Item 1. Financial Statements
ECHO AUTOMOTIVE, INC.
|
(A Development Stage Company)
|
Condensed Consolidated Balance Sheets
|
|
|
|
March 31,
|
|
|
|
December 31,
|
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
253,623
|
|
|
$
|
47,916
|
|
Other current assets
|
|
|
29,798
|
|
|
|
85,095
|
|
Total current assets
|
|
|
283,421
|
|
|
|
133,011
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
767,923
|
|
|
|
779,233
|
|
Intangibles, net
|
|
|
3,154,815
|
|
|
|
3,234,355
|
|
Deferred loan fees, net
|
|
|
101,036
|
|
|
|
26,200
|
|
Total assets
|
|
$
|
4,307,195
|
|
|
$
|
4,172,799
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,212,576
|
|
|
$
|
1,186,562
|
|
Accounts payable - related party
|
|
|
27,073
|
|
|
|
27,073
|
|
Accrued liabilities
|
|
|
504,178
|
|
|
|
489,055
|
|
Derivative Liability
|
|
|
9,640,069
|
|
|
|
—
|
|
Related party advances
|
|
|
111,603
|
|
|
|
111,603
|
|
Current portion of notes payable, net of debt discount of $751,580
|
|
|
|
|
|
|
|
|
and $247,439 for March 31, 2014 and December 31, 2013, respectively
|
|
|
1,264,420
|
|
|
|
737,561
|
|
Total current liabilities
|
|
|
12,759,919
|
|
|
|
2,551,854
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of notes payable, net of current portion and debt discount
|
|
|
|
|
|
|
|
|
of $862,826 and $559,100 for March 31, 2014 and December 31, 2013, respectively
|
|
|
1,026,341
|
|
|
|
940,900
|
|
Total liabilities
|
|
|
13,786,260
|
|
|
|
3,492,754
|
|
|
|
|
|
|
|
|
|
|
Contingencies and commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficit):
|
|
|
|
|
|
|
|
|
Common stock, par value $.001, 650,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
91,577,278 and 87,796,524 issued and outstanding at March 31, 2014
|
|
|
|
|
|
|
|
|
and December 31, 2013, respectively
|
|
|
91,578
|
|
|
|
87,797
|
|
Additional paid in capital
|
|
|
9,751,630
|
|
|
|
9,702,505
|
|
Accumulated deficit
|
|
|
(19,322,273
|
)
|
|
|
(9,110,257
|
)
|
Total stockholders' equity (deficit)
|
|
|
(9,479,065
|
)
|
|
|
680,045
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
4,307,195
|
|
|
$
|
4,172,799
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
ECHO AUTOMOTIVE, INC.
(A Development Stage Company)
Condensed Consolidated Statements
of Operations
(unaudited)
|
|
|
|
Period from
Inception
|
|
|
Three Months Ended
March 31,
|
|
(November 25,
2009)
|
|
|
2014
|
|
2013
|
|
to March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
600
|
|
|
$
|
133,456
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,835,470
|
|
|
|
842,049
|
|
|
|
10,623,656
|
|
Selling and marketing
|
|
|
22,004
|
|
|
|
4,779
|
|
|
|
147,396
|
|
Total operating expenses
|
|
|
1,857,474
|
|
|
|
846,828
|
|
|
|
10,771,052
|
|
Operating loss
|
|
|
(1,857,474
|
)
|
|
|
(846,228
|
)
|
|
|
(10,637,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
14,205,454
|
|
|
|
25,711
|
|
|
|
14,535,589
|
|
Loss on debt extinguishment
|
|
|
147,671
|
|
|
|
—
|
|
|
|
147,671
|
|
Gain on change in fair value of derivative
|
|
|
(6,123,583
|
)
|
|
|
—
|
|
|
|
(6,123,583
|
)
|
Other expense
|
|
|
125,000
|
|
|
|
—
|
|
|
|
125,000
|
|
Total other income and expense
|
|
|
8,354,542
|
|
|
|
25,711
|
|
|
|
8,684,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax provision
|
|
|
(10,212,016
|
)
|
|
|
(871,939
|
)
|
|
|
(19,322,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,212,016
|
)
|
|
$
|
(871,939
|
)
|
|
$
|
(19,322,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
89,216,962
|
|
|
|
75,000,000
|
|
|
|
|
|
The accompanying notes
are an integral part of these condensed consolidated financial statements.
ECHO AUTOMOTIVE, INC.
(A Development Stage Company)
Condensed Consolidated Statements
of Changes in Stockholders’ Equity (Deficit)
(unaudited)
|
|
Common
Stock
|
|
Additional
Paid
|
|
Stock
|
|
Accumulated
|
|
|
|
|
Shares
|
|
Amount
|
|
In
Capital
|
|
Subscriptions
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 25, 2009
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member contributions
|
|
|
800,288
|
|
|
|
800
|
|
|
|
2,524
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,555
|
)
|
|
|
(5,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
800,288
|
|
|
|
800
|
|
|
|
2,524
|
|
|
|
—
|
|
|
|
(5,555
|
)
|
|
|
(2,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member contributions
|
|
|
10,810,148
|
|
|
|
10,810
|
|
|
|
34,090
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member withdrawls
|
|
|
(722,282
|
)
|
|
|
(722
|
)
|
|
|
(2,278
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(38,600
|
)
|
|
|
(38,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
10,888,154
|
|
|
|
10,888
|
|
|
|
34,336
|
|
|
|
—
|
|
|
|
(44,155
|
)
|
|
|
1,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member contributions
|
|
|
15,128,188
|
|
|
|
15,128
|
|
|
|
47,707
|
|
|
|
—
|
|
|
|
—
|
|
|
|
62,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(300,542
|
)
|
|
|
(300,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
26,016,342
|
|
|
|
26,016
|
|
|
|
82,043
|
|
|
|
—
|
|
|
|
(344,697
|
)
|
|
|
(236,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member contributions
|
|
|
26,483,658
|
|
|
|
26,484
|
|
|
|
83,516
|
|
|
|
—
|
|
|
|
—
|
|
|
|
110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock of Canterbury
|
|
|
22,500,000
|
|
|
|
22,500
|
|
|
|
1,777,532
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,800,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock subscriptions assumed in the merger
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(434,507
|
)
|
|
|
—
|
|
|
|
(434,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extinguishment of related party payable
|
|
|
—
|
|
|
|
—
|
|
|
|
91,761
|
|
|
|
—
|
|
|
|
—
|
|
|
|
91,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
25,565
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,362,922
|
)
|
|
|
(2,362,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
75,000,000
|
|
|
|
75,000
|
|
|
|
2,060,417
|
|
|
|
(434,507
|
)
|
|
|
(2,707,619
|
)
|
|
|
(1,006,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing agreements
|
|
|
5,000,000
|
|
|
|
5,000
|
|
|
|
495,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of share issued in exchange
for assets acquired
|
|
|
6,527,778
|
|
|
|
6,528
|
|
|
|
4,402,417
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,408,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
24,961
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock subscription receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
1,500,000
|
|
|
|
(1,500,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receipt of funds on stock subscriptions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,934,507
|
|
|
|
—
|
|
|
|
1,934,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of contingent beneficial conversion
feature and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
893,871
|
|
|
|
—
|
|
|
|
—
|
|
|
|
893,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services
|
|
|
1,268,746
|
|
|
|
1,269
|
|
|
|
325,839
|
|
|
|
—
|
|
|
|
—
|
|
|
|
327,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,402,638
|
)
|
|
|
(6,402,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
87,796,524
|
|
|
|
87,797
|
|
|
|
9,702,505
|
|
|
|
—
|
|
|
|
(9,110,257
|
)
|
|
|
680,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for conversion and settlement
of debts
|
|
|
2,487,420
|
|
|
|
2,488
|
|
|
|
510,697
|
|
|
|
—
|
|
|
|
—
|
|
|
|
513,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity instruments reclassified to derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
(788,660
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(788,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
10,921
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services
|
|
|
1,293,334
|
|
|
|
1,293
|
|
|
|
316,167
|
|
|
|
—
|
|
|
|
—
|
|
|
|
317,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,212,016
|
)
|
|
|
(10,212,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
|
91,577,278
|
|
|
$
|
91,578
|
|
|
$
|
9,751,630
|
|
|
$
|
—
|
|
|
$
|
(19,322,273
|
)
|
|
$
|
(9,479,065
|
)
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
ECHO AUTOMOTIVE, INC.
