ITEM 1
BUSINESS
Adarna Energy Corporation (“we,” “our,” “us,” “Adarna,” or the “Company”) is a clean technology development company with a focus on developing innovations designed to resolve compelling ecological challenges while producing value added carbon neutral and negative products.
Carbon dioxide is the most abundant waste produced by human activity. Continued accumulation in Earth’s atmosphere and oceans needs to be avoided in order to prevent severe climate change. Our waste carbon emissions come from the combustion of fossil fuels to produce electricity, to power transportation, to heat our homes and to manufacture products. The scientific consensus is that these activities are directly responsible for increasing atmospheric carbon dioxide concentrations to the highest that they have been for more than 650,000 years. However, and despite the increased focus on renewable sources of energy, fossil fuels will continue to play a vital and dominant role in providing the majority of our energy needs over at least the next 50 years. Most scientists agree that, unabated, the combustion of fossil fuels to meet these needs will pump enough carbon dioxide into the global atmosphere to bring about severe climate change. Our collective challenge is to stem the tide - to channel the flow of waste carbon emissions in ways that stimulate economic growth and preserve quality of life while preventing the continued accumulation of carbon dioxide in Earth’s atmosphere and oceans.
Adarna’s ambition is to contribute to the resolution of this challenge by developing new clean technologies that reduce and reuse carbon emissions. Our plan to do so while building shareholder value is to develop, license and support technologies and projects that beneficially reuse waste carbon emissions in ways that reduce consumption of fossil fuels, increase use of sustainable raw materials, and decrease production of wastes and emissions.
We have licensed patent-pending technologies involving the composition and production of novel nanocatalysts and use of same in the catalytic conversion of carbon dioxide into methane and other value-added products. Our operating activities during the year ended December 31, 2011 exclusively involved research and development with this technology, and evaluation of additional strategically compatible technologies that we have targeted for licensing or acquisition.
INDUSTRY OVERVIEW
Worldwide energy consumption is projected to increase by 50% from 2005 to 2030, corresponding to an increase in crude oil consumption to over 112 million barrels of crude oil per day from the current 90 million barrels per day. The EIA projected that annual CO2 emissions will increase during this time from about 28 billion metric tons to over 42 billion metric tons in 2030.
The largest and most concentrated source of carbon dioxide (“CO2”) emissions is the growing use of coal-powered electricity generation, especially in developing countries where coal is abundant and inexpensive. Liquid fuels, such as gasoline, are expected to remain the world's most dominant fuel because of their importance in the transportation and industrial sector since there are few alternatives. The transportation sector alone accounts for 74% of the total projected increase from 2005 to 2030, with the industrial sector accounting for the remainder. We believe that this increasing demand is likely to sustain high world oil prices for a long period of time.
The continued use of fossil fuels creates important challenges. Fossil fuel derived CO2 emissions are believed to be the cause of global warming and climate change. Management believes that at some point in the future, there will not be enough supply and production capacity to meet worldwide fossil fuel demands. Based on historic growth trends, crude oil production is projected to peak in 2037 at a volume of 53 billion barrels per year.
We believe that these challenges can be meaningfully addressed by developing technologies that beneficially reuse waste carbon emissions in ways that reduce consumption of fossil fuels, increase use of sustainable raw materials, and decrease production of wastes and emissions.
EMPLOYEES
Adarna currently has 2 employees. In addition to its executive officers, the Company subcontracts with and/or employs on a part-time or at-will basis technical staff on an as-needed basis. There is no union representation for any of our employees.
ITEM 1A
ITEM 1A
RISK FACTORS
There are many important factors that have affected, and in the future could affect, Adarna’s business, including but not limited to the factors discussed below, which should be reviewed carefully together with other information contained in this report. Some of the factors are beyond our control and future trends are difficult to predict.
There is substantial doubt concerning our ability to continue as a going concern.
Adarna incurred a loss from continuing operations of $760,407 during the twelve months ended December 31, 2011, and we had $526 in cash at December 31, 2011. These matters raise substantial doubt about our ability to continue as a going concern. Management’s plans include raising additional proceeds from debt and equity transactions and completing strategic acquisitions.
We are implementing new business plans which make the results of our business uncertain.
Our limited operating history makes it difficult for potential investors to evaluate our business. Therefore, our proposed operations are subject to all of the risks inherent in the initial expenses, challenges, complications and delays frequently encountered in connection with the formation of any new business, as well as those risks that are specific to the biodiesel, ethanol and culinary oils industry in general. Investors should evaluate an investment in our company in light of the problems and uncertainties frequently encountered by companies attempting to develop markets for new products, services and technologies. Despite best efforts, we may never overcome these obstacles to achieve financial success. Our business is speculative and dependent upon the implementation of our business plan, as well as our ability to enter into agreements with third parties for necessary financing, the provision of necessary feedstock sources, engineering, procurement and construction services and the sale and distribution of our biodiesel fuel on terms that will be commercially viable for us. There can be no assurance that our efforts will be successful or result in revenue or profit. There is no assurance that we will earn significant revenues or that our investors will not lose their entire investment.
The fiscal efficiencies of highly capitalized competitors in biotechnology could defeat our efforts to capture a viable market share.
The business of developing new biotechnologies is a capital-intense business, requiring substantial capital resources. The costs that we may incur in obtaining capital are substantially greater per dollar than the cost incurred by large scale enterprises in the industry. This situation could cause us to be unable to compete effectively.
We lack capital to fund our operations.
During the twelve months ended December 31, 2011 our operations used $0 in cash. In addition, during those twelve months we were required to make payments on some of our outstanding debts. Loans
from some of our shareholders funded both the cash shortfall from operations and our debt service. Those individuals may not be able to continue to fund our operations or our debt service.
Our failure to attract qualified engineers and management personnel could hinder our success.
Our ability to attract and retain qualified engineers and other professional personnel when we need them will be a major factor in determining our future success. There is a very competitive market for individuals with advanced engineering training, and we are not assured of being able to retain the personnel we will need.
Key personnel are critical to our business and our future success depends on our ability to retain them.
Our success depends on the contributions of our key management, and engineering personnel. The loss of these officers could result in lost sales opportunities, lost business, difficulties operating our assets, difficulties raising additional funds and could therefore significantly impair our financial condition. Our future success depends on our ability to retain and expand our staff of qualified personnel, including environmental technicians, sales personnel and engineers. Without qualified personnel, we may incur delays in rendering our services or be unable to render certain services.
Viridis Capital can exert control over us and may not make decisions that further the best interests of all stockholders.
Viridis Capital, LLC owns the majority of our outstanding capital stock. As a result, Viridis exerts a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of us and might affect the market price of our common stock, even when a change in control may be in the best interest of all stockholders. Furthermore, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements which we would not otherwise consider.
