Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - ADARNA ENERGY Corp | Financial_Report.xls |
| EX-32.1 - EXHIBIT 32.1 - ADARNA ENERGY Corp | adrnq211ex32.htm |
| EX-31.1 - EXHIBIT 31.1 - ADARNA ENERGY Corp | adrnq211ex31-1.htm |
| EX-31.2 - EXHIBIT 31.2 - ADARNA ENERGY Corp | adrnq211ex31-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q/A
(Amendment No. 1)
_______________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
COMMISSION FILE NO.: 0-32143
ADARNA ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
|
Delaware
|
20-3148296
|
|
|
(State or other jurisdiction
|
(IRS Employer
|
|
|
of incorporation or organization)
|
Identification No.)
|
|
|
5950 Shiloh Road East, Suite N, Alpharetta, Georgia
|
30005
|
|
|
(Address of principal executive offices)
|
(Zip Code)
|
|
|
(212) 994-5374
|
||
|
(Registrant’s telephone number)
|
||
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
|
Yes
|
X
|
No
|
||
|
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the prior 12 months (or for such shorter period that the registrant was required to submit and post such files).
|
Yes
|
|
No
|
X | |
|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
|||||
|
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer[ ] Smaller reporting company [X]
|
|||||
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
|
Yes
|
No
|
X
|
||
|
As of August 12, 2011, there were 61,762,416 shares of common stock outstanding.
|
ADARNA ENERGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED JUNE 30, 2011
TABLE OF CONTENTS
|
Part I
|
Financial Information
|
Page No
|
|
Item 1
|
Financial Statements
|
3
|
|
Condensed Balance Sheets as of June 30, 2011 (unaudited)
|
||
|
and December 31, 2010
|
4
|
|
|
Condensed Statements of Operations for the Three and Six Months
|
||
|
Ended June 30, 2011 (unaudited) and 2010 (unaudited)
|
5
|
|
|
Condensed Statements of Cash Flows for the Six Months
|
||
|
Ended June 30, 2011 (unaudited) and 2010 (unaudited)
|
6
|
|
|
Notes to Condensed Financial Statements
|
7
|
|
|
Item 2
|
Management’s Discussion and Analysis of Financial Condition
|
13
|
|
and Results of Operations
|
||
|
Item 3
|
Quantitative and Qualitative Disclosures about Market Risk
|
16
|
|
Item 4
|
Controls and Procedures
|
16
|
|
Part II
|
Other Information
|
|
|
Item 1
|
Legal Proceedings
|
17
|
|
Item 1A
|
Risk Factors
|
17
|
|
Item 2
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
17
|
|
Item 3
|
Defaults upon Senior Securities
|
17
|
|
Item 4
|
Reserved
|
17
|
|
Item 5
|
Other Information
|
17
|
|
Item 6
|
Exhibits
|
17
|
|
Signatures
|
18
|
2
PART I – FINANCIAL INFORMATION
|
ITEM 1
|
FINANCIAL STATEMENTS
|
3
ADARNA ENERGY CORPORATION
CONDENSED BALANCE SHEETS
AS OF JUNE 30, 2011 (UNAUDITED) AND DECEMBER 31, 2010
|
ASSETS
|
6/30/2011
|
12/31/2010
|
||||||
|
Current assets:
|
||||||||
|
Cash
|
$ | 526 | $ | 526 | ||||
|
Due from affiliate
|
3,158 | 20,219 | ||||||
|
Total current assets
|
3,684 | 20,745 | ||||||
|
Other assets:
|
||||||||
|
Notes receivable
|
581,375 | 549,242 | ||||||
|
Total other assets
|
581,375 | 549,242 | ||||||
|
TOTAL ASSETS
|
$ | 585,059 | $ | 569,987 | ||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY/ (DEFICIT)
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 473,524 | $ | 480,876 | ||||
|
Accrued expenses
|
177,181 | 170,452 | ||||||
|
Accrued interest
|
147,830 | 107,882 | ||||||
|
Accrued interest – related party
|
137,055 | 77,907 | ||||||
|
Convertible debentures, net of discounts
|
940,818 | 887,401 | ||||||
|
Convertible debentures – related party
|
659,715 | 650,419 | ||||||
|
Liability to be settled in stock
|
179,007 | 179,007 | ||||||
|
Total current liabilities
|
2,715,130 | 2,553,944 | ||||||
|
TOTAL LIABILITIES
|
2,715,130 | 2,553,944 | ||||||
|
STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
|
Convertible preferred stock, $0.0001 par value, 5,275,000 authorized
|
||||||||
|
Series D: 1,000,000 authorized, 825,015 and 840,281 issued and
outstanding, respectively
|
825 | 840 | ||||||
|
Series E: 909,312 authorized with none outstanding
|
||||||||
|
Common stock, $0.0001 par value, 5,000,000,000 authorized;
|
||||||||
|
49,446,126 and 43,996,522 issued and outstanding, respectively
|
49,446 | 43,997 | ||||||
|
Additional paid-in capital
|
10,345,459 | 10,149,143 | ||||||
|
Accumulated deficit
|
(12,525,801 | ) | (12,177,937 | ) | ||||
|
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
|
(2,130,071 | ) | (1,983,957 | ) | ||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
$ | 585,059 | $ | 569,987 | ||||
The notes to the Condensed Financial Statements are an integral part of these statements.