(A Development Stage Company)
Condensed Consolidated Statements
of Cash Flows
(unaudited)
|
|
|
|
|
|
Period from Inception
|
|
|
Three Months Ended March 31,
|
|
(November 25, 2009)
|
|
|
2014
|
|
2013
|
|
to March 31, 2014
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,212,016
|
)
|
|
$
|
(871,939
|
)
|
|
$
|
(19,322,273
|
)
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
148,569
|
|
|
|
19,028
|
|
|
|
611,880
|
|
Amortization of debt discount
|
|
|
377,434
|
|
|
|
4,863
|
|
|
|
490,331
|
|
Amortization of deferred loan fees
|
|
|
15,916
|
|
|
|
—
|
|
|
|
17,716
|
|
Non-cash stock compensation
|
|
|
10,921
|
|
|
|
—
|
|
|
|
35,882
|
|
Gain on change in fair value of warrant liability
|
|
|
(6,123,583
|
)
|
|
|
—
|
|
|
|
(6,123,583
|
)
|
Shares issuable for services rendered
|
|
|
150,960
|
|
|
|
—
|
|
|
|
476,799
|
|
Loss on extinguishment of debt
|
|
|
147,671
|
|
|
|
—
|
|
|
|
147,671
|
|
Interest expense related to beneficial conversion feature and warrants issued
|
|
|
13,769,305
|
|
|
|
—
|
|
|
|
13,769,305
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
180,297
|
|
|
|
(10,967
|
)
|
|
|
95,202
|
|
Accounts payable
|
|
|
179,714
|
|
|
|
31,771
|
|
|
|
1,355,762
|
|
Accounts payable - related party
|
|
|
—
|
|
|
|
27,073
|
|
|
|
27,073
|
|
Bank overdraft
|
|
|
—
|
|
|
|
(37,616
|
)
|
|
|
—
|
|
Accrued liabilities
|
|
|
97,688
|
|
|
|
11,034
|
|
|
|
561,743
|
|
Related party advance
|
|
|
—
|
|
|
|
23,000
|
|
|
|
111,603
|
|
Net cash used in operating activities
|
|
|
(1,257,124
|
)
|
|
|
(803,753
|
)
|
|
|
(7,744,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of intangibles
|
|
|
—
|
|
|
|
—
|
|
|
|
(50,000
|
)
|
Purchases of property and equipment
|
|
|
(57,719
|
)
|
|
|
(79,120
|
)
|
|
|
(550,673
|
)
|
Net cash used in investing activities
|
|
|
(57,719
|
)
|
|
|
(79,120
|
)
|
|
|
(600,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock subscriptions
|
|
|
—
|
|
|
|
434,507
|
|
|
|
3,402,307
|
|
Proceeds from issuances of notes payable
|
|
|
1,611,300
|
|
|
|
—
|
|
|
|
4,294,300
|
|
Principal repayments on notes payable
|
|
|
—
|
|
|
|
(31,000
|
)
|
|
|
(88,000
|
)
|
Proceeds from financing agreement
|
|
|
—
|
|
|
|
500,000
|
|
|
|
507,797
|
|
Proceeds from shares issued in exchange for assets acquired
|
|
|
—
|
|
|
|
—
|
|
|
|
493,472
|
|
Advances from Company officers
|
|
|
—
|
|
|
|
—
|
|
|
|
159,250
|
|
Repayments to Company officers on advances
|
|
|
—
|
|
|
|
—
|
|
|
|
(159,250
|
)
|
Deferred loan costs
|
|
|
(90,750
|
)
|
|
|
—
|
|
|
|
(118,750
|
)
|
Capital withdrawals
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,000
|
)
|
Capital contributions
|
|
|
—
|
|
|
|
—
|
|
|
|
111,059
|
|
Net cash provided by financing activities
|
|
|
1,520,550
|
|
|
|
903,507
|
|
|
|
8,599,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
205,707
|
|
|
|
20,634
|
|
|
|
253,623
|
|
Cash, beginning of period
|
|
|
47,916
|
|
|
|
1,879
|
|
|
|
—
|
|
Cash, end of period
|
|
$
|
253,623
|
|
|
$
|
22,513
|
|
|
$
|
253,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
—
|
|
|
$
|
473
|
|
|
$
|
473
|
|
Original issue discounts
|
|
$
|
44,167
|
|
|
$
|
—
|
|
|
$
|
44,167
|
|
Extinguishment of related party payable
|
|
$
|
50,000
|
|
|
$
|
—
|
|
|
$
|
239,454
|
|
Non cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount arising from conversion features and warrants
|
|
$
|
1,250,343
|
|
|
$
|
21,956
|
|
|
$
|
1,297,864
|
|
Discount reduced upon conversion of debt
|
|
$
|
67,237
|
|
|
|
—
|
|
|
$
|
67,237
|
|
Conversion of convertible debt
|
|
$
|
82,800
|
|
|
$
|
—
|
|
|
$
|
82,800
|
|
Extinguished debt
|
|
$
|
275,000
|
|
|
$
|
—
|
|
|
$
|
275,000
|
|
Recognition of contingent beneficial conversion feature and warrants
|
|
|
|
|
|
$
|
—
|
|
|
$
|
893,871
|
|
Accrued interest removed through debt extinguishement
|
|
$
|
27,386
|
|
|
$
|
—
|
|
|
$
|
27,386
|
|
Accrued expense paid through issuance of common stock
|
|
$
|
55,179
|
|
|
$
|
—
|
|
|
$
|
55,179
|
|
Derivative liability removed through conversion of debt
|
|
$
|
85,879
|
|
|
$
|
—
|
|
|
$
|
85,879
|
|
Debt paid through issuance of common stock
|
|
$
|
175,000
|
|
|
$
|
—
|
|
|
$
|
285,000
|
|
Lease deposit offset against accounts payable to lessor
|
|
$
|
50,000
|
|
|
$
|
—
|
|
|
$
|
50,000
|
|
Accounts payable paid through issuance of common stock
|
|
$
|
166,500
|
|
|
$
|
—
|
|
|
$
|
166,500
|
|
Prepaid contingent registration rights paid through issuance of debt
|
|
$
|
125,000
|
|
|
$
|
—
|
|
|
$
|
125,000
|
|
Shares issued in exchange for assets acquired
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,402,417
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
ECHO AUTOMOTIVE,
INC.
Notes to the Condensed Consolidated
Financial Statements
(Unaudited)
Note 1 – Description of Business
Canterbury Resources, Inc. (“Canterbury”)
was organized under the laws of the State of Nevada on September 2, 2008. Canterbury’s initial business plan was to acquire
and explore mineral properties.
Exchange Agreement
On September 21, 2012 Echo Automotive
LLC (“Echo”) and DBPJ Stock Holding, LLC, sole member of Echo (the “Echo Member”) entered into an exchange
agreement (the “Exchange Agreement”) with Canterbury. The Exchange Agreement resulted in the Echo Member receiving
a total of 52,500,000 shares of common stock of Canterbury in exchange for 100% of the issued and outstanding units of Echo. In
accordance with the terms of the Exchange Agreement, the shares received by the Echo Member represented 70% of the issued and outstanding
common stock of Canterbury at the time of the Exchange Agreement. As part of the exchange, Canterbury changed its name to Echo
Automotive, Inc.
Operations
Echo Automotive, Inc. (the Company)
is developing a set of technologies that it believes will reduce overall fuel expenses in commercial fleet vehicles by augmenting
existing powertrains with highly efficient electrical energy delivered by electric motors powered by Echo’s modular plug-in
battery modules. Echo believes this technology will achieve an immediate return on investment for each individual vehicle in a
fleet.
The Company’s operations have
previously been funded by advances and subsequent equity conversions by the majority stockholders. Future funding is expected to
be provided in part by equity investments from other accredited investors. There can be no assurance that any of these strategies
will be achieved on terms attractive to us.
Note 2 – Basis of Presentation
As a result of the Exchange
Agreement, Canterbury merged with Echo, with Echo being the accounting acquirer thus resulting in a reverse merger.
Therefore, the accompanying financial statements are on a consolidated basis subsequent to September 21, 2012, but only
reflect the operations of Echo up to September 21, 2012.
In the opinion of management, the accompanying
condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary for
a fair statement of financial position, results of operations, and cash flows. The information included in this Quarterly Report
on Form 10-Q/A should be read in conjunction with the consolidated financial statements and the accompanying notes included in our
Annual Report on Form 10-K for the year ended December 31, 2013. The accounting policies are described in the “Notes to the
Consolidated Financial Statements” in the 2013 Annual Report on Form 10-K and updated, as necessary, in this Form 10-Q/A. The
year-end condensed consolidated balance sheet data presented for comparative purposes was derived from audited consolidated financial
statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The
results of operations for the three months ended March 31, 2014 are not necessarily indicative of the operating results for the
full year or for any other subsequent interim period.
The Company is a development stage company
and has incurred significant losses during the three months ended March 31, 2014 and 2013 and for the period from inception (November
25, 2009) through March 31, 2014 and has experienced negative cash flows from operations since inception. These circumstances result
in substantial doubt as to the ability of the Company to continue as a going concern as noted in Note 11.
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries, Echo Automotive, LLC and Advanced Technical Asset
Holdings, LLC, beginning with their respective dates of acquisition. All significant intercompany accounts and transactions have
been eliminated.
Fair Value
ASC 820 Fair Value Measurements
and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and enhances
disclosures about fair value measurements. It defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted prices (unadjusted)
in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are
observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities
in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations
whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated
by, third-party pricing services.
Level 3: Unobservable inputs to measure fair value
of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and
assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort.
As of March 31, 2014 the significant inputs to the
Company’s derivative liability calculation were Level 3 inputs.
The following schedule summarizes the valuation of
financial instruments at fair value in the balance sheets as of March 31, 2014 and December 31, 2013:
|
|
Fair Value Measurements as of March 31, 2014
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
None
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
9,640,069
|
|
Total liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
9,640,069
|
|
|
|
|
Fair Value Measurements as of December 31,
2013
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities
classified as Level 3 in the fair value hierarchy:
|
|
Significant
Unobservable
|
|
|
Inputs
|
|
|
(Level
3)
|
|
|
Three
Months Ended March 31,
|
|
|
2014
|
|
2013
|
Beginning balance
|
|
$
|
—
|
|
|
$
|
—
|
|
Total (gains) losses
|
|
|
(6,123,583
|
)
|
|
|
—
|
|
Settlements
|
|
|
(88,813
|
)
|
|
|
—
|
|
Additions
|
|
|
15,852,465
|
|
|
|
—
|
|
Ending balance
|
|
$
|
9,640,069
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Change in
unrealized gains (losses) included in earnings relating to derivatives still held as of March 31, 2014 and
2013
|
|
$
|
(6,123,583
|
)
|
|
$
|
—
|
|
Note 4: Balance Sheet Information
Balance sheet information is as follows:
|
|
March 31,
|
|
December 31,
|
|
|
2014
|
|
2013
|
Property and equipment, net:
|
|
|
|
|
Office equipment/computer
|
|
$
|
113,769
|
|
|
$
|
113,769
|
|
Prototype vehicles
|
|
|
615,945
|
|
|
|
615,945
|
|
Equipment and tools
|
|
|
332,686
|
|
|
|
274,966
|
|
|
|
|
1,062,400
|
|
|
|
1,004,680
|
|
Less: Accumulated depreciation
|
|
|
(294,477
|
)
|
|
|
(225,447
|
)
|
|
|
$
|
767,923
|
|
|
$
|
779,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
December 31,
|
|
|
|
|
2014
|
|
|
|
2013
|
|
Intangible assets, net:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
3,474,719
|
|
|
$
|
3,474,719
|
|
Less: Accumulated amortization
|
|
|
(319,904
|
)
|
|
|
(240,364
|
)
|
|
|
$
|
3,154,815
|
|
|
$
|
3,234,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
December 31,
|
|
|
|
|
2014
|
|
|
|
2013
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
311,561
|
|
|
$
|
282,886
|
|
Accrued interest
|
|
|
192,617
|
|
|
|
206,169
|
|
|
|
$
|
504,178
|
|
|
$
|
489,055
|
|
Note 5: Related Party Transactions
During the year ended December
31, 2013, shareholders of the Company made net advances of $111,603 for working capital purposes. The advances are due on
demand, non-interest bearing, and classified within related party advances in the accompanying condensed consolidated
balance sheet as of March 31, 2014 and December 31, 2013.
The Company paid consulting fees to
certain shareholders and directors of the Company that amounted to $30,000, $70,000, and $1,037,238 for the three months ended
March 31, 2014 and 2013 and for the period from inception (November 25, 2009) through March 31, 2014, respectively.
The Company incurred interest expense
with related parties of $45,205, $4,458, and $140,223 for the three months ended March 31, 2014 and 2013 and for the period from
inception (November 25, 2009) through March 31, 2014, respectively. The Company has accrued interest on related party notes payable
of $126,973 and $96,117 recorded within accrued liabilities in the accompanying condensed consolidated balance sheets as of March
31, 2014 and December 31, 2013, respectively.
The shareholder associated with
the $2,000,000 financing agreement discussed within Note 6 overpaid the Company $16,559 when making the final payment on the
stock subscription in January 2013. Additionally, this shareholder paid for $10,514 of legal expenses on behalf of the
Company. The total of these two transactions, $27,073, is included within accounts payable – related party in the
accompanying condensed consolidated balance sheets as of March 31, 2014 and December 31, 2013.
During the three months ended March
31, 2014, the Company entered into a financing arrangement with GEL Properties, LLC whereby the 7 percent note payable with BK
Family Trust was repaid. Additionally, the Company issued common stock to BK Family Trust to repay accrued interest on the
7 percent note payable. BK Family Trust’s trustee and beneficiary is an immediate family member of the Company’s
Chief Executive Officer. See Note 6.
