indicated wind resources and electrical infrastructure suitable for commercial utility scale power generation. The Company intends to pursue a lease agreement with respect to the new locations, directly with the IAD and other relevant Dominican governmental authorities.
Regulation
The following is a brief summary of certain applicable regulations in the United States and is not, nor should it be considered, a full summary of the law or all related issues.
Energy Regulation. Under the Federal Power Act (FPA), FERC has exclusive rate-making jurisdiction over wholesale sales of electricity and transmission in interstate commerce. The FPA subjects “public utilities” within the meaning of the FPA, among other things, to rate and corporate regulation by FERC. In particular, sellers of electricity at wholesale in interstate commerce and transmission of electricity in interstate commerce are regulated by FERC with respect to: the review of the terms and conditions of wholesale electricity sales and transmission of electricity; the need to obtain advance approval of disposition of public utility facilities, mergers, purchases of securities of other public utilities, acquisitions of existing generation facilities and changes in upstream ownership interest; the regulation of their borrowing and securities issuances and assumption of liabilities; and the review of interlocking directorates. Wind parks with market-based rate authority are subject to regulation by FERC as a “public utility” pursuant to FPA.
In addition to direct regulation by FERC, we believe that our wind project will be subject to rules and terms of participation imposed and administered by regional transmission operators and independent systems operators. Although these entities are themselves ultimately regulated by FERC, they can impose rules, restrictions and terms of service on marker participants, like our wind projects, that can have a material impact on our business.
Some of our wind projects will be subject to varying degrees of regulation by state public utility commissions. State public utility commissions have historically had broad authority to regulate both the rates charged by, and the financial activities of, electric utilities that sell electricity at retail, and a number of other matters related to electric utilities. State laws may also impose certain regulatory and reporting requirements on other owners and operators of generation facilities.
All of our wind projects will, before construction can begin, require approval from the zoning boards of the relevant county governments in which the projects are located. Accordingly, before construction begins, we will need to obtain the necessary zoning/conditional use permits. We have not applied for, nor obtained, any such use permits for any of our existing wind projects.
Environmental Regulation. Our wind project development activities are not, at this time, subject to specific environmental laws or regulations in the State of Texas. However, there can be no assurances that there will not be new regulation passed in the future.
Local laws may in the future also regulate other aspects of our wind project development and operation, by setting limits on the use of local roads, setback requirements and noise standards. If we fail to comply with these possible future requirements, or with other regulatory standards, we may be denied permits that are required for construction or operation, or become subject to potential regulatory enforcement actions.
Competition.
In the United States, large utility companies dominate the energy production industry and coal continues to be the primary resource for electricity production. Electricity generated from wind energy faces competition from other traditional resources such as coal, hydro, natural gas and nuclear power. We expect that the primary competition for the wind power industry will continue to come from utility company producers of electricity generated from coal and other non-renewable energy sources. Also, as the relative advantages or disadvantages of wind over fossil fuel-based generation are resolved over time, and potential legislation regimes arise, it is likely that the utilities themselves will elect to develop wind power assets themselves.
Non-utility entrants in the wind power development market, however, face certain barriers to entry. The capital cost of buying and maintaining turbines are high. Other significant factors include the cost of land control and/or acquisition, the availability of transmission lines and the cost to tie into those lines, land use considerations and the environmental impact of construction and operations. Finally, another critical barrier to entry into the wind power development business is the necessary experience required to bring project to the point where they are able to secure interconnection agreements, power purchase agreements and project financing for construction.
While we are aware of several other companies that are working to develop medium size wind energy projects, none of these companies are currently directly competing with us in the geographic areas in which we are active.
Employees.
We have 2 full time equivalent employees including directors and part-time consultants.
Patents and Trademarks.
We have no trademarks or other proprietary rights registered with the U.S. Patent and Trademark Office.
Item 2:
Item 2: Description of Property
We lease our office at 9375 E. Shea Blvd., Suite 100, Scottsdale, Arizona 85260 on a month to month, as needed basis. Our rent payment is approximately $100 per month. We believe that our current facilities are adequate for our operations as currently conducted and if additional facilities are required, that we could obtain them at commercially reasonable prices.
We generally do not own the property underlying our wind projects. Instead, we typically enter into Wind Project Agreements whereby we received licenses and easements from the landowners that give us the right to install our meteorological equipment, turbines, transmission lines and related equipment and prohibits the landowners from, among other things, building improvements that interfere with or obstruct the operation or maintenance of our wind project, and building or locating any power generation equipment on the subject property. The term of the Wind Project Agreement usually cover two different periods. The first is an evaluation period of five years, with our option to extend the evaluation period for three additional, consecutive one (1) year periods. The second is a 30-year operation period, with our option to extend the operation period for two additional, consecutive ten (10) year periods.
The provisions of our Wind Project Agreement are substantially similar for all of our wind energy projects. Specific terms for individual landowners may differ occasionally, but none of our current Wind Project Agreements differ significantly from the general structure, the pertinent items of which are summarized here:
· During the evaluation period, the landowner receives various fees and payments including an Evaluation Fee (annual fee based on $5.00 per acre for the land comprising the wind project) and a Met Tower Fee (annual fee of $1,000 each year during which a meteorological tower in located on the project).
· During the operation period, the landowner receives a variety of fees and payments including, without limitation, an Installation Fee (one time payment based on each nameplate megawatt of installed wind turbine capacity), an Operating Fee (annual payment based on each nameplate megawatt of installed wind turbine capacity), a Substation Fee (one time payment for each substation or interconnection facility installed on the property), a Transmission Fee (one time payment per Rod for any above-ground high-voltage transmission lines installed on the property) and a Royalty Percentage (a escalating percentage of gross revenues throughout the terms of the operating period).
· We have the right to conduct wind studies, access the land, install meteorological towers and begin the permitting process with the landowners’ cooperation.
· By the third anniversary of the Effective Date, if we have not satisfied, as applicable, certain milestones pertaining to application to interconnect to the transmission or distribution system, a wildlife monitoring study and a wildlife site characterization study, then we and the subject owners will, in good faith, negotiate means for us to satisfy such milestones. However, if the parties are unable to reach such agreement, then we will release the subject owner from the terms of the Agreement.
· The landowner is prohibited from, among other things, building improvements that interfere with or obstruct the operation or maintenance of our wind project, and building or locating any power generation equipment on the subject property
· We have the ability to assign our rights to a third party without the owner’s consent. Also, we have the right to encumber our interests with debt to finance the wind project.
An Addendum to our standard Wind Power Agreement was entered into with three landowners involving approximately 1,070 acres of land located in Donley County, Texas, which property is included in our Leila Lakes wind project. Among the specific terms and provisions contained in the Addendum are the following:
· We agreed to pay the owner’s reasonable attorney’s fees incurred in negotiation of the Agreement. If we fail to pay such attorney’s fees, the Agreement will be void and of no legal effect.
· We agreed to pay all taxes attributable to wind systems on the subject property including, without limitation, any increase in real property taxes assessed as a result of installation or attributable to reclassification of the subject property. The parties agree to use commercially reasonable efforts to cause the assessor to issue separate parcel number for the wind systems and to cause the assessor to issue separate tax bills to both us and the property owner.
· If there is a material default by us under the Agreement, the property owner may terminate the Agreement if we fail to cure the material default within sixty (60) days from time of notice or fails to initiate steps to cure such material default within sixty (60) days and thereafter diligently continue steps to cure until completion.
· On termination, we agreed to return and surrender the subject Property to its owner and will remove all wind systems on the property within one year from date of termination. If we fail to remove wind systems within the time allowed, the owner may remove and sell such wind systems and we will reimburse the owner for costs of removal less salvage value recovered. If salvage value exceeds removal costs, the owner shall retain such excess.
Item 3:
Item 3: Legal Proceedings
We know of no material, active or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
Item 4:
Item 4: Submissions of Matters to a Vote of Security Holders
No matters were submitted to a vote by our security holders during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5:
Item 5: Market for Common Equity and Related Stockholder Matters
Our common stock is traded in the over-the-counter market under the symbol “NCEN.”. The following table sets forth the range of high and low closing bid prices for each quarter of the last two fiscal years.
The closing bid price on June 30, 2010 was $.12. Transactions on the over-the-counter market reflect inter-dealer quotations, without adjustments for retail mark-ups, mark-downs or commissions to the broker-dealer and may not necessarily represent actual transactions.
As of June 30, 2010, we had 24 shareholders of record. The majority of our shares are held in “street name” with broker-dealers and custodians on behalf of our shareholders. Our common shares are issued in registered form. The transfer agent and registrar for our common stock is Island Stock Transfer, 100 Second Avenue South, Suite 104N, St. Petersburg, Florida 33701.
