Item 2. Managements Discussion & Analysis of Financial Condition and Results of Operations.
The following managements discussion and analysis should be read in conjunction with the Companys historical consolidated financial statements and the related notes thereto included in the Company's audited financial statements for the year ended December 31, 2012, and the notes thereto, as reported in our Current Report on Form 8-K/A filed with the SEC on August 5, 2013. The managements discussion and analysis contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words believe, plan, intend, anticipate, target, estimate, expect and the like, and/or future tense or conditional constructions (will, may, could, should, etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this quarterly report. The Companys actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this quarterly report.
Overview
On May 15, 2013, Receivable Acquisition & Management Corporation, a Delaware corporation (the Company) completed the acquisition of Cornerstone Program Advisors LLC, a Delaware limited liability company (Cornerstone) and Sustainable Energy Industries, Inc., a Delaware corporation (Sustainable), and the Company assumed the operations of each of these entities (the Merger).
Receivable Acquisition & Management Corporation had operated as a business purchasing and collecting upon defaulted consumer receivables. Cornerstone has been in the business of managing energy infrastructure projects, specializing in the non-profit marketplace. Sustainable is in the business of developing, marketing, and implementing an engine which can convert low-grade heat energy into useful work, including power production. The previous operations of the Company have been brought to a close and the Company assumed the operations of Cornerstone and Sustainable upon the completion of the Merger. The Company has refocused on managing energy infrastructure projects and developing applications for a licensed heat engine with particular focus on the geothermal and independent power production markets.
On August 5, 2013, the Company filed Amendment No. 1 to its Current Report on Form 8-K (the Form 8-K/A), which included the audited Financial Statements of Cornerstone for the fiscal years ended December 31, 2012 and December 31, 2011, as well as the unaudited Financial Statements of Cornerstone as of March 31, 2013 and for the three months ended March 31, 2013 and 2012. In addition, the Company provided the audited Financial Statements of Sustainable Energy, LLC, a New York limited liability company (Sustainable LLC), for the fiscal years ended December 31, 2012 and December 31, 2011, and the unaudited financial statements of Sustainable LLC, as of March 31, 2013, and for the three months ended March 31, 2013 and 2012. The Financial Statements of Sustainable LLC were provided in lieu of those of Sustainable because Sustainable LLC had transferred to Sustainable substantially all of its assets pursuant to a May 15, 2013 Assignment and Assumption Agreement. In addition, the Company provided the unaudited pro forma condensed combined financial information of the Company, Cornerstone, and Sustainable, as of and for the six months ended March 31, 2013 and for the fiscal year ended September 30, 2012.
Cornerstone is considered to be the acquiring entity in the Merger strictly from an accounting perspective. Accordingly, under the applicable accounting rules, in this Quarterly Report on Form 10-Q for the period ended June 30, 2013 (the 10-Q), the Company is reporting the financial results for Cornerstone through the closing of the Merger on May 15, 2013, and then the financial results of the all of the entities that were combined as a result of the Merger from May 15, 2013 through the end of the June 30, 2013 quarterly period. In the following Results of Operations section, the Company is comparing these combined financial statements (after May 15, 2013) against the financial statements of only Cornerstone from last year, so the Results of Operations are substantially different.
As reported in the Form 8-K/A, the Company changed its fiscal year from September 30 to December 31 to correspond with the fiscal years of each of Cornerstone and Sustainable. However, as the Company is reporting the financials of Cornerstone prior to May 15, 2013, which has always had a December 31 fiscal year end, the December 31 year end apply to last years figures.
3
Results of Operations
Revenue
During the three and six month periods ended June 30, 2013, the Company had net profits of $8,880 and $4,624 on revenues of $235,600 and $470,625, respectively, versus net profits of $36,866 and $50,304 on revenue of $140,533 and $283,989, respectively, in the three and six month periods ended June 30, 2012. Net profit in the most recent three and six month periods in 2013 was substantially lower than the corresponding period last year due to substantial expenses for professional fees in connection with the Merger. In addition, the most recent period had higher consulting fees as compared to the same period in 2012, consistent with the increase in revenues, due to growth in the business.