4
ADARNA ENERGY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
|
6/30/2011
|
6/30/2010
|
6/30/2011
|
6/30/2010
|
||||||||||||
|
Revenues
|
$ | -- | $ | -- | $ | -- | $ | -- | ||||||||
|
Cost of revenues
|
-- | -- | -- | -- | ||||||||||||
|
Gross profit
|
-- | -- | -- | -- | ||||||||||||
|
Operating expenses
|
||||||||||||||||
|
Research and development
|
-- | 97,115 | 10,000 | 116,538 | ||||||||||||
|
Bad debt expense
|
-- | 121,561 | -- | 121,561 | ||||||||||||
|
General and administrative expenses
|
26,424 | 111,754 | 37,705 | 210,012 | ||||||||||||
|
Total operating expenses
|
26,424 | 330,430 | 47,705 | 448,111 | ||||||||||||
|
Operating loss
|
(26,424 | ) | (330,430 | ) | (47,705 | ) | (448,111 | ) | ||||||||
|
Other income (expense)
|
||||||||||||||||
|
Interest income
|
16,156 | 16,155 | 32,134 | 32,311 | ||||||||||||
|
Cancellation fees
|
-- | (71,400 | ) | -- | (71,400 | ) | ||||||||||
|
Amortization of debt discount
|
(7,353 | ) | (7,881 | ) | (14,705 | ) | (18,822 | ) | ||||||||
|
Change in convertible liabilities
|
(12,481 | ) | (51,944 | ) | (27,211 | ) | (62,032 | ) | ||||||||
|
Change in convertible liabilities – related party
|
(2,670 | ) | (48,201 | ) | (3,030 | ) | (52,994 | ) | ||||||||
|
Interest expense
|
(20,207 | ) | (28,492 | ) | (228,199 | ) | (79,912 | ) | ||||||||
|
Interest expense – related party
|
(30,158 | ) | (43,297 | ) | (59,148 | ) | (53,330 | ) | ||||||||
|
Total other income (expense)
|
(56,713 | ) | (235,060 | ) | (300,159 | ) | (306,179 | ) | ||||||||
|
Loss before provision for income taxes
|
(83,137 | ) | (565,490 | ) | (347,864 | ) | (754,290 | ) | ||||||||
|
Provision for income taxes
|
-- | -- | -- | -- | ||||||||||||
|
Net loss
|
$ | (83,137 | ) | $ | (565,490 | ) | $ | (347,864 | ) | $ | (754,290 | ) | ||||
|
Weighted average shares of common stock
|
||||||||||||||||
|
outstanding, basic and diluted
|
49,436,434 | 372,408 | 48,303,623 | 328,698 | ||||||||||||
|
Net loss per share, basic and diluted
|
$ | (0.00 | ) | $ | (1.52 | ) | $ | (0.01 | ) | $ | (2.29 | ) | ||||
The notes to the Condensed Financial Statements are an integral part of these statements.
5
ADARNA ENERGY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)
|
Six Months Ended
|
Six Months Ended
|
|||||||
|
6/30/2011
|
6/30/2010
|
|||||||
|
CASH FLOW FROM OPERATING ACTIVITIES
|
||||||||
|
Net cash used in operating activities
|
$ | -- | $ | (76,240 | ) | |||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Note receivable repayment
|
-- | -- | ||||||
|
Net cash provided by investing activities
|
-- | -- | ||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Proceeds from issuance of convertible notes
|
-- | 74,250 | ||||||
|
Repayment on convertible notes
|
-- | -- | ||||||
|
Loan proceeds from related parties
|
-- | -- | ||||||
|
Net cash provided by financing activities
|
-- | 74,250 | ||||||
|
Net increase (decrease) in cash
|
$ | -- | $ | (1,990 | ) | |||
|
Cash at beginning of period
|
526 | 2,551 | ||||||
|
Cash at end of period
|
$ | 526 | $ | 561 | ||||
|
Supplemental Schedule of Non-Cash Investing and Financing Activities:
|
||||||||
|
Stock issued for conversion of debt
|
$ | 1,750 | $ | 68,421 | ||||
|
Conversion of preferred stock into common
|
$ | 3,550 | $ | 138 | ||||
|
Conversion of convertible liabilities
|
$ | 11,750 | $ | 9,431 | ||||
|
Affiliate debentures issued for payment of accounts payable
|
$ | -- | $ | 2,865 | ||||
|
Transfer of accrued interest to debentures
|
$ | -- | $ | 10,868 | ||||
|
Assignment of related party debt to debenture
|
$ | -- | $ | 445,114 | ||||
The notes to the Condensed Financial Statements are an integral part of these statements.
