The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.
The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
Prior to December 30, 2008, we were a development stage company that sought to market and sell a natural energy drink derived from coconut water to distributors of soft drinks in Israel. On December 30, 2008, we completed a reverse merger, pursuant to which we merged with and into a private company, IX Energy, with IX Energy being the surviving company. In connection with this reverse merger, we discontinued our former business and succeeded to the business of IX Energy as our sole line of business. Since IX Energy acquired a controlling voting interest, it was deemed the accounting acquirer, while we were deemed the legal acquirer. The historical financial statements of the Company are those of IX Energy and of the consolidated entities from the date of merger and subsequent. All costs associated with the reverse merger were expensed as incurred.
IX Energy was incorporated in the State of Delaware on March 3, 2006 for the purpose of designing, manufacturing and installing high-performance solar electric power technologies. Historically, our operations have principally involved the integration and installation of solar power systems manufactured by third parties. However, in an effort to become a vertically integrated solar products and services company that manufactures, designs, markets and installs its own solar power systems, we have recently entered into an agreement to manufacture solar modules that will be marketed primarily to federal military and civilian agencies.
Our margin on the resale of solar panels was approximately 19.41% for the three months ended March 31, 2009. We expect our margins to increase going forward as we now have a more stable arrangement with our suppliers.
Our margin on our construction in progress contracts for the three months ended March 31, 2009 was approximately 19.66% as compared to (41.60%) for the three months ended March 31, 2008. We believe that our margin in 2009 is representative of our contracts going forward.
Operating Expenses
. During the three months ended March 31, 2009, we recorded operating expenses of $5,201,426, as compared to operating expenses of $85,232 for the three months ended March 31, 2008, representing an increase of $5,116,194. This increase in operating expenses was primarily due to increased hiring in 2009 for our management and administrative team, consulting fees related to IR consulting agreements, and common stock issued for long-term compensation.
Loss from Operations
. During the three months ended March 31, 2009, we recorded an operating loss of $4,844,184, as compared to an operating loss of $94,192 for the three months ended March 31, 2008, representing an increase of $4,749,992. This increase in loss from operations was primarily due to increased operation expenses by $5,116,194 that was partially offset by our gross profit in 2009.
Provision for Income Taxes
. We did not recognize any provisions for income taxes during the three months ended March 31, 2009 or 2008 due to our net losses during these periods and the valuation allowances on the resulting deferred tax assets.
Liquidity and Capital Resources
We have historically met our liquidity requirements from a variety of sources, including the sale of equity and debt securities to related parties and institutional investors. Based on our strategy and the anticipated growth in our business, we believe that our liquidity needs will increase. The amount of such increase will depend on many factors, including building out our management team, the costs associated with the fulfillment of our projects, whether we upgrade our technology, and the amount of inventory required for our expanding business. We believe that we have sufficient cash to fund our operations for the next twelve months.
Although we recently raised an aggregate of $3.475 million in a private placement, our ultimate success may depend upon our ability to raise additional capital. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us.
We may be required to pursue sources of additional capital through various means, including joint venture projects and debt or equity financings. Future financings through equity investments are likely to be dilutive to existing stockholders.
Our ability to obtain needed financing may be impaired by such factors as the capital markets, both generally and specifically in the renewable energy industry, and the fact that we are not profitable, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.
Cash and Cash Equivalents. As of March 31, 2009, we had cash and cash equivalents of $2,352,807, as compared to cash and cash equivalents of $4,736,812 as of December 31, 2008.
Net Cash Provided By Operating Activities. Net cash used in operating activities totaled $2,396,683 for the three months ended March 31, 2009, as compared to cash used of $81,471 for the three months ended March 31, 2008. This increase was primarily due to issuance of common stock for consulting services of $539,760, common stock issued to employees for services rendered of $3,675,302, employee stock-based compensation of $284,259, an increase in accrued interest payable to a related party of $24,771, accrued interest payable of $6,165, consultant stock-based compensation of $2,100, depreciation expense of $2,426, and amortization of debt issue costs of $1.988. The increase in net cash used in operating activities was partially offset by our net loss of $4,859,279, and decreases in deferred revenue of $1,796,238, accounts payable and accrued expenses of $128,794, an increase in cost and estimated earnings in excess of billings on uncompleted contracts of $8,659, and an
increase in prepaid expenses of $140,484. For the three months ended March 31, 2008, our net cash used in operating activities of $81,471 was comprised of primarily net loss of $100,863, offset by a decrease in accounts receivable of $7,261, an increase in accounts payable and accrued expenses of $5,460 and accrued interest payable of $6,671.
