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8-K/A - CASITA ENTERPRISES, INC. - Beam Global | casita_8ka-021210.htm |
Envision
Solar International, Inc. and Subsidiaries
Consolidated
Financial Statements
December
31, 2009 and 2008
Envision
Solar International, Inc. and Subsidiaries
Table of
Contents
Page
(s)
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated
Balance Sheets
|
F-2
|
Consolidated
Statements of Operations
|
F-3
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit)
|
F-4
|
Consolidated
Statements of Cash Flows
|
F-5
|
Notes
to Consolidated Financial Statements
|
F-6
– F-25
|
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders of:
Envision
Solar International, Inc.
We have
audited the accompanying consolidated balance sheets of Envision Solar
International, Inc. and Subsidiaries as of December 31, 2009 and 2008 and the
related consolidated statements of operations, changes in stockholders’ equity
(deficit), and cash flows for each of the two years in the period ended December
31, 2009. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Envision Solar International, Inc.
and Subsidiaries as of December 31, 2009 and 2008 and the consolidated results
of its operations and its cash flows for each of the two years in the period
ended December 31, 2009 in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company reported a net loss of
$4,267,310 and $9,595,342 in 2009 and 2008, respectively, and used cash for
operating activities of $274,876 and $2,898,044 in 2009 and 2008,
respectively. At December 31, 2009, the Company had a working capital
deficiency, stockholders’ deficit and accumulated deficit of $2,917,304,
$2,672,399 and $17,432,116, respectively. These matters raise
substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans as to these matters are also described in
Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ SALBERG
& COMPANY, P.A.
SALBERG
& COMPANY, P.A.
Boca
Raton, Florida
March 30,
2010
F-1
Envision
Solar International, Inc. and Subsidiaries
Consolidated
Balance Sheets
December
31,
|
||||||||
2009
|
2008
|
|||||||
Assets | ||||||||
Current
Assets
|
||||||||
Cash
|
$ | 23,207 | $ | 3,083 | ||||
Accounts
Receivable, net
|
13,596 | 173,798 | ||||||
Prepaid
and other current asset
|
96,438 | 70,663 | ||||||
Total
Current Assets
|
133,241 | 247,544 | ||||||
Property
and Equipment, net
|
241,748 | 359,098 | ||||||
Other
Assets
|
||||||||
Deposits
|
3,157 | 33,390 | ||||||
Total
Other Assets
|
3,157 | 33,390 | ||||||
Total
Assets
|
$ | 378,146 | $ | 640,032 | ||||
Liabilities and Stockholders' Equity (Deficit) | ||||||||
Current
Liabilities
|
||||||||
Accounts
Payable
|
$ | 1,092,549 | $ | 990,357 | ||||
Accounts
Payable - Related Parties
|
36,216 | 41,374 | ||||||
Accrued
Expenses
|
387,982 | 58,990 | ||||||
Accrued
Rent
|
268,000 | - | ||||||
Sales
Tax Payable
|
36,826 | 36,828 | ||||||
Billings
in excess of costs on uncompleted contracts
|
140,296 | 56,831 | ||||||
Note
Payable - Related Party
|
34,246 | 18,700 | ||||||
Convertible
Notes Payable
|
1,054,430 | 591,771 | ||||||
Deferred
Revenue
|
- | 3,000 | ||||||
Total
Current Liabilities
|
3,050,545 | 1,797,851 | ||||||
Commitments
and Contingencies (Note 10)
|
||||||||
Stockholders'
Equity (Deficit)
|
||||||||
Common
Stock, $0.001 par value, 50,000,000 shares authorized, 26,000,000
and
25,694,571
shares issued and outstanding at December 31, 2009 and 2008,
respectively
|
26,000 | 25,695 | ||||||
Additional
Paid-in-Capital
|
14,733,717 | 11,981,292 | ||||||
Accumulated
Deficit
|
(17,432,116 | ) | (13,164,806 | ) | ||||
Total
Stockholders' Equity (Deficit)
|
(2,672,399 | ) | (1,157,819 | ) | ||||
Total
Liabilities and Stockholders' Equity (Deficit)
|
$ | 378,146 | $ | 640,032 |
The
Accompanying notes are an integral part of these Consolidated Financial
Statements
F-2
Envision
Solar International, Inc. and Subsidiaries
Consolidated
Statements of Operations
Year Ended Dec. 31, | ||||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 968,668 | $ | 2,418,391 | ||||
Cost
of Revenues
|
726,043 | 2,895,464 | ||||||
Gross
Profit (Loss)
|
242,625 | (477,073 | ) | |||||
Operating
Expenses (including stock based compensation expense
of $2,352,730 for the year ended December 31, 2009 and $4,353,912 for the year ended December 31, 2008) |
3,929,864 | 9,076,473 | ||||||
Loss
From Operations
|
(3,687,239 | ) | (9,553,546 | ) | ||||
Other
Income (Expense)
|
||||||||
Interest
Expense
|
(576,853 | ) | (32,376 | ) | ||||
Total
Other Income (Expense)
|
(576,853 | ) | (32,376 | ) | ||||
Income
(Loss) Before Income Tax
|
(4,264,092 | ) | (9,585,922 | ) | ||||
Income
Tax Expense
|
3,218 | 9,420 | ||||||
Net
Loss
|
$ | (4,267,310 | ) | $ | (9,595,342 | ) | ||
Net
Loss Per Share- Basic and Diluted
|
$ | (0.17 | ) | $ | (0.39 | ) | ||
Weighted
Average Shares Outstanding- basic and diluted
|
$ | 25,845,088 | $ | 24,605,770 |
The
Accompanying notes are an integral part of these Consolidated Financial
Statements
F-3
Envision
Solar International Inc. and Subsidiaries
Consolidated
Statements of Changes of Stockholders' Equity (Deficit)
Years
Ended December 31, 2009 and 2008
Common
Stock
|
Additional
|
Accumulated
|
||||||||||||||||||
Stock
|
Amount
|
Paid-in-Capital
|
Deficit
|
Total
|
||||||||||||||||
Balance
at December 31, 2007
|
23,325,638 | $ | 23,326 | $ | 3,950,803 | $ | (3,569,464 | ) | $ | 404,665 | ||||||||||
Value
of options issued to seller of company acquired
|
- | - | 1,157,676 | - | 1,157,676 | |||||||||||||||
Value
of stock issued to seller of company acquired
|
305,429 | 305 | 99,695 | - | 100,000 | |||||||||||||||
Value
of options granted to reduce the outstanding liabilities from certain
vendors
|
- | - | 14,994 | - | 14,994 | |||||||||||||||
Common
stock issued for cash
|
2,055,870 | 2,056 | 2,690,388 | - | 2,692,444 | |||||||||||||||
Capital
raising fees
|
- | - | (296,168 | ) | - | (296,168 | ) | |||||||||||||
Stock
Option Expense
|
- | - | 4,353,912 | - | 4,353,912 | |||||||||||||||
Stock
issued for services
|
7,634 | 8 | 9,992 | - | 10,000 | |||||||||||||||
Net
Loss - 2008
|
- | - | - | (9,595,342 | ) | (9,595,342 | ) | |||||||||||||
Balance
at December 31, 2008
|
25,694,571 | $ | 25,695 | $ | 11,981,292 | $ | (13,164,806 | ) | $ | (1,157,819 | ) | |||||||||
Stock
issued as loan extension fee
|
305,429 | 305 | 399,695 | - | 400,000 | |||||||||||||||
Stock
Option Expense
|
- | - | 2,352,730 | - | 2,352,730 | |||||||||||||||
Net
Loss - 2009
|
- | - | - | (4,267,310 | ) | (4,267,310 | ) | |||||||||||||
Balance
at December 31, 2009
|
26,000,000 | $ | 26,000 | $ | 14,733,717 | $ | (17,432,116 | ) | $ | (2,672,399 | ) |
The
Accompanying notes are an integral part of these Consolidated Financial
Statements
F-4
Envision
Solar International, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
Year End December 31, | ||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
Loss
|
$ | (4,267,310 | ) | $ | (9,595,342 | ) | ||
Adjustments
to Reconcile Net loss to Net Cash Used in Operating
Activities
|
||||||||
Amortization
of prepaid interest
|
- | 32,108 | ||||||
Depreciation
and Amortization
|
82,118 | 52,105 | ||||||
Loss
on Abandonment of Leasehold
|
35,232 | - | ||||||
Bad
Debt Expense (Recovery)
|
(68,421 | ) | 105,955 | |||||
Goodwill
Impairment
|
1,358,254 | |||||||
Common
stock issued for services or loan extension fee
|
400,000 | 10,000 | ||||||
Trademark
Impairment
|
68,827 | |||||||
Stock
option expense
|
2,352,730 | 4,353,912 | ||||||
Officer
Reimbursable payable
|
15,546 | |||||||
Changes
in assets and liabilities
|
||||||||
(Increase)
decrease in:
|
||||||||
Accounts
Receivable
|
228,623 | (219,484 | ) | |||||
Prepaid
Expenses and other current assets