Adarna Energy Corporation is not likely to hold annual shareholder meetings in the next few years.
Delaware corporation law provides that members of the board of directors retain authority to act until they are removed or replaced at a meeting of the shareholders. A shareholder may petition the Delaware Court of Chancery to direct that a shareholders meeting be held. But absent such a legal action, the board has no obligation to call a shareholders’ meeting. Unless a shareholders’ meeting is held, the existing directors elect directors to fill any vacancy that occurs on the board of directors. The shareholders, therefore, have no control over the constitution of the board of directors, unless a shareholders’ meeting is held. Management does not expect to hold annual meetings of shareholders in the next few years, due to the expense involved. The current board members were appointed to by the previous directors. If other directors are added to the Board in the future, it is likely that the current board will appoint them. As a result, the shareholders of Adarna Energy Corporation will have no effective means of exercising control over the operations of Adarna Energy Corporation.
Investing in our stock is highly speculative and you could lose some or all of your investment.
The value of our common stock may decline and may be affected by numerous market conditions, which could result in the loss of some or the entire amount invested in our stock. The securities markets frequently experience extreme price and volume fluctuations that affect market prices for securities of companies generally and very small capitalization companies such as us in particular.
The volatility of the market for Adarna Energy Corporation common stock may prevent a shareholder from obtaining a fair price for his shares.
The common stock of Adarna Energy Corporation is quoted on the OTC Bulletin Board. It is impossible to say that the market price on any given day reflects the fair value of Adarna Energy Corporation, since the price sometimes moves up or down by 50% or more in a week’s time. A shareholder in Adarna Energy Corporation who wants to sell his shares, therefore, runs the risk that at the time he wants
to sell, the market price may be much less than the price he would consider to be fair.
Our common stock qualifies as a "penny stock" under SEC rules which may make it more difficult for our stockholders to resell their shares of our common stock.
Our common stock trades on the OTC Bulletin Board. As a result, the holders of our common stock may find it more difficult to obtain accurate quotations concerning the market value of the stock. Stockholders also may experience greater difficulties in attempting to sell the stock than if it were listed on a stock exchange or quoted on the NASDAQ Global Market or the NASDAQ Capital Market. Because our common stock does not trade on a stock exchange or on the NASDAQ Global Market or the NASDAQ Capital Market, and the market price of the common stock is less than $5.00 per share, the common stock qualifies as a "penny stock." SEC Rule 15g-9 under the Securities Exchange Act of 1934 imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an "established customer" or an "accredited investor." This includes the requirement that a broker-dealer must make a determination on the appropriateness of investments in penny stocks for the customer and must make special disclosures to the customer concerning the risks of penny stocks. Application of the penny stock rules to our common stock affects the market liquidity of the shares, which in turn may affect the ability of holders of our common stock to resell the stock.
Only a small portion of the investment community will purchase “penny stocks” such as our common stock.
Adarna Energy Corporation common stock is defined by the SEC as a “penny stock” because it trades at a price less than $5.00 per share. Adarna Energy Corporation common stock also meets most common definitions of a “penny stock,” since it trades for less than $1.00 per share. Many brokerage firms will discourage their customers from purchasing penny stocks, and even more brokerage firms will not recommend a penny stock to their customers. Most institutional investors will not invest in penny stocks. In addition, many individual investors will not consider a purchase of a penny stock due, among other things, to the negative reputation that attends the penny stock market. As a result of this widespread disdain for penny stocks, there will be a limited market for Adarna Energy Corporation common stock as long as it remains a “penny stock.” This situation may limit the liquidity of your shares.
ITEM 2
ITEM 2
DESCRIPTION OF PROPERTIES
Adarna Energy Corporation currently maintains office space at 5950 Shiloh Road East, Suite N, Alpharetta, GA 30005. The lease for this space expires in February of 2013. We paid no rent during 2011 for these offices. During 2012, Adarna does not expect to pay rent for these offices.
ITEM 3
ITEM 3
LEGAL PROCEEDINGS
None.
ITEM 4
ITEM 4
MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Adarna’s common stock trades on the OTCQB under the symbol “ADRN”. The following table sets forth, for the periods indicated, the range of high and low closing bid prices for Adarna’s common stock as reported by the National Association of Securities Dealers composite. The reported bid quotations reflect inter-dealer prices without retail markup, markdown or commissions, and may not necessarily represent actual transactions.
The number of holders does not reflect beneficial ownership of shares held in the street name by stock brokerage houses or clearing agents.
REVERSE SPLIT
Effective July 7, 2011, the Company completed a 1 for 100 reverse stock split and reduced the par value of the common stock from $0.001 per share to $0.0001 per share. All stock prices, share amounts, per share information, stock options and stock warrants in this Report reflect the reverse stock split.
DIVIDENDS
We have no present intention of paying dividends in the foreseeable future. Our policy for the time being is to retain earnings and utilize the funds for operations and growth. The Board of Directors based on our earnings, financial condition, capital requirements and other existing conditions will determine future dividend policies.
SALE OF UNREGISTERED SECURITIES
The Company did not sell any unregistered securities during the 4th quarter of 2011.
REPURCHASE OF EQUITY SECURITES
The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Act during the 4th quarter of 2011.
ITEM 6
ITEM 6
SELECTED FINANCIAL DATA
Not applicable.
ITEM 7
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION
Adarna Energy Corporation (“we,” “our,” “us,”, “Adarna,” or the “Company”) is a clean technology development company with a focus on developing innovations designed to resolve compelling ecological challenges while producing value added carbon neutral and negative products.
Carbon dioxide is the most abundant waste produced by human activity. Continued accumulation in Earth’s atmosphere and oceans needs to be avoided in order to prevent severe climate change. Our waste carbon emissions come from the combustion of fossil fuels to produce electricity, to power transportation, to heat our homes and to manufacture products. The scientific consensus is that these activities are directly responsible for increasing atmospheric carbon dioxide concentrations to the highest that they have been for more than 650,000 years. However, and despite the increased focus on renewable sources of energy, fossil fuels will continue to play a vital and dominant role in providing the majority of our energy needs over at least the next 50 years. Most scientists agree that, unabated, the combustion of fossil fuels to meet these needs will pump enough carbon dioxide into the global atmosphere to bring about severe climate change. Our collective challenge is to stem the tide - to channel the flow of waste carbon emissions in ways that stimulate economic growth and preserve quality of life while preventing the continued accumulation of carbon dioxide in Earth’s atmosphere and oceans.
Adarna’s ambition is to contribute to the resolution of this challenge by developing new clean technologies that reduce and reuse carbon emissions. Our plan to do so while building shareholder value is to develop, license and support technologies and projects that beneficially reuse waste carbon emissions in ways that reduce consumption of fossil fuels, increase use of sustainable raw materials, and decrease production of wastes and emissions.