Dividend Policy
We have never paid a cash dividend on our common stock. Any future dividend on common stock will be at the discretion of the Board of Directors and will be dependent upon the Company’s earnings, financial condition, and other factors.
Equity Compensation Plans.
For fiscal year ending March 31, 2010, there were no compensation plans under which equity securities of the Company were authorized for issuance.
Issuer Purchases of Equity Securities.
Nacel did not repurchase any shares of its common stock during the fiscal year ending March 31, 2010.
Item 6:
Item 6: Selected Financial Data
We are not required to provide any selected financial data since we qualify as a “smaller reporting company.”
Item 7:
Item 7: Management’s Discussion and Analysis or Plan of Operation
Plan of Operation
Since our inception, we have been a development stage company and, accordingly, have incurred losses from our operations. For the fiscal year ended March 31, 2010, we incurred net losses of $(2,849,202) and have an accumulated deficit since inception of $(6,038,133). We currently have no revenues. The potential future revenues we expect from our wind power generation projects, will not be generated until sometime after the end of our current fiscal year, March 31, 2011, perhaps longer, and will require the expenditure of additional capital, obtaining of construction and project debt financing and establishing turbine supply relationships.
For the foreseeable future, our operating plan is dependent upon both the ability to conserve existing cash resources and the ability to obtain additional capital through equity financing and/or debt financing in an effort to provide the necessary funds and cash flow to meet our obligations on a timely basis and to support our wind power project development activities. In the event that we are unable to conserve existing cash resources and/or obtain the additional and necessary capital, we may have to cease or significantly curtail our operations. This could materially impact our ability to continue operations.
Liquidity and Capital Resources
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since our inception, we have been a development stage company and, accordingly, have incurred losses from our operations. For the fiscal year ended March 31, 2010, we incurred net losses of $(2,849,202) and have an accumulated deficit since inception of $(6,038,133). We currently have no revenues. The potential future revenues we expect from our wind power generation projects, will not be generated until sometime after the end of our current fiscal year, March 31, 2011, and will require the expenditure of additional capital, obtaining of construction and project debt financing and establishing turbine supply relationships. Our $250,000 demand note payable is due and payable within 15 days after demand for payment is received, with demand for payment being at the discretion of the lender. These factors, among others, indicate that we may be unable to continue as a going concern for a reasonable period of time.
As of March 31, 2010, we had current assets of $331,563 and working capital deficit of $(2,199,162). This compares to cash of $564,677 and working capital of $303,246 at March 31, 2009. Based on commitments arising from our consulting agreements and other general and administrative expenses, we anticipate that operating expenses during each succeeding quarter will be, at a minimum, approximately $35,000. This amount does not include any capital requirements for our wind energy projects or project development costs which may be incurred. Based on the foregoing, we will not have sufficient cash resources to finance our operations except for several months unless we are able to raise additional equity financing and/or debt financing in the immediate future. We have commenced, and will continue to pursue, efforts to raise additional equity financing and/or debt financing from a variety of sources and means. There are no assurances that we will be able to obtain any additional financing and/or equity and, even if obtained, that such financing will be in a sufficient amount to be able to continue operations for a sufficient period until one or more of our wind power generation facilities become operational or until we can generate sufficient revenues to be profitable.
Additional Financings
We completed the following financings during the fiscal year ended at March 31, 2010.
Shareholder Line of Credit. As of March 31, 2009, our $250,000 line of credit facility extended by Murray Fleming, a director, was fully borrowed, thereby leaving no additional funds available for future borrowing. However, on June 30, 2009, the line of credit was increased to $400,000 and then on September 29, 2009, the line of credit was increased to $442,143 and again on October 26, 2009 the line of credit was increased to $460,753. The terms of the line of credit facility provides for simple interest of 8% per annum, to be paid upon the outstanding balance, payable on the first day of the month after each calendar quarter. As of March 31, 2010, we had borrowed the entire $460,753 under this credit facility, which currently leaves no additional funds available for future borrowing.
Demand Note. In July 2009, Nacel executed a new loan with a lender in the amount of $250,000, which provides for simple interest of 10% to be paid in consecutive monthly installments of interest only commencing on July 1st, 2009. Payment is due when the lender has provided the borrower with written notice of demand. The balance owing under this agreement will be paid within 15 days of any such notice of demand. The loan is unsecured.
Senior Secured Convertible Note and Warrants. On November 23, 2009, we entered into a Securities Purchase Agreement and thereafter other related agreements pursuant to which we agreed to issue a Senior Secured Convertible Note in the original principal amount of $900,000 (the “Note”) and common stock warrants (the “Warrants”) for an aggregate purchase price of $750,000 in a private placement (the “November Private Placement”) with a single institutional investor (the “Investor”). The November Private Placement closed on November 24, 2009. The principal purposes of the November Private Placement were to strength our cash position and to provide us with general working capital. The November Private Placement resulted in gross proceeds to us of $730,000, with $20,000 of initial proceeds use to pay legal costs of investor before placement agent fees and other expenses associated with the transaction.
The Note was payable in nine equal installments and matures on December 1, 2010. No interest accrues on the principal amount outstanding unless an event of default occurs in which event interest shall thereafter accrue at the rate of eighteen percent per annum. We may pay installments of principal in cash or, at our option, in shares of common stock.
We may pay each monthly installment in cash or, at our option, subject to satisfaction of customary equity conditions, in shares of our common stock., whereby the value of each share is equal to the lower of (a) the initial conversion price of $0.90 per share, or (b) 90% of the average of the volume weighted average prices of our common stock on each of the twenty (20) consecutive trading days immediately preceding the applicable payment date. In addition, at the option of the Investor holding the Note, all or any part of the principal amount outstanding under the Note is convertible at any time and from time to time into shares of our common stock at an initial conversion price of $0.90 per share. However, the conversion price may be reduced if we issue securities at a price per share less than the conversion price of the Notes then in effect.
The Warrants issued to the Investor in the November Private Placement included the following:
· Series A Warrants, exercisable for a period of 5 years into an aggregate of 125% of the number of shares of common stock initially issuable upon conversion of the Note, with the Series A Warrant being exercisable into 1,250,000 shares immediately upon issuance.
· Series B Warrants, exercisable beginning November 24, 2009 into 100% of the shares of common stock initially issuable upon conversion of the Notes (initially 1,000,000 shares) and remaining exercisable for a period equal to the earlier of (a) 12 months after a registration statement covering the shares of our common stock issuable upon conversion or exercise (as the case may be) of the Note and Warrants is declared effective by the SEC, or (b) November 24, 2011; and
· Series C Warrants, exercisable for a period of 5 years beginning November 24, 2009, but only to the extent that the Series B Warrant are exercised and only in the same percentage that the Series B Warrants are exercised, up to a maximum percentage of 125% of the number of shares of our common stock initially issuable upon conversion of the Note (initially a maximum of 1,000,000 shares).
The initial exercise price of each Series A Warrant, Series B Warrant and Series C Warrant was the same as the initial conversion price under the Note ($0.90 per share). Like the conversion price of the Note, the exercise price of the Warrants is subject to a full-ratchet adjustment upon the occurrence of certain events, including our issuance of securities at a price per share less than the exercise price then in effect. If we issue shares of common stock or options exercisable for or securities convertible into common stock at an effective price per share of common stock less than the exercise price then in effect, the exercise price will be reduced to the effective price of the new issuance.
The Note and the Warrants have conversion features which result in them being recorded as derivative liabilities as described further in Note 10 to the consolidated financial statements for the year ended at March 31, 2010. As derivative liabilities, the existing uncertainties as to the ultimate amount of shares which could be required to issue is not known and may increase significantly. Accordingly, these uncertainties are reflected as obligations until they are resolved through conversion, exercise or expiration.
For further description of this transaction, the documents executed and delivered and other pertinent terms and provisions , see Nacel Energy’s Form 8-K dated November 23, 2009, as filed with the SEC on November 27, 2009.
Subsequent to March 31, 2010, on April 23, 2010, we entered into an Exchange Agreement which effectively amended and modified the terms of the Note and the Warrants held by the Investor. Under the terms of the Exchange Agreement, the Note was exchanged for a New Note and the Warrants were exchanged for New Warrants containing various changes and modifications in their respective terms and provisions.
