United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
Form
10-Q
(Mark One)
|
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
|
For
the quarterly period ended September 30, 2008
|
|
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commissions
file number 001-12000
VORTEX
RESOURCES CORP.
(Exact
name of registrant - registrant as specified in its charter)
Delaware
|
|
13-3696015
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
9107
Wilshire Blvd., Suite 450, Beverly Hills, CA 90210
(Address
of principal executive offices)
(310)
461-3559
|
|
(310)
461-1901
|
Issuer’s
telephone number
|
|
Issuer’s
facsimile number
|
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirement for the past 90 days. Yes
x No
o
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 o
(Do not check if a smaller reporting company) Smaller reporting company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of Exchange Act). Yes
o
No
x
State
the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date:
Common
Stock, $.001 par value
|
82,380,919
|
(Class)
|
(Outstanding
at November 12, 2008)
|
Transitional
Small Business Disclosures Format (Check one): Yes
o
No
x
VORTEX
RESOURCES CORP.
PART
I.
|
Financial
Information
|
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
|
|
|
Condensed
Consolidated Balance Sheet as of September 30, 2008 and as of December
31,
2007
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss)
for
the nine months ended and three months ended September 30, 2008 and
2007
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Stockholders' equity for the nine months
ended
September 30, 2008
|
5
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended September
30, 2008 and 2007
|
6
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
31
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
43
|
|
|
|
Item
4.
|
Controls
and Procedures
|
43
|
|
|
|
PART
II.
|
Other
Information
|
44
|
|
|
|
Signature
|
|
52
|
VORTEX
RESOURCES CORP.
CONDENSED
CONSOLIDATED BALANCE SHEET
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,152,027
|
|
$
|
369,576
|
|
Accounts
receivable
|
|
|
—
|
|
|
218,418
|
|
Restricted
cash, certificates of deposit (Note 3)
|
|
|
4,192,210
|
|
|
13,008,220
|
|
Loan
to Affiliated Party - Emvelco RE Corp. (Note 4)
|
|
|
—
|
|
|
4,538,976
|
|
Prepaid
expenses and other current assets
|
|
|
224,687
|
|
|
—
|
|
Intangible,
debt discount on conversion option, current (Note 5)
|
|
|
762,888
|
|
|
195,266
|
|
Real
Estate Investments – For Sale (Note 6)
|
|
|
—
|
|
|
2,215,725
|
|
Gas
rights on real property (Note 15)
|
|
|
1,217,313
|
|
|
—
|
|
Total
current assets
|
|
|
8,549,125
|
|
|
20,546,181
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
|
—
|
|
|
32,425
|
|
Intangible,
debt discount on conversion option, net of current portion (Note
5)
|
|
|
762,888
|
|
|
694,936
|
|
Investment
in land development
|
|
|
—
|
|
|
33,050,052
|
|
Goodwill
(Notes 2, 7)
|
|
|
49,990,000
|
|
|
1,185,000
|
|
Total
assets
|
|
$
|
59,302,013
|
|
$
|
55,508,594
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
409,533
|
|
$
|
15,380,205
|
|
Due
to related parties
|
|
|
407,325
|
|
|
516,084
|
|
Convertible
secured note payable to third party – current portion (Note
5)
|
|
|
504,000
|
|
|
—
|
|
Secured
bank loans (Note 3)
|
|
|
4,721,489
|
|
|
8,401,154
|
|
Other
current liabilities
|
|
|
350,421
|
|
|
305,520
|
|
Total
current liabilities
|
|
|
6,392,768
|
|
|
24,602,963
|
|
|
|
|
|
|
|
|
|
Liability
for escrow refunds
|
|
|
—
|
|
|
4,489,235
|
|
Fees
due on closing
|
|
|
—
|
|
|
2,384,176
|
|
Convertible
Secured Note Payable to third party (Note 5)
|
|
|
1,096,000
|
|
|
2,277,633
|
|
Unsecured
notes payable to third parties (Note 5)
|
|
|
1,270,000
|
|
|
|
|
Deferred
taxes
|
|
|
—
|
|
|
812,711
|
|
Due
to former members of DCG (Note 7)
|
|
|
1,065,469
|
|
|
—
|
|
Other
long term liabilities
|
|
|
|
|
|
1,919,964
|
|
Total
liabilities
|
|
|
9,824,237
|
|
|
36,486,682
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 9)
|
|
|
|
|
|
|
|
Minority
interest in subsidiary’s net assets (Note 7)
|
|
|
525,000
|
|
|
6,145,474
|
|
Stockholders'
equity (Note 10)
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value - Authorized 5,000,000 shares; no shares
issued and
outstanding
|
|
|
—
|
|
|
—
|
|
Common
stock, $.001 par value - Authorized 400,000,000 shares; 86,626,919
and
4,609,181 shares are issued, respectively; 82,126,919 and 4,609,181
shares
are outstanding, respectively
|
|
|
82,127
|
|
|
4,609
|
|
Additional
paid-in capital
|
|
|
108,202,723
|
|
|
53,281,396
|
|
Accumulated
deficit
|
|
|
(
59,329,848
|
)
|
|
(38,289,630
|
)
|
Accumulated
other comprehensive income
|
|
|
(
2,226
|
)
|
|
(2,226
|
)
|
Treasury
stock - 0 and 1,279,893 common shares, at cost,
respectively
|
|
|
—
|
|
|
(2,117,711
|
)
|
Total
stockholders' equity
|
|
|
48,952,776
|
|
|
12,876,438
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
59,302,013
|
|
$
|
55,508,594
|
|
See
accompanying notes to condensed consolidated financial statements.
VORTEX
RESOURCES CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
(Unaudited)
|
|
Nine months ended
|
|
Three months ended
|
|
|
|
September 30
|
|
September 30
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
– Sales of Real Estate Properties
|
|
$
|
1,990,000
|
|
$
|
6,950,000
|
|
$
|
1,990,000
|
|
$
|
6,950,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues (Exclusive of depreciation and amortization shown
separately below)
|
|
|
1,933,569
|
|
|
6,436,006
|
|
|
1,933,569
|
|
|
6,436,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and related costs
|
|
|
1,049,065
|
|
|
328,547
|
|
|
864,682
|
|
|
90,001
|
|
Consulting,
directors, professional fees and provisions
|
|
|
12,655,015
|
|
|
597,281
|
|
|
560,531
|
|
|
166,597
|
|
Other
selling, general and administrative expenses
|
|
|
168,813
|
|
|
354,689
|
|
|
30,977
|
|
|
151,259
|
|
Software
development expense
|
|
|
—
|
|
|
136,236
|
|
|
—
|
|
|
37,336
|
|
Total
operating expenses
|
|
|
13,872,893
|
|
|
1,416,753
|
|
|
1,456,190
|
|
|
445,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
|
(13,816,462
|
)
|
|
(902,759
|
)
|
|
(1,399,759
|
)
|
|
68,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
473,597
|
|
|
1,425,314
|
|
|
116,982
|
|
|
536,139
|
|
Interest
expense
|
|
|
(1,674,334
|
)
|
|
(205,957
|
)
|
|
(862,374
|
)
|
|
(68,628
|
)
|
Net
interest (expense) income
|
|
|
(1,200,737
|
)
|
|
1,219,357
|
|
|
(745,392
|
)
|
|
467,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
—
|
|
|
13,899
|
|
|
—
|
|
|
—
|
|
Loss
from abandoned project
|
|
|
(185,257
|
)
|
|
—
|
|
|
(185,257
|
)
|
|
—
|
|
Bad
debt expense
|
|
|
(5,837,762
|
)
|
|
—
|
|
|
(688,902
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(21,040,218
|
)
|
|
330,497
|
|
|
(3,109,310
|
)
|
|
536,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive (loss) income
|
|
|
—
|
|
|
(153
|
)
|
|
—
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
(loss) income
|
|
$
|
(21,040,218
|
)
|
$
|
330,344
|
|
$
|
(3,109,310
|
)
|
$
|
536,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (Loss) per share, basic and diluted
|
|
$
|
(1.10
|
)
|
$
|
0.07
|
|
$
|
(0.07
|
)
|
$
|
0.12
|
|
Weighted
average number of shares outstanding, basic and
diluted
|
|
|
19,046,024
|
|
|
4,777,034
|
|
|
46,429,968
|
|
|
4,609,181
|
|
See
accompanying notes to condensed consolidated financial
statements.