|
74,225 | 86,068 | ||||||
Deposits
|
30,233 | (14,150 | ) | |||||
Increase
(decrease) in:
|
||||||||
Accounts
Payable
|
102,192 | 806,984 | ||||||
Accounts
Payable - related party
|
(5,158 | ) | 25,395 | |||||
Accrued
Expenses
|
396,649 | (2,635 | ) | |||||
Accrued
Rent
|
268,000 | - | ||||||
Sales
Tax Payable
|
- | 36,828 | ||||||
Billings
in excess of costs on uncompleted contracts
|
83,465 | 56,831 | ||||||
Deferred
Revenue
|
(3,000 | ) | (59,700 | ) | ||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(274,876 | ) | (2,898,044 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Cash
paid in Acquisition
|
- | (9,000 | ) | |||||
Purchase
of Trademark
|
- | (71,200 | ) | |||||
Purchase
of Equipment
|
- | (181,402 | ) | |||||
NET
CASH USED IN INVESTING ACTIVITIES
|
- | (261,602 | ) | |||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Sale
of Common Stock
|
- | 2,692,444 | ||||||
Capital
Raising costs
|
- | (296,168 | ) | |||||
Proceeds
from Issuance of notes payable
|
295,000 | 490,000 | ||||||
Proceeds
from notes payable from - shareholders
|
- | 18,700 | ||||||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
295,000 | 2,904,976 | ||||||
NET
INCREASE (DECREASE) IN CASH
|
20,124 | (254,670 | ) | |||||
CASH
AT BEGINNING OF YEAR
|
3,083 | 257,753 | ||||||
CASH
AT END OF YEAR
|
$ | 23,207 | $ | 3,083 | ||||
Supplemental
Disclosure of Cash Flow Information:
|
||||||||
Cash
Paid for:
|
||||||||
Interest
|
$ | - | $ | 102,009 | ||||
Income
Tax
|
$ | 3,218 | $ | 9,420 | ||||
Supplemental
Disclosure of Non-Cash Investing and Financing Activities:
|
||||||||
Stock-
based fees paid for acquisition
|
$ | - | $ | 1,257,676 | ||||
Conversion
of Accounts Payable to Common Stock
|
$ | - | $ | 14,994 | ||||
Original
Issue Discount on Note
|
$ | - | $ | 101,771 | ||||
Rent
Prepaid with a promissory note
|
$ | 100,000 | $ | - | ||||
Accrued
interest converted to note payable
|
$ | 67,659 | $ | - |
The
Accompanying notes are an integral part of these Consolidated Financial
Statements
F-5
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
1.
|
NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
CORPORATE
ORGANIZATION
The
Company was incorporated on June 12, 2006 as a limited liability company
(“LLC”), under the name Envision Solar, LLC. In September 2007, the
Company was reorganized as a California C Corporation and issued one share of
common stock for each outstanding member unit in the LLC. The change
in capitalization to common stock from member equity has been retrospectively
applied to all periods presented in the accompanying consolidated financial
statements. Also during 2007, the Company formed various wholly owned
subsidiaries to account for its planned future operations. All
references to “us”, “we”, “our”, “Envision”, “ESII” or “the Company”, refer
to Envision Solar, LLC or the newly formed Corporation and its wholly owned
subsidiaries unless otherwise stated.
In 2007,
the Company established a series of subsidiaries: 1. Envision Energy Group, Inc.
2. Envision Solar Construction Company, Inc. 3. Envision
Solar Design, Inc. 4. Envision Solar Development, Inc.
5. Envision Solar Operation & Management, Inc.
6. Envision Solar Residential, Inc. 7. Envision Solar
Technology, Inc. and 8. Greenshade Network, Inc. In
addition, in 2008, the Company established one other subsidiary, Envision Africa
LLC, a wholly owned LLC. During 2008, only two were operational, with
Envision Africa LLC anticipated to become operational in the
future. The remaining subsidiaries were dissolved with the Secretary
of State of California in 2008. The two operational subsidiaries
included in these consolidated financial statements are: Envision
Solar Residential, Inc. and Envision Solar Construction Company,
Inc.
On
February 11, 2010, the Company was acquired by an inactive publicly-held company
in a transaction treated as a recapitalization of the Company. The
effects of the recapitalization have been retrospectively applied to all periods
presented in the accompanying consolidated financial statements and footnotes.
(See Note 15)
NATURE
OF OPERATIONS
The
Company is a solar project and technology developer providing turn-key
design/build solutions for commercial, industrial, institutional and residential
projects. Founded by award-winning sustainable design architects with
extensive international business development and industrial design expertise,
the Company strives to be first-to-market and the leading worldwide brand in
solar parking arrays. The Company has two lines of business,
ParkSolarSM for
commercial, industrial and government projects, and LifeSystemsSM for
residential and light commercial products and projects. Both groups
have envisioned, invented and engineered the leading next generation, patent
pending, “solar integrated building systems™” (SIBS™) which are providing the
foundation for the lowest cost, most highly engineered solutions available for
the massive future worldwide market for solar parking array
installations.
The
Company’s business model includes vertical integration of all key capabilities
required for the full, turn-key “single-point-of-contract™” implementation of
each project. These capabilities include project planning and
management, design, construction, operations and maintenance, and structured
finance. The Company is continuing to secure its position as the key
participant at the convergence of solar energy and the real estate and building
industry.
The
Company operates with the following trade names: ParkSolarSM:
Commercial Scale Solar Parking Arrays, LifeSystemsSM:
Residential Component-Based Solar Integrated Buildings, and GreenShade.SM
PRINCIPALS
OF CONSOLIDATION
The
consolidated financial statements include the accounts of Envision Solar
International, Inc. and its wholly-owned subsidiaries. All
significant inter-company balances and transactions have been eliminated in the
consolidation.
F-6
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
USE
OF ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates in the accompanying consolidated
financial statements include the allowance for doubtful accounts receivable,
depreciable lives of property and equipment, fair value allocation in an
acquisition, valuation of goodwill and trademarks, valuation of accrued rent,
valuation of share-based payments, valuation of accrued loss contingencies and
the valuation allowance on deferred tax assets.
CONCENTRATIONS
Concentration of Credit
Risk
Financial instruments that
potentially subject us to concentrations of credit risk consist of cash and
accounts receivable.
The Company maintains its cash in
bank and financial institution deposits that at times may exceed federally
insured limits. The Company has not experienced any losses in such
accounts from inception through December 31, 2009. As of December 31, 2009 and
2008, there were no amounts greater than the federally insured
limits.
Concentration of Accounts
Receivable
At December 31, 2009 and 2008,
customers that each accounted for more than 10% of our gross accounts receivable
individually were as follows:
2009
|
2008
|
|
Customer
1
|
35%
|
28%
|
Customer
2
|
18%
|
24%
|
Customer
3
|
16%
|
14%
|
Concentration of
Revenues
For the year ended December 31, 2009
and 2008, customers that each represented more than 10% of our net revenues were
as follows:
2009
|
2008
|
|
Customer
A
|
26%
|
50%
|
Customer
B
|
17%
|
29%
|
Customer
C
|
16%
|
20%
|
Customer
D
|
14%
|
-
|
Customer
E
|
13%
|
-
|
CASH
AND CASH EQUIVALENTS
For the
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less when
purchased to be cash equivalents. There were no cash equivalents at
December 31, 2009 or 2008.