The principal amount of the New Note is $935,000 consisting to the original principal amount of $900,000 plus an additional $35,000 in costs and expenses (including attorney’s fees) which we were obligated to reimburse under the original transaction documents and the negotiation and preparation of the Exchange Agreement and Exchange Documents (as defined in the Exchange Agreement). The New Note provides for payment in seven equal installments of $133,571.42 beginning 21 trading days after the earlier of (a) May 24, 2010, or (b) the date a registration statement covering the shares of our common stock issuable upon conversion or exercise (as the case may be) of the New Note and New Warrants is declared effective by the SEC. Accordingly, the maturity date of the New Note will be no later than December 23, 2010. No interest accrues on the principal amount outstanding unless an event of default occurs in which event interest shall thereafter accrue at the rate of eighteen percent per annum. We may pay installments of principal in cash or, at our option, in shares of common stock.. If we elect to pay the principal in shares of our common stock, the value of each share of common stock will be equal to the lower of (a) the new conversion price of $0.30 per share, or (b) 90% of the average of the volume weighted average prices of our common stock on each of the twenty (20) consecutive trading days immediately preceding the applicable payment date. In addition, at the option of the holder of the Note, all or any part of the principal amount outstanding under the Note is convertible at any time and from time to time into shares of our common stock at the new conversion price of $0.30 per share. However, the conversion price may be reduced if we issue securities at a price per share less than the conversion price of the Notes then in effect.
For further description of the Exchange Agreement, the documents executed and delivered and other pertinent terms and provisions , see Nacel Energy’s Form 8-K dated April 23, 2010, as filed with the SEC on April 27, 2010.
Additional Convertible Note. On March 24, 2010, we executed and delivered, pursuant to a private placement with a single institutional investor, our $300,000 Convertible Promissory Note (the “Convertible Note”) in exchange for the investor’s execution and delivery to us of a $300,000 Secured & Collateralized Promissory Note (the “Secured Note”).
The original principal amount of the Convertible Note is $300,000, and the Convertible Note provides for a 12% one-time interest charge. The Convertible Note has a maturity date of three (3) years from March 24, 2010 at which time all principal and accrued interest shall be due and payable in full. Prepayment is not permitted unless approved by the holder in writing. However, the Convertible Note is payable on demand by the holder in an amount not to exceed the cash amount paid under the Secured Note.
The Convertible Note can only be converted to the extent payments have been received on the Secured Note. The subject conversion amount is converted into shares of our common stock based on a conversion price of seventy percent (70%) of the lowest trade price in the 30 trading days prior to the conversion. However, we have the right to enforce a conversion floor of $0.65 per share. Thus, if the conversion price is less than $0.65 per share, the holder would incur a conversion loss which is satisfied by either (a) cash payment in an amount sufficient to pay the conversion loss (($0.65 per share less the conversion price) times the number of shares being converted), or (b) we may convert the conversion amount into shares at $0.65 per share and adding the conversion loss to the unpaid balance of the Convertible Note.
As of March 31, 2010, if the $50,000 Convertible Note were converted based on the terms above, the Company would incur a conversion loss of $33,308. Accordingly, the amount of the potential conversion loss is recorded as a derivative liability in the consolidated balance sheet as of March 31, 2010, with the same amount included as a loss on derivatives in the consolidated statement of operations for the year ended March 31, 2010. The potential conversion loss associated with the Convertible Note will be re-measured at the end.
The Secured Note is a full recourse obligation of the investor to repay the original principal amount of $300,000 and includes a 13.6% one-time interest charge. The Secured Note has a maturity date of three (3) years from March 24, 2010 at which time all principal and accrued interest shall be due and payable in full. The Secured Note provides that the investor will plan to make, without obligation, monthly payments of $50,000 beginning at the date of execution of the Secured Note subject to conversions being honored as set forth under the Convertible Note and Rule 144 being available to remove restrictive legend from shares obtained in conversions such that the shares are freely tradeable. On March 24, 2010, the investor made a $50,000 payment. Accordingly, the Convertible Note payable balance as of March 31, 2010 is $50,000, which includes the $300,000 outstanding Convertible Note balance, offset by the $250,000 outstanding Secured Note balance.
The investor granted the Company a security interest in specified collateral having a $300,000 value to secure payment and performance of its obligations under the Secured Note. The security interest in the collateral automatically terminates at the time the Secured Note is paid in full.
For further description of the Convertible Note and the Secured Note and other pertinent terms and provisions of this transaction, see Nacel Energy’s Form 8-K dated March 24, 2010, as filed with the SEC on March 30, 2010.
Results of Operations
Results of Operations for the year ended March 31, 2010 compared to March 31,
We generated no revenues from our operations for the twelve months ended March 31, 2010 (“Fiscal 2009-10 Period”) and for the twelve months ended March 31, 2009 (“Fiscal 2008-9 Period”).
Our total operating expenses were $2,056,817 for the Fiscal 2009-10 Period compared to total operating expenses of $2,324,243 for the Fiscal 2008-9 Period. Our operating expenses for the Fiscal 2009-10 Period included $1,204,169 in wind project development expenses compared to $686,768 reported for the Fiscal 2008-9 Period and $839,444 in general and administrative expenses for the Fiscal 2009-10 period compared to $1,635,793 reported for the Fiscal 2008-9 Period. Our general and administrative expenses included $308,750 in executive compensation for the Fiscal 2009-10 period compared to $1,018,000 reported for the Fiscal 2008-9 period; $42,771 in marketing expenses for the Fiscal 2009-10 period compared to $72,319 reported for the Fiscal 2008-9 Period and $465,456 in legal and professional fees for the Fiscal 2009-10 Period compared to $344,832 for the Fiscal 2008-9 Period.
Our net other expenses/income for the Fiscal 2009-10 Period were $792,385 compared to $9,286 reported for the Fiscal 2008-9 Period. Our other expenses included loss on derivative financial instruments of $299,635 for the Fiscal 2009-10 period compared to $0 for the Fiscal 2008-9 Period. Our other expenses also included interest expense of $492,750 for the for the Fiscal 2009-10 period compared to $13,236 for the Fiscal 2008-9 Period. Our other income for the Fiscal 2009-10 Period included interest income of $0 compared to interest income of $3,671 for the Fiscal 2008-9 Period.
Capital Structure and Resources.
We had total assets of $507,464 as of March 31, 2010, which consisted of cash of $57,763, prepaid expenses of $187,261, deferred financing costs of $86,539 and fixed assets net of depreciation of $175,901.
We had total liabilities of $2,530,725 as of March 31, 2010 consisting of accounts payable of $307,301, accounts payable - related party of $19,500, accrued interest payable of $3,333, a demand note payable of $250,000, a convertible note of $300,000, a line of credit extended by a director of $460,753, a convertible note (net of discount) of $341,611 and a derivative liability of $1,098,227.
At March 31, 2010 we had paid-in capital of $3,992,691.
We have had net losses since inception and had an accumulated deficit of $6,038,133 at March 31, 2010.
We had net cash used in operating activities of $1,770,057 for the year ended March 31, 2010. We had a net loss of $2,849,202 including a non-cash item of $191,200 related to stock issued for services.
We had $22,610 in net cash used in investing activities for the year ended March 31, 2010, including $22,610 paid for fixed assets.
We had $1,285,753 in net cash provided by financing activities for the year ended March 31, 2010, including $210,753 from a line of credit extended by a director, $50,000 proceeds from a note receivable, $980,000 from proceeds on notes payable, $165,000 proceeds from sales of stock and paid $120,000 for financing costs.
We had no outstanding cash commitments as of March 31, 2010.
As we expand, we may need to make sizeable cash commitments to develop our wind power generation facilities, and the impact of this potential trend on our business is uncertain. We believe that our mix of capital resources will shift from short-term debt to equity-based financing, which will cause dilution of current shareholders. Because the Company has generated no operating revenues to date, the predominant component of our liquidity is cash on hand.
Cautionary Note Regarding Forward Looking Statements
Some of the statements in this report are “forward-looking statements.” These forward-looking statements involve certain known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among others, the factors set forth above under “Risk Factors.” The words “believe,” “expect,” “anticipate,” “intend,” “plan,” and similar expressions identify forward-looking statements. We caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update and revise any forward-looking statements or to publicly announce the result of any revisions to any of the forward-looking statements in this document to reflect any future or developments. However, the Private Securities Litigation Reform Act of 1995 is not available to us as a penny stock issuer and thus we may not rely on the statutory safe harbor from liability for forward-looking statements. Further, Section 27A(b)(2)(D) of the Securities Act and Section 21E(b)(2)(D) of the Securities Exchange Act expressly state that the safe harbor for forward looking statements does not apply to statements made in connection with this offering.
Item 8:
Item 8: Financial Statements
Our financial statements are stated in United States dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.