We have licensed patent-pending technologies involving the composition and production of novel nanocatalysts and use of same in the catalytic conversion of carbon dioxide into methane and other value-added products. Our operating activities during the year ended December 31, 2011 exclusively involved research and development with this technology, and evaluation of additional strategically compatible technologies that we have targeted for licensing or acquisition.
Moving forward, our development plans for 2012 include continued but expanded research and development activities with our catalytic conversion technologies; the acquisition of one or more targeted carbon emissions conversion and reuse technologies; and the construction of prototype systems based on our technologies, as well as a new Company-owned laboratory for iterative prototype evaluation and refinement. We further plan to hire additional management and to complete the initial equity financing necessary to affect our plans. Our primary goal for the next 12 months is to design and build a commercial-scale prototype of our technologies capable of converting and reusing the carbon emissions from residential-scale combustion sources.
Technology Development Activities
During 2011 and 2010, Adarna conducted research involving patent-pending technologies designed to recycle waste carbon emissions into value-added products. These activities were completed at the direction of our management and in connection with license rights obtained from affiliates of Viridis Capital, LLC, our majority shareholder, pursuant to which we have agreed to provide the capital resources needed to complete research and development in exchange for use rights involving the technologies. To defray cost and risk, this research was completed at our cost at an outsourced laboratory, by the laboratory’s research staff.
The Company plans to conduct additional testing during 2012, which testing may or may not involve the subcontracted technical consultants and project collaborators used for prior testing. All testing is performed under license and no payment is required until the technology has been successfully commercialized, after which the Company will owe 10% of its pre-tax net income deriving from commercial use of licensed technology. Successful commercialization will require sequential progression from bench, to pilot and finally commercial-scale pilot testing. Management’s risk mitigation policies call for a subjective analysis of the results produced by testing at each of the above stages. The goals of this analysis include an assessment of overall feasibility, the establishment of design parameters for cost-efficient scaling to the next sequential stage, and confirmation of previously established design assumptions and stage-specific objectives that Management believes to be required
for continuation of research and development activities for a specific technology. The purpose of each stage of testing for each technology is to provide Management with sufficient information to determine whether or not additional investment into that technology is warranted. No payments have been made to date or are currently due under the above license. Management does not anticipate completion of bench and pilot testing and commencing commercial operations with the licensed technologies during 2012, but completion of testing and development of a reasonable assessment of the economic feasibility of large scale implementation may be achieved within 36 months, depending upon the results of additional testing and the availability of capital for additional research and development activities. We plan to finance the ongoing development of our technologies, as well as acquisitions of additional strategically compatible technologies, through issuance of new debt and equity.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The financial statements included herein have been prepared by the Company, in accordance with Generally Accepted Accounting Principles. This requires the Company’s management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. These estimates and assumptions will also affect the reported amounts of certain revenues and expenses during the reporting period. In the opinion of management, all adjustments which, except as described elsewhere herein, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Actual results could differ materially based on any changes in the estimates and assumptions that the Company uses in the preparation of its financial statements and any changes in the Company’s future operational plans.
The Company accounts for convertible debt in accordance with FASB Accounting Standards Codification, Topic 815, as the conversion feature embedded in the convertible debenture could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares. We calculate the fair value of the conversion feature at the time of issuance and record a conversion liability for the calculated value, which is added to the carrying value of the debenture. We also recognize changes in value for accretion of the conversion liability from present value to fair value over the term of the note.
RESULTS OF OPERATIONS
Year ended December 31, 2011 Compared to Year Ended December 31, 2010
There were no revenues for the year ended December 31, 2011, or for year ended December 31, 2010. There was no cost of revenues for the year ended December 31, 2011 or for the year ended December 31, 2010.
Operating expenses were approximately $493,100 for the year ended December 31, 2011 and primarily consisted of $110,000 incurred in connection with our research and development, $271,000 in fees associated with financing activities and $112,000 in general and administrative costs. Operating expenses were approximately $1,270,800 for the year ended December 31, 2010, and primarily consisted of $233,000 incurred in connection with our research and development, $121,600 in bad debt expense, $29,900 in stock based compensation, $379,400 from the writedown of assets and $507,000 in general and administrative costs. Total other expense for the year ended December 31, 2011 was approximately $267,300 and other expense for the same period last year was approximately $1,452,700 respectively. Included in the year ended December 31, 2011 was about $444,000 of interest expense, $65,000 in liquidated damages, as well as about $345,000 in non-cash expense associated with the changes in the conversion features embedded in the Company’s convertible debentures. Included in other expenses during the year ended December 31, 2010 was $72,900 of loan cancellation fees, $1,112,000 of interest expense, and $298,000 in non-cash expenses associated with the changes in the conversion features in the Company’s convertible debentures. Our net loss for the year ended December 31, 2011 and December 31, 2010 was about $760,400 and about $2,723,500, respectively.
The Company accounts for convertible debt in accordance with FASB Accounting Standards Codification, Topic 815, as the conversion feature embedded in the convertible debenture could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares. We calculate the fair value of the conversion feature at the time of issuance and record
a conversion liability for the calculated value, which is added to the carrying value of the debenture. We also recognize changes in value for accretion of the conversion liability from present value to fair value over the term of the note. The additional expense for the conversion features of $345,000 for the year ended December 31, 2011 has been recognized within other income (expense) as changes in conversion liabilities in the accompanying financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s capital requirements consist of general working capital needs as well as planned research and development expenditures involving our ongoing commercialization efforts with our technologies. The Company's capital resources consist primarily of cash generated from the issuance of debt and stock. The Company relied on the issuance of convertible debt during the year ended December 31, 2011 to cover its capital needs. Our plan moving forward involves continued investment in the research and development of our technologies as well as evaluation of additional early stage clean technologies for license or acquisition. We also plan to raise and invest additional capital in pilot-scale deployments of those of our technologies that demonstrate their qualification for scaling beyond the bench stage, with a goal of producing cash flow from the license or sublicense of developed technologies and through operating activities.
The Company had a working capital deficit of about $2.4 million at December 31, 2011, which includes approximately $322,000 in liabilities associated with the conversion features embedded in convertible debentures which total $362,000 which were issued by the Company. The Company’s working capital deficit net of these amounts would be about $1.7 million.
Off Balance Sheet Arrangements
None.
ITEM 8
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
Page No.