6
ADARNA ENERGY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
|
NOTE 1
|
BASIS OF PRESENTATION
|
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation of the results of operations have been included. The results of operations for the six months ended June 30, 2011 are not necessarily indicative of the results of operations for the full year. When reading the financial information contained in this Quarterly Report, reference should be made to the financial statements, schedules and notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.
|
NOTE 2
|
NATURE OF OPERATIONS
|
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a loss in continuing operations of $347,864 during the six months ended June 30, 2011 and had an accumulated deficit. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans include raising additional proceeds from debt and equity transactions and completing strategic acquisitions.
|
NOTE 3
|
SIGNIFICANT ACCOUNTING POLICIES
|
RECENT ACCOUNTING PRONOUNCEMENTS
Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share represent the amount of earnings (loss) for the period available to each share of common stock outstanding during the reporting period. Diluted earnings (loss) per share reflects the amount of earnings (loss) for the period available to each share of common stock outstanding during the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period, such as common shares that could result from the potential exercise or conversion of securities into common stock. The computation of diluted earnings (loss) per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings (loss) per share. Potential future dilutive securities include common shares issuable under the Company’s outstanding convertible debentures and shares of Series D preferred stock as of June 30, 2011 as described more fully in these Notes to the Company’s Condensed Financial Statements.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation in accordance with Financial Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation.” Under the fair value
7
recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period.
The Company accounts for stock issued for services to non-employees by reference to the fair market value of the Company's stock on the date of issuance as it is the more readily determinable value.
DEFERRED FINANCING CHARGES AND DEBT DISCOUNTS
Deferred finance costs represent costs which may include direct costs incurred to third parties in order to obtain long-term financing and have been reflected as other assets. Costs incurred with parties who are providing the actual long-term financing, which generally include the value of warrants, or the intrinsic value of beneficial conversion features associated with the underlying debt, are reflected as a debt discount. These costs and discounts are generally amortized over the life of the related debt. During the six months ended June 30, 2011 and 2010, the Company recorded amortization of the note discount in the amount of $14,705 and $18,822, respectively.
FINANCIAL INSTRUMENTS
The Company accounted for the convertible debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares.
FAIR VALUE MEASUREMENTS
Effective July 1 2009, the Company adopted ASC 820, Fair Value Measurements and Disclosures. This topic defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance supersedes all other accounting pronouncements that require or permit fair value measurements.
The Company accounted for the convertible debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares.
Under ASC 820, a framework was established for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. Effective July 1 2009, the Company adopted ASC 820-10-55-23A, Scope Application to Certain Non-Financial Assets and Certain Non-Financial Liabilities, delaying application for non-financial assets and non-financial liabilities as permitted. In January 2010, the FASB issued an update to ASC 820, which requires additional disclosures about inputs into valuation techniques, disclosures about significant transfers into or out of Levels 1 and 2, and disaggregation of purchases, sales, issuances, and settlements in the Level 3 rollforward disclosure. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
|
Level 1
|
quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange-traded securities and exchange-based derivatives
|
|
Level 2
|
inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges
|
|
Level 3
|
unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models
|
8
The following table presents the embedded derivative, the Company’s only financial assets measured and recorded at fair value on the Company’s Condensed Balance Sheets on a recurring basis and their level within the fair value hierarchy during the six months ended June 30, 2011:
|
Embedded conversion liabilities as of June 30, 2011:
|
||||
|
Level 1
|
$ | -- | ||
|
Level 2
|
-- | |||
|
Level 3
|
371,500 | |||
|
Total
|
$ | 371,500 | ||
The following table reconciles, for the period ended June 30, 2011, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements:
|
Balance of embedded derivatives at December 31, 2010
|
$ | 353,009 | ||
|
Present value of beneficial conversion features of new debentures
|
15,014 | |||
|
Accretion adjustments to fair value – beneficial conversion features
|
15,227 | |||
|
Reductions in fair value due to principal conversions
|
(11,750 | ) | ||
|
Balance at June 30, 2011
|
$ | 371,500 | ||
The fair value of the conversion features are calculated at the time of issuance and the Company records a conversion liability for the calculated value. The Company recognizes the present value for the conversion liability which is added to the principal of the debenture. The Company also recognizes expense for the accretion of the conversion liability to fair value over the term of the note. The Company has adopted ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in each debenture could result in the note principal being converted to a variable number of the Company’s common shares.
