Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion contained herein contains “forward-looking statements” that involve risk and uncertainties. These statements may be identified by the use of terminology such as “believes,” “expects,” “may,” “should,” or “anticipates,” or expressing this terminology negatively or similar expressions or by discussions of strategy. The cautionary statements made in our Annual Report on Form 10-K, filed January 20, 2017, should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q. Our actual results could differ materially from those discussed in this report. The following discussion should be read in conjunction with the financial statements and the related notes included herein as Item 1.
Accounting Policies and Estimates
The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on the results that we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain.
We have identified the accounting policies that we consider critical in Note 1 “Nature of Business and Significant Accounting Policies” of the notes to our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. The accounting policies and estimates described in that report are contained in Note 1 “Nature of Business and Significant Accounting Policies,” of the notes to our financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016, which includes a discussion of the policies identified in this report and other significant accounting policies and should be read in conjunction with this report.
Overview
Trailblazer Resources, Inc., formerly Energy Composites Corporation (“we,” “us,” “our,” or the “Company”), a Nevada corporation, currently has no business operations.
The Company had one operating subsidiary, ECC Corrosion, Inc. (“ECC-C”), which was sold on October 21, 2011 due to the continuing losses that the Company had incurred since the reverse acquisition in October 2008. Formerly known as Advanced Fiberglass Technologies (“AFT”), ECC-C was incorporated in the state of Wisconsin on January 1, 2005, following nearly ten years operating as M&W Fiberglass, LLC (“M&W”). Founded in 1995 by Jamie and Jennifer Mancl, M&W was the operating entity that developed and operated AFT’s business. In January 2005, M&W transferred all operating assets and liabilities into a newly formed S-Corporation: AFT. On September 1, 2010, AFT changed its name to ECC Corrosion, Inc.
On October 21, 2011, the Company sold all of the stock of ECC-C to Jamie and Jennifer Mancl and their affiliated entities (the “Mancls”) in exchange for substantially all of the Mancls’ shares of the Company’s common stock (the “ECC-C Sale”). These shares were then cancelled, reducing the number of shares issued and outstanding of the Company to 22,752,955. In addition, we changed the name of the Company to “Trailblazer Resources, Inc.” effective October 17, 2011.
Results of Operations
We currently do not generate any revenues, but incur general and administrative expenses related to our status as a publicly-held company, such as legal, accounting and transfer agent fees, as well as other applicable expenses such as investor relations expenses.
The three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016.
General and administrative expenses
Total general and administrative expenses were $33,970 and $118,249 for the three and nine months ended September 30, 2017 compared to $11,577 and $62,163 for the three and nine months ended September 30, 2016, consisting of legal, accounting and other professional fees. The increase is due to legal and accounting costs associated with efforts to become current in the Company’s SEC filings compared to the respective prior year period.
The Company’s net loss from operations was $33,970 and $118,249 for the three and nine months ended September 30, 2017, respectively, compared to $11,577 and $62,163 for the three and nine months ended September 30, 2016, respectively, due to the factors described above.
Loss on extinguishment of debt
The Company recognized $0 and $17,180 of loss on extinguishment of debt during the three and nine months ended September 30, 2017, respectively. The 2017 loss arose as a result of the certain convertible noteholders exchanging accrued interest from convertible debt of $33,041 in exchange for shares of Company common stock with an aggregate fair market value of $50,221 on the issuance date in January 2017.
Interest expense
Total interest expense was $8,161 and $24,283 for the three and nine months ended September 30, 2017, respectively, compared to $11,276 and $32,836 for the three and nine months ended September 30, 2016, respectively.
Interest expense for the three and nine months ended September 30, 2017 includes interest expense on convertible notes payable of $6,049 and $18,016, respectively, compared to $8,367 and $24,773 for the three and nine months ended September 30, 2016, respectively.
Interest expense during the three and nine months ended September 30, 2017 included $1,103 and $3,272 respectively, compared to $1,100 and $3,272 for the three and nine months ended September 30, 2016, respectively, of interest incurred on the interest on advances from shareholders, all of whom are related parties.
The Company also incurred interest expense of $1,009 and $2,994 for the three and nine months ended September 30, 2017, compared to $1,814 and $4,789 for the three and nine months ended September 30, 2016, respectively, related to the short-term note payable to JIMMAR Consulting, Inc., a shareholder.
Interest expense decreased in the three and nine months ended September 30, 2017 as compared to the three and nine months ended September 30, 2016 primarily due to reduced interest bearing debt amounts, resulting from the Company’s repayments on the note payable to shareholder over the past twelve months.
Income tax benefit
The Company has established a full valuation allowance against its deferred tax assets because the Company believes it is more likely than not, that the net deferred tax assets will not be realized, and therefore, there is no tax provision recorded for the three and nine months ended September 30, 2017 and 2016.
Net loss
The Company’s net loss was $42,131 and $159,712 for the three and nine months ended September 30, 2017, respectively, compared to $22,853 and $94,999 for the three and nine months ended September 30, 2016, respectively, due to the factors described above.
Liquidity and Capital Resources
At September 30, 2017, the corporate shell company had cash of $0 and a working capital deficiency of $1,679,855. These conditions, and the Company's recurring operating losses, raise substantial doubt as to our ability to continue as a going concern.
Operating Cash Flows
Operating cash flows used cash of $58,071 and $53,228 during the nine months ended September 30, 2017 and 2016, respectively. All operating cash was used to pay various accounts payable and other accrued expenses.
Investing Cash Flows
There were no investing transactions during the nine months ended September 30, 2017 and 2016.