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statements of Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNGINT FIRM
To the Board of Directors and
Stockholders of Adarna Energy Corporation
We have audited the accompanying balance sheets of Adarna Energy Corporation as of December 31, 2011 and 2010, and the related statements of operations, stockholders’ equity (deficit) and cash flows for each of the years in the two year period ended December 31, 2011. Adarna Energy Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Adarna Energy Corporation. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2 to the financial statements, the Company incurred a loss from continuing operations, has an accumulated deficit and negative cash flow from continuing operations as of December 31, 2011. The conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Rosenberg Rich Baker Berman & Company
Somerset, New Jersey
April 16, 2012
ADARNA ENERGY CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 2011
12/31/2011
12/31/2010
ASSETS
Current Assets:
Cash
$
$
Due from affiliates
--
20,219
Total current assets
20,745
Other Assets:
Project development costs
--
--
Note receivable
--
549,242
Total other assets
--
549,242
TOTAL ASSETS
569,987
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued expenses
607,982
651,328
Accrued interest
30,743
107,882
Accrued interest - related party
-
77,907
Convertible debentures, - other
684,763
887,401
Convertible debentures - related party
--
650,419
Liabilities to be settled in stock
179,007
179,007
Due to related party
870,845
--
Total current liabilities
2,373,340
2,553,944
Total Liabilities
2,373,340
2,553,944
Stockholders’ Equity (Deficit):
Convertible preferred stock, $0.001 par value, 500,000,000 shares authorized:
Series D: 1,000,000 authorized, 605,201 and 840,281 issued and outstanding, respectively
Common stock: $0.0001 par value, 5,000,000,000 authorized;
4,617,738,646 and 43,996,522 issued and outstanding, respectively
461,774
43,997
Additional paid in capital
10,103,151
10,149,143
Accumulated deficit
(12,938,344
)
(12,177,937
)
Total stockholders’ equity (deficit)
(2,372,814
)
(1,983,957
)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
$
$
569,987
The notes to the Consolidated Financial Statements are an integral part of these statements.
ADARNA ENERGY CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
12/31/2011
12/31/2010
Revenue
$
--
$
--
Cost of revenues
--
--
Gross profit
--
--
Operating expenses:
Stock based compensation
--
29,880
Research and development
110,000
233,076
Loss on writedown of asset
--
379,355
Bad debt expense
--
121,561
General and administrative expenses
383,096
506,976
Total operating expenses
493,096
1,270,848
Income (loss) from operations
(493,096
)
(1,270,848
)
Other Income (Expense):
Interest income
48,466
64,978
Gain on extinguishment of debt
560,696
--
Cancellation fees
--
(72,900
)
Liquidated damages
(65,000
)
--
Amortization of debt discount
(22,058
)
(35,036
)
Change in conversion liabilities
(311,800
)
(264,071
)
Change in convertible liabilities - related party
(33,558
)
(33,562
)
Interest expense
(354,274
)
(1,007,621
)
Interest expense - related party
(89,783
)
(104,476
)
Total other income (expense)
(267,311
)
(1,452,688
)
Loss before provision for income taxes
(760,407
)
(2,723,536
)
(Provision for)/benefit from income taxes
--
--
Net income (loss)
(760,407
)
(2,723,536
)
Weighted average common shares outstanding, basic and diluted
673,691,473
7,763,498
Earnings (Loss) per Share:
Net income (loss) per share - basic and diluted
$
0.00
$
(0.35)
The notes to the Consolidated Financial Statements are an integral part of these statements.
ADARNA ENERGY CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010
The notes to the Consolidated Financial Statements are an integral part of these statements.
ADARNA ENERGY CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010
Additional Paid-in Capital
Accumulated Deficit
Total Stockholders’ Equity (Deficit)
Balance at 12/31/09
$
8,613,205
$
(9,454,401)
$
(840,054)
Shares issued for services
29,631
--
29,880
Effect of conversions on feature of convertible debt
161,239
--
161,239
Conversion of debt
1,193,673
--
1,204,915
Series D Preferred stock conversions
(32,190)
--
--
Issuance to Junior investors
(15)
--
--
Forgiveness of debt
183,599
--
183,599
Net loss
--
(2,723,536)
(2,723,536)
Balance at 12/31/10
$
10,149,143
$
(12,177,937)
$
(1,983,957)
Effect of conversions on feature of convertible debt
104,028
--
104,028
Conversion of debt
189,548
--
213,773
Series D Preferred stock conversions
(437,572)
--
Forgiveness of debt
53,503
--
53,503
Effect of change in par value from $0.001 to $0.0001
44,502
--
--
Net loss
--
(760,407)
(760,407)
Balance at 12/31/11
$
10,103,151
$
(12,938,344)
$
(2,372,813)
The notes to the Consolidated Financial Statements are an integral part of these statements.
ADARNA ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010
The notes to the Consolidated Financial Statements are an integral part of these statements.
ADARNA ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Adarna Energy Corporation (“we,” “our,” “us,” “Adarna,” or the “Company”) is a technology development company with a focus on cleantech innovations designed to resolve compelling ecological challenges while producing value added carbon neutral and negative products.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2011-04, “Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs, by ensuring that fair value has the same meaning in U.S. GAAP and IFRSs and that their respective disclosure requirements are the same except for inconsequential differences in wording and style. The amendments in ASU No. 2011-04 apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. Some of the disclosures required by ASU No. 2011-04 are not required for nonpublic entities. These amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments to result in a change in the application of the requirements in ASC Topic 820. Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The adoption of ASU 2011-04 did not have a material impact on the Company’s results of operations or financial condition.
In April 2010, the FASB issued ASU 2010-17, Revenue Recognition - Milestone Method (“ASU 2010-17”). ASU 2010-17 provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. The following criteria must be met for a milestone to be considered substantive. The consideration earned by achieving the milestone should (i) be commensurate with either the level of effort required to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone; (ii) be related solely to past performance; and (iii) be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. Accordingly, an arrangement may contain both substantive and non-substantive milestones. ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Management evaluated the potential impact of ASU 2010-17 and does not expect its adoption to have a material effect on the Company’s results of operations or financial condition.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC 820 to require a number of additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. The ASU also clarifies the requirements for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The amended guidance is effective for interim and annual financial periods beginning after December 15, 2009. The adoption of ASU 2010-06 did not have a significant effect on the Company’s financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
NOTE 2
GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a loss in continuing operations of $760,407 during the year ended December 31, 2011, and had an accumulated deficit and negative cash flow from continuing operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans include raising additional proceeds from debt and equity transactions and completing strategic acquisitions.
NOTE 3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company follows the percentage-of-completion method of accounting for contracts for which the outcomes can be reliably estimated. Costs include all direct material and labor costs, and indirect costs, such as supplies, tools, repairs and depreciation. Revenue on such contracts is determined by reference to stage of completion. Revenue on long-term contracts is for which the outcomes cannot be estimated reliably at the outset is recognized to the extent that costs incurred are deemed recoverable.