F-7
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
ACCOUNTS
RECEIVABLE
Accounts
receivable are customer obligations due under normal trade
terms. Management reviews accounts receivable on a monthly basis to
determine if any receivables will potentially be
uncollectible. Management’s evaluation includes several factors
including the aging of the accounts receivable balances, a review of significant
past due accounts, our historical write-off experience, net of recoveries and
economic conditions. The Company includes any accounts receivable
balances that are determined to be uncollectible, along with a general reserve,
in its overall allowance for doubtful accounts. After all attempts to
collect a receivable have failed, the receivable is written off against the
allowance.
PROPERTY,
EQUIPMENT AND DEPRECIATION
Property
and equipment is recorded at cost. Depreciation is computed using the
straight-line method based on the estimated useful lives of the related assets
of 5 to 7 years. Leasehold improvements are amortized over the lesser
of the lease term or the useful life of the
improvements. Expenditures for maintenance and repairs along with
fixed assets below our capitalization threshold are expensed as
incurred.
WEBSITE
AND OTHER SOFTWARE DEVELOPMENT COSTS
The
Company accounts for website development costs in accordance with ASC 350-50-25
formerly, EITF Issue No. 00-2, “Accounting for website development
costs”. Additionally, the Company accounts for its computer software
costs in accordance with ASC 350-40-15 formerly Statement of Position No. 98-1,
“Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use” (“SOP 98-1”). The Company also applies SOP 98-1 to its
other software development or purchase costs of software for internal
use. These costs are included in property and equipment in the
accompanying consolidated financial statements.
ASC
350-40-15, requires the expensing of all costs of the preliminary project stage
and the training and application maintenance stage and the capitalization of all
internal or external direct costs incurred during the application development
stage. The Company amortizes the capitalized cost of software
developed or obtained for internal use over an estimated life of five
years.
IMPAIRMENT
OF LONG-LIVED ASSETS
The
Company accounts for long-lived assets in accordance with the provisions of ASC
360-10 formerly, Statement of Financial Accounting Standards (“SFAS”)
No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
REVENUE
AND COST RECOGNITION
Revenues
consist of design fees for the design of solar systems and arrays, and revenues
from sales, construction and installation of the same.
Revenues
from design services are recognized as earned.
F-8
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
Construction
contracts are generally short term (less than one year duration) and revenues
and related costs are recognized using the “completed contract method” of
accounting in accordance with ASC 605-35 formerly, Statement of Position 81-1,
“Accounting for Performance of Construction-Type and Certain Production Type
Contracts”. Under this method, contract costs are accumulated as
deferred assets and billings and/or cash received are recorded to a deferred
revenue liability account, during the periods of construction, but no revenues,
costs, or profits are recognized in operations until the period upon completion
of the contract. Costs include direct material, direct labor and
subcontract labor. A contract is considered complete when all costs
except insignificant items have been incurred and the installation is operating
according to specifications or has been accepted by the
customer. Corporate general and administrative expenses are charged
to the periods as incurred. However, in the event a loss on a
contract is foreseen, the Company will recognize the loss as it is
incurred.
The
deferred asset (accumulated contract costs) in excess of the deferred liability
(billings and/or cash received) is classified as a current asset under costs in
excess of billings on uncompleted contracts. The deferred liability
(billings and/or cash received) in excess of the deferred asset (accumulated
contract costs) is classified under current liabilities as billings in excess of
costs on uncompleted contracts. Contract retentions are included in
accounts receivable.
The
Company includes shipping and handling fees billed to customers as revenues and
shipping and handling costs as cost of revenues. The Company does not
provide any warranties on its products other than those passed on to its
customers from its manufacturers, if any.
Additionally,
the Company follows the guidance of ASC 605-50 formerly, Emerging Issues Task
Force (EITF) Issue 01-9 “Accounting for Consideration Given by a Vendor to a
Customer” and ASC 605-50 formerly (EITF) Issue 02-16 “Accounting by a
Customer (Including a Reseller) for Certain Considerations Received from
Vendors.” Accordingly, any incentives received from vendors are
recognized as a reduction of the cost of products. Cash incentives
provided to our customers are recognized as a reduction of the related sale
price, and therefore, are a reduction in sales.
RESEARCH
AND DEVELOPMENT
In
accordance with ASC 730-10 formerly, Statement of Financial Accounting Standards
No. 2, “Accounting for Research and Development Costs” expenditures for
research and development of the Company’s products are expensed when incurred,
and are included in operating expenses. The Company recognized
research and development costs of $5,926 for the year ending December 31, 2009
and $127,337 for the year ending December 31, 2008.
ADVERTISING
The
Company conducts advertising for the promotion of its products and
services. In accordance with ASC 720-35 formerly, SOP 93-7,
advertising costs are charged to operations when incurred; such amounts
aggregated $33,777 in 2009 and $18,845 in 2008.
STOCK-BASED
COMPENSATION
At
inception, the Company adopted ASC 718 formerly, SFAS No. 123(R), “Share
Based Payment” and related interpretations. SFAS No. 123(R) requires
companies to estimate and recognize the fair value of stock-based awards to
employees and directors. The value of the portion of an award that is
ultimately expected to vest is recognized as an expense over the requisite
service periods using the straight-line attribution method.
The
Company estimated the fair value of each stock option at the grant date by using
the Black-Scholes option pricing model.
F-9
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
INCOME
TAXES
Prior to
September 12, 2007, the Company operated as an LLC and thus had no income tax
exposure. Effective September 12, 2007, the Company accounts for
income taxes pursuant to the provisions of ASC 740 formerly, SFAS No. 109,
“Accounting for Income Taxes,” which requires, among other things, an asset and
liability approach to calculating deferred income taxes. The asset
and liability approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and
liabilities. A valuation allowance is provided to offset any net
deferred tax assets for which management believes it is more likely than not
that the net deferred asset will not be realized.
Beginning
September 12, 2007, the Company adopted the provisions of ASC 740-10 formerly,
the FASB’s Financial Interpretation Number 48 (FIN 48), Accounting for Uncertain Income Tax
Positions. When tax returns are filed, it is highly certain
that some positions taken would be sustained upon examination by the taxing
authorities, while others are subject to uncertainty about the merits of the
position taken or the amount of the position that would be ultimately
sustained. In accordance with the guidance of FIN 48, the benefit of
a tax position is recognized in the financial statements in the period during
which, based on all available evidence, management believes it is more likely
than not that the position will be sustained upon examination, including the
resolution of appeals or litigation processes, if any. Tax positions
taken are not offset or aggregated with other positions. Tax
positions that meet the more-likely-than-not recognition threshold are measured
as the largest amount of tax benefit that is more than 50 percent likely of
being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions
taken that exceeds the amount measured as described above should be reflected as
a liability for unrecognized tax benefits in the accompanying balance sheets
along with any associated interest and penalties that would be payable to the
taxing authorities upon examination. The Company believes its tax
positions are all highly certain of being upheld upon examination. As
such, the Company has not recorded a liability for unrecognized tax
benefits. As of December 31, 2009, tax years 2007, 2008 and 2009
remain open for IRS audit. The Company has received no notice of
audit from the IRS for any of the open tax years.
Effective
September 12, 2007, the Company adopted ASC 740-10-05 formerly, FASB Staff
Position FIN 48-1, Definition
of Settlement in FASB Interpretation No. 48, (“FSP FIN 48-1”), which
was issued on May 2, 2007. FSP FIN 48-1 amends FIN 48 to provide
guidance on how an entity should determine whether a tax position is effectively
settled for the purpose of recognizing previously unrecognized tax
benefits. The term “effectively settled” replaces the term
“ultimately settled” when used to describe recognition, and the terms
“settlement” or “settled” replace the terms “ultimate settlement” or “ultimately
settled” when used to describe measurement of a tax position under FIN
48. FSP FIN 48-1 clarifies that a tax position can be effectively
settled upon the completion of an examination by a taxing authority without
being legally extinguished. For tax positions considered effectively
settled, an entity would recognize the full amount of tax benefit, even if the
tax position is not considered more likely than not to be sustained based solely
on the basis of its technical merits and the statute of limitations remains
open. The adoption of FSP FIN 48-1 did not have an impact on the
accompanying consolidated financial statements.