VORTEX
RESOURCES CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
|
|
|
|
Comprehensive
|
|
|
|
Total
|
|
|
|
Number of
|
|
|
|
Paid-in
|
|
Accumulated
|
|
Income
|
|
Treasury
|
|
Stockholders'
|
|
|
|
shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
(Loss)
|
|
Stock
|
|
Equity
|
|
Balances, January
1, 2007
|
|
|
5,412,270
|
|
$
|
5,413
|
|
$
|
52,224,829
|
|
$
|
(27,389,840
|
)
|
$
|
5,539
|
|
$
|
(994,884
|
)
|
$
|
23,851,057
|
|
Foreign
currency translation loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,765
|
)
|
|
|
|
|
(7,765
|
)
|
Compensation
charge on share options and warrants issued to consultants
|
|
|
|
|
|
|
|
|
80,233
|
|
|
|
|
|
|
|
|
|
|
|
80,233
|
|
Treasury
stock - Open Market
|
|
|
(180,558
|
)
|
|
(181
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(288,636
|
)
|
|
(288,817
|
)
|
Treasury
stock - Navigator Sale
|
|
|
(622,531
|
)
|
|
(623
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(834,191
|
)
|
|
(834,814
|
)
|
Discount
on Appswing Note Payable
|
|
|
|
|
|
|
|
|
976,334
|
|
|
|
|
|
|
|
|
|
|
|
976,334
|
|
Net
loss for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(10,899,790
|
)
|
|
-
|
|
|
-
|
|
|
(10,899,790
|
)
|
Balances,
December 31, 2007
|
|
|
4,609,181
|
|
$
|
4,609
|
|
$
|
53,281,396
|
|
$
|
(38,289,630
|
)
|
$
|
(2,226
|
)
|
$
|
(2,117,711
|
)
|
$
|
12,876,438
|
|
Compensation
charge on share options and warrants issued to employees and
consultants
|
|
|
|
|
|
|
|
|
2,576,860
|
|
|
|
|
|
|
|
|
|
|
|
2,576,860
|
|
Treasury
stock - Open Market
|
|
|
(3,000
|
)
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,591
|
)
|
|
(3,594
|
)
|
Issuance
of preferred shares and subsequent conversion into common
shares
|
|
|
50,000,000
|
|
|
50,000
|
|
|
49,950,000
|
|
|
|
|
|
|
|
|
|
|
|
50,000,000
|
|
Issuance
of shares - common
|
|
|
2,520,738
|
|
|
2,521
|
|
|
1,014,993
|
|
|
|
|
|
|
|
|
|
|
|
1,017,514
|
|
Conversion
of note payable into common shares
|
|
|
25,000,000
|
|
|
25,000
|
|
|
1,975,000
|
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
Cancellation
of treasury shares
|
|
|
|
|
|
|
|
|
(2,121,302
|
)
|
|
|
|
|
|
|
|
2,121,302
|
|
|
—
|
|
Discount
on Trafalgar Note Payable
|
|
|
|
|
|
|
|
|
1,525,776
|
|
|
|
|
|
|
|
|
|
|
|
1,525,776
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
(21,040,218
|
)
|
|
|
|
|
|
|
|
(21,040,218
|
)
|
Balances,
June 30, 2008
|
|
|
82,126,919
|
|
$
|
82,127
|
|
$
|
108,202,723
|
|
$
|
(59,329,848
|
)
|
$
|
(2,226
|
)
|
$
|
—
|
|
$
|
48,952,776
|
|
See
accompanying notes to condensed consolidated financial
statements.
VORTEX
RESOURCES CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
2,510,809
|
|
$
|
(1,845,079
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of affiliate
|
|
|
—
|
|
|
500,000
|
|
Advances
to related party
|
|
|
—
|
|
|
(130,000
|
)
|
Cash
received from sale of discontinued operations - Navigator
|
|
|
—
|
|
|
3,200,000
|
|
Loan
advances to Verge
|
|
|
(241,837
|
)
|
|
(2,450,288
|
)
|
Loan
advances to ERC
|
|
|
(294,361
|
)
|
|
(6,039,981
|
)
|
Construction
in progress
|
|
|
—
|
|
|
(903,626
|
)
|
Cash
proceeds received from Vortex Ocean One member
|
|
|
525,000
|
|
|
—
|
|
Cash
proceeds received from former DCG members
|
|
|
10,000
|
|
|
—
|
|
Investment
in gas rights on real property
|
|
|
(767,313
|
)
|
|
—
|
|
Repayments
from Verge
|
|
|
328,300
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(440,211
|
)
|
|
(5,823,895
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from secured bank loans
|
|
|
17,993
|
|
|
8,174,009
|
|
Repayment
of bank loans
|
|
|
(4,249,590
|
)
|
|
(3,000,000
|
)
|
Proceeds
from related party
|
|
|
889,530
|
|
|
—
|
|
Repayment
to related party
|
|
|
(1,000,000
|
)
|
|
—
|
|
Proceeds
from loans payable
|
|
|
3,240,000
|
|
|
—
|
|
Principal
payments on loans payable
|
|
|
(200,000
|
)
|
|
—
|
|
Payments
to acquire treasury stock
|
|
|
(3,594
|
)
|
|
(289,439
|
)
|
Proceeds
from issuance of stock
|
|
|
1,017,514
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided from financing activities
|
|
|
(288,147
|
)
|
|
4,884,570
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
—
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
1,782,451
|
|
|
(2,784,557
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
369,576
|
|
|
2,852,620
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,152,027
|
|
$
|
68,063
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
4,725
|
|
$
|
10,126
|
|
Cash
received for interest
|
|
$
|
305,803
|
|
$
|
76,060
|
|
|
|
|
|
|
|
|
|
Summary
of non-cash transactions:
|
|
|
|
|
|
|
|
Appswing
note payable converted into 25,000,000 shares
|
|
$
|
2,000,000
|
|
$
|
—
|
|
Acquisition
of DC Gas Preferred shares subsequently converted into 50,000,000
common
shares
|
|
$
|
50,000,000
|
|
|
—
|
|
See
accompanying notes to condensed consolidated financial
statements.