ACCOUNTS RECEIVABLE
Accounts receivable are customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. No interest is charged on any past due accounts. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of the amount that will not be collected. Management reviews balances that are 90 days from the invoice date and based on assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated depreciation. For financial reporting purposes, the costs of plant and equipment are depreciated over the estimated useful lives of the assets, which range from three to five years for equipment, and 40 years for real estate, using the straight-line method.
INCOME TAXES
Income taxes are accounted for under the asset and liability method, whereby deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to a concentration of credit risk, consist of cash and cash equivalents. The Company places its cash and cash equivalents with various high quality financial institutions; these deposits may exceed federally insured limits at various times throughout the year. The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets as of December 31, 2011 and 2010 for cash equivalents and accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of notes payable, notes receivable, and long-term debt approximates their carrying value as the stated or discounted rates of the debt reflect recent market conditions.
FAIR VALUE MEASUREMENTS
Effective July 1 2009, the Company adopted ASC 820, Fair Value Measurements and Disclosures. This topic defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance supersedes all other accounting pronouncements that require or permit fair value measurements.
The Company accounted for the convertible debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares.
Under ASC 820, a framework was established for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. Effective July 1 2009, the Company adopted ASC 820-10-55-23A, Scope Application to Certain Non-Financial Assets and Certain Non-Financial Liabilities, delaying application for non-financial assets and non-financial liabilities as permitted. In January 2010, the FASB issued an update to ASC 820, which requires additional disclosures about inputs into valuation techniques, disclosures about significant transfers into or out of Levels 1 and 2, and disaggregation of purchases, sales, issuances, and settlements in the Level 3 rollforward disclosure. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1
quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange-traded securities and exchange-based derivatives
Level 2
inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges
Level 3
unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models
The following table presents the embedded derivative, the Company’s only financial assets measured and recorded at fair value on the Company’s Condensed Balance Sheets on a recurring basis and their level within the fair value hierarchy during the year ended December 31, 2011:
Embedded conversion liabilities as of December 31, 2011:
Level 1
$
--
Level 2
--
Level 3
322,382
Total
$
322,382
The following table reconciles, for the years ended December 31, 2011 and 2010, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements:
Balance of embedded conversion liability at January 31, 2010
$
216,616
Present value of beneficial conversion feature of new debentures
266,689
Reduction in fair value due to principal conversions
(161,239)
Accretion adjustment to fair value conversion feature
30,943
Balance of embedded conversion liability at December 31, 2011
353,009
Present value of beneficial conversion feature of new debentures
306,809
Accretion adjustment to fair value conversion feature
37,538
Gain on extinguishment of conversion feature
(271,957)
Gain on extinguishment of conversion feature - related party
(82,530)
Reduction in fair value due to principal conversions
(20,487)
Balance at December 31, 2011
$
322,382
The fair value of the conversion features are calculated at the time of issuance and the Company records a conversion liability for the calculated value. The Company recognizes interest expense for the conversion liability which is added to the principal of the debenture. The Company also recognizes interest expense for accretion of the conversion liability to fair value over the term of the note.
The Company has adopted ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in each debenture could result in the note principal being converted to a variable number of the Company’s common shares.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
CASH AND CASH EQUIVALENTS
For purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share represent the amount of earnings (loss) for the period available to each share of common stock outstanding during the reporting period. Diluted earnings (loss) per share reflects the amount of earnings (loss) for the period available to each share of common stock outstanding during the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period, such as common shares that could result from the potential exercise or conversion of securities into common stock. The computation of diluted earnings (loss) per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings (loss) per share. Potential future dilutive securities include common shares issuable under the Company’s outstanding options, convertible debentures and preferred stock as of December 31, 2011 as described more fully in these Notes to the Company’s Condensed Financial Statements.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation in accordance with Financial Accounting Standards Codification (“ASC”) 718, “Compensation - Stock Compensation.” Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period.
The Company accounts for stock issued for services to non-employees by reference to the fair market value of the Company's stock on the date of issuance as it is the more readily determinable value.
DEFERRED FINANCING CHARGES AND DEBT DISCOUNTS
Deferred finance costs represent costs which may include direct costs incurred to third parties in order to obtain long-term financing and have been reflected as other assets. Costs incurred with parties who are providing the actual long-term financing, which generally include the value of warrants, or the intrinsic value of beneficial conversion features associated with the underlying debt, are reflected as a debt discount. These costs and discounts are generally amortized over the life of the related debt. During the years ended December 31, 2011 and 2010, the Company recorded amortization of the note discount in the amount of $22,058 and $35,036, respectively.
NOTE 4
STOCKHOLDERS’ EQUITY
SERIES D PREFERRED STOCK
Shares of the Series D Preferred Stock (the "Series D Shares") may be converted by the holder into Company common stock at a rate representing 80% of the fully diluted outstanding common shares outstanding after the conversion (which includes all common shares outstanding plus all common shares potentially issuable upon the conversion of all derivative securities not held by the holder). The holder of Series D Shares may cast the number of votes at a shareholders meeting or by written consent that equals the number of common shares into which the Series D Shares are convertible on the record date for the shareholder action. In the event the Board of Directors declares a dividend payable to Company common shareholders, the holders of Series D Shares will receive the dividend that would be payable if the Series D Shares were converted into Company common shares prior to the dividend. In the event of a liquidation of the Company, the holders of Series D Shares will receive a preferential distribution of $0.001 per share, and will share in the distribution as if the Series D Shares had been converted into common shares.
During the year ended December 31, 2011, Viridis Capital, LLC (“Viridis”) converted 204,343 shares of Series D preferred stock into 4,000,234,000 common shares, 1,600,000,000 of which were returned to the Company and cancelled during 2012. Minority Interest Fund (I), LLC (“MIF”) converted 130,737 shares of Series D preferred stock into 348,355,918 common shares.
SERIES E PREFERRED STOCK
The Company’s Series E Preferred Stock was authorized during 2009 in connection with the Preferred Equity Financing. The Company entered into an agreement to cancel all Series E shares previously issued in April 2010, which agreement called for the issuance of a total of 50,000 Company common shares and the retention of another 18,690 common shares previously issued to the relevant investors in anticipation of converting Series E shares. All Series E shares have been cancelled. The 5,000,000 common shares to be issued to the relevant investors have been recorded as liabilities due to be settled in stock and were valued as of the April 15, 2010 commitment date.
COMMON STOCK
Effective July 7, 2011, the Company completed its amendment to its articles of incorporation to reduce the par value of the Company’s common stock from $0.001 per share to $0.0001 per share and to affect a 1-for-100 reverse stock split of the Company’s common stock. The Company also changed the name of the Company to Adarna Energy Corporation. All stock prices, common share amounts, per share information, stock options and stock warrants in this Report retroactively reflect the reverse stock split.