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
Basic net
loss per share is computed by dividing the net loss by the weighted average
number of common shares outstanding during the period. Diluted net
loss per common share is computed by dividing the net loss by the weighted
average number of common shares outstanding for the period and, if dilutive,
potential common shares outstanding during the period. Potentially
dilutive securities consist of the incremental common shares issuable upon
exercise of common stock equivalents such as stock options and convertible debt
instruments. Potentially dilutive securities are excluded from the
computation if their effect is anti-dilutive. As of December 31, 2009
there were options and warrants outstanding to purchase 13,147,201 and 168,383,
respectively, common shares which may dilute future earnings per
share. Due to the net loss in 2009 and 2008, basic and diluted net
loss per share amounts are identical.
F-10
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
CONTINGENCIES
Certain
conditions may exist as of the date the consolidated financial statements are
issued, which may result in a loss to the Company, but which will only be
resolved when one or more future events occur or fail to
occur. Company management and its legal counsel assess such
contingent liabilities, and such assessment inherently involves an exercise of
judgment. In assessing loss contingencies related to legal
proceedings that are pending against the Company or unasserted claims that may
result in such proceedings, the Company's legal counsel evaluates the perceived
merits of any legal proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought
therein. If the assessment of a contingency indicates that it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated, then the estimated liability would be accrued in the
Company's financial statements. If the assessment indicates that a
potentially material loss contingency is not probable but is reasonably
possible, or is probable but cannot be reasonably estimated, then the nature of
the contingent liability, together with an estimate of the range of possible
loss if determinable would be disclosed. The Company does not include
legal costs in its estimates of amounts to accrue.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
We
measure our financial assets and liabilities in accordance with accounting
principles generally accepted in the United States of America. For
certain of our financial instruments, including cash, accounts receivable,
accounts payable, accrued expenses and short term loans the carrying amounts
approximate fair value due to their short maturities.
Effective
January 1, 2008, we adopted accounting guidance for financial assets and
liabilities (ASC 820). The adoption did not have a material impact on
our results of operations, financial position or liquidity. This
standard defines fair value, provides guidance for measuring fair value and
requires certain disclosures. This standard does not require any new
fair value measurements, but rather applies to all other accounting
pronouncements that require or permit fair value measurements. This
guidance does not apply to measurements related to share-based
payments. This guidance discusses valuation techniques, such as the
market approach (comparable market prices), the income approach (present value
of future income or cash flow), and the cost approach (cost to replace the
service capacity of an asset or replacement cost). The guidance
utilizes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The
following is a brief description of those three levels:
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, either directly or
indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or similar assets
or liabilities in markets that are not active.
Level
3: Unobservable inputs in which little or no market data exists, therefore
developed using estimates and assumptions developed by us, which reflect those
that a market participant would use.
On
January 1, 2008, we adopted a newly issued accounting standard for fair value
measurements of all non-financial assets and liabilities not recognized or
disclosed at fair value in the consolidated financial statements on a recurring
basis.
We
currently measure and report at fair value our intangible assets which are
non-financial assets. The fair value of intangible assets including
goodwill has been determined using the present value of estimated future cash
flows method. The Company could not project positive cash flow for
valuation purposes related to goodwill and trademarks and therefore recorded
100% impairment in 2009. The following table summarizes our financial
assets and liabilities measured at fair value on a recurring basis as of
December 31, 2009 (in thousands):
Balance
at December 31, 2009
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
other Observable
Inputs
|
Significant
Unobservable Inputs
|
|||||||||||||
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||||
Assets:
|
||||||||||||||||
Goodwill
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Trademarks
|
- | - | - | - | ||||||||||||
Total
Non-Financial Assets
|
$ | - | $ | - | $ | - | $ | - |
F-11
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
Following is a summary of activity for
assets measured under level 3 through December 31, 2008 of the fair value of
intangible assets:
Balance
at December 31, 2007
|
$ | - | ||
Cumulative
effect of adoption of accounting principle
|
- | |||
Balance
at January 1, 2008
|
- | |||
Fair
value recorded for goodwill
|
1,358,254 | |||
Fair
value recorded for trademarks
|
71,200 | |||
Amortization
of trademarks
|
(2,373 | ) | ||
Change
in fair value included in net loss
|
(1,427,081 | ) | ||
Ending
balance at December 31, 2008
|
$ | - |
There was no activity for level 3
assets during 2009.
RECENT
ACCOUNTING PRONOUNCEMENTS
In May 2009, the Financial Accounting
Standards Board (“FASB”) issued an accounting standard that became part of ASC
Topic 855, “Subsequent Events”. ASC Topic 855 establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. ASC Topic 855 sets forth (1) the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, (2) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements and (3) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. ASC Topic 855 is effective for interim or annual financial
periods ending after June 15, 2009. The adoption of ASC Topic 855 did
not have a material effect on the Company’s consolidated financial
statements.
In June
2009, the FASB issued an accounting standard whereby the FASB Accounting
Standards Codification (“Codification” or “ASC”) will be the single source of
authoritative nongovernmental U.S. generally accepted accounting
principles. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. ASC Topic 105 is effective for interim and annual
periods ending after September 15, 2009. All existing accounting
standards are superseded as described in ASC Topic 105. All other
accounting literature not included in the Codification is
non-authoritative. The Codification is not expected to have a
significant impact on the Company’s consolidated financial
statements. The accompanying consolidated financial statements
contain references to both new codification and prior to ease the
transition.
RECLASSIFICATIONS
Certain
amounts in the 2008 consolidated financial statements have been reclassified to
conform to the 2009 presentation.
2.
|
GOING
CONCERN
|
As
reflected in the accompanying consolidated financial statements for the year
ended December 31, 2009 and 2008, the Company had net losses of $4,267,310 and
$9,595,342, respectively, and cash used in operations of $274,876 and
$2,898,044, respectively. Additionally, at December 31, 2009, the
Company had a working capital deficit, stockholders’ deficit and accumulated
deficit of $2,917,304, $2,672,399 and $17,432,116, respectively. The
Company received funds through private offerings or loans of approximately
$295,000 and $3,200,000 in 2009 and 2008, respectively, before deducting cash
offering costs of $296,168 in 2008. In addition, subsequent to the
December 31, 2009 balance sheet date, management believes that the Company has
not met its expected needs required to support its operations for the next 12
months through December 31, 2010. The ability of the Company to
continue as a going concern is dependent on the Company's ability to raise
additional capital and implement its business plan. The consolidated
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
F-12
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
Pursuant to a plan of merger between
Casita Enterprises and the Company, Envision executed a merger agreement,
subsequent to year-end, whereby it became a wholly-owned subsidiary of Casita
Enterprises. Casita Enterprises is an over-the-counter-bulletin board
listed company whose assets consist principally of cash and other miscellaneous
assets. At the time of merger, which occurred on February 11, 2010,
Casita was expected to hold approximately $200,000 in cash. $30,000
of the amount at closing was sent directly to the Company’s legal firm leaving
the balance of $170,000 for Company operations. Subsequent to year
end the Company entered into a Placement Agency Agreement with Stonegate
Securities, Inc., whereby the Company plans to raise between $1.0 and $3.0
million in equity. Management believes that the actions presently
being taken to obtain additional funding and implement its business plan provide
the opportunity for the Company to continue as a going concern.
3.
|
COSTS
IN EXCESS OF BILLINGS (BILLINGS IN EXCESS OF COSTS) ON UNCOMPLETED
CONTRACTS AND ACCOUNTS RECEIVABLE
|
Costs in excess of billings on
uncompleted contracts represent accumulated contract costs that exceeded
billings and/or cash received on uncompleted contracts.
At December 31, 2009 and 2008, there
were no costs in excess of billings on uncompleted contracts.
Billings in excess of costs on
uncompleted contracts represents billings and/or cash received that exceed
accumulated contract costs on uncompleted contracts.