The following consolidated financial statements are filed as part of this annual report:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Nacel Energy Corporation
(a development stage company)
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheets of Nacel Energy Corporation (“Nacel Energy”) as of March 31, 2010 and 2009 and the related consolidated statements of expenses, stockholders’ equity (deficit), and cash flows for the years ended March 31, 2010 and 2009 and for the period from February 7, 2006 (inception) through March 31, 2010. These financial statements are the responsibility of Nacel Energy. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. Nacel Energy is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Nacel Energy’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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nacel Energy as of March 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for the years ended March 31, 2010 and 2009 and for the period from February 7, 2006 (inception) through March 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that Nacel Energy will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, Nacel Energy has suffered recurring losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
MALONE & BAILEY, LLP
www.malone-bailey.com
Houston, Texas
July 14,
Nacel Energy Corporation
(A Development Stage Company)
Consolidated Balance Sheets
See accompanying summary of accounting policies and notes to consolidated financial statements
Nacel Energy Corporation
(A Development Stage Company)
Consolidated Statements of Expenses
Years Ended March 31, 2010 and 2009 and For The Period
From February 7, 2006 (Inception) Through March 31, 2010
See accompanying summary of accounting policies and notes to consolidated financial statements
Nacel Energy Corporation
(A Development Stage Company)
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
For The Period From February 7, 2006 (Inception) Through March 31, 2010
Nacel Energy Corporation
(A Development Stage Corporation)
Consolidated Statements of Cash Flows
Years Ended March 31, 2010 and 2009 and For The Period
From February 7, 2006 (Inception) Through March 31, 2010
NACEL ENERGY CORPORATION
(A Development Stage Company)
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of organization & business.
i) Organization
We were incorporated in the State of Wyoming on February 7, 2006. On March 13th, 2006 we applied and subsequently received the approval of the Wyoming Secretary of State on March 31, 2006, to amend Article 5 of our Articles of Incorporation to authorize the issuance of an unlimited number of common and preferred shares without further application to the State as provided for under Wyoming law. Currently, our Board of Directors has authorized a total of 50 million common shares, of which 22,181,000 are issued and outstanding, and no preferred shares. We changed our name to Nacel Energy Corporation (“Nacel Energy”) from Zephyr Energy Corporation on April 3, 2007.
ii) Business
We intend to become a wind power generation and wind project development, company. We intend to identify and evaluate the economic feasibility and resource potential of wind development properties, domestically and internationally, for the purposes of developing utility scale wind turbine projects. We may participate in these projects with development partners and receive revenue from the sale of electric energy through our working interests in the partnerships or through the sale of our interests in the development projects.
Since our inception, we have been engaged in business planning activities, including researching wind energy technologies, developing our economic models and financial forecasts, performing due-diligence regarding potential development partners, investigating wind electric energy properties and project opportunities, and raising capital. We are a development stage company and have commenced entering into agreements and various operations in furtherance of our wind power generation business.
Basis of Presentation.
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America.
Use of Estimates.
In preparing financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheet and revenue and expenses in the statement of expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents.
For purposes of the statement of cash flows, Nacel Energy considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Property and equipment
Property and equipment is recorded at cost and depreciated on the straight-line method over the estimated useful lives. Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any gain or loss is included in operations.
Derivative Financial Instruments
Nacel does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Nacel evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, Nacel uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Fair Value Measurements
In September 2006, the FASB issued ASC 820 (previously SFAS 157) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 were effective January 1, 2008. The FASB has also issued Staff Position (FSP) SFAS 157-2 (FSP No. 157-2), which delays the effective date of SFAS 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008.
As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observations of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of March 31, 2010. As required by SFAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
The derivatives listed above are carried at fair value. The fair value amounts in current period earnings associated with the Company’s derivatives resulted from Level 2 fair value methodologies; that is, the Company is able to value the assets and liabilities based on observable market data for similar instruments. This observable data includes the quoted market prices and estimated volatility factors.
Reclassifications.
Certain prior year amounts have been reclassified to conform with the current year presentation.
Consolidation.
The consolidated financial statements include the accounts of Nacel Energy and its wholly-owned subsidiaries, 0758817 BC Ltd., Blue Creek Wind Energy Facility, LLC, Channing Flats Wind Energy Facility, LLC, Swisher Wind Energy Facility, LLC, Hedley Pointe Wind Energy Facility, LLC. Leila Lakes Wind Energy Facility, LLC and Snowflake Wind Energy Facility, LLC. Significant inter-company accounts and transactions have been eliminated.
Wind Project Development Costs
Wind project development costs are charged to expense as incurred. These costs consist of such costs as contracted operations and maintenance fees, turbine and related equipment warranty fees, land rent, insurance, professional fees, operating personnel and permit compliance.
Leases
The Company has entered into several Wind Project Agreements granting the right to install equipment and restricting use of the property by the landowner. Fees paid in conjunction with these agreements are expensed as incurred.
Income taxes.
The Company has adopted the provisions of FASB ASC Topic 740, “Income Taxes ” (“ASC 740”). As required under ASC 740, the Company accounts for income taxes using an asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences
between the financial statements and tax bases of assets and liabilities at the applicable tax rates. A valuation allowance is utilized when it is more likely than not, that some portion of, or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under ASC 740, the Company recognizes tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.
Basic and diluted net loss per share.
The Company computes loss per share in accordance with ASC 260, ‘‘Earnings per Share’’ which requires presentation of both basic and diluted earnings per share on the face of the statement of operations. Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period including stock options and warrants using the treasury method. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive.
Stock Compensation.
Nacel Energy follows Financial Accounting Standard No. 123R (ASC 718), “Share-Based Payment” as interpreted by SEC Staff Accounting Bulletin No. 107 for financial accounting and reporting standards for stock-based employee compensation plans. It defines a fair value based method of accounting for an employee stock option or similar equity instrument. There were no compensatory options or warrant granted since inception through March 31, 2010.
Consolidation.
The consolidated financial statements include the accounts of Nacel Energy and its wholly-owned subsidiaries, 0758817 BC Ltd., Blue Creek Wind Energy Facility, LLC, Channing Flats Wind Energy Facility, LLC, Swisher Wind Energy Facility, LLC, Hedley Pointe Wind Energy Facility, LLC, Leila Lakes Wind Energy Facility LLC and Snowflake Wind Energy Facility, LLC. Significant inter-company accounts and transactions have been eliminated.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Nacel Energy has incurred material recurring losses from operations. Since inception, Nacel Energy has incurred losses of approximately $6.04 million. In addition, Nacel Energy is experiencing a continuing operating cash flow deficiency. These factors, among others, raise substantial doubt about Nacel Energy’s ability to continue as a going concern for a reasonable period of time.
Nacel Energy is pursuing, and will continue to pursue, additional equity financing and/or debt financing while managing cash flow in an effort to provide funds and cash flow to meet its obligations on a timely basis and to support wind project development activities.
The consolidated financial statements do not contain any adjustments to reflect the possible future effects on the classification of assets or the amounts and classification of liability that may result should Nacel Energy be unable to continue as a going concern.
NOTE 3 - DEMAND NOTES PAYABLE
In July 2009, Nacel executed a new loan with a lender in the amount of $250,000, which provides for simple interest of 10% per annum to be paid monthly upon the outstanding balance. The note is due on demand and is unsecured.
NOTE 4 - SHAREHOLDER LINE OF CREDIT
At inception, Nacel Energy entered into an agreement with Mr. Fleming with respect to an unsecured, no-interest $250,000 line of credit repayable at an unspecified future date.
Effective July 1, 2008, Nacel Energy agreed to new terms for the line of credit, which provided for simple interest to be added to the outstanding balance of the line of credit, once each quarter, based upon the current 3 month LIBOR plus 500 basis points. Prior to that date, interest on the line of credit was imputed to paid-in capital based on the market rate of interest for the period.
On June 30, 2009, Mr. Fleming loaned an additional $150,000 on the line of credit. On July 1, 2009, we ratified the terms for the line of credit to allow an increase in the balance to $400,000, which provides for simple interest of 8% per annum on the outstanding balance with interest payments beginning October 1, 2009.
On September 29, 2009, we ratified the terms for the line of credit to allow an additional increase in the balance to $442,143. The terms and payment arrangements remain the same as agreed upon on June 30, 2009.
On October 26, 2009, we ratified the terms for the line of credit to allow an additional increase in the balance to $460,753. The terms and payment arrangements remain the same as agreed upon on June 30, 2009.
As of March 31, 2010, the $460,753 line of credit extended by the director was fully drawn upon, and no further amounts are available for borrowing unless the agreement is re-negotiated, of which there is no certainty. There was a balance of accrued interest in the amount of $3,333 as of March 31, 2010.
NOTE 5 - CONVERTIBLE NOTES PAYABLE
Senior Secured Note - On November 24, 2009, Nacel entered into a definitive Securities Purchase Agreement for the issuance of a Senior Secured Convertible Note (the “Note”) and 3,500,000 Warrants in a private placement with a single institutional investor. Proceeds from the Note were $730,000 with repayment amount of $900,000. The Note has an original issue discount of $150,000. $20,000 of the initial proceeds were used to pay legal costs for the investor. In addition, Nacel paid an additional $25,000 in separate legal fees associated with the offering. The legal fees were deferred and will be amortized until maturity to interest expense.
The note is payable over nine monthly installments and matures on December 1, 2010. The repayment amount of $900,000 does not accrue interest unless an event of default occurs, in which case the interest rate shall be 18% per annum. Subsequent to March 31, 2010, the terms of this note were modified. See Note 12.