During the three months ended March
31, 2014, the Company entered into a financing arrangement with William W. Kennedy, an immediate family member of the Company’s
Chief Executive Officer. The financing arrangement included the issuance of warrants to purchase 100,000 shares of the Company’s
common stock at an exercise price of $0.01 per share, exercisable over an eighteen (18) month term. See Note 6.
Note 6: Notes Payable
Notes payable consisted of the following
as of March 31, 2014 and December 31, 2013:
|
|
March 31,
|
|
December 31,
|
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
7% note payable issued March 30, 2011, principal and interest due December 31, 2013. (8)
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
7% convertible note payable with related party issued March 31, 2012, principal and interest due January 1, 2014. (11)
|
|
|
—
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
7% convertible note payable with related party issued July 27, 2012, principal and interest due July 27, 2014. (1)
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
12% convertible note payable issued October 25, 2012, principal and interest due July 1, 2015. (10)
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
12% convertible note payable with related party issued April 11, 2012, principal and interest due
|
|
|
100,000
|
|
|
|
100,000
|
|
April 11, 2014. (9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12% convertible note payable issued November 11, 2011, principal and interest due January 1, 2014. (13)
|
|
|
—
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
12% note payable issued December 1, 2011, principal and interest due December 31, 2012. (4)
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
18% convertible note payable issued May 30, 2012, principal and interest due January 1, 2014. (12)
|
|
|
—
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
21% note payable with related party issued July 13, 2012, principal and interest due January 1, 2014,
|
|
|
10,000
|
|
|
|
10,000
|
|
containing a warrant feature which requires the Company to issue warrants to purchase 100,000
|
|
|
|
|
|
|
|
|
shares of the Company's common stock at no more than $0.01 per share with a term of five years. (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21% note payable issued July 13, 2012, principal and interest due January 1, 2014. (2)
|
|
|
—
|
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
8% convertible note payable issued in 9 installments. For each $0.55 of cash, the company issued a
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
warrant to purchase 1.25 shares of stock at $0.65 with a term of 18 months (increased to 5 years during the
|
|
|
|
|
|
|
|
|
quarter ending March 31, 2014). The exercise price was lowered to $0.35 subsequent to March 31, 2014.
|
|
|
|
|
|
|
|
|
Principal and interest due June 15, 2018. (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8% convertible note payable issued July 8, 2013, principal and interest due June 20, 2018. (6)
|
|
|
—
|
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
|
15% note payables issued December 31, 2013, principal and interest due June 1, 2014. (7)
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
12% note payable issued January 9, 2014, principal and interest due July 3, 2014. (14)
|
|
|
375,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
15% note payable issued January 28, 2014, principal and interest due June 1, 2014. (15)
|
|
|
110,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
12% convertible note payable issued February 6, 2014, principal and interest due February 6, 2016. (16)
|
|
|
166,667
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
10% convertible note payable issued February 12, 2014, principal and interest due February 11, 2015. (17)
|
|
|
55,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
8% convertible note payable issued February 21, 2014, prinicpal and interest due February 20, 2015. (18)
|
|
|
65,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
8% convertible note payable issued February 21, 2014, prinicpal and interest due February 20, 2015. (18)
|
|
|
50,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
10% convertible note payable issued February 28, 2014, principal and interest due October 27, 2015. (19)
|
|
|
222,500
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
8% convertible note payable issued March 6, 2014, principal and interest due February 20, 2015. (20)
|
|
|
50,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
8% convertible note payable issued March 10, 2014, principal and interest due February 20, 2015. (20)
|
|
|
37,500
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
8% convertible note payable issued March 7, 2014, principal and interest due March 7, 2015. (21)
|
|
|
50,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
7% note payable issued March 11, 2014, principal and interest due April 10, 2014. (22)
|
|
|
110,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
8% convertible note payable issued March 17, 2014, principal and interest due November 12, 2014. (23)
|
|
|
78,500
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
15% convertible note payable issued March 26, 2014, principal and interest due June 1, 2014. (24)
|
|
|
500,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,905,167
|
|
|
|
2,485,000
|
|
Less debt discount
|
|
|
(1,614,406
|
)
|
|
|
(806,539
|
)
|
Less current portion of notes payable
|
|
|
(1,264,420
|
)
|
|
|
(737,561
|
)
|
Long-term notes payable
|
|
$
|
1,026,341
|
|
|
$
|
940,900
|
|
(1)
|
The note contains a conversion
feature which enables either the Company or the lender to convert the outstanding balance into common stock of the Company at
a rate of one share per $0.35 of converted dollars. The conversion feature was not exercised by either party as of March 31, 2014. Upon
conversion of the note, for every share issued to the lender, the lender will receive one additional warrant to purchase one share
of the Company’s common stock at a strike price of $0.75 with no vesting requirement and a term of 18 months. Subsequent
to March 31, 2014, the Company lowered the warrant strike price to $0.35 per share.
|
|
|
(2)
|
The note contained a conversion feature which enabled either the Company or the lender to convert the outstanding balance into common stock of the Company at a rate of one share per $0.375 of converted dollars. The conversion feature was not exercised by either party as of March 31, 2014; alternatively, on February 21, 2014, the note payable principal balance was bought out by a third party (see (18) below). The Company issued 124,730 shares of its common stock in consideration of the accrued interest owed on this note payable as of the transaction date. The terms of the original note provided that, upon conversion of the note, for every $10 outstanding at the end of each calendar month, the Company would issue the lender one warrant to purchase one share of the Company’s common stock at no more than $0.01 per share with no vesting requirement and a term of five years. Accordingly, in February 2014, the Company issued the lender a warrant totaling 253,500 shares, at a strike price of $0.01 with a term of 5 years. Foregoing warrants are included within warrants granted in Note 8.
|
|
|
(3)
|
For every $10 outstanding at the end of each calendar month, the Company will issue the lender one warrant to purchase one share of the Company’s common stock at no more than $0.01 per share with no vesting requirement and a term of five years. The note was issued for $50,000 and the Company subsequently repaid $20,000 in 2012, with $10,000 payments in both November and December 2012, and the Company repaid $20,000 in 2013, with two $10,000 repayments made in January 2013. Accordingly, the lender received 5,000 warrants each month from issuance through October 2012, 4,000 warrants in November 2012, 3,000 warrants in December 2012, and 1,000 warrants per month thereafter. Foregoing warrants are included within warrants granted in Note 8. The Company is currently negotiating an extension for this note.
|
|
|
(4)
|
The note payable agreement is convertible into 395,000 shares of the Company’s common stock. However, the lender is disputing the conversion terms of the agreement. Additionally, the Company is in default with regards to the note, as the outstanding balance is past due, and has offered to repay the lender in full. The Company is attempting to utilize on-going dialogue with the lender to resolve the dispute and cure the default.
|
|
|
(5)
|
Pursuant to the terms and conditions of this agreement, United Fleet Financing, LLC, (“UFF”), of which the sole member is a related party, has agreed to provide the Company $1,500,000 of financing for working capital. The financing was provided to the Company during 2013 in several installments. Each installment payment has a term of 5 years from first installment of funding. Pursuant to the agreement, UFF has the option to convert any amounts paid to the Company pursuant to the financing agreement, into common stock at a conversion price of $0.55 per share. The agreement also provided UFF the right to receive up to 2,727,272 warrants, each to purchase 1.25 shares of common stock at a per share exercise price of $0.65 with a term of 18 months; accordingly, the Company has issued UFF a total of 3,409,093 warrants in connection with this arrangement. During January, 2014, the Company agreed to extend the warrant term to 5 years. Foregoing warrants are included within warrants granted in Note 8. As of March 31, 2014, the Company has received $1,500,000 in cash related to this agreement. A debt discount of $596,169 was recorded to reflect a beneficial conversion feature and warrants associated with the cash received. The debt discount is being amortized to interest expense until maturity or its earlier repayment or conversion. Subsequent to March 31, 2014, the Company lowered the warrant strike price to $0.35 per share.
|
|
|
(6)
|
On June 20, 2013, the Company entered into a financing and security agreement and a secured convertible promissory note (the “Emerald Note”) in the amount of $200,000 with Emerald Private Equity Fund, LLC (“Emerald”). Pursuant to the terms of the Emerald Note, Emerald provided the Company with $200,000 upon execution. In connection with this financing, Emerald received a warrant to purchase 714,286 shares of the Company’s common stock at an exercise price of $0.65 per share, exercisable over a five (5) year term. The Emerald Note has a maturity date of five (5) years and bears interest at eight percent (8%) annually. The unpaid outstanding balance on the Emerald Note may be converted at the option of either party a rate of two (2) shares of the Company’s restricted common stock for each $0.70. As of December 31, 2013 the Company received $200,000 under this private placement, repaid Emerald $25,000, and issued the related warrants. During the period ending March 31, 2014, the Company issued a total of 1,142,858 shares of its common stock to Emerald relating to this agreement. The Emerald Note was considered to be in default because the Company’s S-1 filing was not cleared within the time frame required in the Emerald Note; as such, during the period ending March 31, 2014, the parties agreed to a revised due date for the Emerald Note of June 1, 2014, and the Company increased the number of the shares under the warrant by 285,714 to 1,000,000. Foregoing warrants are included within warrants granted in Note 8.
|
(7)
|
On
December 31, 2013, the Company entered into two promissory note agreements in the amount of $40,000 and $60,000 with UFF.
Pursuant to the terms and conditions of these agreements, UFF provided the Company with $100,000 and UFF received a warrant
to purchase 800,000 shares of the Company’s common stock at an exercise price of $0.55 per share, exercisable over
a five (5) year term. Subsequent to March 31, 2014, the Company lowered the warrant strike price to $0.35 per
share. The promissory notes, as amended, have a maturity date of June 1, 2014. The stated interest rate is equal to 15%
per year.
|
(8)
|
On March 13, 2014, this note agreement was modified to extend the due date to January 1, 2015. Subsequent to March 31, 2014, the Company repaid this note and all accrued interest on the note through the issuance of 489,171 shares of its common stock.
|
|
|
(9)
|
The note contains a conversion feature which enables either the Company or the lender to convert the outstanding balance into common stock of the Company at a rate of one share per $0.50 of converted dollars. The conversion feature was not exercised by either party as of March 31, 2014. Upon conversion of the note, the Company shall issue the lender 150,000 warrants, each of which allows the lender to purchase one share of the Company’s common stock at $0.01, with a term of 18 months. The Company is currently negotiating an extension for this note.
|
|
|
(10)
|
On March 19, 2014, this note agreement was modified to extend the due date to July 1, 2015. The note contains a conversion feature which enables either the Company or the lender to convert the outstanding balance into common stock of the Company at a rate of one share per $0.50 of converted dollars. The conversion feature was not exercised by either party as of March 31, 2014. Upon conversion of the note, the Company shall issue the lender 30,000 warrants, each of which allows the lender to purchase one share of the Company’s common stock at $0.01, with a term of 18 months.