At December 31, 2009, billings in
excess of costs on uncompleted contracts consisted of the
following:
Billings
and/or cash receipts on uncompleted contract
|
$ | 202,131 | ||
Less:
Uncompleted contract costs
|
(61,835 | ) | ||
Billings
in excess of costs on uncompleted contracts
|
$ | 140,296 |
At December 31, 2008, billings in
excess of costs on uncompleted contracts consisted of the
following:
Billings
and/or cash receipts on uncompleted contract
|
$ | 309,465 | ||
Less:
Uncompleted contract costs
|
(252,634 | ) | ||
Billings
in excess of costs on uncompleted contracts
|
$ | 56,831 |
The Company records accounts receivable
related to its construction contracts and its design services, based on billings
or on amounts due under the contractual terms. Allowance for doubtful
accounts is based upon the Company’s policy. Any amounts considered
recoverable under the customer’s surety bonds are treated as contingent gains
and recognized only when received. Accounts receivable throughout the
year may decrease based on payments received, credits for change orders, or back
charges incurred.
At December 31, 2009 and 2008, accounts
receivable were as follows:
December 31,
2009
|
December 31,
2008
|
|||||||
Accounts
Receivable
|
$ | 48,447 | $ | 277,070 | ||||
Less:
Allowance for doubtful accounts
|
(34,851 | ) | (103,272 | ) | ||||
Accounts
Receivable, Net
|
$ | 13,596 | $ | 173,798 |
Bad debt expense (recovery on bad debt)
for 2009 and 2008 was $(68,421) and $105,955, respectively.
F-13
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
4.
|
PREPAID
EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid
expenses and other current assets are summarized as follows:
December 31,
2009
|
December 31,
2008
|
|||||||
Prepaid
Interest
|
$ | - | $ | 69,633 | ||||
Prepaid
Rent
|
96,438 | - | ||||||
Other
|
- | 1,030 | ||||||
Total
prepaid expenses and other current assets
|
$ | 96,438 | $ | 70,663 |
Prepaid
interest of $69,633 relates to the note payable of $591,771 as the note was
issued at a $101,771 discount. A total of $32,138 of prepaid interest
was amortized to interest expense in 2008 and $69,633 was amortized in
2009. Prepaid rent in 2009 relates to the Company entering into an
agreement on its new premises whereby it issued a $100,000 promissory note to
the landlord for a full year of rent. The portion included above is
the unamortized portion of this rent. Rent expense related to the
prepaid rent was $3,562 for 2009.
5.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consists of the following:
Est.
Useful
Lives
|
December 31,
2009
|
December 31,
2008
|
|||||||
Computer
equipment and software
|
5
years
|
$ | 145,015 | $ | 145,015 | ||||
Furniture
and fixtures
|
7
years
|
197,169 | 197,169 | ||||||
Leasehold
improvements
|
5
years
|
- | 60,399 | ||||||
Office
equipment
|
5
years
|
24,076 | 24,076 | ||||||
Total
property and equipment
|
$ | 366,260 | $ | 426,659 | |||||
Less
accumulated depreciation
|
(124,512 | ) | (67,561 | ) | |||||
Property
and Equipment, Net
|
$ | 241,748 | $ | 259,098 |
Total
depreciation expense for 2009 and 2008 was $82,118 and $49,732,
respectively. In December 2009, the Company vacated it prior office
space and therefore wrote-off the remaining leasehold improvements related to
that office space of $35,233, net of accumulated depreciation, resulting in a
loss on abandonment for the same amount.
F-14
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
6. ACCRUED
EXPENSES
The major
components of accrued expenses are summarized as follows:
December
31,
|
||||||||
2009
|
2008
|
|||||||
Accrued
vacation
|
$ | 73,143 | $ | 42,115 | ||||
Accrued
officer salary
|
285,313 | 16,875 | ||||||
Other
accrued expenses
|
29,529 | - | ||||||
Total
accrued expenses
|
$ | 387,985 | $ | 58,990 |
7. NOTE
PAYABLE - OFFICER
In 2008,
one of the Company’s officers advanced the cost for various expenses on behalf
of the Company. As a result, in June 2008, the Company issued the
shareholder a note in the amount of $18,700. The note bears interest
at 5% and was due and payable with accrued interest on or before May 31,
2009. The note was not paid at maturity and the balance was included
in the $34,246 principal balance of a new note executed in October 2009 and due
December 31, 2009. The officer resigned in November
2009. As of February 2010, this note was in default for payment of
principal and interest. (See Note 13)
8. CONVERTIBLE
NOTES PAYABLE
In
November 2008, the Company entered into a five-month $591,771 promissory note
with Gemini Master Fund, Ltd. (the “holder” or “lender”) as bridge financing to
an equity raise. Under the terms of the note, $101,771 of prepaid
interest was included in the note balance of which $10,000 was a loan
fee. The note bears interest at the rate of 7% annum on the $500,000
net subscription amount, plus a 15% fee on the subscription amount, plus 15% of
the 7% per annum interest (effective interest in approximately 49%) with a
default rate of 20% per annum. The note was due April 11, 2009, is
secured by substantially all assets of the Company and its subsidiaries, and is
unconditionally guaranteed by all the subsidiaries. Under the terms
of the note, the outstanding principal and interest can be converted into equity
at a 10% discount from any reverse merger financing in the event the Company
enters into a “reverse merger” with a publicly traded company.
Subsequent
to December 31, 2008, the note came due and the Company was unable to fulfill
its obligations under the original terms of the note. In April 2009,
the Company and the lender entered into a forbearance agreement, which extended
the due date to December 31, 2009. Under the terms of the forbearance
agreement, the interest rate changed to 15% and the Company issued 305,429
shares of its common stock to the lender in consideration of this
agreement. This was not considered a troubled debt restructure or
debt modification under generally accepted accounting principles. The
shares were valued at the most recent common stock offering and sale price of
$1.31 per share resulting in a $400,000 value, which was recorded as a debt
discount and was to be amortized through the new maturity date of December 31,
2009 but became fully amortized as of October 31, 2009 due to a subsequent debt
modification treated as a debt extinguishment for accounting purposes (see
below). Interest only payments would start being due monthly in
arrears in the first calendar month after which the Company raises $100,000 from
all capital raising transactions.
Interest
expense under this note in 2008 was $32,138 and prepaid interest was $69,633 at
December 31, 2008 and zero at December 31, 2009.
F-15
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
On October 30, 2009, the Company
entered into a second amendment to the loan agreement. This amendment
increases the interest rate at 20% retroactive to April 11, 2009 through October
30, 2009, adjusts the per annum interest to 12% starting November 1, 2009
(default rate of 20%), extends the maturity to December 31, 2010 and adds a
conversion feature to allow conversion at the holder’s option to common stock at
$0.33 per share. The $591,771 note was amended to add accrued
interest of $65,423 to the principal balance resulting in a new principal
balance of $657,194. Additionally, a new second secured note was
issued for $125,000 with proceeds of $117,500, net of issue costs of $7,500,
which was deposited into an escrow account for purposes of the Company paying
expenses for the cost of becoming a publicly held company. On
November 27, 2009 and December 18, 2009, two additional secured notes for
$40,000 and $30,000, respectively, were issued for cash
proceeds. These new notes have the same terms of the amended
note. Interest under both notes is due on the first business day of
each calendar quarter starting January 4, 2010, however, upon three days advance
notice, the Company may elect to add such interest to the note principal balance
effectively making the interest due at note maturity. With regard to
the conversion feature of both notes, the conversion rights contain price
protection whereby if the Company sells equity or converts existing instruments
to common stock at a price less than the $0.33 conversion price, the conversion
price will be adjusted downward to the sale price. Furthermore, if
the Company issues new rights, warrants, options or other common stock
equivalents at an exercise price less than the $0.33 conversion price, then the
conversion price shall be adjusted downward to a new price based on a stipulated
formula. The holder may not convert the debt if it results in the
holder beneficially holding more than 9.9% of the Company common
stock. The holder is subject to a lock-up agreement on the debt and
underlying shares from October 30, 2009 through June 30, 2010. This
October 30, 2009 amendment was considered a debt extinguishment under
generally accepted accounting principles due to the addition of the conversion
feature. The accounting effect was to fully amortize the remaining
debt discount at October 30, 2009, remove the old debt and record the new
debt. The price protection provision does not cause bifurcation and
treatment of the embedded conversion option as a derivative liability because as
of December 31, 2009, the Company was privately held and its stock was not
publicly traded and no market existed. Therefore, the underlying
conversion shares were not easily convertible to cash which is a criteria for
derivative treatment. Furthermore, there was no beneficial conversion
value at the note dates as the conversion price was deemed to be equal to or
greater than the fair value of the common stock. When the common
stock starts to trade in 2010, the Company will evaluate derivative treatment
for these convertible notes.