VORTEX
RESOURCES CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
1. Organization
and Business
Vortex
Resources Corp formerly known as Emvelco Corp., is a Delaware Corporation,
which
was incorporated on November 9, 1992 (“Vortex”). Vortex and its consolidated
subsidiaries are collectively referred to herein as the “Company”. The Company's
authorized capital stock consists of 400,000,000 common shares with a par value
of $0.001 per share, and 5,000,000 preferred stocks. As of September 30,
2008, there are 86,626,919 common shares issued and 82,126,919 common shares
outstanding with a par value of $0.001 per share.
Through
December 31, 2007, the Company invested in the real estate development, and
in
the financing business through Emvelco RE Corp. (“ERC”) and its subsidiaries in
the United States of America (“US”) and in Europe. The Company commenced
operations in the investment real estate industry through the acquisition of
an
empty, non-operational, wholly-owned subsidiary, ERC, which was acquired in
June
2006. Primary activity of ERC includes investment, development and subsequent
sale of real estate, as well as investment in the form of loans provided to,
or
ownership acquired in, property development companies, directly or via majority
or minority owned affiliates. The Company’s headquarters are located in Beverly
Hills , California.
In
2008,
the Company changed its business model to focus on the gas and oil industry,
which was approved by its shareholders. Effective August 19, 2008, the Company
changed its name to Vortex Resources Corp., which was accomplished by merger
of
a wholly owned subsidiary into the Company with the Company being the survivor
entity.
Based
on
series of agreements commonly known as “reverse merger” which were formalized on
May 1, 2008, the Company entered into an Agreement and Plan of Exchange (the
"DCG Agreement") with Davy Crockett Gas Company, LLC ("DCG") and its members
("DCG Members"). Pursuant to the DCG Agreement, the Company acquired and the
DCG
Members sold, 100% of the outstanding membership in DCG. DCG is a limited
liability company organized under the laws of the State of Nevada and
headquartered in Bel Air, California. As a newly formed designated LLC, DCG
holds certain development rights for gas drilling in Crockett County, Texas.
DCG
has entered into the final DCG Agreement with the Company, which provided that
the members sold all of their membership units to the Company in exchange for
50
million preferred shares of the Company. The sales price was $50 million, as
calculated by the 50 million shares at an agreed price of $1.00.
The
Company elected to move from The NASDAQ Stock Market to the OTCBB to reduce,
and
more effectively manage, its regulatory and administrative costs, and to enable
Company’s management to better focus on its business of developing the natural
gas drilling rights recently acquired in connection with the acquisition of
DCG.
As
a
result of the series of these reverse merger transactions described above,
the
Company’s ownership structure at September 30, 2008 is as follows:
|
100%
of DCG
|
|
50%
of Vortex Ocean One, LLC
|
|
7%
of Micrologic, which may be sold
|
|
100%
of 610 N. Crescent Heights, LLC and 50% of 13059 Dickens, LLC – both
properties sold
|
The
accompanying financial statements have been prepared on the basis of accounting
principles applicable to a “going concern”, which assumes that the Company will
continue in operation for at least one year and will be able to realize its
assets and discharge its liabilities in the normal course of
operations.
DCG,
a
wholly owned subsidiary is a limited liability company and was organized in
Nevada on February 22, 2008. The Company's members’ capital accounts consist of
10,000 units. As of September 30, 2008, 10,000 member’s units are issued and
outstanding. DCG has obtained drilling rights from a third party in Wolfcamp
Canyon Sandstone Field in West Texas and entering the natural gas production
& exploration, drilling, and extraction business. DCG has the option to
purchase rights on up to 180 in-fill drilling locations on about specific 3,600
acres, based on a 20 acres spacing. The field was first developed in the 1970s
on a 160 acre well spacing and was later reduced based on a small radius of
the
wells drainage. The spacing has subsequently been reduced to 40 acres, 20 acres,
and 10 acres accordingly. DCG’s drilling program is based on 20 acres spacing.
DCG
has
obtained a reserve evaluation report from an independent engineering firm,
which
classifies the gas reserves as “proven undeveloped”. According to the
independent well evaluation, each well contains approximately 400 MMCF (400,000
cubic feet) of recoverable natural gas.
2.
Summary of Significant Accounting Policies
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”).
Basis
of consolidation
The
consolidated financial statements include the accounts of the Company, its
majority-owned subsidiaries and all variable interest entities for which the
Company is the primary beneficiary. All intercompany balances and transactions
have been eliminated upon consolidation. Control is determined based on
ownership rights or, when applicable, whether the Company is considered the
primary beneficiary of a variable interest entity.
Unaudited
Interim Financial Statements
The
accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principals for interim financial
information and with the instructions to Form 10-Q of Regulation S-X. They
do
not include all information and footnotes required by United States generally
accepted accounting principles for complete financial statements. However,
except as disclosed herein, there have been no material changes in the
information disclosed in the notes to the financial statements for the year
ended December 31, 2007 included in the Company’s Form 10K filed with the
Securities and Exchange Commission. The interim unaudited financial statements
should be read in conjunction with those financial statements included in the
Form 10K. In the opinion of management, all adjustments considered necessary
for
a fair presentation, consisting solely of normal recurring adjustments, have
been made.
Operating
results for the nine months ended September 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending December
31,
2008.
Variable
Interest Entities
Under
Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised
December 2003) “Consolidation of Variable Interest Entities” (“FIN 46R”), the
Company is required to consolidate variable interest entities (“VIE's”), where
it is the entity’s primary beneficiary. VIE's are entities in which equity
investors do not have the characteristics of a controlling financial interest
or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
primary beneficiary is the party that has exposure to a majority of the expected
losses and/or expected residual returns of the VIE.
Based
on
the transactions, which were closed on November 2, 2007, the Company owned
58.3%
of Atia Group Limited (AGL) as of December 31, 2007. This interest was divested
as of effective January 1st,
2008
upon completion of the DCG reverse merger transaction. Since the company is
the
primary beneficiary through December 31, 2007, the financial statements of
AGL
are consolidated into these 2007 financial statements. However, as of January
1,
2008, the balance sheet and results of operations of AGL are not consolidated
into these financial statements. The Company previously issued interim financial
statements dated as of March 31, 2008 and for the three month period ending
March 31, 2008. Those financial statements included the consolidation of the
AGL. In
accordance with Financial Accounting Standards, FAS 154, Accounting
Changes and Error Corrections,
the
Company disclosed the accounting change results in financial statements that
are, in effect, the statements of a different reporting entity. The change
shall
be retrospectively applied to the financial statements of all prior periods
presented to show financial information for the new reporting entity for those
periods (see Note 13). As of and for the periods ending September 30, 2008,
the
balance sheets and results of operations of DCG, 610 Crescent Heights, LLC,
Dickens LLC and Vortex Ocean One, LLC are consolidated into these financial
statements.
Use
of estimates
The
preparation of consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Fair
value of financial instruments
The
carrying values of cash equivalents, notes and loans receivable, accounts
payable, loans payable and accrued expenses approximate fair
values.
Revenue
recognition
The
Company applies the provisions of Securities and Exchange Commission’s (“SEC”)
Staff Accounting Bulletin ("SAB") No. 104, “Revenue Recognition in
Financial Statements” (“SAB 104”), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 104 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosure related to revenue recognition policies.