|
(11)
|
The note contained a conversion feature which enabled either the Company or the lender to convert the outstanding balance into common stock of the Company at a rate of one share per $0.35 of converted dollars. The conversion feature was not exercised by either party as of March 31, 2014; alternatively, on March 7, 2014, the note payable principal balance was bought out by a third party (see (20) below). The Company issued 37,849 shares of its common stock in consideration of the accrued interest owed on this note payable as of the transaction date. The terms of the original note provided that, upon conversion of the note, for every share issued to the lender, the lender would receive one additional warrant to purchase one share of the Company’s common stock at a strike price of $0.75 with no vesting requirement and a term of 18 months. Accordingly, in March 2014, the Company issued the lender a warrant totaling 161,240 shares, at a strike price of $0.75 and extended the contractual warrant term from a term of 18 months to a term of 5 years. Foregoing warrants are included within warrants granted in Note 8.
|
|
|
(12)
|
The note contained a conversion feature which enabled either the Company or the lender to convert the outstanding balance into common stock of the Company at a rate of one share per $0.35 of converted dollars. The conversion feature was not exercised by either party as of March 31, 2014; alternatively, on March 10, 2014, the note payable principal balance was bought out by a third party (see (21) below). The Company issued 99,668 shares of its common stock in consideration of the accrued interest owed on this note payable as of the transaction date. The terms of the original note provided that, upon conversion of the note, for every share issued to the lender, the lender would receive one additional warrant to purchase one share of the Company’s common stock at a strike price of $0.75 with no vesting requirement and a term of 18 months. Accordingly, in March 2014, the Company issued the lender a warrant totaling 271,097 shares, at a strike price of $0.75 extended the contractual warrant term from a term of 18 months to a term of 5 years. Foregoing warrants are included within warrants granted in Note 8.
|
(13)
|
On
February 20, 2014 the Company issued 337,855 shares of its common stock to satisfy its obligation in connection with its 12%
convertible note payable issued November 11, 2011 totaling $100,000, including accrued interest on this obligation.
Additionally, in connection with this transaction, the Company issued a warrant to purchase 506,782 shares of the
Company’s common stock at an exercise price of $0.01 per share, exercisable over a five (5) year term. Foregoing
warrants are included within warrants granted in Note 8. The transaction was analyzed for extinguishment accounting and the
company determined that extinguishment accounting was appropriate and any additional consideration provided in the
transaction was recorded as a gain/loss on debt extinguishment in other income and expense.
|
|
|
(14)
|
On January 9, 2014, the Company received gross proceeds of $250,000 via a financing arrangement with Hanover Holdings I, LLC. The principal balance of $375,000 includes a $125,000 prepaid contingent expense that the Company became subject to by (i) failing to file a S-1 registration statement (covering the resale of the underlying common stock pertaining to this financing arrangement) by February 18, 2014 ($40,000); and (ii) failing to have the S-1 registration statement become effective by May 3, 2014 ($85,000). Neither of these criteria were met by the Company. The terms of this financing arrangement bears interest at twelve percent (12%) annually, and has a maturity date of July 3, 2014. The unpaid outstanding balance may be converted at the option of the investor a rate of one (1) share of the Company’s restricted common stock for each $0.15223, subject to adjustment. On February 17, 2014 the Company expensed the registration right penalties. The note contains an anti-dilution protection full-ratchet reset feature which qualifies the note as a derivative instrument. Subsequent to March 31, 2014, the conversion feature of the financing arrangement was modified whereby the unpaid outstanding balance may be converted at the option of the investor at the lessor of (i) sixty percent (60%) of the lowest trade price in the 10 days prior to conversion; or (ii) the original conversion price as stated in the January, 2014 financing arrangement.
|
|
|
(15)
|
On January 28, 2014, the Company received gross proceeds of $110,000 via a financing arrangement with UFF. The terms of this financing arrangement, as amended, bears interest at fifteen percent (15%) annually, and has a maturity date of June 1, 2014. In connection with this financing arrangement, the Company issued warrants to purchase 800,000 shares of the Company’s common stock at an exercise price of $0.55 per share, exercisable over a five (5) year term. Subsequent to March 31, 2014, the Company lowered the warrant strike price to $0.35 per share.
|
|
|
(16)
|
On February 6, 2014, the Company received gross proceeds of $150,000 via a financing arrangement with JMJ Financial. The principal balance of $166,666 includes a $16,666 original issue discount. The terms of this financing arrangement bears interest at twelve percent (12%) annually, and has a maturity date of February 6, 2016. The unpaid outstanding balance may be converted at the option of the investor at the lessor of (i) a rate of one (1) share of the Company’s restricted common stock for each $0.23, or (ii) sixty percent (60%) of the lowest trade price in the 25 days prior to conversion. The variable conversion feature qualifies the note as a derivative instrument and tainted all other equity linked instruments including outstanding warrants and fixed rate convertible debt. See further discussion below in
Derivative Liabilities- Convertible Notes
.
|
|
|
(17)
|
On February 12, 2014, the Company received gross proceeds of $50,000 via a financing arrangement with Vista Capital Investments, LLC. The principal balance of $55,000 includes a $5,000 original issue discount. The terms of this financing arrangement bears interest at ten percent (10%) annually, and has a maturity date of February 11, 2015. The unpaid outstanding balance may be converted at the option of the investor at the lessor of (i) a rate of one (1) share of our restricted common stock for each $0.35, or (ii) seventy percent (70%) of the lowest trade price in the 20 days prior to conversion. The variable conversion feature qualifies the note as a derivative instrument since the number of shares issuable under the note is indeterminate.
|
|
|
(18)
|
On February 21, 2014, the Company received gross proceeds of $50,000 via a financing arrangement with LG Capital Funding, LLC. The terms of this financing arrangement bears interest at eight percent (8%) annually, and has a maturity date of February 20, 2015. The unpaid outstanding balance may be converted at fifty-five percent (55%) of the lowest trade price in the ten (10) days prior to conversion. Additionally, on February 21, 2014, LG Capital Funding, LLC paid off the 21 percent note payable issued July 13, 2012 totaling $65,000 (see (2) above), on the Company’s behalf, and, accordingly, the Company agreed to repay LG Capital Funding, LLC a total of $65,000 via a replacement note bearing interest at eight percent (8%) annually, with a maturity date of February 20, 2015. The replacement note’s unpaid outstanding balance may be converted at fifty-five percent (55%) of the lowest trade price in the 10 days prior to conversion. The variable conversion feature of the replacement note qualifies the note as a derivative instrument since the number of shares issuable under the note is indeterminate. The transaction was analyzed for extinguishment accounting and the Company determined that extinguishment accounting was appropriate and any additional consideration provided in the transaction was recorded as a gain/loss on debt extinguishment in other income and expense.
|
|
|
(19)
|
On February 28, 2014, the Company received gross proceeds of $200,000 via a financing arrangement with Typenex Co-Investment, LLC. The principal balance of $222,500 includes a $22,500 original issue discount. The terms of this financing arrangement bears interest at ten percent (10%) annually, and has a maturity date of October 27, 2015. The unpaid outstanding balance may be converted at the option of the investor at the lessor of (i) a rate of one (1) share of our restricted common stock for each $0.27, or (ii) seventy percent (70%) of the lowest trade price in the fifteen (15) days prior to conversion. The note contains an anti-dilution protection full-ratchet reset feature which qualifies the note as a derivative instrument.
|
|
|
(20)
|
On March 6, 2014, the Company received gross proceeds of $50,000 via a financing arrangement with GEL Properties, LLC, The terms of this financing arrangement bears interest at eight percent (8%) annually, and has a maturity date of February 20, 2015. The unpaid outstanding balance may be converted at fifty-five percent (55%) of the lowest trade price in the ten (10) days prior to conversion. Additionally, on March 7, 2014, GEL Properties, LLC paid off the 7 percent note payable with a related party issued March 31, 2012 totaling $50,000 (see (11) above), on the Company’s behalf, and, accordingly, the Company agreed to repay GEL Properties, LLC a total of $52,500 via a replacement note bearing interest at eight percent (8%) annually, with a maturity date of February 20, 2015. The replacement note’s unpaid outstanding balance may be converted at fifty-five percent (55%) of the lowest trade price in the ten (10) days prior to conversion. During the period ending March 31, 2014, GEL Properties, LLC elected to convert $15,000 of principal balance under the terms of the replacement note, and received a total of 164,935 shares of the Company’s common stock. The variable conversion feature of the replacement note qualifies the note as a derivative instrument since the number of shares issuable under the note is indeterminate. The transaction was analyzed for extinguishment accounting and the Company determined that extinguishment accounting was appropriate and any additional consideration provided in the transaction was recorded as a gain/loss on debt extinguishment in other income and expense.
|
(21)
|
On March 10, 2014, the Company received gross proceeds of $50,000 via a financing arrangement with Union Capital, LLC. The terms of this financing arrangement bears interest at eight percent (8%) annually, and has a maturity date of March 7, 2015. The unpaid outstanding balance may be converted at fifty-five percent (55%) of the lowest trade price in the ten (10) days prior to conversion. Additionally, on March 10, 2014, Union Capital, LLC paid off the 18 percent note payable issued May 30, 2012 totaling $60,000 (see (12) above), on the Company’s behalf, and, accordingly, the Company agreed to repay Union Capital, LLC a total of $67,800 via a replacement note bearing interest at eight percent (8%) annually, with a maturity date of March 7, 2015. The replacement note‘s unpaid outstanding balance may be converted at fifty-five percent (55%) of the lowest trade price in the ten (10) days prior to conversion. During the period ending March 31, 2014, Union Capital, LLC elected to convert its principal balance under the terms of the replacement note, and received a total of 579,525 shares of the Company’s common stock. The variable conversion feature of the note qualifies the note as a derivative instrument since the number of shares issuable under the note is indeterminate. The transaction was analyzed for extinguishment accounting and the Company determined that extinguishment accounting was appropriate and any additional consideration provided in the transaction was recorded as a gain/loss on debt extinguishment in other income and expense.
|
|
|
(22)
|
On March 11, 2014, the Company received gross proceeds of $110,000 via a financing arrangement with William W. Kennedy, of whom Mr. William D. Kennedy, our CEO, is an immediate family member. The terms of this financing arrangement bears interest at seven percent (7%) annually, and has a maturity date of April 10, 2014. In connection with this financing arrangement, we issued warrants to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.01 per share, exercisable over an eighteen (18) month term. Foregoing warrants are included within warrants granted in Note 8. The Company is currently negotiating an extension for this note.
|
|
|
(23)
|
On March 17, 2014, the Company received gross proceeds of $78,500 via a financing arrangement with Asher Enterprises, Inc. The terms of this financing arrangement bears interest at eight percent (8%) annually, and has a maturity date of November 12, 2014. The unpaid outstanding balance may be converted at sixty-nine percent (69%) of the lowest trade price in the ten (10) days prior to conversion. The variable conversion feature of the note qualifies the note as a derivative instrument since the number of shares issuable under the note is indeterminate. Additionally, the note contains an anti-dilution protection full-ratchet reset feature which qualifies the note as a derivative instrument.
|
|
|
(24)
|
On March 26, 2014, the Company received gross proceeds of $500,000 via a financing arrangement with UFF. The terms of this financing arrangement bears interest at fifteen percent (15%) annually, and has a maturity date of June 1, 2014. In connection with this financing arrangement, the Company issued warrants to purchase 1,428,571 shares of the Company’s common stock at an exercise price of $0.35 per share, exercisable over a five (5) year term. Foregoing warrants are included within warrants granted in Note 8.
|
Interest expense incurred
on all debt, which excludes the expense related to the accretion of the debt discount and excludes the expense related to
the change in the valuation of derivative instruments, was $69,014, $25,711, and $278,274 for the three months ended March
31, 2014 and 2013 and for the period from inception (November 25, 2009) through March 31, 2014, respectively. Of the
total interest expense incurred on all debt, approximately $45,205, $4,458, and $140,223 pertained to related party notes
payable for the three months ended March 31, 2014 and 2013 and for the period from inception (November 25, 2009) through
March 31, 2014, respectively. Included within interest expense in the accompanying condensed consolidated statement of
operations for the three months ended March 31, 2014, 2013, and the period from inception (November 25, 2009) through March
31, 2014, is $218,269, $2,597 and $399,213 of expense related to the accretion of the debt discount recorded due to the
issuance of the warrants associated with the notes payable. Included within interest expense in the accompanying condensed
consolidated statement of operations for the three months ended March 31, 2014, 2013, and the period from inception (November
25, 2009) through March 31, 2014, is $13,918,171, $0 and $13,918,171 of expense related to the valuation of the notes payable
and warrants classified as derivative liability.