In addition to the common shares issued noted above, the Company issued 225,151,588 shares of common stock upon the conversion of an aggregate of $29,673 in debt during the year ended December 31, 2011. The Company issued 1,124,110 shares of common stock upon the conversion of an aggregate of $1,124,110 in debt during the year ended December 31, 2010.
During the year ended December 31, 2010, the Company issued 24,900,000 common shares to a consultant for a total of $29,880 in connection with the Company’s ongoing technology development efforts.
NOTE 5
RELATED PARTY TRANSACTIONS
Minority Interest Fund (II), LLC (“MIF”) is party to certain convertible debentures issued by the Company (see Note 7, Convertible Debentures, below). The managing member of MIF is a relative of the Company’s chairman. Viridis Capital, LLC (“Viridis”), is the majority shareholder of the Company (see Note 4, Stockholder’s Equity, above). The sole member of Viridis is the Company’s chairman.
NOTE 6
FINANCING ARRANGEMENTS
The following is a summary of the Company’s financing arrangements as of December 31, 2011 and 2010:
Current portion of convertible debentures:
Note discounts
$
--
$
(42,891
)
Convertible debentures to Minority Interest Fund (II), LLC
--
601,446
Convertible debentures to JMJ Financial Corp
--
526,268
Convertible debentures to SILS Ventures
60,827
70,500
Convertible debentures to Mammoth Corporation
280,054
27,738
Convertible debentures to E-Lionheart Associates
21,500
1,750
Conversion liabilities
322,382
353,009
Total current portion of convertible debentures
$
684,763
$
1,537,820
A total of $362,381 in principal from the convertible debt noted above is convertible into the common stock of the Company (see Note 7, Convertible Debentures). The following chart is presented to assist the reader in analyzing the Company’s ability to fulfill its fixed debt service requirements (net of note discounts) as of December 31, 2011 and the Company’s ability to meet such obligations:
Year
Amount
$
82,327
280,054
--
--
--
Thereafter
--
Total minimum payments due under current and long term obligations
$
362,381
NOTE 7
CONVERTIBLE DEBENTURES
As of December 31, 2010, the Company had a convertible debenture payable to Minority Interest Fund (II), LLC (“MIF”) in the amount of $601,446 (the “MIF Debenture”). The MIF Debenture is convertible into Company common stock at a rate equal to 90% of the lowest volume weighted average price for the Company’s common stock for the twenty trading days preceding conversion. The Company accounted for the MIF Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the MIF Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the MIF Debenture at December 31, 2010 to be $650,419 which represented the face value of the debenture of $601,446 plus the present value of the conversion feature. During the year ended December 31, 2011, the MIF Debenture was increased by $33,266 from new advances and decreased by $25,000 for amounts assigned to unrelated third parties. The Company recognized an increase in conversion liabilities at present value of $29,307 and recorded an expense of $4,251 for the accretion to fair value of the conversion liability for the year ended December 31, 2011. Interest expense of $89,783 for these obligations was accrued for the year ended December 31, 2011. The terms of the MIF Debenture were amended and restated on September 30, 2011 to include accrued interest of $167,690 and other amounts due of $270,333. The terms of a portion of the MIF Debenture consisting of $878,045 in principal were amended to provide for 6% interest, conversion at 90% of the market price at the time of conversion, and a maturity date of June 30, 2013. That debenture was then assigned to an entity majority owned by Viridis Capital, LLC, to reverse the impact of a transaction pursuant to which $878,045 in debt due to MIF was paid in the form of $878,045 in convertible debt issued by the
Company. As a result, the Company recorded a reduction of convertible debt payable to MIF of $878,045 and an affiliate obligation in the same amount. The balance of the MIF Debenture was then assigned on the same date to Mammoth Corporation (“Mammoth”), an unrelated third party. These transactions eliminated the balance of convertible debt due to MIF on September 30, 2011.
The principal balance due to Mammoth on December 31, 2011 was $300,054 (the “Mammoth Debenture”). Prior to September 30, 2011, the Mammoth Debenture was convertible into Company common stock at a rate equal to 50% of the lowest reported closing market price for the Company’s common stock for the five trading days preceding conversion. The Company accounted for the Mammoth Debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Mammoth Debentures could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Mammoth Debenture at December 31, 2010 to be $53,657 which represented the face value of the debenture of $27,738 plus the present value of the conversion feature. During the year ended December 31, 2011, the Company recorded an expense of $14,492 for the accretion to fair value of the conversion liability for the period. The carrying value of the Mammoth Debentures was $560,109 at December 31, 2011, and included principal of $280,054 and the fair value of the conversion liability. Interest expense of $18,925 for these obligations was accrued for the year ended December 31, 2011. The terms of the Mammoth Debenture were amended and restated on September 30, 2011 to provide for an extended maturity date of December 31, 2013. The Company additionally incurred a liquidated damages expense of $69,500 during 2011 in connection with prior conversion shares received by Mammoth at conversion prices below the par value of the Company’s stock.
On September 9, 2009, JMJ Financial Corporation (“JMJ”) issued the Company a 14.4% secured promissory note in the amount of $500,000 (“the JMJ Note”) in return for $600,000 in 12% convertible debt (“the JMJ Debenture”) issued by the Company. The principal balance receivable under the JMJ Note was $450,000 as of September 30, 2011 and accrued interest receivable under the JMJ Note was $131,375. The principal balance due under the JMJ Debenture was $526,268 as of September 30, 2011 and accrued interest owed under the JMJ Debenture was $147,936. On September 2, 2011, JMJ sent notice of its election to offset the JMJ Note against the JMJ Debenture. As a result of this offset, the Company and JMJ are both released of their liability in regards to the JMJ Note and the JMJ Debenture. The Company recorded a $327,620 gain on extinguishment of debt as a result of the offset as well as in income from the elimination of the underlying conversion liability. As of December 31, 2011, the balances on the JMJ Note and the JMJ Debenture have been paid in full. For the year ended December 31, 2011, interest expense of $47,234 for these obligations was incurred.
On May 25, 2010, the Company entered into a convertible promissory note with Asher Enterprises, Inc. (“Asher”) in the amount of $30,000 (the “Asher Note”). The convertible debt issued to Asher bears interest at a rate of 8% and matures on February 26, 2011. The Asher Note is convertible into Company common stock at a rate equal to 55% multiplied by the market price, defined as the average of the lowest three trading prices for the Company’s common stock for the ten trading days preceding the one trading day prior to conversion. Asher will not be permitted, however, to convert into a number of shares that would cause it to own more than 4.99% of the Company’s outstanding common shares. The Company accounted for the Asher Note in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Asher Note could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Asher Note at May 25, 2010 to be $52,852 which represented the face value of the debenture of $30,000 plus the present value of the conversion feature. During the year ended December 31, 2011, the Company recognized a reduction in conversion liability at present value of $23,589 for conversions during the period. During the year ended December 31, 2011, the Company recorded an expense of $737 for the accretion to fair value of the conversion liability for the period. The Asher Debenture was paid in full during the year ended December 31, 2011. Interest expense of $4,100 for these obligations was accrued for the year ended December 31, 2011.