|
NOTE 4
|
SHAREHOLDERS’ EQUITY
|
Shares of the Series D Preferred Stock (the "Series D Shares") may be converted by the holder into Company common stock at a rate representing 80% of the fully diluted outstanding common shares outstanding after the conversion (which includes all common shares outstanding plus all common shares potentially issuable upon the conversion of all derivative securities not held by the holder). The holder of Series D Shares may cast the number of votes at a shareholders meeting or by written consent that equals the number of common shares into which the Series D Shares are convertible on the record date for the shareholder action. In the event the Board of Directors declares a dividend payable to Company common shareholders, the holders of Series D Shares will receive the dividend that would be payable if the Series D Shares were converted into Company common shares prior to the dividend. In the event of a liquidation of the Company, the holders of Series D Shares will receive a preferential distribution of $0.001 per share, and will share in the distribution as if the Series D Shares had been converted into common shares.
During the six months ended June 30, 2011, Minority Interest Fund (I), LLC (“MIF”) converted 15,069 shares of Series D preferred stock into 3,315,604 common shares. An additional 196 shares of Series D preferred stock beneficially owned by Viridis Capital, LLC (“Viridis”) were converted during the six months ended June 30, 2011 into 234,000 common shares (see Note 5, Related Party Transactions, below).
The Company’s Series E Preferred Stock was authorized during 2009 in connection with the Preferred Equity Financing. The Company entered into an agreement to cancel all Series E shares previously issued in April 2010, which agreement called for the issuance of a total of 50,000 Company common shares and the retention of another 18,690 common shares previously issued to the relevant investors in anticipation of converting Series E shares. All Series E shares are consequently pending cancelation. The 50,000 common shares to be issued to the relevant investors (and 1,000 shares due to the escrow agent) have been recorded as liabilities due to be settled in stock and were valued as of the April 15, 2010 commitment date.
9
In addition to the common shares issued noted above, the Company issued 1,900,000 shares to E-LionHeart Associates upon the conversion of $1,750 in debt incurring $188,250 in interest expense in order to effect the conversion at par.
Effective July 7, 2011, the Company completed its amendment to its articles of incorporation to reduce the par value of the Company’s common stock from $0.001 per share to $0.0001 per share and to affect a 1-for-100 reverse stock split of the Company’s common stock. The Company also changed the name of the Company to Adarna Energy Corporation. All stock prices, common share amounts, per share information, stock options and stock warrants in this Report retroactively reflect the reverse stock split.
|
NOTE 5
|
RELATED PARTY TRANSACTIONS
|
Minority Interest Fund (II), LLC (“MIF”) is party to certain convertible debentures issued by the Company (see Note 6, Convertible Debentures, below). The managing member of MIF is a relative of the Company’s chairman.
Viridis Capital, LLC (“Viridis”), is the majority shareholder of the Company (see Note 4, Stockholder’s Equity, above). The sole member of Viridis is Kevin Kreisler, the Company’s Chief Executive Officer.
|
NOTE 6
|
CONVERTIBLE DEBENTURES
|
As of December 31, 2010, the Company had a convertible debenture payable to Minority Interest Fund (II), LLC (“MIF”) in the amount of $601,446 (the “MIF Debenture”). The convertible debt issued to MIF bears interest at a rate of 20% and matures on December 31, 2011. The MIF Debenture is convertible into Company common stock at a rate equal to 90% of the lowest volume weighted average price for the Company’s common stock for the twenty trading days preceding conversion. The Company accounted for the MIF Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the MIF Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the MIF Debenture at December 31, 2010 to be $650,419 which represented the face value of the debenture of $601,446 plus the present value of the conversion feature. The MIF Debenture was also increased by $31,266 in additional advances during the six months ended June 30, 2011. During the six months ended June 30, 2011, MIF sold a portion of the MIF Debenture in the amounts of $25,000 to Sonata Ventures, LLC. During the six months ended June 30, 2011, the Company recognized an increase in conversion liabilities at present value of $668 due to the net increase from additional funding received less principal sold and recorded an expense of $2,362 for the accretion to fair value of the conversion liability for the six months. The carrying value of the MIF Debenture was $659,716 at June 30, 2011, and included principal of $607,713 and the value of the conversion liability. The liability for the conversion feature shall increase from its present value of $52,003 at June 30, 2011 to its estimated settlement value of $54,382 at December 31, 2011. Interest expense of $59,148 for these obligations was accrued for the six months ended June 30, 2011.