Derivative Liabilities- Convertible
Notes
The embedded conversion
and anti-dilution features in the convertible debt instruments and warrants issued in the three months ending March 31,
2014 qualify certain notes as derivative instruments since the number of shares issuable under the notes are indeterminate
based on guidance in FASB ASC 815, Derivatives and Hedging. These convertible notes tainted all other equity linked
instruments including outstanding warrants and fixed rate convertible debt.
The valuation of the derivative
liability attached to the convertible debt was arrived at through the use of a Monte Carlo model that values the derivative
liability within the notes. The technique applied generates a large number of possible (but random) price paths for the
underlying (or underlyings) via simulation, and then calculates the associated payment value (cash, stock, or warrants) of
the derivative features. The price of the underlying common stock is modeled such that it follows a geometric Brownian motion
with constant drift, and elastic volatility (increasing as stock price decreases). The stock price is determined by a random
sampling from a normal distribution. Since the underlying random process is the same, for enough price paths, the value of
the derivative is derived from path dependent scenarios and outcomes. The features in the notes that were analyzed and
incorporated into the model included the conversion features with the reset provisions, the call/redemption/prepayment
options, and the default provisions. Based on these features, there are six primary events that can occur; payments are made
in cash; payments are made with stock; the noteholder converts upon receiving a redemption notice; the noteholder converts
the note; the issuer redeems the note; or the Company defaults on the note.
The model simulates the underlying economic
factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be
in effect at the time (i.e. stock price, conversion price, etc.). Probabilities were assigned to each variable such as redemption
likelihood, default likelihood, and timing and pricing of reset events over the remaining term of the note based on management
projections. This led to a cash flow simulation over the life of the note. A discounted cash flow for each simulation was completed,
and it was compared to the discounted cash flow of the note without the embedded features, thus determining a value for the derivative
liability of $10,340,351 at either issuance date or tainting date. The Company recorded the change in the fair value of the derivative
liability as a gain of $4,146,356 to reflect the value of the derivative liability as $6,105,182 as of March 31, 2014. The Company
also recorded settlements of $88,813 related to conversions of three of their convertible notes.
Extinguishments and Settlements
During the three months ending March
31, 2014, the Company entered into certain debt transactions (see footnotes 13, 18, 20, and 21 to debt schedule above) in which
extinguishment accounting was applied. As a result, a loss on extinguishment of debt of $147,671 was recorded as a loss on
debt extinguishment in other income and expense related to these extinguishments.
Note 7: Equity
In January, 2014, the Company issued
1,142,858 shares of its common stock to Emerald in connection with the Emerald Note (see Note 6). No proceeds were received in
connection with this common stock issuance. The common stock was issued to reduce the Emerald Note’s principal balance and
accrued interest. The Emerald Note was considered to be in default because the Company’s S-1 filing was not cleared within
the time frame required in the Emerald Note, so in response the parties agreed to an accelerated due date for the Emerald Note,
and agreed to increase the number of the shares under the warrant by 285,714 to 1,000,000.
On February 20, 2014, the Company
issued 337,855 shares of its common stock to satisfy its obligation in connection with its 12% convertible note payable issued
November 11, 2011 totaling $100,000 (see Note 6). Additionally, in connection with this transaction, the Company issued a warrant
to purchase 506,782 shares of the Company’s common stock at an exercise price of $0.01 per share, exercisable over a five
(5) year term. In connection with the Company’s financing arrangement with LG Capital Funding, LLC, whereby LG Capital Funding,
LLC repaid the 21% convertible note payable issued July 13, 2012 totaling $65,000, on February 20, 2014, the Company issued 124,730
shares of its common stock to the same lender to satisfy accrued interest on the repaid, extinguished obligation.
In connection with the Company’s
financing arrangement with GEL Properties, LLC, whereby GEL Properties, LLC repaid the 7% convertible note payable with a related
party issued March 31, 2012 totaling $50,000, on March 7, 2014, the Company issued 37,849 shares of its common stock to the related
party to satisfy accrued interest on the repaid, extinguished obligation. Furthermore, GEL Properties, LLC, elected to convert
a portion of their principal balance to common stock as permitted in connection with the replacement note payable, and, accordingly,
on March 11, 2014, the Company issued 164,935 shares of its common stock to GEL Properties, LLC to reduce the obligation under
the replacement note payable by a total of $15,000.
In connection with the Company’s
financing arrangement with Union Capital, LLC, whereby Union Capital, LLC repaid the 18% convertible note payable issued May 30,
2012 totaling $60,000, on March 10, 2014, the Company issued 99,668 shares of its common stock to the same lender to satisfy accrued
interest on the repaid, extinguished obligation. Furthermore, Union Capital, LLC, elected to convert their principal balance to
common stock as permitted in connection with the replacement note payable, and, accordingly, on March 10, 2014 and March 14, 2014,
the Company issued 359,858 and 219,667 shares of its common stock, respectively, to Union Capital, LLC to fully extinguish the
obligation under the replacement note payable.
During the three months ending
March 31, 2014, the Company issued a total of 1,293,344 shares of its common stock to various service providers in a series of
transactions related to consulting and professional services rendered during 2013 and 2014. The total operating expense related
to these transactions was $317,460; of which $166,500 was included in accrued liabilities at December 31, 2013.
During the three months ending
March 31, 2014, the Company recorded stock based compensation expense of $10,921.
The embedded conversion and anti-dilution
features in the convertible debt instruments issued in the three months ending March 31, 2014 qualify certain notes as a derivative
instrument since the number of shares issuable under the note is indeterminate based on guidance in FASB ASC 815, Derivatives and
Hedging. These convertible notes tainted all other equity linked instruments including outstanding warrants and fixed rate convertible
debt. The Company determined that there was a total fair value of $788,660 related to tainted warrants classified as equity that
were reclassified during the period and recorded as a derivative liability.
Note 8: Warrants
As discussed in Note 6, the
Company issued warrants during the three months ended March 31, 2014. The following summarizes the warrant activity for the
three months ended March 31, 2014:
|
|
|
|
|
Number
of
Units
|
|
|
|
Weighted-
Average
Exercise Price
|
|
|
|
Weighted-
Average
Remaining
Contractual Term
(in years)
|
|
|
|
Intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
|
13,764,472
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
|
31,609,124
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
|
45,373,596
|
|
|
$
|
0.23
|
|
|
|
4.6
|
|
|
$
|
5,913,522
|
|
Exercisable at March 31, 2014
|
|
|
|
45,373,596
|
|
|
$
|
0.23
|
|
|
|
4.6
|
|
|
$
|
5,913,522
|
|
During the three months ended March
31, 2014 and 2013, the Company entered into several note payable agreements that included detachable warrants with no vesting requirements,
as discussed in Note 6. The weighted-average grant date fair value for the three months ended March 31, 2014, equaled $0.16 per
share. The total fair value of warrants granted and vested during the three months ended March 31, 2014 and 2013 was $5,131,613
and $25,565, of which an allocated portion was recorded as a debt discount. During the three months ended March 31, 2014 and 2013,
$375,239 and $16,351 of the discount was accreted to interest expense. The grant-date fair value of the warrants, and thus the
debt discount, was valued using a Monte Carlo model.
Derivative Liabilities- Warrants
The embedded conversion and anti-dilution
features in the convertible debt instruments and warrants issued in the three months ending March 31, 2014 qualify certain notes
as a derivative instrument since the number of shares issuable under the note is indeterminate based on guidance in FASB ASC 815,
Derivatives and Hedging. These convertible notes tainted all other equity linked instruments including outstanding warrants and
fixed rate convertible debt.
The valuation of the derivative
liability of the warrants was determined through the use of a Monte Carlo options model that values the liability of the
warrants based on a risk-neutral valuation where the price of the option is its discounted expected value. The technique
applied generates a large number of possible (but random) price paths for the underlying common stock via simulation, and
then calculates the associated exercise value (i.e. "payoff") of the option for each path. These payoffs are then
averaged and discounted to a current valuation date resulting in the fair value of the option.
Using this model, the Company determined
a fair value of $5,512,114 at either issuance date or tainting date, including the warrants previously classified in equity which
had a value at tainting of $788,660 (see Note 7). The Company recorded the change in the fair value of the derivative liability
as a gain of $1,977,227 to reflect the value of the derivative liability as $3,534,887 as of March 31, 2014.
Note 9: Stock Options
On December 10, 2013, the Company’s
Board of Directors (the “Board”), after careful consideration, unanimously approved the 2013 Equity Incentive Plan (the
“Equity Incentive Plan”), pursuant to which the Company reserved for issuance thereunder 8,000,000 shares of the Company’s
outstanding Common Stock. The Company’s stockholders approved the Equity Incentive Plan and it became effective in January
2014
.
From time to time, the Company grants
stock option awards to officers and employees. Such awards are valued based on the grant date fair value of the instruments, net
of estimated forfeitures, using a Black-Scholes option pricing model.
Stock option awards are expensed on
a straight-line basis over the requisite service period. During the three months ended March 31, 2014 and 2013, the Company recognized
compensation expense of $10,921 and $0, respectively, associated with stock option awards. At March 31, 2014, future stock compensation
expense (net of estimated forfeitures) not yet recognized was $213,731 and will be recognized over a weighted average remaining
vesting period of 3.63 years.
The following summarizes stock option activity for the three
months ended March 31, 2014:
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
Number of
|
|
Exercise
|
|
Remaining
|
|
|
|
|
Shares
|
|
Price
|
|
Contractual Life
|
|
Intrinsic Value
|
Outstanding at December 31, 2013
|
|
|
|
1,000,000
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
|
1,000,000
|
|
|
$
|
0.26
|
|
|
|
9.74
|
|
|
$
|
—
|
|
Exercisable at March 31, 2014
|
|
|
|
143,750
|
|
|
$
|
0.26
|
|
|
|
9.74
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about the Company’s
non-vested shares as of March 31, 2014:
|
|
|
|
Weighted-Average
|
|
|
Number of
|
|
Grant-Date
|
|
|
Shares
|
|
Fair Value
|
Nonvested at December 31, 2013
|
|
|
|
900,000
|
|
|
$
|
0.25
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
|
(43,750
|
)
|
|
|
0.25
|
|
Nonvested at March 31, 2014
|
|
|
|
856,250
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has issued shares of its common stock registered in connection with
its Form S-8 filing to certain consultants and service providers. See Notes 7 and 13.