Subsequent
to the year-end date of December 31, 2009, on January 20, 2010, the Company
entered into a Second Amendment Agreement with Gemini Master Fund, LTD whereby
certain terms of the First Amendment Agreement were modified. Under
the Second Amendment Agreement the conversion price for all previous notes was
reduced from $0.33 to $0.25 per share; the interest payment was extended from
January 4, 2010 to April 1, 2010; and the beneficial ownership percentage was
reduced from 9.9% to 4.9%.
Subsequent
to the year-end date of December 31, 2009, on March 10, 2010, the Company
entered into a new secured note with Gemini Master Fund, LTD, Note No. 5, for
$75,000. The new note bears interest at 12% per annum, payable in
quarterly installments of the accrued and unpaid interest, beginning April 1,
2010, with the note maturing on December 31, 2010. In the event a quarterly
payment is late it incurs a late fee of 20%. The note carries a
conversion feature whereby, the lender at it option may at any time convert this
loan into common stock into $.25 per share.
During
2009, a lender advanced $50,000 in March and $50,000 in September to the
Company. On October 1, 2009, the Company executed a 10% convertible
promissory note for $102,236, which includes the total $100,000 principal
advanced plus $2,236 of accrued interest. This note is due December
31, 2010. This note is convertible to common shares at $0.33 per
share. There was no beneficial conversion feature at the note
date. However, if the Company receives greater than $100,000 debt or
equity financing proceeds, 25% of amount in excess of $100,000 shall be used to
pay down the note. This note is subordinate to the Gemini Master
Funds notes.
On
December 17, 2009, the Company executed a convertible promissory note for
$100,000 to a new landlord in lieu of paying rent for one year for new office
space. The interest is 10% per annum and the note principal and
interest are due on December 18, 2010. However, if the Company
receives greater than $100,000 debt or equity financing proceeds, 25% of amount
in excess of $100,000 shall be used to pay down the note. This note
is subordinate to all existing senior indebtness of the Company. The
note is convertible at $0.33 per share. There was no beneficial
conversion feature at the note date.
F-16
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
The
convertible notes are summarized below for the year ended December
31:
2009
|
2008
|
|||||||
Notes
Payable Gemini
|
$ | 852,194 | $ | 591,771 | ||||
Note
Payable
|
102,236 | - | ||||||
Note
Payable-Rent
|
100,000 | - | ||||||
Total
Notes Payable
|
$ | 1,054,430 | $ | 591,771 |
The weighted average interest rate for
short term notes as of December 31, 2009 was 11.6%.
9.
COMMITMENTS AND CONTINGENCIES
Leases:
On March 26, 2007, the Company entered
into a lease agreement for its corporate office on a month-to-month basis
beginning May 1, 2007, in La Jolla, California. Monthly rent at the
premise is approximately $6,140 per month. Subsequent to December 31,
2007, the Company entered into an amended lease agreement at the same location
in order to expand operations. The new lease had a commencement date
of April 1, 2008 and is for a period of three years with an escalating yearly
base rent beginning at $16,505. During 2009, the Company entered into
litigation with the landlord due to the Company’s default on rental payments and
in December 2009, the Company abandoned the premises. (See Legal
Matters below) The Company vacated these premises and has recognized
the approximately $268,000 present value of the remaining lease obligations as a
liability on its consolidated balance sheet.
In December 2009, the Company entered
into a new 4-year lease for new premises. The lease agreement
includes a $100,000 note payable feature as discussed in Note 8, for the first
year, and then the rent increases each year thereafter.
Future minimum lease payments as
of December 31, 2009 for lease agreements with non-cancelable terms in
excess of one year including the liability in 2010 for the $268,000 discusses
above are as follows:
2010
|
$ | 364,438 | ||
2011
|
101,002 | |||
2012
|
102,846 | |||
2013
|
107,168 | |||
Total
|
$ | 675,454 |
Rent
expense was $405,233 (including the abandonment accrual of $268,000) and
$163,879 for the years ended December 31, 2009 and 2008,
respectively.
Legal Matters:
From time
to time, we may be involved in litigation relating to claims arising out of our
operations in the normal course of business. As of December 31, 2009,
there were no pending or threatened lawsuits that could reasonably be expected
to have a material effect on the results of our operations except for the
following:
In August
2008, the Company received a letter from a contractor asserting that $400,000
was owed resulting from an alleged breach of contract. The Company
denies any liability under the agreement and facts of the assertion and rejected
the claim. No further communications have been had to date and based
on the information available at this time, it is not possible to determine the
possible outcome of this matter.
F-17
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
The
Company is a party to a wrongful termination suit filed by former
employee. The employee was an “at-will” employee under California
employment law. The Plaintiff claims that he was promised a job as
in-house counsel, which never materialized. ESII successfully
demurred to Plaintiff’s complaint. The Plaintiff amended his
complaint; ESII answered it and is now undergoing discovery process to obtain
evidence to disprove the Plaintiff's allegations. The Company denies
any liability under the agreement and facts of the assertion and rejected the
claim. No further communications have been had to date and based on
the information available at this time, it is not possible to determine the
possible outcome of this matter however, as the Company does not believe it is
probable the plaintiff will prevail, no amounts have been accrued as of December
31, 2009 or December 31, 2008.
The
Company is a party to a lawsuit filed in July 2009 with a Company owned by one
its shareholders. The lawsuit alleges fraud in misrepresenting signed
contracts in the 2008 Private Placement Memorandum and seeks to recover $250,000
in investments made in the private placement and approximately $166,000 plus
interest at 10% from April 1, 2009 in monies owed for project work in 2008 and
2009. In connection with the litigation, the Company is responding to
discovery of documents. The Company denies any liability under the
lawsuit and has rejected the claim. No further communications have
been had to date and based on the information available at this time, it is not
possible to determine the possible outcome of this matter. The
amounts owned under project work aggregating approximately $166,000 have been
accrued as accounts payable as of December 31, 2009.
The
Company is a party to a lawsuit with its former landlord whereby the landlord
claims that the Company broke its lease with respect to the rental of office
space, which housed the Company’s headquarters. The Company attempted
to renegotiate the remaining term of its lease at a lower rate but the proposal
was rejected by the Landlord. The Company vacated premises on
December 20, 2009 and the landlord repossessed premises on January 1,
2010. The Plaintiff seeks damages for past rent due, interest and
attorney’s fees. The Company does not deny the breach of its lease
and is attempting to work out a settlement. As of December 31, 2009,
the Company has accrued approximately $268,000 representing the fair value of
the future rent due under the abandoned lease. (See “Leases”
above)
On
February 4, 2010, Continental Maritime filed a complaint for breach of
contract. The Plaintiff provided steel columns and associated labor
to the Company as part of UC-San Diego Solar Parking Structure
project. The claim is for approximately $140,000. The
Agreement was entered into on June 9, 2008. Due to project
cost overruns and capital raise shortfalls in 2008 and 2009, the Company was
unable to make payments on the remaining balance. The Company is
reviewing the claim to assess its liability if any under the lawsuit and the
basis for the claim. No further communications have been had to date and
based on the information available at this time, it is not possible to determine
the possible outcome of this matter. The Company has accrued payables
to this vendor of approximately $140,000 at December 31, 2009.
In March
2010, the Company received a letter from a vendor threatening to sue the Company
for $177,479 plus interest of $68,799 that was owed resulting from non-payment
of invoices related to a contract completed in fiscal year 2008. The
vendor has threatened to bring legal action against the Company to recover its
principal balance plus interest in the event that the principal amounts of the
invoices are not paid as of March 31, 2010. The Company does not deny
any liability under the agreement with respect to the principal balance but
denies any liability with respect to claimed interest charges. The
principal amount of the claim is included in accounts payable as of December 31,
2009. No further communications have been had to date and based on the
information available at this time, it is not possible to determine the possible
outcome of this matter.