Sunny Isle Ventures (“SIV”) held a debenture in the amount of $50,000 as of April 15, 2010 (the “SIV Debenture”). The SIV Debentures are convertible into Company common stock at a rate equal to 50% of the average closing market price for the Company’s common stock for the five trading days preceding conversion. The Company accounted for the SIV Debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the SIV Debentures could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the SIV Debentures at December 31, 2010 to be $49,567 which represented the face value of the debenture of $45,000 plus the present value of the
conversion feature. During the year ended December 31, 2011, the Company recorded an expense of $433 for the accretion to fair value of the conversion liability for the year ended December 31, 2011. The carrying value of the SIV Debentures was $50,000 at December 31, 2011, and included principal of $45,000 and the value of the conversion liability. The liability for the conversion feature of $5,000 at December 31, 2011 is equal to its estimated settlement value. Interest expense of $2,250 for these obligations was accrued for the year ended December 31, 2011.
Long Side Ventures (“LSV”), the successor to Sunny Isle Ventures, held an additional debenture in the amount of $32,500 on July 14, 2010 (the “LSV Debenture”). The LSV Debentures are convertible into Company common stock at a rate equal to 50% of the average closing market price for the Company’s common stock for the five trading days preceding conversion. The Company accounted for the LSV Debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the LSV Debentures could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the LSV Debentures at July 14, 2010 to be $63,611 which represented the face value of the debenture of $25,500 plus the present value of the conversion feature. The carrying value of the LSV Debentures was $31,654 at December 31, 2011, and included principal of $15,827 and the value of the conversion liability. The liability for the conversion feature of $15,827 at December 31, 2011 is equal to its estimated settlement value. Interest expense of $4,583 for these obligations was accrued for the year ended December 31, 2011
MIF sold a portion of its MIF Debenture to E-LionHeart Associates (“E-Lion”) in the amount of $35,000 on September 22, 2010 (the “E-Lion Debenture”). The convertible debt sold to E-Lion bears interest at a rate of 20% and matures on December 31, 2011.The E-Lion Debenture is convertible into Company common stock at a rate equal to 50% of the average of the three lowest reported closing market price for the Company’s common stock for the twenty trading days preceding conversion. The Company accounted for the E-Lion Debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the E-Lion Debentures could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the E-Lion Debentures at December 31, 2010 to be $13,417 which represented the face value of the debenture of $1,750 plus the present value of the conversion feature. During the year ended December 31, 2011, the Company recognized a reduction in conversion liability at present value of $8,775 for conversions during the period. During the year ended December 31, 2011, the Company recorded an expense of $2,129 for the accretion to fair value of the conversion liability for the period. The liability for the conversion feature of $21,500 at December 31, 2011 is equal to its estimated settlement value. Interest expense of $4,467 for these obligations was accrued for the year ended December 31, 2011.
An additional debenture in the amount of $25,000 had been assigned by MIF to an unrelated third party on January 20, 2011, but returned to MIF on September 30, 2011. This debenture was convertible into Company common stock at a rate equal to 90% of the lowest volume weighted average price for the Company’s common stock for the five trading days preceding conversion. The Company accounted for this debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in this debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of this debenture at January 20, 2011 to be $27,525 which represented the face value of the debenture of $25,000 plus the present value of the conversion feature. During the year ended December 31, 2011, the Company recorded an expense of $190 for the accretion to fair value of the conversion liability for the year ended December 31, 2011. The carrying value of this debenture was $27,652 at December 31, 2011, and included principal of $25,000 and the value of the conversion liability. The debenture has been converted and paid in full as of the year ended December 31, 2011. Interest expense of $3,466 for these obligations was accrued for the year ended December 31, 2011.
NOTE 8
STOCK BASED COMPENSATION
During the year ended December 31, 2010, the Company’s recorded the grant of a total of 51,000 common shares related to the cancellation of a preferred equity financing for a total of $71,400 relating to cancellation fees. A consultant for the Company was issued 249,000 shares valued at $29,880 for consulting services performed.
NOTE 9
INCOME TAXES
The Company has incurred losses, which have generated net operating loss carry forwards for the Company as of December 31, 2011. These loss carry forwards are subject to limitation in future years should certain ownership changes occur. For the years ended December 31, 2011 and 2010, the Company’s effective tax rate differs from the federal statutory rate principally due to net operating losses and other temporary differences for which no benefit was recorded. The provision for income taxes for the years ended December 31, 2011 and 2010 consisted of state income tax provisions. Deferred tax assets are as follows:
The Company has federal net operating loss carry-forwards of approximately $4,600,000 which expire through December 31, 2025.
NOTE 10
OPTIONS AND WARRANTS
The following is a table of stock options and warrants outstanding as of December 31, 2011 and December 31, 2010. The number of shares and price has been adjusted to reflect the 1-for-100 reverse stock split which occurred on July 7, 2011.
Summarized information about the Company’s stock options outstanding at December 31, 2011 is as follows:
Options exercisable at December 31, 2011 were 275,000, with a weighted average exercise price of $0.46 per share. The fair value of each option granted during 2006 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Dividend yield
--
Expected volatility
69%
Risk-free interest rate
2%
Expected life
10 yrs.
NOTE 11
SUBSEQUENT EVENTS
Between January 1, 2012 and April 14, 2012, the Company issued a total of 828,500,000 common shares upon conversion of debt, as well as 243,999,800 shares of common stock upon conversion of 17,979 of Series D Preferred Stock.
ITEM 9
ITEM 9
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A
ITEM 9A
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer participated in and supervised the evaluation of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in the reports that we file is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our principal executive officer or officers and principal financial officer, to allow timely decisions regarding required disclosure. In the course of making our assessment of the effectiveness of our disclosure controls and procedures, we identified a material weakness. This material weakness consisted of inadequate staffing and supervision within the bookkeeping and accounting operations of our company. The lack of employees prevents us from segregating disclosure duties. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews. Based on the results of this assessment, our Chief Executive Officer and our Chief Financial Officer concluded that because of the above condition, our disclosure controls and procedures were not effective as of the end of the period covered by this report.