On June 9, 2009, JMJ Financial Corporation (“JMJ”) issued the Company a 14.4% secured promissory note in the amount of $500,000 (“the JMJ Note”) in return for $600,000 in 12% convertible debt (“the JMJ Debenture”) issued by the Company. The Company recognized a $100,000 debt discount in relation to the difference between the $600,000 JMJ Debenture and the $500,000 JMJ Note. This discount is being amortized over the term of the debenture. The Company recognized amortization of debt discount of $14,705 and $18,822 for the six months ended June 30, 2011 and 2010, respectively. The principal balance receivable under the JMJ Note was $450,000 as of June 30, 2011 and accrued interest receivable under the JMJ Note was $131,375. The principal and accrued interest for the JMJ Note and JMJ Debenture has been presented as of June 30, 2011, at their face value, without offset. The JMJ Debenture is convertible into Company common stock at a rate equal to 70% of the lowest closing market price for the Company’s common stock for the twenty trading days preceding conversion. The Company accounted for the JMJ Debenture dated June 9, 2009 in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the JMJ Debenture could result in the note principal being converted to a variable number of the Company’s common shares.
The Company determined the value of the JMJ Debenture at December 31, 2010 to be $820,462 which represented the face value of the debenture and accrued interest plus the present value of the conversion feature minus the unamortized debt discount of $42,891. For the six months ended June 30, 2011, an expense of $23,350 has been recorded to recognize the present value of the conversion features for additional accrued interest and for the accretion to fair value of the conversion liability. The carrying value of the $600,000 JMJ Debenture was $889,835 at June 30, 2011 which represented the
10
face value of the debenture and accrued interest plus the present value of the conversion feature minus the unamortized debt discount of $28, 185. The liability for the conversion feature shall increase from its present value of $259,734 at June 30, 2011 to its estimated settlement amount of $282,123 at June 11, 2012. For the six months ended June 30, 2011, interest expense of $31,317 for these obligations was incurred.
MIF sold a portion of its MIF Debenture to Sunny Isle Ventures (“SIV”) in the amount of $50,000 on April 15, 2010 (the “SIV Debenture”). The convertible debt sold to SIV bears interest at a rate of 5% and matures on December 31, 2011. The SIV Debentures are convertible into Company common stock at a rate equal to 50% of the average closing market price for the Company’s common stock for the five trading days preceding conversion. SIV will not be permitted, however, to convert into a number of shares that would cause it to own more than 4.99% of the outstanding the Company’s common shares. The Company accounted for the SIV Debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the SIV Debentures could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the SIV Debentures at December 31, 2010 to be $49,567 which represented the face value of the debenture of $45,000 plus the present value of the conversion feature. During the six months ended June 30, 2011, the Company recorded an expense of $216 for the accretion to fair value of the conversion liability for the six months. The carrying value of the SIV Debentures was $49,784 at June 30, 2011, and included principal of $45,000 and the value of the conversion liability. The liability for the conversion feature shall increase from its present value of $4,784 at June 30, 2011 to its estimated settlement value of $5,000 at December 31, 2011. Interest expense of $1,116 for these obligations was accrued for the six months ended June 30, 2011.
MIF sold a portion of its MIF Debenture to Long Side Ventures (“LSV”), the successor to Sunny Isle Ventures, in the amount of $32,500 on July 14, 2010 (the “LSV Debenture”). The convertible debt sold to LSV bears interest at a rate of 20% and matures on December 31, 2010. The LSV Debentures are convertible into Company common stock at a rate equal to 50% of the average closing market price for the Company’s common stock for the five trading days preceding conversion. LSV will not be permitted, however, to convert into a number of shares that would cause it to own more than 4.99% of the Company’s outstanding common shares. The Company accounted for the LSV Debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the LSV Debentures could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the LSV Debentures at July 14, 2010 to be $63,611 which represented the face value of the debenture of $25,500 plus the present value of the conversion feature. The carrying value of the LSV Debentures was $51,000 at June 30, 2011, and included principal of $25,500 and the value of the conversion liability. The liability for the conversion feature of $25,500 at June 30, 2011 is equal to its estimated settlement value. Interest expense of $2,529 for these obligations was accrued for the six months ended June 30, 2011.
MIF sold a portion of its MIF Debenture to E-LionHeart Associates (“E-Lion”) in the amount of $35,000 on September 22, 2010 (the “E-Lion Debenture”). The convertible debt sold to E-Lion bears interest at a rate of 20% and matures on December 31, 2011.The E-Lion Debenture is convertible into Company common stock at a rate equal to 50% of the average of the three lowest reported closing market price for the Company’s common stock for the twenty trading days preceding conversion. The Company accounted for the E-Lion Debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the E-Lion Debentures could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the E-Lion Debentures at December 31, 2010 to be $13,417 which represented the face value of the debenture of $1,750 plus the present value of the conversion feature. During the six months ended June 30, 2011, the Company recognized a reduction in conversion liability at present value of $11,750 for conversions during the period. During the six months ended June 30, 2011, the Company recorded an expense of $83 for the accretion to fair value of the conversion liability for the period. The debenture has been converted and paid in full as of the six months ended June 30, 2011. Interest expense of $31 for these obligations was accrued for the six months ended June 30, 2011.