Nacel may pay each monthly installment in cash or, at its option, subject to the satisfaction of customary equity conditions, in shares of common stock. The Note is convertible into shares of Nacel’s common stock at an initial conversion price of $0.90 per share. The embedded conversion option contains a reset provision that can cause an adjustment to the conversion price if Nacel sells or issues an equity instrument at a price lower than the initial conversion price. Due to this provision, the embedded conversion option qualifies for derivative accounting under ASC 815-15 (See Note 10 below). The fair value of the embedded conversion option was determined to be $374,228 at the inception of the note. This fair value in conjunction with the fair value of the warrants issued with the note (See Note 9 below) resulted in a full discount to the note payable at inception. As of March 31, 2010, $341,611 of the discount had been amortized.
In conjunction with the note payable, Nacel paid $75,000 and issued 83,333 warrants to a placement agent with a fair value of $68,950. Both amounts were deferred and will be amortized until maturity to interest expense. As of March 31, 2010, $102,053 of the amounts deferred (including legal fees mentioned above) had been amortized.
Additional Convertible Note - On March 24, 2010, we executed and delivered, pursuant to a private placement with a single institutional investor, our $300,000 Convertible Promissory Note (the “Convertible Note”) in exchange for the investor’s execution and delivery to us of a $300,000 Secured & Collateralized Promissory Note (the “Secured Note”).
The original principal amount of the Convertible Note is $300,000, and the Convertible Note provides for a 12% one-time interest charge. The Convertible Note has a maturity date of three (3) years from March 24, 2010 at which time all principal and accrued interest shall be due and payable in full. Prepayment is not permitted unless approved by the holder in writing. However, the Convertible Note is payable on demand by the holder in an amount not to exceed the cash amount paid under the Secured Note.
The Convertible Note can only be converted to the extent that payments have been received on the Secured Note. The subject conversion amount is converted into shares of our common stock based on a conversion price of seventy percent (70%) of the lowest trade price in the 30 trading days prior to the conversion. However, we have the right to enforce a conversion floor of $0.65 per share. Thus, if the conversion price is less than $0.65 per share, the holder would incur a conversion loss which is satisfied by either (a) cash payment in an amount sufficient to pay the conversion loss (($0.65 per share less the conversion price) times the number of shares being converted), or (b) we may convert the conversion amount into shares at $0.65 per share and adding the conversion loss to the unpaid balance of the Convertible Note.
As of March 31, 2010, if the $50,000 Convertible Note were converted based on the terms above, the Company would incur a conversion loss of $33,308. Accordingly, the amount of the potential conversion loss is recorded as a derivative liability in the consolidated balance sheet as of March 31, 2010, with the same amount included as a loss on derivatives in the consolidated statement of operations for the year ended March 31, 2010. The potential conversion loss associated with the Convertible Note will be re-measured at the end of each reporting period and the changes in the amount recorded through earnings.
The Secured Note is a full recourse obligation of $300,000 and includes a 13.6% one-time interest charge. The Secured Note has a maturity date of three (3) years from March 24, 2010 at which time all principal and accrued interest shall be due and payable in full. The Secured Note provides that the investor will plan to make, without obligation, monthly payments of $50,000 beginning at the date of execution of the Secured Note subject to conversions being honored as set forth under the Convertible Note and Rule 144 being available to remove restrictive legend from shares obtained in conversions such that the shares are freely tradeable. On March 24, 2010, the investor made a $50,000 payment. Accordingly, the Convertible Note payable balance as of March 31, 2010 is $50,000, which includes the $300,000 outstanding Convertible Note balance, offset by the $250,000 outstanding Secured Note balance.
The investor granted the Company a security interest in a money market account having a $300,000 value to secure payment and performance of its obligations under the Secured Note. The security interest in the collateral automatically terminates at the time the Secured Note is paid in full.
NOTE 6 - COMMITMENTS
Nacel Energy’s principal office is located at 9375 E. Shea Blvd., Suite 100, Scottsdale, Ariziona 85260. The rent is approximately $100 per month in a month to month agreement.
NOTE 7 - INCOME TAXES
Nacel Energy uses the liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes.
Nacel Energy has incurred net losses since inception and therefore has no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved. The cumulative net operating loss carry-forward is approximately $1,465,000 as of March 31, 2010 and will expire in the years 2026 through 2030.
The components of the deferred tax asset, the statutory tax rate, the effective tax rate and the elected amount of the valuation allowance are indicated below:
The changes in the valuation allowance for the years ending March 31, 2010 and 2009 were $837,000 and $100,000, respectively. The effective rate differs from the statutory rate due to the valuation allowance.
NOTE 8 - EQUITY TRANSACTIONS
At inception, February 7, 2006, Nacel Energy issued 11,000,000 shares of common stock at par value to two founders for reimbursement of expenses paid by the founders.
On April 16, 2007, the Company issued a warrant with an exercise price of $0.50 per share to a third party for which the fair value of the warrant was nominal. On June 7, 2007, the Securities and Exchange Commission declared effective the Company's registration statement on Form SB-2 relating to the offer and sale of 8,000,000 shares of common stock, at a price of $0.005 per share and 2,400,000 shares of common stock underlying a warrant, at an exercise price of $0.50. On September 24, 2007, the Company sold all 8,000,000 common shares to 50 investors for proceeds of $40,000. On October 20, 2007, the Company enacted a 1:20 forward split of its capital stock resulting in total issued and outstanding post-split common shares of 21,400,000. There was no change to the warrant exercise price of $0.50. On November 19, 2007, all 2,400,000 post-split shares underlying the warrant were delivered and the warrant-holder entered into a promissory note of $1,200,000. Through the period ending March 31, 2008, the Company received $509,627 of the total $1,200,000 proceeds related to the warrant exercise and the balance was recorded as a subscription receivable. On April 10, 2008, the remaining $690,373 was received from the warrant-holder and the subscription receivable was retired.
On December 01, 2007, the Company reduced total authorized post-split capital stock from 100,000,000 to 50,000,000 common shares. The director’s determined the reduced capital stock was sufficient to accommodate future capital requirements.
On May 16, 2008, we issued 16,000 shares of common stock under our S-8 plan for Director’s fees. The share awards were non-cancellable and vested immediately. These shares were recorded at their fair value of $62,240.
On August 27, 2008, the Company issued 250,000 shares of restricted common stock to our former President and CEO, Mr. Daniel Leach, as compensation. The share award was non-cancellable and vested immediately. These shares were recorded at their fair value of $1,007,500.
In November and December of 2008, we issued 120,000 restricted shares of common stock to Renergix Wind LLC, our project development consultants, for services related to the achievement of wind project development milestones as specified in our joint development agreement. The share awards were non-cancellable and vested immediately. These shares were recorded at their fair value of $95,400.
On December 23, 2008, the Company sold 1,000,000 shares of common stock to a third party. These shares were sold under the terms of a non-brokered private placement agreement in exchange for proceeds of $750,000.
On December 31, 2008, Company CEO, Mr. Brian Lavery, returned 1,000,000 of his founders’ shares for cancellation simultaneously with the issuance of the 1,000,000 share of common stock. The cancellation of Mr. Lavery’s shares was done to prevent diluting the Company’s common stock and shareholders. The shares were returned to the Company and cancelled at par value of $.001 per share.
On September 24, 2009, the Company sold 220,000 shares of common stock to a third party. These shares were sold under the terms of a non-brokered private placement agreement in exchange for proceeds of $165,000.
During the year ended March 31, 2010, the Company issued 175,000 shares of restricted common stock to Renergix Wind LLC, our project development consultants, for services related to the achievement of a wind project development milestone as specified in our joint development agreement. We expensed $191,200 during the period related to this stock issuance.
Equity Compensation Plan Information
Effective April 1, 2008, Nacel Energy adopted a STOCK AWARD PLAN with the following provisions:
·
The Stock Award Plan (the 'Plan') is for selected employees, consultants and advisors to the Company and is intended to advance the best interests of the Company by providing stock-based compensation to employees and consultants of the Company.
·
The Plan shall be administered by the board of directors of the Company
·
The total number of shares of common stock available under the Plan shall not exceed in the aggregate 100,000, subject to increase at the discretion of the board of directors.
·
The individuals who shall be eligible to participate in the Plan shall be any employee, consultant, advisor or other person providing services to the Company, provided the services are not related to any prohibited activity (hereinafter such persons may sometimes be referred to as the 'Eligible Individuals'). Prohibited Activity shall include the following:
o
Any services in connection with the offer or sale of securities in a capital-raising transaction, any services that directly or indirectly promote or maintain a market for the Company’s securities, and any services in connection with a shell merger.