The Company recognizes revenue when persuasive evidence of an arrangement
exists, the product or service has been delivered, fees are fixed or
determinable, collection is probable and all other significant obligations
have
been fulfilled.
Revenues
from property sales are recognized in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 66, “Accounting for Sales of Real Estate,”
when the risks and rewards of ownership are transferred to the buyer, when
the
consideration received can be reasonably determined and when Emvelco has
completed its obligations to perform certain supplementary development
activities, if any exist, at the time of the sale. Consideration is reasonably
determined and considered likely of collection when Emvelco has signed sales
agreements and has determined that the buyer has demonstrated a commitment
to
pay. The buyer’s commitment to pay is supported by the level of their initial
investment, Emvelco’ assessment of the buyer’s credit standing and Emvelco’
assessment of whether the buyer’s stake in the property is sufficient to
motivate the buyer to honor their obligation to it.
Revenue
from fixed price contracts is recognized on the percentage of
completion method. The percentage of
completion method is also used for condominium projects in which the Company
is
a real estate developer and all units have been sold prior to the completion
of
the preliminary stage and at least 25% of the project has been carried out.
Percentage of completion is measured by the percentage of costs incurred to
balance sheet date to estimated total costs. Selling, general,
and administrative costs are charged to expense as incurred. Profit
incentives are included in revenues, when their realization is reasonably
assured. Provisions for estimated losses on uncompleted projects are made in
the
period in which such losses are first determined, in the amount of the
estimated loss of the full contract. Differences between estimates and actual
costs and revenues are recognized in the year in which such differences are
determined. The provision for warranties is provided at certain percentage
of
revenues, based on the preliminary calculations and best estimates of the
Company's management.
Cost
of revenues
Cost
of
revenues includes the cost of real estate sold and rented as well as costs
directly attributable to the properties sold such as marketing, selling and
depreciation.
Real
estate
Real
estate held for development is stated at the lower of cost or market. All direct
and indirect costs relating to the Company's development project are capitalized
in accordance with SFAS No. 67 "Accounting for Costs and Initial Rental
Operations of Real Estate Projects". Such standard requires costs associated
with the acquisition, development and construction of real estate and real
estate-related projects to be capitalized as part of that project. The
realization of these costs is predicated on the ability of the Company to
successfully complete and subsequently sell or rent the property.
Treasury
Stock
Treasury
stock is recorded at cost. Issuance of treasury shares is accounted for on
a
first-in, first-out basis. Differences between the cost of treasury shares
and
the re-issuance proceeds are charged to additional paid-in capital.
Foreign
currency translation
The
Company considers the United States Dollar (“US Dollar” or "$") to be the
functional currency of the Company and its subsidiaries, the prior owned
subsidiary, AGL, which reports it’s financial statements in New Israeli
Sheqel.(“N.I.S”) The reporting currency of the Company is the US Dollar and
accordingly, all amounts included in the consolidated financial statements
have
been presented or translated into US Dollars.
For
non-US subsidiaries that do not utilize the US Dollar as its functional
currency, assets and liabilities are translated to US Dollars at period-end
exchange rates, and income and expense items are translated at weighted-average
rates of exchange prevailing during the period. Translation adjustments are
recorded in “Accumulated other comprehensive income” within stockholders’
equity.
Foreign
currency transaction gains and losses are included in the consolidated results
of operations for the periods presented.
Cash
and cash equivalents
Cash
and
cash equivalents include cash at bank and money market funds with maturities
of
three months or less at the date of acquisition by the Company.
Marketable
securities
The
Company determines the appropriate classification of all marketable securities
as held-to-maturity, available-for-sale or trading at the time of purchase,
and
re-evaluates such classification as of each balance sheet date in accordance
with SFAS No. 115, “Accounting for Certain Investments in Debt and
Equity Securities” (“SFAS 115”). In accordance with Emerging Issues Task
Force (“EITF”) No. 03-01, “The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investment” (“EITF 03-01”), the Company assesses
whether temporary or other-than-temporary gains or losses on its marketable
securities have occurred due to increases or declines in fair value or other
market conditions.
The
Company did not have any marketable securities within continuing operations
for
the six month period ended September 30, 2008.
Property
and equipment
Property
and equipment are stated at cost, less accumulated depreciation. The Company
provides for depreciation of property and equipment using the straight-line
method over the following estimated useful lives:
Software
|
|
|
3
years
|
|
Computer
equipment
|
|
|
3-5
years
|
|
Other
furniture equipment and fixtures
|
|
|
5-7
years
|
|
The
Company’s policy is to evaluate the appropriateness of the carrying value of
long-lived assets. If such evaluation were to indicate an impairment of assets,
such impairment would be recognized by a write-down of the applicable assets
to
the fair value. Based on the evaluation, no impairment was indicated in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (“SFAS 144”).
Equipment
purchased under capital leases is stated at the lower of fair value and the
present value of minimum lease payments at the inception of the lease, less
accumulated depreciation. The Company provides for depreciation of leased
equipment using the straight-line
method over the shorter of estimated useful life and the lease term. During
the
six month period ended June 30, 2008 and the year ended December 31, 2007,
the
Company did not enter into any capital leases.
Recurring
maintenance on property and equipment is expensed as incurred.
Any
gain
or loss on retirements and disposals is included in the results of operations
in
the period of the retirement or disposal. No retirements and disposals occurred
for the period ended September 30, 2008 and year ended December 31, 2007 for
the
Company’s continuing operations.
Goodwill
and intangible assets
Goodwill
results from business acquisitions and represents the excess of purchase price
over the fair value of identifiable net assets acquired at the acquisition
date.
There was goodwill recorded in the transaction with AGL totaling $1.2 million
as
of December 31, 2007. Since this subsidiary was divested as of January 1, 2008
in compliance with the C Properties Agreement, this goodwill was impaired during
the first quarter of 2008 and presented as a consulting, director and
professional fees in the P&L. As a result of the acquisition of DCG, the
Company recorded Goodwill for a total of $49,990,000 as the former members
of
DCG were given conversion rights under the preferred stock arrangement for
50,000,000 common shares at a $1.00 price per share less the contribution of
$10,000.
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill
is tested for impairment annually and whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Management evaluates the recoverability of goodwill by comparing the carrying
value of the Company’s reporting units to their fair value. Fair value is
determined based a market approach. For
the
year ended December 31, 2007, an analysis was performed on the goodwill
associated with the investment in AGL, and impairment was charged against the
P&L for approximately $10.2 million.
Intangible
assets that have finite useful lives, whether or not acquired in a business
combination, are amortized over their estimated useful lives, and also reviewed
for impairment in accordance with SFAS 144. On July 22, 2007, the Company
entered into a $2 million note payable agreement with Appswing, which included
an option to convert the debt into equity. Accordingly, the Company recorded
in
intangible assets related to the discount on the issuance of debt. The estimated
value of the conversion feature is approximately $976,334, and will be reported
as interest expense over the anticipated repayment period of the debt. Said
note
was converted during August 2008 – See subsequent events – as such all value of
the conversion feature is approximately $976,334 was recorded as interest
expense.
Earnings
(loss) per share
Basic
earnings (loss) per share is computed by dividing income (loss) attributable
to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings (loss) per share reflects the effect of
dilutive potential common shares issuable upon exercise of stock options and
warrants.
Comprehensive
income
Comprehensive
income includes all changes in equity except those resulting from investments
by
and distributions to shareholders.