MIF sold a portion of its MIF Debenture to Mammoth Corporation (“Mammoth”) in the amount of $57,688 on June 30, 2011 (the “Mammoth Debenture”). The convertible debt sold to Mammoth bears interest at a rate of 20% and matures on December 31, 2011. The Mammoth Debenture is convertible into Company common stock at a rate equal to 50% of the lowest reported closing market price for the Company’s common stock for the five trading days preceding conversion. The Company accounted for the Mammoth Debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as
11
the conversion feature embedded in the Mammoth Debentures could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Mammoth Debentures at December 31, 2010 to be $53,657 which represented the face value of the debenture of $27,738 plus the present value of the conversion feature. During the six months ended June 30, 2011, the Company recorded an expense of $910 for the accretion to fair value of the conversion liability for the period. The carrying value of the Mammoth Debentures was $54,566 at June 30, 2011, and included principal of $27,738 and the value of the conversion liability. The liability for the conversion feature shall increase from its present value of $26,828 at June 30, 2011 to its estimated settlement value of $27,738 at December 31, 2011. Interest expense of $2,751 for these obligations was accrued for the six months ended June 30, 2011.
MIF sold a portion of its MIF Debenture to Sonata Ventures, LLC. (“Sonata”) in the amount of $25,000 on January 20, 2011 (the “Sonata Debenture”). The convertible debt sold to Sonata bears interest at a rate of 20% and matures on December 31, 2011. The Sonata Debenture is convertible into Company common stock at a rate equal to 90% of the lowest volume weighted average price for the Company’s common stock for the five trading days preceding conversion. The Company accounted for the Sonata Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Sonata Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Sonata Debenture at January 20, 2011 to be $27,525 which represented the face value of the debenture of $25,000 plus the present value of the conversion feature. During the six months ended June 30, 2011, the Company recorded an expense of $127 for the accretion to fair value of the conversion liability for the six months. The carrying value of the Sonata Debenture was $27,652 at June 30, 2011, and included principal of $25,000 and the value of the conversion liability. The liability for the conversion feature shall increase from its present value of $2,652 at June 30, 2011 to its estimated settlement value of $2,778 at December 31, 2011. Interest expense of $2,205 for these obligations was accrued for the six months ended June 30, 2011.
|
NOTE 7
|
SUBSEQUENT EVENTS
|
Between July 1, 2011 and August 20, 2011, the Company issued a total of 4,481,400 shares of common stock upon conversion of 178 shares of Series D Preferred Stock held by MIF.
12
|
ITEM 2
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION
|
Adarna Energy Corporation (“we,” “our,” “us,” “Adarna,” or the “Company”) is a clean technology development company with a focus on developing innovations designed to resolve compelling ecological challenges while producing value added carbon neutral and negative products.
Carbon dioxide is the most abundant waste produced by human activity. Continued accumulation in Earth’s atmosphere and oceans needs to be avoided in order to prevent severe climate change. Our waste carbon emissions come from the combustion of fossil fuels to produce electricity, to power transportation, to heat our homes and to manufacture products. The scientific consensus is that these activities are directly responsible for increasing atmospheric carbon dioxide concentrations to the highest that they have been for more than 650,000 years. However, and despite the increased focus on renewable sources of energy, fossil fuels will continue to play a vital and dominant role in providing the majority of our energy needs over at least the next 50 years. Most scientists agree that, unabated, the combustion of fossil fuels to meet these needs will pump enough carbon dioxide into the global ecosystem to bring about severe climate change. Our collective challenge is to stem the tide – to channel the flow of waste carbon emissions in ways that stimulate economic growth and preserve quality of life while preventing the continued accumulation of carbon dioxide in Earth’s atmosphere and oceans.
Adarna’s ambition is to contribute to the resolution of this challenge by developing new clean technologies that reduce and reuse carbon emissions. Our plan to do so while building shareholder value is to develop, license and support technologies and projects that beneficially reuse waste carbon emissions in ways that reduce consumption of fossil fuels, increase use of sustainable raw materials, and decrease production of wastes and emissions.
We have licensed a technology portfolio from GS CleanTech Corporation, a subsidiary of GreenShift Corporation, an entity whose majority owner is the same as our majority owner. The technology portfolio includes several feedstock and product conditioning technologies, lipid and alcohol production and refining technologies, and carbon dioxide recycling and refining technologies; we have no license rights involving any of GS CleanTech’s corn oil technologies. While the licensed technologies have wide application potential in several industries and processes, we are initially focused on developing applications of these technologies for use in the existing renewable fuels industry. We believe that the composition and extent of the installed renewable fuels complex and the relatively uncomplicated nature of its inputs and outputs presents compelling opportunities to defray risk as we commercialize our technologies. Importantly, significant demand exists today for technologies that enhance the efficiency and sustainability of refining biomass into carbon-neutral or carbon-negative fuel. We believe that satisfying this demand can be expected to result in reduced reliance on petroleum products, more efficient use of natural resources, increased use of biomass-derived fuels and other products, and decreased greenhouse gas emissions on globally-meaningful scales.