Note 10: Basic and Diluted Net Loss
Per Share
Net loss per share was computed by dividing
the net loss by the weighted average number of common shares outstanding during the period. The weighted average number of shares
was calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding.
For the three months ended March 31, 2014 and 2013, the assumed exercise of exercisable warrants and conversion of convertible
notes payable are anti-dilutive due to the Company’s net loss and are excluded from the determination of net loss per common
share – diluted. Accordingly, net loss per common share – diluted equals net loss per common share – basic in
all periods presented.
The following table summarizes the potential
shares of common stock that were excluded from diluted net loss per share, because the effect of including these potential shares
was antidilutive:
|
|
March 31,
|
|
|
2014
|
|
2013
|
|
|
|
|
|
Convertible notes payable
|
|
|
76,669,368
|
|
|
|
1,654,524
|
|
Warrants
|
|
|
45,373,596
|
|
|
|
5,364,500
|
|
Stock Options
|
|
|
143,750
|
|
|
|
—
|
|
Note 11: Going Concern
The accompanying condensed
consolidated financial statements have been prepared assuming that the Company will continue as a going concern. For the
three months ended March 31, 2014, the Company had a net loss of $10,212,016 as compared to a net loss of $871,939 for the
three months ended March 31, 2013. Additionally, the Company has incurred a net loss of $19,322,273 for the period
from inception (November 25, 2009) to March 31, 2014. As of March 31, 2014, the Company had not emerged from the
development stage. These circumstances result in substantial doubt as to the Company’s ability to continue as a going
concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to begin
operations and achieve a level of profitability. The Company intends to finance operations by issuing additional common
stock, warrants and through bridge and long term financing. The failure to achieve the necessary levels of profitability and
obtain the additional funding would be detrimental to the Company. The condensed consolidated financial statements of the
Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts
and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 12: Commitments and Contingencies
Litigation
The Company may from time to time be
involved in legal proceedings arising from the normal course of business.
Note Payable Default and Dispute
On August 16, 2013, the Company received
notice of a lawsuit filed in the District Court of Clark County, Nevada filed by Portofino Investments II Limited Partnership (“Portofino”)
against the Company regarding a convertible loan in the principal amount of $100,000. The lawsuit alleges that the Company
has failed to repay the loan amount and interest that were due to Portofino under the convertible loan and that Portofino is entitled
to judgment in the full amount due under such convertible loan, in addition to costs and expenses relating to the cause of action.
The Company has filed an answer to the complaint and Portofino has subsequently filed an amended complaint. The Company is currently
working on a response, and is simultaneously negotiating with Portofino as to a potential settlement.
Former Service Provider Dispute
A former service provider of the Company
has asserted various claims regarding the Company relating to activities that took place during 2012 and 2013. The Company
has concluded an independent investigation, performed by a third party legal firm, into the merit of these claims and determined
that they were either without merit or immaterial. The Company does not believe that any amounts that may potentially be
paid as a result of any of these claims would have a material effect on its condensed consolidated financial statements.
Note 13: Subsequent Events
Subsequent to March 31, 2014, the Company
received gross proceeds of $35,000 via an advance from Mindnest LLC. The terms of this advance incurs a total of $2,000 of interest,
and has a maturity date of May 31, 2014.
Subsequent to March 31, 2014, the
Company received gross proceeds of $50,000 via a financing arrangement with Mr. Mark Brooks. The terms of this financing
arrangement bears interest at twenty-one percent (21%) annually, and had a maturity date of May 11, 2014. The Company repaid
the loan plus accrued interest on May 9, 2014. In connection with this financing arrangement, the Company issued warrants to
purchase 100,000 shares of our common stock at an exercise price of $0.10 per share, exercisable over an eighteen (18) month
term.
Subsequent to March 31, 2014, the Company
received gross proceeds of $124,300 via a financing arrangement with Blue Citi, LLC. The terms of this financing arrangement
bears interest at eight percent (8%) annually, and has a maturity date of May 5, 2015. The unpaid outstanding balance may
be converted at fifty-eight percent (58%) of the lowest trade price in the twenty (20) days prior to conversion. Additionally,
subsequent to March 31, 2014, Blue Citi, LLC repaid the 12 percent note payable issued April 11, 2012 totaling $100,000, and, accordingly,
we agreed to repay Blue Citi, LLC a total of $125,067 via a Replacement Note bearing interest at eight percent (8%) annually, with
a maturity date of May 5, 2015. The Replacement Note unpaid outstanding balance may be converted at fifty-eight percent (58%)
of the lowest trade price in the twenty (20) days prior to conversion. In connection with this financing arrangement, the Company
issued warrants to purchase 310,750 shares of our common stock at an exercise price of $0.20 per share, exercisable over a five
(5) year term.
Subsequent to March 31, 2014, the Company
received gross proceeds of $400,000 via a financing arrangement with 31 Group, LLC. The terms of this financing arrangement bears
interest at eight percent (8%) annually, and has a maturity date of May 7, 2016. The unpaid outstanding balance may be converted
at the option of the investor at the lesser of (i) a rate of one (1) share of our restricted common stock for each $0.15, or (ii)
sixty-five percent (65%) of the average of the lowest three trade prices in the ten (10) days prior to conversion.
Subsequent to March 31, 2014, the Company
issued 109,810 shares of its common stock to GEL Properties, LLC, 105,281 shares of its common stock to LG Capital Fund, LLC and
246,305 shares of its common stock to Blue Citi, LLC in connection with their respective convertible notes. No proceeds were received
in connection with these common stock issuances. The common stock was issued to reduce the Company's note payable balances.
Subsequent to March 31, 2014, the Company
issued 760,282 shares of its common stock with respect to the exercise of two warrants. The Company received total proceeds of
$7,603 in connection with this warrant exercise.
Subsequent to March 31, 2014, the Company
issued 489,171 shares of its common stock to satisfy its obligation in connection with its 7% note payable issued March 30, 2011
totaling $50,000.
Subsequent to March 31, 2014, the Company
issued a total of 600,000 shares of its common stock to various service providers in a series of transactions related to consulting
and professional services rendered during 2014, totaling $78,000.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Forward-Looking Statements
This Report on Form 10-Q/A contains
forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation
Reform Act of 1995. Reference is made in particular to the description of our plans and objectives for future operations,
assumptions underlying such plans and objectives, and other forward-looking statements included in this report. Such
statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,”
“believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar
terms, variations of such terms or the negative of such terms. Such statements are based on management’s current
expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from
those described in the forward-looking statements. Such statements address future events and conditions concerning,
among others, capital expenditures, earnings, litigation, regulatory matters, liquidity and capital resources, and accounting matters. Actual
results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic
conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we operate, results
of litigation, and other circumstances affecting anticipated revenues and costs, and the risk factors set forth in our Annual Report
on Form 10-K filed on March 31, 2014.
As used in this Form 10-Q/A, “we,”
“us,” and “our” refer to Echo Automotive, Inc., which is also sometimes referred to as the “Company.”
You Should Not Place Undue Reliance
on These Forward-Looking Statements
The forward-looking statements made
in this report on Form 10-Q/A relate only to events or information as of the date on which the statements are made in this report
on Form 10-Q/A. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made
or to reflect the occurrence of unanticipated events. You should read this report and the documents that we reference
in this report, including documents referenced by incorporation, completely and with the understanding that our actual future results
may be materially different from what we expect or hope.
Overview
We were organized under the laws of
the State of Nevada on September 2, 2008 under the name Canterbury Resources, Inc. On August 27, 2012 we effected a stock dividend
of four shares of common stock of the Company for each share of common stock issued and outstanding. Effective September 24, 2012,
we amended our Articles of Incorporation to change our name from “Canterbury Resources, Inc.” to “Echo Automotive,
Inc.”
On October 11, 2012 we closed a voluntary
exchange transaction (the “Exchange” or “Exchange Transaction”) with Echo Automotive, LLC, an Arizona limited
liability company (“Echo LLC”) and DBPJ Stock Holding, LLC, an Arizona limited liability company and sole member of
Echo (the “Echo LLC Member”) pursuant to an Exchange Agreement dated September 21, 2012 (the “Exchange Agreement”)
by and among the Company, Echo LLC, and the Echo LLC Member. As a result of the Exchange, the Echo LLC Member acquired 70% of our
issued and outstanding common stock, Echo LLC became our sole wholly-owned subsidiary, and we acquired the business and operations
of Echo LLC.
Through Echo LLC, we are now a development
stage company with several technologies and methods that allow commercial fleet vehicles to significantly reduce their overall
fuel expenses. Our business plan is based on providing the marketplace with a business proposition for reducing the use of fossil
fuels by augmenting power trains within existing commercial fleet vehicles with highly efficient electrical assist delivered through
electric motors powered by our modular plug-in batteries to achieve rapid real-world operating results including a rapid return
on the investment for such amended vehicles.
Bright Automotive, Inc. was established
in 2008 as an offspring of the non-profit Rocky Mountain Institute to commercialize and develop the IDEA plug-in hybrid electric
fleet vehicle. Bright Automotive ceased operations in March 2012 after failing to obtain a loan through the Advanced Technology
Vehicles Manufacturing Loan Program. We successfully hired key members of the Bright Automotive team and acquired certain facilities
and intellectual property in a bid to accelerate EchoDriveTM’s commercialization in spring of 2012. In the first quarter
of 2013, Bright Automotive, Inc.’s assets, including all of its intellectual properties and patents, were auctioned off and
were purchased by Advanced Technical Asset Holdings, LLC (“ATAH”). On April 5, 2013, we acquired ATAH for 6,000,000
shares of our common stock as part of an exchange agreement with ATAH in which we received full ownership of the assets described
above (“ATAH Exchange”). We plan to use the intellectual property and patents to develop additional electrification
solutions for the marketplace.
As of the date of this Quarterly Report
on Form 10-Q/A, we have generated minimal revenue and we do not generate adequate cash flows to support our existing operations.
Moreover, the historical and existing capital structure is not adequate to fund our planned growth. Our operations to date have
been funded by advances, private “family and friends” capital contributions, equity financings, convertible notes and
subsequent equity conversions by the majority stockholders. Our working and growth capital is dependent on more significant future
funding expected to be provided in part by equity investments from other accredited investors including institutional investors.
Future cash flows are subject to a number of variables, including the level of production, economic conditions and maintaining
cost controls. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to
maintain planned or future levels of capital expenditures.
Results of Operations
Comparison of the Three Months Ended
March 31, 2014 to the Three Months Ended March 31, 2013
Revenues
We are in the research and development
phase and currently have no customers. We had $0 and $600, respectively of revenue during the three months ended March
31, 2014 and 2013. The 2013 revenue is attributable to the sales of carbon credits and consulting services.