Income
taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry-forwards. Deferred tax assets are reduced by a
valuation allowance if it is more likely than not that some portion or all
of
the deferred tax asset will not be realized. Deferred tax assets and
liabilities, are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
a
change in tax rates is recognized in income in the period that includes the
enactment date.
Stock-based
compensation
Effective
January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based
Payment” (“SFAS 123R”). Under SFAS 123R, the Company is required to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. The measured
cost is recognized in the statement of operations over the period during which
an employee is required to provide service in exchange for the award.
Additionally, if an award of an equity instrument involves a performance
condition, the related compensation cost is recognized only if it is probable
that the performance condition will be achieved.
Prior
to
the adoption of SFAS 123R , the Company accounted for stock-based employee
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(“APB 25”) and related interpretations, and chose to adopt the disclosure-only
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,
“Accounting for Stock-based Compensation” (“SFAS 123”), as amended by SFAS No.
148, “Accounting for Stock-Based Compensation — Transition and Disclosure”
(“SFAS 148”). Under APB 25, the Company did not recognize expense related to
employee stock options because the exercise price of such options was equal
to
the quoted market price of the underlying stock at the grant date.
The
Company adopted SFAS 123R using the modified prospective method, which requires
the application of the accounting standard as of January 1, 2006, the first
day of the Company’s fiscal year 2006. Under this method, compensation cost
recognized during the year ended December 31, 2006 includes: (a) compensation
cost for all share-based payments granted prior to, but not yet vested, as
of
January 1, 2006, based on the grant date fair value estimated in accordance
with
the original provisions of SFAS 123 and amortized on an straight-line basis
over
the requisite service period, and (b) compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of SFAS 123R amortized on
a
straight-line basis over the requisite service period. Results for prior periods
have not been restated.
The
Company estimates the fair value of each option award on the date of the grant
using the Black-Scholes option valuation model. Expected volatilities are based
on the historical volatility of the Company’s common stock over a period
commensurate with the options’ expected term. The expected term represents the
period of time that options granted are expected to be outstanding and is
calculated in accordance with SEC guidance provided in the SAB 107, using a
“simplified” method. The risk-free interest rate assumption is based upon
observed interest rates appropriate for the expected term of the Company’s stock
options.
The
following table shows total non-cash stock-based employee compensation expense
included in the consolidated statement of operations for the period ended
September 30, 2008 and the year ended December 31, 2007:
Categories of cost and expenses
|
|
Nine Months
ended
September30,
2008
|
|
Year ended
December 31,
2007
|
|
|
|
|
|
|
|
Compensation
and related costs
|
|
$
|
738,786
|
|
$
|
36,817
|
|
Consulting,
professional and directors fees
|
|
|
1,838,074
|
|
|
43,416
|
|
Total
stock-based compensation expense
|
|
$
|
2,576,860
|
|
$
|
80,233
|
|
Recently
Issued but Not Yet Adopted Accounting Standards
In
December 2007, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 110 (“SAB 110”). SAB 110 amends and replaces
Question 6 of Section D.2 of Topic 14, “Share-Based Payment,” of the Staff
Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses
the
views of the staff regarding the use of the “simplified” method in developing an
estimate of the expected term of “plain vanilla” share options and allows usage
of the “simplified” method for share option grants prior to December 31,
2007. SAB 110 allows public companies which do not have historically sufficient
experience to provide a reasonable estimate to continue to use the “simplified”
method for estimating the expected term of “plain vanilla” share option grants
after December 31, 2007. The Company will continue to use the “simplified”
method until it has enough historical experience to provide a reasonable
estimate of expected term in accordance with SAB 110.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) 141-R, “Business Combinations.” SFAS 141-R retains the fundamental
requirements in SFAS 141 that the acquisition method of accounting (referred
to
as the purchase method) be used for all business combinations and for an
acquirer to be identified for each business combination. It also establishes
principles and requirements for how the acquirer: (a) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree;
(b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase and (c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141-R will
apply prospectively to business combinations for which the acquisition date
is
on or after the Company’s fiscal year beginning October 1, 2009. While the
Company has not yet evaluated the impact, if any, that SFAS 141-R will have
on
its consolidated financial statements, the Company will be required to expense
costs related to any acquisitions after September 30, 2009.
In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements.” This Statement amends Accounting Research
Bulletin 51 to establish accounting and reporting standards for the
noncontrolling (minority) interest in a subsidiary and for the deconsolidation
of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary
is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. The Company has not yet
determined the impact, if any, that SFAS 160 will have on its consolidated
financial statements. SFAS 160 is effective for the Company’s fiscal year
beginning October 1, 2009.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures
about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. In February 2008, the FASB issued FASB Staff Position
No. FAS 157–2, “Effective Date of FASB Statement No. 157”, which provides a
one year deferral of the effective date of SFAS 157 for non–financial assets and
non–financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, effective
January 1, 2008, we adopted the provisions of SFAS No. 157 with respect to
our financial assets and liabilities only. Since the Company has no investments
available for sale, the adoption of this pronouncement has no material impact
to
the financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—
including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
items
at fair value. This statement provides entities the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Effective January 1, 2008,
we adopted SFAS No. 159 and have chosen not to elect the fair value option
for any items that are not already required to be measured at fair value in
accordance with accounting principles generally accepted in the United
States.
Gas
Rights on Real Property, plant, and equipment
Depreciation,
depletion and amortization, based on cost less estimated salvage value of the
asset, are primarily determined under either the unit-of-production method
or
the straight-line method, which is based on estimated asset service life taking
obsolescence into consideration. Maintenance and repairs, including planned
major maintenance, are expensed as incurred. Major renewals and improvements
are
capitalized and the assets replaced are retired. Interest costs incurred to
finance expenditures during the construction phase of multiyear projects are
capitalized as part of the historical cost of acquiring the constructed assets.
The project construction phase commences with the development of the detailed
engineering design and ends when the constructed assets are ready for their
intended use. Capitalized interest costs are included in property, plant and
equipment and are depreciated over the service life of the related assets.
The
Company uses the “successful efforts” method to account for its exploration and
production activities. Under this method, costs are accumulated on a
field-by-field basis with certain exploratory expenditures and exploratory
dry
holes being expensed as incurred. Costs of productive wells and development
dry
holes are capitalized and amortized on the unit-of-production method. The
Company records an asset for exploratory well costs when the well has found
a
sufficient quantity of reserves to justify its completion as a producing well
and where the Company is making sufficient progress assessing the reserves
and
the economic and operating viability of the project. Exploratory well costs
not
meeting these criteria are charged to expense.
Acquisition
costs of proved properties are amortized using a unit-of-production method,
computed on the basis of total proved natural gas reserves. Significant unproved
properties are assessed for impairment individually and valuation allowances
against the capitalized costs are recorded based on the estimated economic
chance of success and the length of time that the Company expects to hold the
properties. The valuation allowances are reviewed at least annually. Other
exploratory expenditures, including geophysical costs, other dry hole costs
and
annual lease rentals, are expensed as incurred.
Unit-of-production
depreciation is applied to property, plant and equipment, including capitalized
exploratory drilling and development costs, associated with productive
depletable extractive properties. Unit-of-production rates are based on the
amount of proved developed reserves of natural gas and other minerals that
are
estimated to be recoverable from existing facilities using current operating
methods. Under the unit-of-production method, natural gas volumes are considered
produced once they have been measured through meters at custody transfer or
sales transaction points at the outlet valve on the lease or field storage
tank.