Our operating activities during the six months ended June 30, 2011 exclusively involved research and development with our technologies and performing due diligence on a number of additional strategically compatible technologies that we have targeted for licensing.
INDUSTRY OVERVIEW
Worldwide energy consumption is projected to increase by 50% from 2005 to 2030, corresponding to an increase in crude oil consumption to over 112 million barrels of crude oil per day from the current 90 million barrels per day. The EIA projected that annual CO2 emissions will increase during this time from about 28 billion metric tons to over 42 billion metric tons in 2030.
The largest and most concentrated source of carbon dioxide (“CO2”) emissions is the growing use of coal-powered electricity generation, especially in developing countries where coal is abundant and inexpensive. Liquid fuels, such as gasoline, are expected to remain the world's most dominant fuel because of their importance in the transportation and industrial sector since there are few alternatives. The transportation sector alone accounts for 74% of the total projected increase from 2005 to 2030, with the industrial sector accounting for the remainder. We believe that this increasing demand is likely to sustain high world oil prices for a long period of time.
13
The continued use of fossil fuels creates important challenges. Fossil fuel derived CO2 emissions are believed to be the cause of global warming and climate change. Management believes that at some point in the future, there will not be enough supply and production capacity to meet worldwide fossil fuel demands. Based on historic growth trends, crude oil production is projected to peak in 2037 at a volume of 53 billion barrels per year.
We believe that these challenges can be meaningfully addressed by developing technologies that beneficially reuse waste carbon emissions in ways that reduce consumption of fossil fuels, increase use of sustainable raw materials, and decrease production of wastes and emissions.
Technology Development Activities
During 2011 and 2010, Adarna conducted research involving patent-pending technologies designed to recycle waste carbon emissions into value-added products. These activities were completed at the direction of our management and in connection with license rights obtained from affiliates of Viridis Capital, LLC, our majority shareholder, pursuant to which we have agreed to provide all of the capital resources needed to complete research and development in exchange for use rights involving the technologies. To defray cost and risk, this research was completed at our cost at an outsourced laboratory, by the laboratory’s research staff.
The Company plans to conduct additional testing during 2011 and 2012, which testing may or may not involve the subcontract technical consultants and project collaborators used for prior testing. All testing is performed under license and no payment is required until the technology has been successfully commercialized. Our license with GS CleanTech provides that we have to pay royalties to GS CleanTech equal to 10% of our pre-tax net income deriving from commercial use of licensed technology. Successful commercialization will require sequential progression from bench, to pilot and finally commercial-scale pilot testing. Management’s risk mitigation policies call for a subjective analysis of the results produced by testing at each of the above stages. The goals of this analysis include an assessment of overall feasibility, the establishment of design parameters for cost-efficient scaling to the next sequential stage, and confirmation of previously established design assumptions and stage-specific objectives that Management believes to be required for continuation of research and development activities for a specific technology. The purpose of each stage of testing for each technology is to provide Management with sufficient information to determine whether or not additional investment into that technology is warranted. No payments have been made to date or are currently due under the above license. Management does not anticipate completion of bench and pilot testing and commencing commercial operations with the licensed technologies during 2011 or 2012, but completion of testing and development of a reasonable assessment of the economic feasibility of large scale implementation may be achieved within 36 months, depending upon the results of additional testing and the availability of capital for additional research and development activities.
We plan to finance the ongoing development of our technologies, as well as acquisitions of additional strategically compatible technologies, through issuance of new debt and equity.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The financial statements included herein have been prepared by the Company, in accordance with Generally Accepted Accounting Principles. This requires the Company’s management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. These estimates and assumptions will also affect the reported amounts of certain revenues and expenses during the reporting period. In the opinion of management, all adjustments which, except as described elsewhere herein are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Actual results could differ materially based on any changes in the estimates and assumptions that the Company uses in the preparation of its financial statements and any changes in the Company’s future operational plans.
The Company accounts for convertible debt in accordance with FASB Accounting Standards Codification, Topic 815, as the conversion feature embedded in the convertible debenture could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares. We calculate the fair value of the conversion feature at the time of issuance and record
14
a conversion liability for the calculated value, which is added to the carrying value of the debenture. We also recognize changes in value for accretion of the conversion liability from present value to fair value over the term of the note.