Financing Cash Flows
Cash flow provided by financing activities for the nine months ended September 30, 2017 and 2016 consisted of: (1) an increase in short-term notes payable of $57,722 and $46,000, (2) payments on short-term note payable of $0 and $20,213, and (3) an increase in short-term notes payable, shareholder of $0 and $25,650, respectively.
Debenture Financing
From August 2008 to December 2008, we raised $6,370,000 by selling units, each unit consisting of (i) a 3-year, 6% convertible debenture (the “Debentures”) with a conversion price of $2.50 per share (subject to adjustment for stock splits and stock dividends), and (ii) a number of warrants equal to the number of shares issuable upon conversion of the principal amount of the Debenture (the “Warrants”). The Debentures sold included the issuance of 2,548,000 Warrants. Each Warrant was originally exercisable into shares of common stock for a term of 3 years at $5.00 per share. The Warrants also provided anti-dilution protection for the following events: reorganization, reclassification, consolidation, merger or sale; subdivision, combination or dividend of our common stock. The Warrants expired June 30, 2014.
At September 30, 2017 and December 31, 2016, Debentures totaling $400,000 were outstanding and currently due. Many of the remaining Debenture holders have elected to receive interest in the form of stock, lowering our cash outlays for debt service on the Debentures. Since the Company does not have the capital resources at this time to repay these Debentures, we are working with the Debenture holders in an attempt to convert them to common stock, extend or otherwise renegotiate their terms. In December 2016, certain debenture holders converted $150,000 in outstanding principal and $24,453 in accrued interest payable to 69,782 shares of common stock. Additionally, 13,216 shares were issued to pay $33,041 of accrued interest for non-converting debentures in January 2017. The shares were issued in January 2017.
Revolving Convertible Note Financing
On February 21, 2013; the Company established an unsecured revolving convertible note in the amount of $250,000 with DEP. Under the terms of the note, DEP had agreed to make loans to the Company during the three-year term of the revolving credit commitment period. Interest accrued on the unpaid principal balance at a rate of eight percent per annum and required quarterly payments beginning May 31, 2013; however, none of the interest has been paid as of September 30, 2017.
During 2015, the entire $250,000 principal balance of the revolving note was repaid, funded entirely by the proceeds of the note payable from GCS, discussed in Note 4. Note Payable. Accrued expenses include $49,260 of interest due to shareholders relating to this revolving convertible note as of September 30, 2017 and December 31, 2016, respectively.
Note Payable Financing
On April 15, 2015, the Company established a promissory note in the amount of $250,000 with Global CashSpot Corp (GCS). Under the terms of the promissory note, GCS has agreed to advance the Company funds up to $250,000 to fund accounting, legal and other operating costs. The unsecured promissory note is non-interest bearing, and repayment is due within 60 days following notice of demand by GCS. In the event the Company enters into a business combination with GCS, the promissory note shall be deemed paid in full. In September 2015, the Company and GCS agreed to amend the promissory note, increasing its amount to $350,000. The borrowing amount was further increased to $515,000 and $523,500 in February and August 2016, respectively. During the three and nine months ended September 30, 2017, GCS advanced $0 and $46,000, under the promissory note, respectively.
On April 15, 2015, the Company established a promissory note in the amount of $250,000 with Global CashSpot Corp (GCS). Under the terms of the promissory note, GCS has agreed to advance the Company funds up to $250,000 to fund accounting, legal and other operating costs. The unsecured promissory note is non-interest bearing, and repayment is due within 60 days following notice of demand by GCS. In the event the Company enters into a business combination with GCS, the promissory note shall be deemed paid in full. In September 2015, the Company and GCS agreed to amend the promissory note, increasing its amount to $350,000. The borrowing amount was further increased to $515,000 and $523,500 in February and August 2016, respectively. During the nine months ended September 30, 2017 and 2016, GCS advanced $57,722 and $46,000 under the promissory note, respectively. Outstanding borrowings under this promissory note were $581,222 and $523,500 at September 30, 2017 and December 31, 2016, respectively.
Going Forward
The illiquidity and continuing losses suffered by ECC-C led to its sale to the Mancls in exchange for their shares in the Company. This allows the Company to potentially acquire another business operation, which hopefully will have a greater potential for profitability. The Company will still need to convert, extend or otherwise renegotiate the terms of the Debentures and other financings described above. The Company is relying upon the limited funds provided from shareholders to continue to operate as a public company in good standing while we look for a target business. The Company anticipates that any acquisition with a target company will be consummated primarily through the issuance of the Company's shares of stock, as we do not have sufficient cash to use for such purposes.
We will need to seek additional funding for our operations and ongoing general and administrative expenses. Our current plan is to identify and evaluate industries and business opportunities in order to identify a suitable acquisition target for the Company. We cannot give any assurance that we will be successful in this effort or that if a suitable acquisition target is obtained, it will result in profitable operations nor can we give any assurances that we will obtain adequate funding to stay in business until a suitable acquisition target is identified.
Off-Balance Sheet Arrangements
As of September 30, 2017, we did not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable to smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures and Changes in Internal Controls
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Interim Chief Financial Officer and Interim Chief Executive Officer as appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.
As of September 30, 2017, our management, with the participation of our Interim Chief Executive Officer and Interim Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act. Based on this evaluation, the Interim Chief Financial Officer and Interim Chief Executive Officer concluded that the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure because of the material weakness relating to internal controls that are described in Item 9A of the Company’s Form 10-K for the year ended December 31, 2016, filed April 17, 2017.
Notwithstanding the material weaknesses that existed as of September 30, 2017, our Interim Chief Financial Officer and Interim Chief Executive Officer concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the financial position, results of operations and cash flows of the Company and its subsidiaries in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.