Gains
on
sales of proved and unproved properties are only recognized when there is no
uncertainty about the recovery of costs applicable to any interest retained
or
where there is no substantial obligation for future performance by the
Company’s. Losses on properties sold are recognized when incurred or when the
properties are held for sale and the fair value of the properties is less than
the carrying value. Proved oil and gas properties held and used by the Company
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amounts may not be recoverable. Assets are grouped at the
lowest levels for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. The Company estimates
the future undiscounted cash flows of the affected properties to judge the
recoverability of carrying amounts. Cash flows used in impairment evaluations
are developed using annually updated corporate plan investment evaluation
assumptions for natural gas commodity prices. Annual volumes are based on
individual field production profiles, which are also updated annually. Cash
flow
estimates for impairment testing exclude derivative instruments. Impairment
analyses are generally based on proved reserves. Where probable reserves exist,
an appropriately risk-adjusted amount of these reserves may be included in
the
impairment evaluation. Impairments are measured by the amount the carrying
value
exceeds the fair value.
Restoration,
Removal and Environmental Liabilities
The
Company is subject to extensive federal, state and local environmental laws
and
regulations. These laws regulate the discharge of materials into the environment
and may require the Company to remove or mitigate the environmental effects
of
the disposal or release of natural gas substances at various sites.
Environmental expenditures are expensed or capitalized depending on their future
economic benefit. Expenditures that relate to an existing condition caused
by
past operations and that have no future economic benefit are expensed.
Liabilities for expenditures of a noncapital nature are recorded when
environmental assessments and/or remediation is probable, and the costs can
be
reasonably estimated. Such liabilities are generally undiscounted unless the
timing of cash payments for the liability or component is fixed or reliably
determinable.
The
Company accounts for asset retirement obligations in accordance with SFAS No.
143, "Accounting
for Asset Retirement Obligations” (SFAS
143). SFAS 143 addresses accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 143 requires that the fair value of a liability for
an
asset's retirement obligation be recorded in the period in which it is incurred
and the corresponding cost capitalized by increasing the carrying amount of
the
related long-lived asset. The liability is accreted to its then present value
each period, and the capitalized cost is depreciated over the useful life of
the
related asset. The Company will include estimated future costs of abandonment
and dismantlement in the full cost amortization base and amortize these costs
as
a component of our depletion expense in the accompanying financial
statements.
Business
segment reporting
Though
the company had minor holdings of real estate properties which have been sold
as
of September 30, 2008, the Company manages its operations in one business
segment, the natural gas production, exploration, drilling, and extraction
business.
3.
Lines of Credit and Restricted Cash
The
Company’s real estate investment operations required substantial
up-front expenditures for land development contracts and construction.
Accordingly, the Company required a substantial amount of cash on hand, as
well
as funds accessible through lines of credit with banks or third parties, to
conduct its business. The Company had financed its working capital needs
on a project-by-project basis, primarily with loans from banks and debt via
the
All Inclusive Trust Deed Agreement (AITDA), and with the existing cash of the
Company. On August 28, 2006, the Company entered into a $4,000,000
Revolving Line of Credit (“line of credit”) with a commercial bank. As security
for this credit facility, the Company deposited $4,000,000 into a certificate
of
deposit (“CD”) as collateral for a two year period. The CD earns interest at a
rate of 5.25% annually, and any interest earned on the CD is restricted from
withdrawal and must remain in the account for the entire term. On November
21,
2006, the Company deposited an additional $4,000,000 into another CD with the
same restrictions on withdrawal. This CD matures on November 21, 2008 and the
deposit bears an interest rate of 5.12% annually. The interest rate on the
line
of credit is 5.87% annually.
As
of
September 30, 2008, the Company partially paid off the line of credit and the
Company intends to pay off the balance of the line in full in November 2008.
4.
Loans to Emvelco RE Corp (ERC) and Verge Living Corporation
(“Verge”)
On
June
14, 2006, Emvelco issued a $10 million line of credit to ERC. Outstanding
balances beared interest at an annual rate of 12% and the line of credit had
a
maximum borrowing limit of $10 million. Initially on October 26, 2006 and then
again ratified on December 29, 2006, the Board of Directors of Emvelco approved
an increase in the borrowing limit of the line of credit to $20 million. The
Board also restricted use of the funds to real estate development. On November
2, 2007, the Company exercised the Verge option to purchase a multi-use
condominium and commercial property in Las Vegas, Nevada,, thereby reducing
the
amount outstanding by $10 million. Additionally, the Verge option required
that
the Company pays TIGH, the then parent of ERC, another $5 million when
construction began on the Verge Project. As of September 30, 2008, the Company
has accrued and recorded that payment as a reduction to this loan receivable
balance. As of September 30, 2008, the outstanding loan receivable balances
by
ERC and Verge are $4,992,181,and $845,580, respectively. Due to the Company
change of strategy, and in lieu of the turmoil in the real estate industry
including the sub-prime crisis, the parties entered negotiations in order to
restructure the debt and potentially its payment. As such, the Company fully
reserved the receivable and charged bad debt expense on the statement of
operations for the nine month period ending September 30, 2008.
5.
Convertible Notes Payable and Debt Discount
Appswing:
The
Company recorded an intangible asset related to the discount on the issuance
of
debt. The estimated value of the conversion feature was approximately $976,334,
and would have been reported as interest expense over the anticipated repayment
period of the debt. The $2,000,000 note was converted into common stock on
August 13, 2008. Accordingly, the Company recognized amortization of the
discount in the aggregate amount of $232,581 from inception to interest expense
and the remaining $743,752 of the intangible asset related to the discount
on
the issuance of debt was expensed.
Trafalgar:
The
Company entered into a Securities Purchase Agreement (the "Agreement") with
Trafalgar Capital Specialized Investment Fund, Luxembourg ("Buyer") on September
25, 2008 for the sale of up to $2,750,000 in convertible notes (the "Notes").
Pursuant to the terms of the Agreement, the Company and the Buyer closed on
the
sale and purchase of $1,600,000 in Notes on September 25, 2008, with escrow
instruction to be closed on October 1, 2008. The Buyer, at its sole discretion,
has the option to close on a second financing for $400,000 in Notes (which
has
been exercised as discussed below) and a third financing for $750,000 in Notes.
Pursuant to the terms of the Agreement, the Company agreed to pay to the Buyer
a
commitment fee of 4% of the commitment amount, a structuring fee of $15,000,
a
facility draw down fee of 4%, issue the Buyer 150,000 shares of common stock,
pay a due diligence fee to the Buyer of $15,000 and pay an advisory fee of
$100,000 to TAS Holdings Limited.
The
Notes
bear interest at 8.5% with such interest payable on a monthly basis with the
first two payments due at closing. The Notes are due in full in September 2010.