Net Cash Used in Investing Activities. Net cash used in investing activities totaled $260,547 during the three months ended March 31, 2009, as compared to net cash used in investing activities of $51,930 during the three months ended March 31, 2008. Cash used in investing activities during the three months ended March 31, 2009 was comprised of purchases of property and equipment for $260,547. For the three months ended March 31, 2008, our net cash used in investing activities was comprised of $51,930 that was due from an affiliate.
Net Cash Provided By Financing Activities.
Net cash provided by financing activities totaled $273,225 during the three months ended March 31, 2009, as compared to net
cash of zero from financing activities during the three months ended March 31, 2008. The proceeds for the three months ended
March 31, 2009 were derived from proceeds from common stock for cash in a private placement totaling $725,000. This was partially offset by
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repayment of notes payable of $250,000 to a related party and cash paid as direct offering costs of $201,775 related to the proceeds raised in the private placement. For the three months ended March 31, 2008, our cash provided by financing activities was comprised of $50,000 of advances made by a related party, and this was offset by repayment of $50,000 to that related party.
Going Concern
As reflected in the accompanying financial
statements, the Company has a net loss of $4,859,279 and net cash used in operations of $2,396,683 for
the three months ended March 31, 2009; and had a working capital deficit of $70,325, and an accumulated
deficit of $6,331,044 at March 31, 2009.
The ability of the Company to continue its
operations is dependent on management’s plans, which include the raising of capital through debt and/or
equity markets with some additional funding from other traditional financing sources, including term
notes, until such time that funds provided by operations are sufficient to fund working capital
requirements.
The Company believes its current available cash,
along with anticipated revenues, may be insufficient to meet its cash needs for the near future. There
can be no assurance that financing will be available in amounts or terms acceptable to the Company, if
at all. The Company may require additional funding to finance the growth of its current and expected
future operations, as well as to achieve its strategic objectives. The Company believes that the further
implementation of its business plan will provide future positive cash flows.
Critical Accounting Policies and Estimates
We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are disclosed throughout this section where such policies affect our reported and expected financial results. Our preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Significant estimates for the three months ended March 31, 2009 and the year ended December 31, 2008 included management’s estimate for recording costs and estimated earnings in excess of billings, estimating the loss on uncompleted contracts in the period when known, and a 100% valuation allowance for deferred taxes due to the Company’s continuing and expected future losses.
Accounts Receivable.
Accounts receivable represents trade obligations from customers that are subject to normal trade collection terms, without discounts, however, in certain cases we are entitled to rebates upon the completion of certain jobs post installation. The Company periodically evaluates the collectability of its accounts receivable and considers the need to adjust an allowance for doubtful accounts based upon historical collection experience and specific customer information. Actual amounts could vary from the recorded estimates. We have determined that as of March 31, 2009 and December 31, 2008 no allowance was required.
At both March 31, 2009 and December 31, 2008, the Company had a concentration of accounts receivable from one customer totaling 100%. For the three months ended March 31, 2009 and 2008, the Company had a concentration of sales with one customer totaling 98% and 0%.
Revenue Recognition
. We follow the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" ("SAB 104") for revenue recognition and we record revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the product is delivered and installed, (3) the sales price to the customer is fixed or determinable and (4) collectability of the related customer receivable is reasonably assured. We have two methods of revenue recognition. For our construction contracts, we record revenues based upon the use of the percentage of completion method. For certain energy products that we resell to third parties, we record revenue based upon the shipment date.
Share-Based Compensation.
We follow Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004), “Share-Based Payment,” (“SFAS 123R”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including grants of employee stock options based on estimated fair values. We have used the Black-Scholes option pricing model to estimate grant date fair value for all option grants. The assumptions we use in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As such, as we use different assumptions based on a change in factors, our stock-based compensation expense could be materially different in the future.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A
ITEM 4T. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
. Under the supervision and with the participation of our management, including our President, Chief Financial Officer and Secretary, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our President, Chief Financial Officer and Secretary concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and
(ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control Over Financial Reporting.
During the most recent quarter ended March 31, 2009, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business.
A complaint was filed in the Supreme Court of the State of New York by a vendor seeking to recover the sum of $101,820, plus costs and disbursements. The Company believes this complaint is without merit. As of March 31, 2009, the Company has accrued $29,900 based on actual invoices received from this vendor.
A complaint was filed in the Supreme Court of the State of New York by the holder of a promissory note seeking a summary judgment for repayment of the noteholder’s $150,000 original investment plus interest. The Company believes this complaint is without merit.
ITEM 1A. RISK FACTORS.
N/A
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended March 31, 2009, we issued and sold 1,812,500 shares of common stock for proceeds of $725,000. In addition, we issued 526,738 shares of common stock to consultants for services rendered in the amount of $539,759. In connection with the issuance of such shares, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
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