·
During the 12 months ended March 31, 2009 the following shares were issued under the Plan.
o
12,000 to Dr. Nedal Deeb
o
2,000 to Michael Williams, Esq.
o
1,000 to Roger Hoad
o
1,000 to Ben Lowther
·
The Company’s Stock Award Plan was terminated on March 31,
NOTE 9 - WARRANTS
During the year, Nacel issued 3,500,000 warrants in relation to convertible notes and an additional 83,333 to the placement agent in the transaction (see Note 6 above). The warrants are exercisable at $0.90 per share for 5 years. The warrants granted contain reset provisions that can cause an adjustment to the exercise price if Nacel sells or issues an equity instrument at a price lower than the initial exercise price. Due to this provision, the warrants qualify for derivative accounting under ASC 815-15 (See Note 7 below).
A summary of the options issued by us for the year ended March 31, 2010 as follows:
NOTE 10 - DERIVATIVE LIABILITY
Embedded feature of equity-linked financial instrument:
ASC 815-15, "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock" lays out a procedure to determine if an equity linked financial instrument (or embedded feature) is indexed to its own common stock. The ASC 815-15 is effective for fiscal years beginning after December 15, 2008.
Senior Secured Note - The embedded conversion option in Nacel’s $900,000 note described in Note 5 and the related warrants contain a reset provision that can cause an adjustment to the conversion price if Nacel sells or issues an equity instrument at a price lower than the initial conversion price. Nacel’s 3,583,333 outstanding warrants and the embedded conversion option in its convertible note were classified as derivative liabilities on November 24, 2009 as a result of this reset provision in accordance with ASC 815-15. The fair value of these liabilities at inception of the instruments was $3,323,593. Because the fair value of the instruments at inception exceeded the carrying amount of the note payable, a loss of $2,525,001 was recorded. The fair value of these liabilities will be re-measured at the end of every reporting period and the change in fair value will be reported in our consolidated statement of operations as a gain or loss on derivative financial instruments. The fair value of these liabilities as of March 31, 2010 was $1,064,919. The change in fair value from inception of the instruments through March 31, 2010 resulted in a gain of $2,258,674 resulting in a net derivative loss for the year ended March 31, 2010 of $266,327 from these instruments.
Nacel used the Black-Scholes option pricing model to value the embedded conversion feature and warrants above using the following assumptions: number of options as set forth in the convertible note and warrant agreements; no expected dividend yield; expected volatility ranging from 84% - 152%; risk-free interest rates ranging from 0.06% - 2.69% and expected terms based on the contractual term.
Additional Convertible Note - As mentioned in Note 5, as of March 31, 2010, if the $50,000 Convertible Note were converted based on its terms, the Company would incur a conversion loss of $33,308. Accordingly, the amount of the potential conversion loss is recorded as a derivative liability in the consolidated balance sheet as of March 31, 2010, with the same amount included as a loss on derivatives in the consolidated statement of operations for the year ended March 31, 2010. The potential conversion loss associated with the Convertible Note will be re-measured at the end of each reporting period and the changes in the amount recorded through earnings.
NOTE 11 - CONCENTRATIONS OF RISK
Cash and cash equivalents deposited with financial institutions are insured by the Federal Deposit Insurance Corporation(“FDIC”). Nacel Energy held cash in excess of FDIC insurance coverage at a financial institution as of March 31, 2010 and 2009 in the amount of $0 and $314,677, respectively.
NOTE 12 - SUBSEQUENT EVENTS
Effective as of April 23, 2010, Nacel entered into an Exchange Agreement which amended the Note and 3,500,000 Warrants held by an institutional investor. (See Note 6 above), Under the Exchange Agreement, the Note was exchanged for a new Senior Secured Convertible Note (the “New Note”) and the 3,500,000 Warrants were exchanged for 10,500,000 Warrants (“New Warrants”).
The principal amount of the New Note is $935,000 which is payable in seven equal installments of $133,571 beginning June 23, 2010 and matures on December 23, 2010.
Nacel may pay each monthly installment in cash or, at its option, subject to the satisfaction of customary equity conditions, in shares of common stock. The New Note is convertible into shares of Nacel’s common stock at an initial conversion price of $0.65 per share. The embedded conversion option contains a reset provision that can cause an adjustment to the conversion price if Nacel sells or issues an equity instrument at a price lower than the initial conversion price. Due to this provision, the embedded conversion option qualifies for derivative accounting under ASC 815-15. (See Note 10 above).
The New Warrants are exercisable at $0.65 per share for 5 years. The New Warrants contain reset provisions that can cause an adjustment to the exercise price if Nacel sells or issues an equity instrument at a lower price than the new exercise price. Due to this provision, the New Warrants qualify for derivative accounting under ASC 815-15. (See Note 10 above).
On April 25, 2010, Nacel issued 300,158 shares to Renergix as payment for accrued and deferred compensation of $90,047.50.
On April 25, 2010, Nacel issued 250,000 shares and 45,000 shares to former executive officers as payment for accrued and deferred compensation of $75,000 and $13,500, respectively.
On May 23, 2010, Nacel issued an aggregate of 462,569 shares to the institutional investor in connection with the pre-installment payment obligation under the New Note.
On June 23, 2010, Nacel issued an aggregate of 158,275 shares, which coupled with the earlier 462,569 shares issued on May 23, 2010, satisfied the initial monthly installment due on June 23, 2010. Also on June 23, 2010, Nacel issued an aggregate of 620,844 shares to the institutional investor in connection with the pre-installment payment obligation under the New Note.
On July 1, 2010, the due date of the director's line of credit was extended to April 1, 2011. There were no other changes to the terms of the agreement.
Item 9:
Item 9:
Disagreements with Accountants on Accounting and Financial Disclosure
We have no disagreement with our auditors.
Item 9A:
Item 9A:
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures that are designed for the purpose of ensuring that information required to be disclosed in its SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Principal Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.
For the period ended March 31, 2010, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act. Based on that evaluation, as of March 31, 2010, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective for the purposes stated above
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer at the end of the fiscal year covered by this Annual Report, conducted an evaluation of the effectiveness of our internal control over financial reporting. In the course of this evaluation, our management considered the material weaknesses in our internal control over financial reporting as discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009. Based on this evaluation, as of March 31, 2010, our management concluded that the Company’s internal control over financial reporting was effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
To address the issues associated with our material weaknesses as described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, we made changes in our internal controls over financial reporting during the nine month period ending December 31, 2009. A financial consultant was engaged which allowed implementation of additional procedures for monitoring and review of work performed by our Chief Financial Officer and to mitigate the segregation of duty issue where the Chief Financial Officer is involved in drafting financial statements and cannot conduct an independent review. In addition, we hired a new Chief Financial Officer with more extensive public accounting and SEC experience. We believe these remedial actions will result in proper segregation of duties and provide more checks and balances in our disclosure controls and procedures.
We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financing reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
Except as noted above, there have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2010 that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
Item 9B:
Item 9B:
Other Information
There is no information required to be disclosed on Form 8-K during the fourth quarter of the year ended March 31, 2010 that has not been reported.
PART III
Item 10:
Item 10:
Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The directors serve until their successors are elected and qualified. Executive officers are elected by the Board of Directors and serve at the discretion of the directors.
At March 31, 2010, our directors and executive officers, their ages, positions held, and duration of such, are as follows:
Name
Position Held with our Company
Age
Date First
Elected or
Appointed
Paul Turner
Chief Executive Officer
July 15, 2009
Andre Schwegler
Chief Financial Officer
January 8, 2010
Murray Fleming
Director
February 6, 2006
Mark Schaftlein
Director
July 15, 2009
Subsequent to March 31, 2010, on April 23, 2010, the services of Paul Turner and Andre Schwegler as Chief Executive Officer and Chief Financial Officer, respectively, were terminated in accordance with separate Termination Agreements between us and each executive officer. For more information concerning these terminations, see our Form 8-K dated April 23, 2010, as filed with the SEC on April 27, 2010.
Subsequent to March 31, 2010, on April 23, 2010, Mark Schaftlein became our Chief Executive Officer and Chief Financial Officer.
Business Experience
The following is a brief account of the education and business experience of each director and executive officer during at least the past five years, indicating each person's principal occupation during the period, and the name and principal business of the organization by which he was employed.