In the event of default, the Buyer may elect to convert the interest payable
in
cash or in shares of common stock at a conversion price using the closing bid
price of when the interest is due or paid. The Notes are convertible into common
stock, at the Buyer's option, at a conversion price equal to 85% of the volume
weighted average price for the ten days immediately preceding the conversion
but
in no event below a price of $2.00 per share. If on the conversion or redemption
of the Notes, the Euro to US dollar spot exchange rate (the "Exchange Rate")
is
higher that the Exchange Rate on the closing date, then the number of shares
shall be increased by the same percentage determined by dividing the Exchange
Rate on the date of conversion or redemption by the Exchange Rate on the closing
date. The Company is required to redeem the Notes starting on the fourth month
in equal installments of $56,000 with a final payment of $480,000 with respect
to the initial funding of $1,600,000. We are also required to pay a redemption
premium of 7% on the first redemption payment, which will increase 1% per month.
The Company may prepay the Notes in advance, which such prepayment will include
a redemption premium of 15%. In the event the Company closes on a funding in
excess of $4,000,000, the Buyer, in its sole election, may require that the
Company redeem the Notes in full. On any principal or interest repayment date,
in the event that the Euro to US dollar spot exchange rate is lower than the
Euro to US dollar spot exchange rate at closing, then we will be required to
pay
additional funds to compensate for such adjustment.
Pursuant
to the terms of the Notes, the Company shall default if (i) the Company fails
to
pay amounts due within 15 days of maturity, (ii) failure of the Company to
comply with any provision of the Notes upon ten days written notice; (iii)
bankruptcy or insolvency or (iv) any breach of the Agreement and such breach
is
not cured upon ten days written notice. Upon default by the Company, the Buyer
may accelerate full repayment of all Notes outstanding and all accrued interest
thereon, or may convert all Notes outstanding (and accrued interest thereon)
into shares of common stock (notwithstanding any limitations contained in the
Agreement and the Notes). The Buyer has a secured lien on three of our wells
and
would be entitled to foreclose on such wells in the event an event of default
is
entered. In the event that the foregoing was to occur, significant adverse
consequences to the Company would be reasonably anticipated.
So
long
as any of the principal or interest on the Notes remains unpaid and unconverted,
the Company shall not, without the prior written consent of the Buyer, (i)
issue
or sell any common stock or preferred stock, (ii) issue or sell any Company
preferred stock, warrant, option, right, contract, call, or other security
or
instrument granting the holder thereof the right to acquire Common Stock, (iii)
incur debt or enter into any security instrument granting the holder a security
interest in any of the assets of the Company or (iv) file any registration
statement on Form S-8.
The
Buyer
has contractually agreed to restrict their ability to convert the Notes and
receive shares of our common stock such that the number of shares of the Company
common stock held by a Buyer and its affiliates after such conversion or
exercise does not exceed 9.9% of the Company's then issued and outstanding
shares of common stock.
The
Buyer
exercised its option to close on a second financing for $400,000 in Notes on
October 28, 2008 and still holds an option to close on additional financing
for
$750,000 in Notes. The terms of the second financing for $400,000 are identical
to the terms of the $1,600,000 Note, as disclosed in detail on the Company
filing on October 2, 2008 on Form 8-K - Unregistered Sale of Equity Securities,
Financial Statements and Exhibits. The Notes are convertible into our common
stock, at the Buyer's option, at a conversion price equal to 85% of the volume
weighed average price for the ten days immediately preceding the conversion
but
in no event below a price of $2.00 per share.
As
of the
date hereof, the Company is obligated on the Notes issued to the Buyer in
connection with this offering. The Notes are a debt obligation arising other
than in the ordinary course of business, which constitute a direct financial
obligation of the Company.
The
Notes
were offered and sold to the Buyer in a private placement transaction made
in
reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act of 1933 and Rule 506 promulgated thereunder. The Buyer is an
accredited investor as defined in Rule 501 of Regulation D promulgated under
the
Securities Act of 1933.
The
Company recorded an intangible asset related to the discount on the issuance
of
debt. The estimated value of the conversion feature was approximately $1,525,776
and will be reported as interest expense over the anticipated repayment period
of the debt.
Star:
On
September 1, 2008, the Company entered into a note payable with Star Equity
Investments LLC, a third party, for $1 million was effective January 1, 2008.
The proceeds from this note were used to pay off the Company’s debt to Mr.
Attia, a related party. The note bears 12% interest commencing October 1st,
2008
and can be converted (including interest) into common shares of the Company
at
an established conversion price of $0.75 per share.
6.
Real Estate Investments for Sale
The
Company owns 100% of subsidiary 610 N. Crescent Heights, LLC, which is located
in Los Angeles, CA. On April 2008, the Company obtained Certificate of Occupancy
from the City of Los Angles, and listed the property for sale at selling price
of $2,000,000. At September 30, 2008, the Company sold the property for the
gross sale price of $1,990,000 and recorded costs of sales totaling $1,933,569,
which were previously capitalized construction costs.
The
Company owns 50% of 13059 Dickens, LLC, as reported by the Company on Form
8-K
on December 21, 2007, through a joint venture with a third party at no cost
to
the Company. As all balances due under this venture is via All Inclusive Trust
Deed, and in lieu of the Company new strategy, the Company entered advanced
negotiations with regards to selling its interest to the other party, as no
cost
to the Company, or liability, by conveying back title of said property, and
releasing the Company from any associated liability. As of September 30, 2008,
the project was sold back to the third party, by reversing the transaction,
at
no cost to the Company.
7.
Acquisitions
Davy
Crockett Gas Company, LLC
Based
on
series of agreements commonly known as a “reverse merger” which was formalized
on May 1, 2008, the Company entered into an Agreement and Plan of Exchange
with
DCG. (See Notes 1, 2)
Vortex
Ocean One, LLC
On
June
30, 2008, the Company formed a limited liability company with Tiran Ibgui,
an
individual ("Ibgui"), named Vortex Ocean One, LLC (the "Vortex One"). The
Company and Ibgui each own a fifty percent (50%) membership interest in Vortex
One. The Company is the Manager of the Vortex One. Vortex One has been formed
and organized to raise the funds necessary for the drilling of the first well
being undertaken by the Company's wholly owned subsidiary DCG (as reported
on
the Company's Form 8-Ks filed on May 7, 2008 and May 9, 2008 and amended on
June
16, 2008). The Company and Ibgui entered into a Limited Liability Company
Operating Agreement which sets forth the description of the membership
interests, capital contributions, allocations and distributions, as well as
other matters relating to Vortex One. Mr. Ibgui paid $525,000 as consideration
for his 50% ownership in Vortex One and the Company issued 525,000 common shares
at an establish $1.00 per share price for its 50% ownership in Vortex
One.
On
October 29, 2008, the Company entered into a settlement arrangement with Mr.
Ibgui, whereby the Company agree to transfer the 525,000 common shares
previously owned by Vortex One to Mr. Ibgui in exchange for settlement of all
disputes between the two parties. (See Note 14 – Subsequent Events)
8.
Dispositions
Completed
divesture of Atia Group Limited (AGL) shares
On
August
19, 2008, the Company entered into a Final Fee Agreement (the “Consultant
Agreement”) with a third party, C. Properties Ltd. (“Consultant”). Pursuant to
the Consultant Agreement (See - Subsequent events), the Company agreed with
the
Consultant to exchange the Company’s interest in AGL as a final fee in
connection with its DCG acquisition. The Company had to pay Consultant certain
fees in accordance with the Consultant Agreement and the Consultant had agreed
that, in lieu of cash payment, it would receive an aggregate of up to
734,060,505 shares of stock of the Atia Group Ltd. (the “Atia Shares”). The
Consultant was not advised about the restructuring of the acquisition of DCG
by
the Company and in order to compensate the Consultant and avoid any potential
litigation, the Company has agreed to waive the above production requirements
set forth in the Consultant Agreement and transfer all of the Atia Shares
immediately which such transfer shall be considered effective January 1, 2008.