Other than described above, there have been no changes in the company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect, the company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management has conducted, with the participation of the Chief Executive Officer and the Chief Financial Officer, an assessment, including testing of the effectiveness of our internal control over financial reporting. The assessment was conducted using the criteria in Internal Control-Integrated Framework issued by the committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with management’s assessment of the company’s internal control over financial reporting, management identified the following material weakness in the company’s internal control over financial reporting as of December 31, 2011. Management determined that at December 31, 2011, the company had a material weakness related to its control environment because it did not have a sufficient number of personnel with an appropriate level of U.S. GAAP knowledge and experience commensurate with its financial reporting requirements.
Because of the material weakness described above, management has concluded that the company did not maintain effective internal control over financial reporting as of December 31, 2011, based on the Internal Control-Integrated Framework issued by COSO.
ITEM 9B
ITEM 9B
OTHER INFORMATION
None.
PART III
ITEM 10
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Name
Age
Position
Kevin Kreisler
Chairman, Chief Executive Officer
Jacqueline L. Flynn
Chief Financial Officer
Mr. Kreisler is the chairman and the majority shareholder of Adarna through his holding company, Viridis Capital, LLC. Mr. Kreisler is also the chairman and chief executive officer of GreenShift Corporation. Mr. Kreisler served as GreenShift’s vice president from 1998 to 2000, president from 2000 to 2002, chief executive officer from 2002 to 2005 and has served as GreenShift’s chairman from 2005 to the present. Mr. Kreisler is a graduate of Rutgers University College of Engineering (B.S., Civil and Environmental Engineering, 1994), Rutgers University Graduate School of Management (M.B.A., 1995), and Rutgers University School of Law (J.D., 1997). Mr. Kreisler was admitted to practice law in New Jersey and the United States District Court for the District of New Jersey.
Jacqueline Flynn has over twenty years’ experience in financial accounting for both public and private companies. Ms. Flynn has been employed since 2006 as Controller of GreenShift Corporation, an affiliate of Adarna. From 2002 to 2005, Ms. Flynn was employed as Chief Financial Officer by Accent Mortgage Company of Alpharetta, Georgia. During the three years prior to 2002 Ms. Flynn was employed by Lahaina Acquisitions, Inc., a public company that owned Accent Mortgage Company during that period. She was employed by Lahaina Acquisitions first as Controller and then as Chief Financial Officer. Ms. Flynn was awarded an M.B.A. in 1994 by Brenau University.
NOMINATING, COMPENSATION AND AUDIT COMMITTEE
The Board of Directors does not have an audit committee, a compensation committee or a nominating committee due to the small size of the Board. The Board of Directors also does not have an audit committee financial expert, for the same reason.
CODE OF ETHICS
The Company does not have a written code of ethics applicable to its executive officers. The Board of Directors has not adopted a written code of ethics because there is only one member of management
SHAREHOLDER COMMUNICATIONS
The Board of Directors will not adopt a procedure for shareholders to send communications to the Board of Directors until it has reviewed the merits of several alternative procedures.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
None of the officers, directors or beneficial owners of more than 10% of the Company’s common stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during the year ended December 31, 2011, except that none of the two members of management has filed a Form 3.
ITEM 11
ITEM 11
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the Company’s executive officers during the years indicated as relevant. As of December 31, 2011, no executive officer held shares of exercisable options for the Company’s Common Stock.
Jacqueline Flynn
$
25,000
--
--
--
--
Chief Financial Officer
$
53,668
--
--
--
--
$
10,000
--
--
--
--
EMPLOYMENT AGREEMENTS
The Company’s relationships with its officers are on an at-will basis.
COMPENSATION OF DIRECTORS
Our directors are reimbursed for out-of-pocket expenses incurred on our behalf, but receive no additional compensation for service as directors.
ITEM 12
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the voting stock beneficially owned by any person who, to our knowledge, owned beneficially more than 5% of any class of voting stock as well as by the members of our Board of Directors and by all officers and directors as a group.
Name and Address
Of Beneficial Owner(1)
Common
% of Class
Series D Preferred
% of Class
Percentage of Voting Power
Kevin Kreisler(2)
2,400,000,000
61.5%
817,856
96.46%
80.00%
Officers and Directors
as a group (2 persons)
2,400,000,000
61.5%
817,856
100.00%
80.00%
(1)
The address of each shareholder is c/o Adarna Energy Corporation, 5950 Shiloh Road East, Suite N, Alpharetta, Georgia, 30005.
(2)
All shares listed for Mr. Kreisler are owned of record by Viridis Capital, LLC, of which Mr. Kreisler is the sole member.
ITEM 13
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Minority Interest Fund (II), LLC (“MIF”) is party to certain convertible debentures issued by the Company (see Note 7, Convertible Debentures, above). The managing member of MIF is a relative of the Company’s chairman.
DIRECTOR INDEPENDENCE
None of the members of the Board of Directors is independent as “independent” is defined in the rules of the NASDAQ Stock Market.
PART IV
ITEM 14
ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES
INDEPENDENT AUDITOR FEES
Audit Fees
Rosenberg Rich Baker Berman & Company, P.A. billed $12,000 to the Company in 2011 and $14,250 in 2010 for professional services rendered for the audit of our 2010 financial statements and review of the financial statements included in fiscal 2011 10-Q filings.
Audit-Related Fees
None.
Tax Fees
None.
All Other Fees.
None.
It is the policy of the Company’s Board of Directors that all services other than audit, review or attest services, must be pre-approved by the Board of Directors. All of the services above were approved by the Board of Directors.
ITEM 15
ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following are exhibits filed as part of the Company’s Form 10K for the year ended December 31, 2011:
INDEX TO EXHIBITS
Exhibit Number
Description
3.1
Certificate of Incorporation, as amended - filed as an Exhibit to the Current Report on Form 10-K filed on July 15, 2005 and incorporated herein by reference
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 as incorporated herein by reference
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 as incorporated herein by reference
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002 as incorporated herein by reference
101.INS
XBRL Instance
101.SCH
XBRL Schema
101.CAL
XBRL Calculation
101.DEF
XBRL Definition
101.LAB
XBRL Label
101.PRE
XBRL Presentation
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the date indicated.
ADARNA ENERGY CORPORATION
By:
/s/
KEVIN KREISLER
KEVIN KREISLER, Chairman
Chief Executive Officer
Date:
April 16, 2012
In accordance with the Exchange Act, this Report has been signed below by the following persons, on behalf of the Registrant and in the capacities and on the dates indicated.
By:
/s/
KEVIN KREISLER
KEVIN KREISLER, Chairman
Chief Executive Officer
Date:
April 16, 2012
By:
/s/
JACQUELINE FLYNN
JACQUELINE FLYNN
Chief Financial Officer
Chief Accounting Officer
Date:
April 16, 2012