General and Administrative Expenses
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General and Administrative Expenses
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2014
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2013
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Change
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Percent
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Three Months Ended March 31,
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$
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1,835,470
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$
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842,049
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$
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993,421
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118
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%
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General and administrative expenses
increased for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 due to increases in payroll
expenses of approximately $259,000, increases in rent expense of approximately $54,000, increases in legal expense of approximately
$87,000, increases in depreciation and amortization expense of approximately $145,000, increases in consulting expenses of approximately
$39,000, and increases in other expenses of approximately $409,000.
Selling and Marketing Expenses
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Selling and Marketing Expenses
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2014
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2013
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Change
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Percent
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Three Months Ended March 31,
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$
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22,004
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$
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4,779
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$
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17,225
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360
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%
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Selling and marketing expenses increased
in the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 due to significant sales, marketing
and public relations efforts including, but not limited to, a major industry tradeshow, news releases providing business updates
to the marketplace, marketing collateral for customer meetings, and sales calls which required the shipping of the Echo demonstration
vehicle.
Operating Loss
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Operating Loss
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2014
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2013
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Change
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Percent
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Three Months Ended March 31,
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$
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1,857,474
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$
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846,228
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$
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1,011,246
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120
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%
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The increase in our operating loss for the three months ended
March 31, 2014 as compared to the three months ended March 31, 2013 is due to the increase in general and administrative expenses
and selling and marketing expenses, each of which is described above.
Interest Expense
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Interest Expense
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2014
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2013
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Change
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Percent
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Three Months Ended March 31,
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$
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14,205,454
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$
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25,711
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$
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14,179,743
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55150
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%
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The increase in interest expense for
the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 is due to an increase in new debt agreements,
combined with significant interest expense recorded in connection with the Company’s derivative accounting treatment of new
convertible note agreements entered into during the three months ended March 31, 2014.
Other Income (Expense)
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Other Income (Expense)
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2014
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2013
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Change
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Percent
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Three Months Ended March 31,
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$
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5,850,912
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$
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—
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$
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5,850,912
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N/A
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The increase in other expense for the
three months ended March 31, 2014 as compared to the three months ended March 31, 2013 is due to a gain on change in fair value
of the derivative liability partially offset by a loss on extinguishment of debt and other expense related to contingent registration
rights recorded in connection with the Company’s derivative accounting treatment of new convertible note agreements entered
into during the three months ended March 31, 2014.
Net Loss
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Net Loss
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2014
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2013
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Change
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Percent
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Three Months Ended March 31,
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$
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10,212,016
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$
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871,939
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$
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9,340,077
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1071
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%
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Changes in net loss are attributable to our changes in operating
loss and other expense, each of which we have described above.
From Inception (November 25, 2009) to March 31, 2014
We have generated $133,456 of revenue
since inception (November 25, 2009). We are in the research and development phase and currently have no customers.
Revenue from inception to March 31, 2014 is attributable to the sales of carbon credits and consulting services. We have
incurred $10,771,052 of operating expenses from inception through March 31, 2014. These expenses are comprised of $10,623,656
of general and administrative expenses and $147,396 of selling and marketing expenses. The general and administrative expenses
consist of payroll, consulting, legal, rent, and miscellaneous expenses. We also incurred $14,535,589 of interest expense,
a majority of which pertains to the valuation of derivative liabilities recorded during the three months ending March 31, 2014.
Our net loss from inception through March 31, 2014 is $19,322,273.
Liquidity and Capital Resources
Net cash used in operating activities
was $1,257,124 and $803,753 for the three months ended March 31, 2014 and 2013, respectively. The increase is mainly attributable
to increases in net loss of approximately $9,340,077 and the change in fair value of derivative liability of $6,123,583, offset
by interest expense related to beneficial conversion feature of $13,769,305.
As of March 31, 2014, we had cash on
hand of $253,623 and negative working capital of $12,476,498. We believe that our cash on hand and working capital will not be
sufficient to meet our anticipated cash requirements for the next 12 months. To date, our working capital has been a
combination of private investments, private loans, stockholder capital contributions, and advances through promissory notes.
Cash used in investing activities was
$57,719 and $79,120 for the three months ended March 31, 2014 and 2013, respectively. In 2014 and 2013, these amounts consisted
of purchases of property and equipment.
Cash provided by financing activities
was $1,520,550 and $903,507 for the three months ended March 31, 2014 and 2013, respectively. During the three months ended March
31, 2014, we received proceeds from notes payable of $1,611,300 and deferred loan costs of $90,750. During the three months ended
March 31, 2013, we received cash from stock subscriptions in the amount of $434,507, proceeds from notes payable of $500,000 and
repayments on debt of $31,000.
We had negative working capital of $12,476,498
as of March 31, 2014 compared to $2,418,843 as of December 31, 2013. Our cash position increased to $253,623 at March 31, 2014
compared to $47,916 at December 31, 2013, for the reasons described above.
As of March 31, 2014, we have outstanding
notes payable totaling $2,290,761, of which $1,264,420, including the debt discount, is classified as short-term. Interest expense
incurred on all debt, excluding the expense related to the accretion of the debt discount of $375,239 and the interest expense
related to beneficial conversion feature and warrants issued of $13,769,305, was $60,910 and $20,848, for the three months ended
March 31, 2014 and 2013, respectively.
Recent Financings
On May 16, 2013, we entered into a securities
purchase agreement with United Fleet Financing LLC “UFF” of which the sole member is a related party. Pursuant to the
agreement, UFF agreed to provide $1,500,000 of funding for working capital in exchange for the issuance of 2,727,273 units at a
price of $0.55 per unit. Each unit consists of one share of common stock and a warrant to purchase 1.25 shares of our common stock
at an exercise price equal to $0.65 per share, exercisable over five years. As of March 31, 2014 we received $1,500,000 under this
private placement and issued 3,409,093 warrants. As of March 31, 2014 the Company has not issued any shares of its common stock
related to this agreement. Subsequent to our quarter ended March 31, 2014, we lowered the warrant strike price to $0.35 per share.
On May 20, 2013, we entered into a financing
and security agreement and a secured convertible subordinated promissory note with UFF. Pursuant to the terms and conditions
of this agreement, UFF has agreed to provide us $1,500,000 of financing for working capital. The financing will be provided to
us in nine scheduled installments beginning June 15, 2013 and ending January 1, 2014, starting with a first installment of
$166,000. Pursuant to the agreement UFF has the option to convert any amounts paid to the Company pursuant to the financing
agreement, into common stock at a conversion price of $0.55 per share and receive up to 2,727,272 warrants, each to purchase 1.25
shares of common stock at a per share exercise price of $0.65 with a term of 18 months. As of March 31, 2014
we received $1,500,000 under this private placement and issued 3,409,093 warrants. As of March 31, 2014 the Company
has not issued any shares of its common stock related to this agreement. Subsequent to our quarter ended March 31, 2014, we agreed
to extend the warrant term to 5 years and lowered the warrant strike price to $0.35 per share.
On June 20, 2013, we entered into a
financing and security agreement and a secured convertible promissory note (the “Emerald Note”) in the amount of $200,000
with Emerald Private Equity Fund, LLC (“Emerald”). Pursuant to the terms of the Emerald Note, Emerald agreed to provide
us with $200,000 upon execution. In connection with this financing, Emerald received a warrant to purchase 714,286 shares of our
common stock at an exercise price of $0.65 per share, exercisable over a five (5) year term. The Emerald Note has a maturity date
of five (5) years and bears interest at eight percent (8%) annually. The unpaid outstanding balance on the Emerald Note may be
converted at the option of either party a rate of two (2) shares of our restricted common stock for each $0.70. As of
March 31, 2014 we received $200,000 under this private placement and issued the related warrants. During the three months ending
March 31, 2014, we issued 1,142,858 shares of our common stock to Emerald to reduce the balance due under the Emerald Note. Subsequent
to our quarter ended March 31, 2014, we lowered the warrant strike price to $0.35 per share.
On December 31, 2013, we entered into
two promissory note agreements in the amount of $40,000 and $60,000 with UFF. Pursuant to the terms and conditions of these agreements,
UFF provided us with $100,000 and UFF received a warrant to purchase 800,000 shares of our common stock at an exercise price of
$0.55 per share, exercisable over a five (5) year term. The promissory notes have a maturity date of June 1, 2014. The stated interest
rate is equal to 15% per annum. During the three months ending March 31, 2014, the exercise price was lowered to $0.35 per share.
On January 9, 2014, we received
gross proceeds of $250,000 via a financing arrangement with Hanover Holdings I, LLC. The terms of this financing arrangement
bears interest at twelve percent (12%) annually, and has a maturity date of July 3, 2014. The unpaid outstanding balance may
be converted at the option of the investor at a rate of one (1) share of our restricted common stock for each $0.15223.
Subsequent to our quarter ended March 31, 2014, the conversion feature of the financing arrangement was modified whereby the
unpaid outstanding balance may be converted at the option of the investor at the lessor of (i) sixty percent (60%) of
the lowest trade price in the 10 days prior to conversion; or (ii) the original conversion price as stated in the
January, 2014 financing arrangement.
On January 28, 2014, we received gross
proceeds of $110,000 via a financing arrangement with United Fleet Financing, LLC, of which the sole member is a related party.
The terms of this financing arrangement bears interest at fifteen percent (15%) annually, and has a maturity date of June 1, 2014.
In connection with this financing arrangement, we issued warrants to purchase 800,000 shares of our common stock at an exercise
price of $0.55 per share, exercisable over a five (5) year term. Subsequent to our quarter ended March 31, 2014, we lowered the
warrant strike price to $0.35 per share.
On February 6, 2014, we received gross
proceeds of $150,000 via a financing arrangement with JMJ Financial. The terms of this financing arrangement bears interest at
ten percent (10%) annually, and has a maturity date of February 6, 2016. The unpaid outstanding balance may be converted at the
option of the investor at the lessor of (i) a rate of one (1) share of our restricted common stock for each $0.23, or (ii) sixty
percent (60%) of the lowest trade price in the twenty-five (25) days prior to conversion.
On February 12, 2014, we received gross
proceeds of $55,000 via a financing arrangement with Vista Capital Investments, LLC. The terms of this financing arrangement bears
interest at ten percent (10%) annually, and has a maturity date of February 11, 2015. The unpaid outstanding balance may be converted
at the option of the investor at the lessor of (i) a rate of one (1) share of our restricted common stock for each $0.35, or (ii)
seventy percent (70%) of the lowest trade price in the twenty (20) days prior to conversion.
On February 21, 2014, we received gross
proceeds of $50,000 via a financing arrangement with LG Capital Funding, LLC (“LG Capital”). The terms of this financing
arrangement bears interest at eight percent (8%) annually, and has a maturity date of February 20, 2015. The unpaid outstanding
balance may be converted at fifty-five percent (55%) of the lowest trade price in the ten (10) days prior to conversion. Also on
February 21, 2014, LG Capital paid off the 21 percent note payable issued July 13, 2012 totaling $65,000 on the Company’s
behalf, and, accordingly, we agreed to repay LG Capital a total of $65,000 via a replacement note bearing interest at eight percent
(8%) annually, with a maturity date of February 20, 2015. The Company issued 124,730 shares of its common stock to the former holder
of the 21 percent note payable issued July 13, 2013 totaling $65,000 to satisfy accrued interest on the repaid, extinguished obligation.