Paul Turner, CEO and Director; Dr. Turner is a principal of Renergix Wind LLC., an entity which, effective as of January 1, 2009, has provided consulting services for and on behalf of the Company. Since August 2008, Dr. Turner has assisted in the implementation of the Company’s wind power development strategies. From 2001 to 2006, Dr. Turner was Managing Director of People’s Energy Resources Corp (PERC), an affiliate of Peoples Energy of Chicago, IL. While at PERC, Dr. Turner was responsible for the development of electric power generation facilities and asset acquisitions. Prior to his career with PERC, Dr. Turner was a founding principal of Cornerstone Energy Advisors, a boutique mergers and acquisition firm which provided strategic and financial advice on over $2 billion in acquisitions and divestitures of natural gas, oil and coal-fired electric generating facilities. Also, from 1999 to 2000, Dr. Turner served as an Assistant Professor of Economics at New Mexico State University and was a consultant to the New Mexico Attorney General concerning the deregulation of electrical markets. Mr. Turner earned his B.Sc. in electrical engineering (power concentration) from the University of Illinois in 1987, his M.Sc. in electrical engineering (Electric Utility Management Program) from New Mexico State University in 1991 and his Ph.D. in economics (environmental and regulatory concentration) in 1997, from the University of Wyoming.
Andre Schwegler, CFO; Since 2003, Andre Schwegler has been a managing director and licensed securities representative of TerraNova Capital Partners, Inc. and its wholly-owned subsidiary, European American Equities, Inc., a broker-dealer which, effective as of June 15, 2009, has provided investment banking services to the Company. Mr. Schwegler earned his Bachelor of Science in Business and Engineering from the Clarkson University in 1978.
Murray Fleming, Director; Mr. Fleming joined Nacel Energy on February 6, 2006 and is currently a Director. From February 2005 to present, he has been a principal of Before the Bell Publishing LLC, an organization which provides investor relations services. From May 2005 to July 2005, he was president and chief executive officer of Iguana Ventures an exploration stage company engaged in the acquisition and exploration of resource properties. In 1986, he earned a Bachelor of Arts degree in Economics & Environmental Studies from the University of Victoria.
Mark Schaftlein, Director; Mark Schaftlein, earlier in 2009 prior to his appointment as an executive officer, served in an advisory capacity to the Company, focusing upon improving our management, financial and corporate structure. Mr. Schaftlein was our Chief Financial Officer from July 15, 2009 until his resignation on January 10, 2010, at which time he was appointed a director. On April 23, 2010, Mr. Schaftlein was appointed the President and Chief Financial Officer. Mr. Schaftlein is the founder and Chief Executive Officer of Capital Consulting, Inc., an advisory firm which for the past 8 years has assisted smaller public companies in the areas of capital sourcing, debt restructuring and business strategy. In addition to NACEL Energy, Mr. Schaftlein has also previously served in officer and director capacities with other public companies including Far East Energy Corporation, SP Holdings (later Organic to Go) and Ortec International. From 1982 to 2000, Mr. Schaftlein held a number of management positions in the banking industry, initially with Citicorp through 1992, then Fleet Financial, National Lending Center and Westmark Group Holdings from 1995 to 2000. During his tenure at Westmark, Mr. Schaftlein served as CEO and helped it achieve $100M in corporate financing. Mr. Schaftlein earned a degree in Business Administration from Western Kentucky University in 1980.
Family Relationships
There are no family relationships between any director or officer.
Involvement in Certain Legal Proceedings
None of our directors, executive officers, promoters or control persons have been involved in any of the following legal proceedings during the past ten years: (a) 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; (b) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences); (c) any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or (d) any finding 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, and the judgment has not been subsequently reversed, suspended, or vacated.
Audit Committee Financial Expert
We do not have a separately designated audit committee, but rather the entire Board of Directors serves as its audit committee. None of the current board members have been designated as the equivalent of the “audit committee financial expert” as neither member is considered independent and neither member would otherwise satisfy the criteria adopted under the Securities Exchange Act for financing accounting expertise. During the ensuing fiscal year, we expect to consider expanding our Board of Directors and believe that such expansion will include the appointment of independent directors, the establishment of a formal audit committee and the appointment of an audit committee member who meets the criteria adopted under the Securities Exchange Act for financial accounting expertise and independence. However, we caution, given the risk and exposure associated with board participation, recruiting independent directors, especially those that qualify as a financial expert, may prove difficult. Furthermore, director compensation and insurance premiums could prove costly. Accordingly, we may alter or vary our plans based upon these concerns in addition to changes in circumstances, lack of funds, and/or other events which we are not able to anticipate.
Changes to Nominating Process.
Given our small size and the small size of our Board, we do not currently have a Nominating Committee and no formal procedures have been established concerning the selection and nomination of directors. The Board will evaluate potential candidates to serve as a director by considering a candidate’s background and accomplishments, skills, expertise, character and to insure that the board reflects a range of talents, ages, skills, diversity and expertise. The Board seeks to maintain a diverse membership, but there is no separate policy on diversity. The Board is open to receiving recommendations from shareholders as to potential candidates it might consider.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings. Based solely on the review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended March 31, 2010, all filing requirements applicable to officers, directors and greater than ten percent beneficial owners were complied with.
Code of Ethics.
Due to our small size and efforts to establish our business, we have not yet adopted a Code of Ethics which applies to executive officers and employees, including our Chief Executive Officer and Chief Financial Officer. However, the Board does intend to adopt a Code of Ethics in the ensuing months which will be disclosed in a Current Report on Form 8-K. Once adopted, we will provide a copy of the Code of Ethics to any person without charge, upon request. The request for a copy can be made in writing to Nacel Energy, Inc., 9375 E. Shea Blvd., Suite 100, Scottsdale, Arizona 85260.
Item 11:
Item 11:
Executive Compensation
Summary Compensation Table
The following table sets forth the compensation paid or accrued to our Chief Executive Officers, former President and Chief Financial Officer for fiscal 2010 and 2009. No other director, officer or employee received annual compensation that exceeded $100,000.
(1)
The amount shown for each executive officer is the fair value of the stock awards issued during fiscal 2010 and fiscal 2009.
(2)
As noted in the above table, during fiscal year 2009, we issued 250,000 shares of restricted common stock to Daniel Leach, our former CEO, as compensation. These shares were recorded at their fair value of $1,007,500.
(3)
During fiscal year 2009, we issued a total of 16,000 shares to four (4) persons pursuant to the terms of our Stock Award Plan. For further information concerning the Stock Award Plan, see Note 9 - Equity Transactions - Equity Compensation Plan Information.”
(4)
The amounts shown for Mr. Turner represent amounts paid to him for services rendered as a Nacel executive officer. In addition to the indicated amount, there is $75,000 in accrued compensation due and owing for fiscal year 2010.
(5)
The amounts shown for Mr. Schaftlein represent amounts paid to him for services rendered as a Nacel executive officer. In addition to the indicated amounts, there are $23,500 in accrued compensation due and owing for fiscal year 2010.
(6)
The amounts shown for Mr. Schwegler represent amounts paid to him for services rendered as a Nacel executive officer. In addition to the indicated amount, there is $13,500 in accrued compensation due and owing for fiscal year 2010.
Employment/Consulting Agreements
Except as indicated below, we have not entered into any employment agreement or consulting agreements with our directors and executive officers.
Effective as of July 15, 2009, we entered into an Employment Agreement with Paul Turner, as Chief Executive Officer, which is for a term which expires on July 1, 2012 unless terminated sooner. As compensation, Dr. Turner received a base salary of $25,000 per month together with fringe benefits and other perquisites offered by us including public holidays and 14 days of paid vacation per 12 month period, which vacation benefit does not accrue or extend into subsequent periods and no right exits to receive payment for any unused vacation time. The Employment Agreement contains various other provisions which includes, without limitation, confidentiality, non-solicitation and non-compete provisions, provisions applicable to termination of employment (with and without cause) and other miscellaneous provisions.
Effective as of July 15, 2009, we entered into an Employment Agreement with Mark Schaftlein, as Chief Financial Officer, which is for a term which expires on July 1, 2012 unless terminated sooner. As compensation, Mr. Schaftlein received a base salary of $10,000 per month until March 31, 2010 and thereafter until the end of the term in the amount of $12,500 per month. In addition, Mr. Schaftlein receives fringe benefits and other perquisites offered by us including public holidays and 14 days of paid vacation per 12 month period, which vacation benefit does not accrue or extend into subsequent periods and no right exits to receive payment for any unused vacation time. The Employment Agreement contains various other provisions which includes, without limitation, confidentiality, non-solicitation and non-compete provisions, and other miscellaneous provisions.
Effective as of January 8, 2010, the Employment Agreement between the Company and Mark Schaftlein was modified and amended in connection with his appointment as a member of the Board of Directors and his resignation as our Chief Financial Officer. Mr. Schaftlein’s base salary was reduced to $7,500 per month effective as of November 1, 2009, subject to review and potential adjustment at the end of each year. Except for the foregoing, no other terms of the Employment Agreement were modified or amended. In connection with the reduced $7,500 monthly salary, $3,500 was paid monthly and the other $4,000 was accrued for subsequent payment. As of March 31, 2010, a total of $23,500 in accrued salary was due to Mr. Schaftlein.