The revenue increase for the three and six month periods ended June 30, 2013, over the corresponding periods from 2012 are each attributable to the fact that during the first half of 2012, the Company was engaged in advisory, oversight, and management activities for one customer, but this was increased to two customers in the corresponding periods in 2013 due to successful business development activities.
Operating Expenses
Total operating expenses for the three and six month periods ended June 30, 2013 were $226,720 and $466,001, respectively, versus $103,667 and $233,685, respectively, during the three and six month periods ended June 30, 2012. The increase in operating expenses in the three and six month periods in 2013 against the corresponding periods in 2012 are primarily due to an increase in consulting expenses, as discussed in the following section, as well as professional fees associated with the Merger, as noted above. The Companys other expenses grew in line with revenue levels.
Consulting Expenses
The Company outsources a significant portion of its project management, oversight and advisory activities to a carefully selected group of small firms, individuals and subcontractors with expertise specific to the projects underway. As of the quarter ended June 30, 2013, the Company was using five such consulting resources. Consulting expenses consistently constitute the bulk of operating costs for the project advisory and management business activities of the Company, and accordingly generally tracks revenue.
Liquidity and Capital Resources
As of June 30, 2013, the Company had a working capital deficit of ($29,503) versus working capital of $298,662 as of year ended December 31, 2012. Most of this change is due to a $192,000 increase stemming from the contractual obligation assumed by the Company and described below. The other principal contributing factor was the growth in other payables, partly in connection with the growth of the business but most of which were expenses related to the Merger, as noted above.
At the end of period ended June 30, 2013, the Company had net cash of $58,143 versus $3,415 at December 31, 2012. At the end of the six months ended June 30, 2013, net cash provided by operating activities was $175,130 versus $110,494 at the end of the six months ended June 30, 2012. This is consistent with the growth in the business over that time.
At the end of the six months ended June 30, 2013, there was $43,580 net cash from investing activities versus none during the six months ended June 30, 2012. Most of this increase was due to cash received as part of the Merger transaction.
At the end of the six months ended June 30, 2013, there was ($163,982) net cash used by financing activities versus ($99,208) during the six months ended June 30, 2012. This was primarily due to increased distributions prior to the Merger, consistent with the increase in business over this time.
4
The Company believes that funds generated from operations, together with existing cash will be sufficient to finance its operations for the next twelve months, but are likely to be insufficient to fund its contractual obligation discussed below and to fund growth. The Company has begun exploring options and alternatives for raising additional capital to cover any working capital needs and its contractual obligation, and to fund growth initiatives in its identified markets. However, there can be no assurance that any new debt or equity financing arrangement will be available to the Company when needed on acceptable terms, if at all.
Income Taxes
The Company did not record any income tax provision for the three or six month periods ended June 30, 2013.
Contractual Obligation
As previously disclosed, the Company has entered into a renewable 20-year engine technology license agreement (the Agreement) with a third party licensor (the Licensor) that developed engines capable of converting low grade heat into other forms of energy. Under the terms of the Agreement, the Company obtained certain exclusive license rights in the engines developed by the Licensor which will permit the Company to develop, manufacture and integrate such engines into its projects. An upfront payment of $200,000 and escalating volume-related quarterly payments are contractually required in order to maintain certain exclusive markets. The payments, taken as whole, are expected to obligate the Company to amounts of $250,000 to $400,000 per year depending upon the growth in revenue from this source. If the expected revenues do not materialize, the Company may elect not to pay these sums, and in the event of non-payment, the Company retains a non-exclusive license subject to royalty fees. As of June 30, 2013, the Company has begun payments under this Agreement.
Critical Accounting Policy & Estimates
Our Managements Discussion and Analysis of Financial Condition and Results of Operations section discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the condensed consolidated financial statements included in this quarterly report.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.