The replacement note unpaid outstanding balance may be converted at fifty-five percent (55%) of the lowest trade price in the ten
(10) days prior to conversion.
On February 28, 2014, we received gross
proceeds of $200,000 via a financing arrangement with Typenex Co-Investment, LLC. The terms of this financing arrangement bears
interest at ten percent (10%) annually, and has a maturity date of October 27, 2015. The unpaid outstanding balance may be converted
at the option of the investor at the lessor of (i) a rate of one (1) share of our restricted common stock for each $0.27, or (ii)
seventy percent (70%) of the lowest trade price in the fifteen (15) days prior to conversion.
On March 6, 2014, we received gross
proceeds of $50,000 via a financing arrangement with Union Capital, LLC (“Union”). The terms of this financing arrangement
bears interest at eight percent (8%) annually, and has a maturity date of March 7, 2015. The unpaid outstanding balance may be
converted at fifty-five percent (55%) of the lowest trade price in the ten (10) days prior to conversion. Also on March 6, 2014
Union paid off the 12 percent note payable issued May 30, 2012 totaling $60,000, on the Company’s behalf, and, accordingly,
we agreed to repay Union a total of $67,800 via a replacement note bearing interest at eight percent (8%) annually, with a maturity
date of March 7, 2015. The replacement note unpaid outstanding balance may be converted at fifty-five percent (55%) of the lowest
trade price in the ten (10) days prior to conversion. On March 10, 2014, the Company issued 99,668 shares of its common stock to
the same lender to satisfy accrued interest on the repaid, extinguished obligation. Furthermore, Union Capital, LLC, elected to
convert their principal balance to common stock as permitted in connection with the replacement note payable, and, accordingly,
on March 10, 2014 and March 14, 2014, the Company issued 359,858 and 219,667 shares of its common stock, respectively, to Union
Capital, LLC to fully extinguish the obligation under the replacement note payable.
On March 10, 2014, we received gross
proceeds of $50,000 via a financing arrangement with GEL Properties, LLC (“GEL Properties”). The terms of this financing
arrangement bears interest at eight percent (8%) annually, and has a maturity date of February 20, 2015. The unpaid outstanding
balance may be converted at fifty-five percent (55%) of the lowest trade price in the ten (10) days prior to conversion. Also on
March 10, 2014, GEL Properties paid off the 7 percent note payable with a related party issued March 31, 2012 totaling $50,000,
on the Company’s behalf, and, accordingly, we agreed to repay GEL Properties a total of $52,500 via a replacement note bearing
interest at eight percent (8%) annually, with a maturity date of February 20, 2015. The replacement note unpaid outstanding balance
may be converted at fifty-five percent (55%) of the lowest trade price in the ten (10) days prior to conversion. On March 7, 2014,
the Company issued 37,849 shares of its common stock to the related party to satisfy accrued interest on the repaid, extinguished
obligation. Furthermore, GEL Properties, LLC, elected to convert a portion of their principal balance to common stock as permitted
in connection with the replacement note payable, and, accordingly, on March 11, 2014, the Company issued 164,935 shares of its
common stock to GEL Properties, LLC to fully reduce the obligation under the replacement note payable by a total of $15,000.
On March 11, 2014, we received gross
proceeds of $110,000 via a financing arrangement with William W. Kennedy, of whom Mr. William D. Kennedy, our CEO, is an immediate
family member. The terms of this financing arrangement bears interest at seven percent (7%) annually, and has a maturity date of
April 10, 2014. In connection with this financing arrangement, we issued warrants to purchase 100,000 shares of our common stock
at an exercise price of $0.01 per share, exercisable over an eighteen (18) month term.
On March 17, 2014, we received gross
proceeds of $78,500 via a financing arrangement with Asher Enterprises, Inc. The terms of this financing arrangement bears interest
at eight percent (8%) annually, and has a maturity date of November 12, 2014. The unpaid outstanding balance may be converted at
sixty-nine percent (69%) of the lowest trade price in the ten (10) days prior to conversion.
On March 5, 2014, we issued 337,855
shares of our common stock to satisfy our obligation in connection with the 12% convertible note payable issued November 11, 2011
totaling $100,000 (see Note 6 of the Financial Statements). Additionally, in connection with this transaction, we issued a warrant
to purchase 506,782 shares of our common stock at an exercise price of $0.01 per share, exercisable over a five (5) year term.
On March 5, 2014, in connection with
the repayment of the 21% note payable issued July 13, 2012 totaling $65,000, we issued 124,730 shares of our common stock to the
lender to satisfy accrued interest owed under this note.
On March 26, 2014, we received gross
proceeds of $500,000 via a financing arrangement with United Fleet Financing, LLC, of which the sole member is a related party.
The terms of this financing arrangement bears interest at fifteen percent (15%) annually, and has a maturity date of June 1, 2014.
In connection with this financing arrangement, we issued warrants to purchase 1,428,571 shares of our common stock at an exercise
price of $0.35 per share, exercisable over a five (5) year term.
Subsequent to the three months ended
March 31, 2014, on May 7, 2014, we entered into a securities purchase agreement with 31 Group, LLC pursuant to which 31 Group,
LLC purchased senior convertible note with an initial principal amount of $624,000 from the Company and a warrant to acquire up
to 4,500,000 shares of the Company’s common stock, for a total purchase price of $400,000. The senior convertible note matures
on May 7, 2016 and accrues interest annually at 8%. The warrant is exercisable during a five year term and has an exercise price
of $0.1807.
Subsequent to the three months ended
March 31, 2014, we also received an aggregate of $209,300 in gross proceeds from financings with various investors.
We are currently seeking both short-term
funding to finance current operations as well as significant amounts of long term capital to execute our business plan. We project
that in order to execute our business plan and proceed to full production, approximately $3.0 million in short term funding will
be required over the next four months and $5.5 million in the first half of 2014. Our base monthly expenses total approximately
$450,000. The additional working capital needs are related to hiring additional personnel, purchase of electric motors, battery
cells, and costs related to selling and marketing efforts.
Our current cash requirements are significant
due to planned development and marketing of our current products, and we anticipate generating losses. In order to execute on our
business strategy, we will require additional working capital commensurate with the operational needs of planned marketing, development
and production efforts. We expect to incur additional marketing, development and production expenses. Accordingly, we expect to
continue to use debt and equity financing to fund operations for the foreseeable future as we look to expand our asset base and
fund marketing, development and production of the EchoDrive™ product.
To meet future objectives, we will need
to meet revenue targets and sell additional equity and debt securities, which most likely will result in dilution to current stockholders.
Future cash flows are subject to a number of variables, including the level of production, economic conditions and maintaining
cost controls. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to
maintain planned or future levels of capital expenditures.
Considering we have yet to emerge from
the development stage, we do not generate adequate cash flows to support our existing operations, our reliance on capital from
investors, the potential need to seek additional loans to meet future objectives, and other factors, we believe there is substantial
doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability
to begin operations and achieve a level of profitability.
Off-Balance Sheet Arrangements
None.
Significant Accounting Policies
In addition to the following, our significant
accounting policies are described in Note 3 to the consolidated financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2013, which are incorporated by reference herein.
Derivative Liabilities- Convertible Notes
The embedded conversion and anti-dilution
features in the convertible debt instruments and warrants issued in the three months ended March 31, 2014 qualify certain notes
as a derivative instrument since the number of shares issuable under the note is indeterminate based on guidance in FASB ASC 815,
Derivatives and Hedging. These convertible notes tainted all other equity linked instruments including outstanding warrants and
fixed rate convertible debt.
The valuation of the derivative liability
attached to the convertible debt arrived at through the use of a Monte Carlo model that values the derivative liability within
the notes. The technique applied generates a large number of possible (but random) price paths for the underlying (or underlyings)
via simulation, and then calculates the associated payment value (cash, stock, or warrants) of the derivative features. The price
of the underlying common stock is modeled such that it follows a geometric Brownian motion with constant drift, and elastic volatility
(increasing as stock price decreases). The stock price is determined by a random sampling from a normal distribution. Since the
underlying random process is the same, for enough price paths, the value of derivative is derived from path dependent scenarios
and outcomes. The features in the note that were analyzed and incorporated into the model included the conversion feature with
the reset provisions, the call/redemption/prepayment options, and the default provisions. Based on these features, there are six
primary events that can occur; payments are made in cash; payments are made with stock; the Holder converts upon receiving a redemption
notice; the Holder converts the note; the Issuer redeems the note; or the company defaults on the note.
The model simulates the underlying economic
factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be
in effect at the time (i.e. stock price, conversion price, etc.). Probabilities were assigned to each variable such as redemption
likelihood, default likelihood, and timing and pricing of reset events over the remaining term of the note based on management
projections. This led to a cash flow simulation over the life of the note. A discounted cash flow for each simulation was completed,
and it was compared to the discounted cash flow of the note without the embedded features, thus determining a value for the derivative
liability of $10,340,351 at either issuance date or tainting date. The Company recorded the change in the fair value of the derivative
liability as a gain of $4,146,356 to reflect the value of the derivative liability as $6,105,182 as of March 31, 2014. The Company
also recorded settlements of $88,813 related to conversions of three of their convertible notes.
Extinguishments and Settlements
During the three months ended March
31, 2014, the Company entered into certain debt transactions (see footnotes 13, 18, 20, and 21 to debt schedule in the notes to
the Financial Statements) in which extinguishment accounting was applied. As a result, a loss on extinguishment of debt of $147,671
was recorded as a loss on debt extinguishment in other income and expense related to these extinguishments.
Derivative Liabilities- Warrants
The embedded conversion and
anti-dilution features in the convertible debt instruments and warrants issued in the three months ended March 31, 2014
qualify certain notes as a derivative instrument since the number of shares issuable under the note is indeterminate based on
guidance in FASB ASC 815, Derivatives and Hedging. These convertible notes tainted all other equity linked instruments
including outstanding warrants and fixed rate convertible debt.
The valuation of the derivative liability
of the warrants was determined through the use of a Monte Carlo options model that values the liability of the warrants based on
a risk-neutral valuation where the price of the option is its discounted expected value. The technique applied generates a large
number of possible (but random) price paths for the underlying common stock via simulation, and then calculates the associated
exercise value (i.e. "payoff") of the option for each path. These payoffs are then averaged and discounted to today resulting
in the fair value of the option.
Using this model, the Company determined
a fair value of $5,512,114 at either issuance date or tainting date, including the warrants previously classified in equity which
had a value at tainting of $788,660 (see Note 7). The Company recorded the change in the fair value of the derivative liability
as a gain of $1,977,227 to reflect the value of the derivative liability as $3,534,887 as of March 31, 2014.
Recently Issued Accounting Pronouncements
We have implemented all new accounting
pronouncements that are in effect. These pronouncements did not have any material impact on our condensed consolidated
financial statements unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that
have been issued but not yet effective that might have a material impact on our financial position, results of operations, or condensed
consolidated financial statements.