Effective as of January 8, 2010, we entered into an Employment Agreement with Andre Schwegler, as Chief Financial Officer, which is for a term which expires on December 31, 2013 unless terminated sooner. As compensation, Mr. Schwegler received a base salary of $10,000 per month until November 30, 2010 and thereafter until the end of the term in the amount of $12,500 per month. Mr. Schwegler is entitled to receive bonus compensation consisting of (a) $5,000 per MW installed on each of our wind energy projects, due and payable 5 days after completion of construction on such wind project, and (b) an amount equal to 25 basis points on equity amounts raised by, or loan or other indebtedness amounts received by us, due and payable 5 days after our receipt of the subject equity or debt proceeds. In addition, Mr. Schwegler received fringe benefits and other perquisites offered by us including public holidays and 14 days of paid vacation and 14 days of unpaid vacation per 12 month period, which vacation benefit does not accrue or extend into subsequent periods and no right exits to receive payment for any unused vacation time. The Employment Agreement contains various other provisions which includes, without limitation, confidentiality, non-solicitation and non-compete provisions, provisions applicable to termination of employment (with and without cause) and other miscellaneous provisions.
Subsequent to March 31, 2010, effective as of April 22, 2010, we entered into separate Termination Agreements with Paul Turner, President, and Andre Schwegler, Chief Financial Officer, whereby each person’s employment as an officer of the Company was terminated, with such termination being without cause under terms of their respective Employment Agreement.
Under the terms of his Termination Agreement, the accrued and deferred compensation amounts due to Mr. Turner totaling $75,000 for the period from October 1, 2009 through March 31, 2010 was paid to him through the issuance of 250,000 shares of our common stock based on a value of $0.30 per share.
Under the terms of his Termination Agreement, the accrued and deferred compensation amounts due to Mr. Schwegler totaling $13,500 for the period from October 1, 2009 through March 31, 2010 was paid to him through the issuance by the Company of 45,000 shares of the Company’s common stock based on a value of $0.30 per share.
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We do not have any material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our executive officers except for our Stock Award Plan which expired on March 31, 2010.
Directors Compensation
Members of our Board of Directors are entitled to an award of up to $15,000 in director’s fees and up to 12,000 shares of common stock each fiscal year. Our directors are reimbursed for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. In addition, our Board of Directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director.
During the 12 months ended March 31, 2010, no directors received special remuneration.
Item 12:
Item 12:
Security Ownership of Certain Beneficial Owners and Management
As of July 7, 2010, there were 24,017,846 shares of our common stock issued and outstanding. The following table sets forth certain information known to us with respect to the beneficial ownership of our common stock as of that date by (i) each of our directors, (ii) each of our executive officers, and (iii) all of our directors and executive officers as a group. Except as set forth in the table below, there is no person known to us who beneficially owns more than 5% of our common stock. The number of shares beneficially owned is determined under rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has the sole or shared voting power or investment power and any shares which the individual has the right to acquire within 60 days of March 31, 2010 through the exercise of any stock option or other right. Unless otherwise noted, we believe that each person has sole investment and voting power (or shares such powers with his or her spouse) with respect to the shares set forth in the following
(1)
Based on 24,071,846 shares of common stock issued and outstanding as of July 7, 2010.
(2)
All 6,650,000 shares are owned directly by Mr. Lavery.
(3)
All 1,000,000 shares are owned directly by Mr. Fleming
(4)
All 80,000 shares are owned directly by Mr. Schaftlein
Changes in Control
We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change of control of our company.
Item 13:
Item 13: Certain Relationships and Related Transactions, and Director Independence
Except as disclosed herein, there have been no transactions or proposed transactions in which the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last three completed fiscal years in which any of our directors, executive officers or beneficial holders of more than 5% of the outstanding shares of our common stock, or any of their respective relatives, spouses, associates or affiliates, has had or will have any direct or material indirect interest.
On January 7, 2009, Murray Fleming, an officer, director and principal shareholder, entered into a stock purchase agreement with Darby Investments LLC, a personal holding company of our former CEO, Daniel Leach, for the exchange of 1,000,000 shares of Mr. Fleming’s personal holdings of Nacel Energy common stock in return for the organization and delivery of four development stage wind energy projects known as Blue Creek, Channing Flats, Kansas and the Dominican Republic. The transaction also included wind data collected from anemometers at various locations over a period of years in the States of Texas, Kansas, Wyoming, Colorado and New Mexico. The scope of organization and delivery included a survey of regional characteristics including topography, power market, transmission and permitting, the opening of discussions with local power authorities, securing the wind development rights related to the projects, the sourcing of anemometers to be located at the project sites and the sourcing and implementation of software to manage the collection of the data. On March 13, 2009, we acquired these four wind power generation projects in a non-arms length transaction with Mr. Fleming for $1. In addition, we acquired the wind data. The acquisition of the projects and the wind data is recorded in our consolidated statement of expenses as wind project development costs of $490,000.
At inception, Nacel Energy entered into an agreement with Murray Fleming, an officer, director and principal shareholder, whereby Mr. Fleming provided us an unsecured, no-interest $250,000 line of credit repayable at an unspecified future date. As of March 31, 2009, our $250,000 line of credit facility extended by Murray Fleming was fully borrowed, thereby leaving no additional funds available for future borrowing. However, on June 30, 2009, the line of credit was increased to $400,000 and then on September 29, 2009, the line of credit was increased to $442,143 and again on October 26, 2009 the line of credit was increased to $460,753. The terms of the line of credit facility provides for simple interest of 8% per annum, to be paid upon the outstanding balance, payable on the first day of the month after each calendar quarter. As of March 31, 2010, the $460,753 line of credit extended by the Mr. Fleming was fully drawn upon, and no further amounts are available for borrowing unless the loan agreement is re-negotiated, of which there are no assurances. Total interest on the line of credit for the fiscal year ended March 31, 2010 was $26,648, of which $23,315 was paid and $3,333 was accrued.
On January 6, 2009, we cancelled a total of 1,000,000 shares of common stock owned by Brian Lavery, an officer, director and principal shareholder, with such cancellation being made without any consideration being received by Mr. Lavery. The cancellation of these shares, as requested by Mr. Lavery, to avoid dilution of shareholders in the private placement of 1,000,000 shares of our common stock on December 23, 2009.
Item 14:
Item 14: Principal Accountant Fees and Services
The following table discloses the fees that the Company was billed for professional services rendered by its independent public accounting firm in each of the last two fiscal years.
(1)
Reflects fees billed for the audit of the Company’s consolidated financial statements included in its Form 10-K and review of its quarterly reports on Form 10-Q.
(2)
Reflects fees, if any, for consulting services related to financial accounting and reporting matters.
(3)
Reflects fees billed for tax compliance, tax advice and preparation of the Company’s federal tax return.
(4)
Reflects fees, if any, for other products or professional services not related to the audit of the Company’s consolidated financial statements and review of its quarterly reports, or for tax services.
Pre-Approval Policies and Procedures
The Board of Directors, acting as its audit committee, approves all audit, audit-related services, tax services and other services provided. Any services provided that are not specifically included within the scope of the audit must be pre-approved by the Board of Directors in advance of any engagement. Under the Sarbanes-Oxley Act of 2002, audit committees are permitted to approve certain fees for audit-related services, tax services and other services pursuant to a de minimus exception prior to the completion of an audit engagement. In fiscal 2010, none of the fees paid to Malone and Bailey were approved pursuant to the de minimus exception.
PART IV
Item 15:
Item 15: Exhibits, Financial Statement Schedules
(a) List of documents filed as part of this Report:
None
(b) Exhibits:
The following exhibits listed are filed as part of this Report:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
(1) Previously filed as exhibits to Registrant’s Form SB-2 filed on May 11, 2007 and incorporated herein by reference.
(2) Previously filed as exhibits to Registrant’s Form 8-K filed on November 24, 2009 and incorporated herein by reference.
(3) Previously filed as exhibit to Registrant’s Form 10-Q filed on February 17, 2009 and incorporated herein by reference.
(4) Previously filed as exhibits to Registrant’s Form 10-K filed on June 26, 2009 and incorporated herein by reference.
(5) Previously filed as exhibits to Registrant’s Form 10-Q/A filed on December 31, 2009 and incorporated herein by reference.
(6) Previously filed as exhibits to Registrant’s Form S-1 Registration Statement filed on January 4, 2009 and incorporated herein by reference.
(7) Previously filed as exhibits to Registrant’s Form 8-K filed on April 27, 2010 and incorporated herein by reference.
* Exhibit filed herein.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned in the capacities they occupied at the end of the fiscal year covered by this report, thereunto duly authorized.
NACEL ENERGY CORPORATION
/s/ Mark Schaftlein
Principal Executive Officer and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities they occupied at the end of the fiscal year covered by this report and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ Murray Fleming
Director
July 14 , 2010
/s/ Mark Schaftlein
Director
July 14 , 2010