F-18
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
Other Commitments:
The Company enters into various
contracts or agreements in the normal course of business whereby such contracts
or agreements may contain commitments. During 2009 and 2008, the
Company entered into agreements to act as a reseller for certain vendors; joint
development contracts with third parties; referral agreements where the Company
would pay a referral fee to the referrer for business generated; sales agent
agreements whereby sales agents would received a fee equal to a percentage of
revenues generated by the agent; business development agreements and strategic
alliance agreements where both parties agree to cooperate and provide business
opportunities to each other and in some instances, provide for a right of first
refusal with respect to certain projects of the other parties; agreements with
vendors where the vendor may provide marketing, public relations, technical
consulting or subcontractor services and financial advisory agreements where the
financial advisor would receive a fee and/or commission for raising capital for
the Company. All expenses and liabilities relating to such contracts
were recorded in accordance with generally accepted accounting principles during
2009 and 2008 and as of December 31, 2009 and 2008. Although such
agreements increase the risk of legal actions against the Company for potential
non-compliance, there are no firm commitments in such agreements as of
December 31, 2009 and 2008.
Effective December 19, 2006, the
Company entered into an agreement with a manufacturer who owns the trademarks
“Solar Grove” and “Solar Tree”. Under the terms of the agreement, the
manufacturer is to provide products to the Company on a per unit basis and the
Company is to pay the manufacturer a royalty, set at 0.25% of revenue, for each
project sold under the above-mentioned trademarks, less the fees for the product
provided by the manufacturer. The Company also had the right to
purchase the above-mentioned trademarks during the term of the agreement which
purchase cancels any future royalties. In November 2008, the Company
exercised its option to purchase the trademarks for
$71,200. Royalties owed in 2007 and 2008 were de
minimis. In 2008, the Company amortized $2,373 of the trademarks and
then wrote off the remaining balance of $68,827 trademarks under the impairment
provisions since there is not a justifiable means to document its future
value. This impairment charge is included in operating
expenses.
Upon the signing of customer contracts,
the Company enters into various other agreements with third party vendors who
will provide services and/or products to the Company. Such vendor
agreements typically call for a deposit along with certain other payments based
on the delivery of goods or services. Payments made by the Company
before the completion of projects are treated as prepaid assets and due to the
contractual nature of the agreement; the Company may be contingently liable for
other payments required under the agreement.
10. COMMON
STOCK
Shares
issued
Issuances
of the Company’s common stock during the years ended December 31, 2009 and
2008 as follows:
Shares
Issued for Cash
2008
During 2008, the Company issued
2,055,870 shares of common stock for cash at $1.31 per share. The
gross proceeds from these issuances were $2,692,444. The Company also
incurred capital raising fees of $296,168 related to the sale and issuance of
the aforementioned common stock.
F-19
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
Shares
Issued as Compensation
2008
In 2008,
the Company issued 7,636 shares of stock valued at $1.31 per share or an
aggregate $10,000 based on the contemporaneous sale price in exchange for
non-employee services rendered to the Company. The expense was fully
recognized on the grant date as services were completed.
Shares
Issued in Connection with Loan Proceeds
2009
In 2009,
the Company issued 305,429 shares of stock at valued at $1.31 per share or an
aggregate $400,000 based on the recent sale price in connection with the loan
from Gemini referenced above. The $400,000 was recorded as a debt
discount loan fee and was fully amortized to interest expense as of December 31,
2009.
Shares
Issued in Connection with Acquisition of a Company
2008
In
January 2008, the Company issued 305,429 shares to the seller in an
acquisition. The shares were valued at the contemporaneous sale price
of $0.33 per share resulting in a $100,000 value, which was recorded as part of
the purchase accounting (see Note 14).
The
Company issued options to certain Company vendors connected to the above
acquisition, in exchange for the vendors reducing their obligations to the
Company. The Company issued options valued at $14,994 to these
vendors. (See Notes 11 and 14)
11. STOCK
OPTIONS AND WARRANTS
In 2008, the Board approved the 2008
Stock Option Plan, which authorizes 6,108,571 shares under the
plan. Exercise rights may not expire more than three months after the
date of termination of the employee but may expire in less time as stipulated in
the individual grant notice. For disability or death, the optionee or
estate will generally have up to twelve months to exercise their
options. For certain options the Company may have rights of first
refusal for a stipulated period of time, under a separate stock restriction
agreement, whereby if the holder exercise the options and then desires to sell
the underlying shares, the Company has the right to repurchase such shares at a
price to which the holder has agreed to sell them to a third party.
In 2007,
the Company authorized the 2007 Unit Option Plan when the Company was a limited
liability company. Options granted under this plan were exchanged one
for one for options of Envision Solar International, Inc. upon conversion to a
corporation from an LLC. (See Note 1)
Stock
Options
At
inception in 2006, the Company adopted the provisions of ASC 718 formerly,
Statement of Financial Accounting Standards 123(Revised 2004), Share-Based
Payment (“SFAS 123R”). SFAS 123R establishes standards surrounding
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. SFAS 123R focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions, such as options issued under the Company’s
Stock Option Plans. The Company’s stock option compensation expense
was $2,352,730 and $4,353,912 for the years ended December 31, 2009 and
2008, respectively, and there was $114,840 of total unrecognized compensation
cost related to unvested options granted under the Company’s options plans as of
December 31, 2009. This stock option expense will be recognized
through December 2012.
F-20
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
The fair value of each option is
estimated on the date of grant using the Black-Scholes option-pricing
model. This model incorporates certain assumptions for inputs
including a risk-free market interest rate, expected dividend yield of the
underlying common stock, expected option life and expected volatility in the
market value of the underlying common stock. We used the following
assumptions for options granted in fiscal 2009 and 2008:
2009
|
2008
|
|
Expected
volatility
|
106%
|
106%
|
Expected
lives
|
5
Years
|
2-10
Years
|
Risk-free
interest rate
|
2.2%
|
2%
|
Expected
dividend yield
|
None
|
None
|
The
Black-Scholes option-pricing model was developed for use in estimating the fair
value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company’s stock options and warrants have
characteristics different from those of its traded stock, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management’s opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of such stock options. The
risk free interest rate is based upon quoted market yields for United States
Treasury debt securities with a term similar to the expected
term. The expected dividend yield is based upon the Company’s history
of having never issued a dividend and management’s current expectation of future
action surrounding dividends. As the Company was not publicly traded
during the time of the option grants, expected volatility in 2009 and 2008 was
based on the comparative company method where other, publicly traded companies
within the same industry as us, were used as the benchmark for our
calculation. The Expected lives for such grants were based on the
simplified method for employees or on the contractual terms of the options or
warrants for non-employees.
All
options qualify as equity pursuant to ASC 815-40-25 formerly, EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock”.
Option
activity for the years ended December 31, 2009 and 2008 under the 2008 Plan is
as follows:
Number
of Options
|
Weighted
Average
Exercise
Price
|
|||||||
Outstanding
at December 31, 2007
|
13,495,665 | $ | 0.33 | |||||
Granted
|
10,635,754 | 0.82 | ||||||
Exercised
|
- | - | ||||||
Forfeited
|
(5,469,461 | ) | 0.76 | |||||
Expired
|
- | - | ||||||
Outstanding
at December 31, 2008
|
18,661,958 | $ | 0.48 | |||||
Exercisable
at December 31, 2008
|
17,123,637 | $ | 0.50 | |||||
Weighted
average grant date fair value
|
$ | 0.53 | ||||||
Granted
|
1,882,387 | 1.18 | ||||||
Exercised
|
- | - | ||||||
Forfeited
|
(6,486,416 | ) | 0.20 | |||||
Expired
|
(910,788 | ) | 0.65 | |||||
Outstanding
at December 31, 2009
|
13,147,201 | $ | 0.46 | |||||
Exercisable
at December 31, 2009
|
12,637,716 | $ | 0.46 | |||||
Weighted
average grant date fair value
|
$ | 1.18 |
F-21
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
The following table summarizes
information about employee stock options under the 2008 Stock Option Plan
outstanding at December 31, 2009:
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||||||||||
Range
of Exercise Price
|
Number
Outstanding at
December
31, 2008
|
Weighted
Average Remaining Contractual Life
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
Number
Exercisable
at
December
31, 2008
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
|||||||||||||||||||||||
$ | 10-40 | 13,147,201 |
7.98
Years
|
$ | 0.46 | $ | - | 12,637,716 | $ | 0.46 | $ | 0.00 | ||||||||||||||||||
13,147,201 | - | $ | 0.46 | $ | - | 12,637,716 | $ | 0.46 | $ | 0.00 |
Included
in the 2008 grants are to certain Company vendors in exchange for the vendors
reducing their obligations to the Company. The Company issued options
valued at $14,994 to these vendors. There was no gain or loss on
these settlements. (See Note 14)
Warrants
In
connection with the asset purchase agreement (see Note 14), the Company reduced
an assumed liability of $8,006 through the issuance of 24,434 warrants with an
exercise price of nil. The warrants expire in seven years and were
valued at $8,006 using the Black-Sholes option-pricing model with the following
assumptions: share value $0.33, exercise price nil, expected volatility of 74%,
expected life 7 years, risk free interest rate 2.20%. The quantity of
these options is variable based on the liability of $8,006 divided by the lesser
of (i) $0.33 or (ii) a preferred stock sale price in a future
offering.