RESULTS OF OPERATIONS
Operating expenses were $47,700 for the six months ended June 30, 2011 and $448,100 for the six months ended June 30, 2010. The decrease in operating costs as compared to prior periods is due to decreased development costs during the period and a decrease in salaries and legal fees. Total other expense for the six months ended June 30, 2011 was t $300,200 and other expense for the same period last year was $306,200 respectively. Included in the six months ended June 30, 2011 was about $287,300 of interest expense as well as about $30,200 in non-cash expenses associated with the changes in the conversion features embedded in the Company’s convertible debentures. Included in other expenses during the six months ended June 30, 2010 was $71,400 of loan cancellation fees, $133,200 of interest expense, and $115,000 in non-cash expenses associated with the changes in the conversion features in the Company’s convertible debentures. Our net loss for the six months ended June 30, 2011 and June 30, 2010 was about $347,900 and about $754,300, respectively.
The factors determining our expenses during the three month periods ended June 30, 2011 and 2010 were not different in any significant way from the factors discussed with reference to the six month periods then ended. Our net loss for the three months ended June 30, 2011 was $83,137, compared to a net loss of $565,490 during the three months ended June 30, 2010.
The Company accounts for convertible debt in accordance with FASB Accounting Standards Codification, Topic 815, as the conversion feature embedded in the convertible debenture could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares. We calculate the fair value of the conversion feature at the time of issuance and record a conversion liability for the calculated value, which is added to the carrying value of the debenture. We also recognize changes in value for accretion of the conversion liability from present value to fair value over the term of the note. The additional cost for the conversion features of $30,200 for the six months ended June 30, 2011 has been recognized within other income (expense) as changes in conversion liabilities in the accompanying financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s capital requirements consist of general working capital needs as well as planned research and development expenditures involving our ongoing commercialization efforts with our technologies. The Company's capital resources consist primarily of cash generated from the issuance of debt and stock. The Company relied on the issuance of convertible debt during the six months ended June 30, 2011 to cover its capital needs. Our plan moving forward involves continued investment in the research and development of our technologies as well as evaluation of additional early stage clean technologies for license or acquisition. We also plan to raise and invest additional capital in pilot-scale deployments of those of our technologies that demonstrate their qualification for scaling beyond the bench stage, with a goal of producing cash flow from the license or sublicense of developed technologies and through operating activities.
The Company had a working capital deficit of about $2.7 million at June 30, 2011, which includes $371,500 in liabilities associated with the conversion features embedded in convertible debentures issued by the Company, as well as about $649,500 in convertible debt due to third parties, and about $607,700 in convertible debt due to related parties. The Company’s working capital deficit net of these amounts would be about $1.1 million.
Off Balance Sheet Arrangements
None.
15
|
ITEM 3
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not applicable.
|
ITEM 4
|
CONTROLS AND PROCEDURES
|
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer participated in and supervised the evaluation of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in the reports that we file is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our principal executive officer or officers and principal financial officer, to allow timely decisions regarding required disclosure.
In the course of making our assessment of the effectiveness of our disclosure controls and procedures, we identified a material weakness. This material weakness consisted of inadequate staffing and supervision within the bookkeeping and accounting operations of our company. The lack of employees prevents us from segregating disclosure duties. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews. Based on the results of this assessment, our management concluded that because of the above condition, our disclosure controls and procedures were not effective as of the end of the period covered by this report.
There have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
16
PART II – OTHER INFORMATION
|
ITEM 1
|
LEGAL PROCEEDINGS
|
None.
|
ITEM 1A
|
RISK FACTORS
|
There has been no material change in the risk factors affecting the Company that were set forth in Item 1A to our Annual Report on Form 10-K for the year ended December 31, 2010.
|
ITEM 2
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None.
|
ITEM 3
|
DEFAULTS UPON SENIOR SECURITIES
|
None.
|
ITEM 4
|
RESERVED
|
|
ITEM 5
|
OTHER INFORMATION
|
None.
|
ITEM 6
|
EXHIBITS
|
The following are exhibits filed as part of the Company’s Form 10-Q for the quarter ended June 30, 2011:
INDEX TO EXHIBITS
|
Exhibit Number
|
Description
|
|
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 as incorporated herein by reference
|
|
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 as incorporated herein by reference
|
|
32.1
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002 as incorporated herein by reference
|
|
101.INS
|
XBRL Instance
|
|
101.SCH
|
XBRL Schema
|
|
101.CAL
|
XBRL Calculation
|
|
101.DEF
|
XBRL Definition
|
|
101.LAB
|
XBRL Label
|
|
101.PRE
|
XBRL Presentation
|
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the date indicated.
ADARNA ENERGY CORPORATION
|
By:
|
/s/
|
KEVIN KREISLER
|
||
|
KEVIN KREISLER
|
||||
|
Chief Executive Officer
|
||||
|
Date:
|
August 19, 2011
|
|||
|
By:
|
/s/
|
JACQUELINE FLYNN
|
||
|
JACQUELINE FLYNN
|
||||
|
Chief Financial Officer &
|
||||
|
Chief Accounting Officer
|
||||
|
Date:
|
August 19, 2011
|