During
2008, the Company issued 143,918 warrants directly related to its stock offering
as finder fees. These warrants were valued at $141,687, using the
Black-Sholes option-pricing model with the following assumptions: share value
$1.31, exercise price $1.31, expected volatility of 106%, expected life 5 years,
risk free interest rate 2.21%. There was not accounting effect as the
warrants were issued as an offering cost to be offset against the gross proceeds
of the offering and charged to additional paid-in capital.
12. INCOME
TAXES
There was
no income tax expense for the years ended December 31, 2009 and 2008 due to the
Company’s net losses.
The
blended Federal and State tax rate of 39.83% applies to loss before
taxes. The Company’s tax expense differs from the “expected” tax
expense for Federal income tax purposes, (computed by applying the United States
Federal tax rate of 34% to loss before taxes), as
follows:
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Computed
“expected” tax expense (benefit)
|
$ | (1,450,885 | ) | $ | (3,262,416 | ) | ||
State
taxes, net of federal benefit
|
(248,881 | ) | (476,033 | ) | ||||
Goodwill
impairment and other non-deductible items
|
528 | 488,331 | ||||||
Change
in deferred tax asset valuation allowance
|
1,699,239 | 3,250,018 | ||||||
$ | - | $ | - |
F-22
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The effects of temporary
differences that gave rise to significant portions of deferred tax assets and
liabilities at December 31 are as follows:
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Accrued
vacation
|
$ | 29,136 | $ | 16,776 | ||||
Accrued
salaries
|
113,653 | 6,722 | ||||||
Charitable
contributions
|
1,616 | 899 | ||||||
Reserve
for bad debt
|
19,488 | 41,138 | ||||||
Stock
options
|
3,395,806 | 2,463,943 | ||||||
Net
operating loss carryforward
|
2,444,962 | 1,775,943 | ||||||
Total
gross deferred tax assets
|
6,004,660 | 4,305,421 | ||||||
Less:
Deferred tax asset valuation allowance
|
(5,978,082 | ) | (4,278,843 | ) | ||||
Total
net deferred tax assets
|
26,578 | 26,578 | ||||||
Deferred
tax liabilities:
|
||||||||
Depreciation
|
(26,578 | ) | (26,578 | ) | ||||
Total
deferred tax liabilities
|
(26,578 | ) | (26,578 | ) | ||||
Total
net deferred taxes
|
$ | - | $ | - |
The
valuation allowance at December 31, 2008 was $4,278,843. The increase
in the valuation allowance during 2009 was $1,699,239.
At
December 31, 2009, the Company has a net operating loss carry forward of
approximately $6,138,000 available to offset future net income through
2029. The NOL expires during the years 2013 to 2029. The
utilization of the net operating loss carryforwards is dependent upon the
ability of the Company to generate sufficient taxable income during the
carryforward period. In the event that a significant change in
ownership of the Company occurs as a result of the Company’s issuance of common
stock, the utilization of the NOL carry forward will be subject to limitation
under certain provisions of the Internal Revenue Code. Management
does not presently believe that such a change has occurred.
13. RELATED
PARTY TRANSACTIONS
Accounts Payable and Related
Party Vendor Payments
At
December 31, 2009, the Company owed its Chief Executive Officer (CEO) $122,500
of deferred compensation included in accrued expenses and $15,703 of
reimbursable expenses and another $480 was due to an affiliate of the CEO
included in accounts payable, related parties. At
December 31, 2008, the Company owed its Chief Executive Officer (CEO)
$41,374.
At
December 31, 2009, reimbursable expenses of $20,033 were due to two current and
one former officer and included in accounts payable, related
parties.
Note Payable to
Officer
In 2008,
one of the Company’s officers advanced the cost for various expenses on behalf
of the Company. As a result, in June 2008, the Company issued the
shareholder a note in the amount of $18,700. The note bears interest
at 5% and is due and payable with accrued interest on or before May 31,
2009. The note was not paid at maturity and the balance was included
in the $34,246 principal balance of a new note executed in October 2009 and due
December 31, 2009. The officer resigned in November
2009. As of February 2010, this note was in default for payment of
principal and interest. (See Note 7)
F-23
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
14. ACQUISITION
In
January 2008, the Company acquired the assets and assumed the liabilities of a
company, Generating Assets, LLC. The purchase price included cash of
$9,000, 305,429 shares of common stock of the Company valued at the
contemporaneous sale price of $0.33 per share or $100,000 and options to
purchase 5,161,131 common shares such options valued at
$1,157,676. The total purchase price was $1,266,676. The
Company entered into this asset purchase agreement with an individual who then
became an officer of the Company. The Company acquired all right,
title and interest, including the name “Generating Assets, LLC”, along with all
intellectual property of the company, all transferable or assignable licenses,
all of the rights, title and interest to certain contracts and the right to
negotiate final agreements for predetermined contracts. The Company
assumed $91,578 of liabilities and assumed all obligations under the assigned
contracts. All of the intangible rights were assigned to goodwill
since the assigned contracts were not executed and there was no other value to
intangibles. At the end of the year 2008, the Company wrote off as an
impairment charge all the $1,358,254 goodwill related to this asset purchase
since the future value and current value of the goodwill is not readily
discernible. This impairment charge is included in operating
expenses.
In
connection with the above acquisition, the Company issued 31,154 options in
exchange for another assumed liability of $6,988. The options were
valued at the same $6,988 value of the liability using the black-scholes pricing
method.
The
Company accounted for this acquisition using the purchase method of
accounting.
The final
allocation of fair value of the assets acquired and liabilities assumed was as
follows:
Goodwill
|
$ | 1,358,254 | ||
Liabilities
|
(91,578 | ) | ||
Purchase
Price
|
$ | 1,266,676 |
There were no material operations of
Generating Assets, LLC through the acquisition date.
15. SUBSEQUENT
EVENTS
On
February 11, 2010, the Company was acquired by an inactive publicly-held company
in a transaction treated as a recapitalization of the Company. Just subsequent
to consummation of the acquisition, the shareholders of the Company retained
approximately 67% of the voting common stock of the public company before
consideration of unexercised common stock options and warrants. The
effects of the recapitalization based on a combination exchange ratio and
forward-split of the common shares aggregating 30.5428526 have been
retrospectively applied to all periods presented in the accompanying
consolidated financial statements and footnotes.
On
January 20, 2010, the Company entered into a Second Amendment Agreement with
Gemini Master Fund, LTD whereby certain terms of the First Amendment Agreement
were modified. Under the Second Amendment Agreement the conversion
price for all previous notes was reduced from $0.33 to $0.25 per share; the
interest payment was extended from January 4, 2010 to April 1, 2010; and the
beneficial ownership percentage was reduced from 9.9% to 4.9%.
F-24
ENVISION
SOLAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 and 2008
On March 10, 2009, the Company entered
into a new note with Gemini Master Fund, LTD, Note No. 5, for
$75,000. The new note bears interest at 12% per annum, payable in
quarterly installments of the accrued and unpaid interest, beginning April 1,
2010, with the note maturing on December 31, 2010. In the event a
quarterly payment is late it incurs a late fee of 20%. The note
carries a conversion feature whereby, the lender at it option may at any time
convert this loan into common stock into $0.25 per share.
F-25