On
August
16, 2008 610 N. Crescent Heights, LLC, entered into a sale and escrow agreement
with third parties, for the sale of the real property located at 610 North
Crescent Heights, Los Angeles, for $1,990,000. Said escrow was closed as of
September 30, 2008.
On
August
19, 2008, the Dickens LLC conveyed title and full reconveyance of its AITD
to
third party, reversing the Company’s joint venture with said third party, at no
cost or liability to the Company.
9.
Commitments and Contingencies
(a)
Employment Agreements
Effective
July 1, 2006, the Company entered into a five-year employment agreement with
Yossi Attia as the President and provides for annual compensation in the amount
of $240,000, an annual bonus not less than $120,000 per year, and an annual
car
allowance. On August 14, 2006, the Company amended the agreement to provide
that
Mr. Attia shall serve as the Chief Executive Officer of the Company for a term
of two years commencing August 14, 2006 and granting annual compensation of
$250,000 to be paid in the form of Company shares of common stock. The number
of
shares to be received by Mr. Attia is calculated based on the average closing
price 10 days prior to the commencement of each employment year.
On
August
19, 2008, the Company entered into that certain Employment Agreement with Mike
Mustafoglu, effective July 1, 2008, pursuant to which Mr. Mustafoglu agreed
to
serve as the Chairman of the Board of Directors of the Company for a period
of
five years. Mr. Mustafoglu will receive (i) a salary of $240,000; (ii) a
performance bonus of 10% of net income before taxes, which will be allocated
by
Mr. Mustafoglu and other key executives at the sole discretion of Mr.
Mustafoglu; and (iii) a warrant to purchase 10 million shares of common stock
of
the Company at an exercise price equal to the lesser of $.50 or 50% of the
average market price of the Company’s common stock during the 20 day period
prior to exercise on a cashless basis (the “Mustafoglu Warrant”). The Mustafoglu
Warrant shall be released from escrow on an equal basis over the employment
period of five years. As a result, 2,000,000 shares of the Mustafoglu Warrant
will vest per year.
Effective
July 16, 2008, the Board of Directors of the Company approved that certain
Mergers and Acquisitions Consulting Agreement (the "M&A Agreement") between
the Company and TransGlobal Financial LLC, a California limited liability
company ("TransGlobal"). Pursuant to the M&A Agreement, TransGlobal agreed
to assist the Company in the identification, evaluation, structuring,
negotiation and closing of business acquisitions for a term of five years.
As
compensation for entering into the M&A Agreement, TransGlobal shall receive
a 20% carried interest in any transaction introduced by TransGlobal to the
Company that is closed by the Company. At TransGlobal's election, such
compensation may be paid in restricted shares of common stock of the Company
equal to 20% of the transaction value. Mike Mustafoglu, who is the Chairman
of
Transglobal Financial, was elected on July 28, 2008 at a special shareholder
meeting as the Company’s Chairman of the Board of Directors.
(b)
Construction Loans
During
2007, the Company entered into several loan agreements with different financial
institutions in connection with the financing of the different real estate
projects (see Note 3).
(c)
AGL
Transaction:
Based
on
series of agreements commencing June 5, 2007 and following by July 23, 2007
(as
reported on the Company's Form 8-K’s – See Disposal of ERC, Verge and
Acquisition of AGL), the Company, the Company's chief executive officer Yossi
Attia, and Darren Dunckel - CEO of ERC (collectively, the "Investors") entered
into an Agreement (the "Upswing Agreement") with a third party, Upswing, Ltd.
(also known as Appswing Ltd., hereinafter referred to as "Upswing"). Pursuant
to
the Upswing Agreement, the Investors intend to invest in an entity listed on
the
Tel Aviv Stock Exchange – the Atia Group Limited, f/k/a Kidron Industrial
Holdings Ltd (herein referred to as AGL). Based on closing of said transaction,
on July 23, 2007 the Company issued a straight note to Upswing for the amount
of
$2,000,000. This Promissory Note is made and entered into based upon a series
of
agreements by and between Maker and Holder dated as of June 5, 2007,
July 20, 2007 and July 23, 2007, wherein the actual Closing of the
transactions which are the subject matter of the Appswing Agreements known
as
the Kidron Industrial Holdings, Ltd. Transaction (the “Kidron Transaction”) has
taken place and therefore this note is final and earned, as referenced in the
Appswing Agreement dated July 20, 2007 (the “Closing”) and the Company
becoming the majority shareholder of Kidron with a controlling interest of
not
less than 50.1%. The Unpaid Principal Balance of this note shall bear interest
until due and payable at a rate equal to 8 % per annum. The principal hereof
shall be due and payable in full in no event sooner than January 22, 2008,
(the "Maturity Date"). 51% of the Company holdings in AGL, were pledged to
secure said note.
As
the
Company defaulted on said note on April 11, 2008, the parties amended the note
terms, by adding a contingent convertible feature to the note, as well as extend
its Maturity Date in no event sooner than January 22, 2013. The outstanding
debt represented by this Note (including accrued Interest) may be converted
to
ordinary common shares of the Company only if The Company issues during any
six
(6) month period subsequent to the date of this Note, 25,000,000 (twenty five
million) or more shares of its common stock. Holder may, at any time after
the
occurrence of the preceding event, have the right to convert this Note in whole
or in part into The Company common shares at a conversion price of $0.08 per
share. Based on notices dated August 8, 2008, said note were partially converted
on August 18, 2008 – See subsequent events.
As
part
of the AGL closing, the Company undertook to indemnify the AGL in respect of
any
tax to be paid by Verge, deriving from the difference between (a) Verge's
taxable income from the Las Vegas project, up to an amount of $21.7 million
and
(b) the book value of the project in Las Vegas for tax purposes on the books
of
Verge, at the date of the closing of the transfer of the shares of Verge to
the
Company. Accordingly, the amount of the indemnification is expected to be the
amount of the tax in respect of the aforementioned difference, up to a maximum
difference of $11 million. The Company believes it as no exposure under said
indemnification. Atia Project undertook to indemnify AGL in respect of any
tax
to be paid by Sitnica, deriving from the difference between (a) Verge's taxable
income from the Samobor project, up to an amount of $5.14 million and (b) the
book value of the project in Samobor for tax purposes on the books of Sitnica,
at the date of the closing of the transfer of the shares of Sitnica to the
Company. Accordingly, the amount of the indemnification is expected to be the
amount of the tax in respect of the aforementioned difference, up to a maximum
difference of $0.9 million. The Atia Project undertook to bear any additional
purchase tax (if any is applicable) that Sitnica would have to pay in respect
of
the transfer of the contractual rights in investment real estate in Croatia,
from the Atia Project to Sitnica.
On
April
29, 2008, the Company entered into Amendment No. 1 ("Amendment No. 1") to that
certain Share Exchange Agreement between the Company and Trafalgar Capital
Specialized Investment Fund, ("Trafalgar"). Amendment No. 1 states that due
to
the fact that the Israeli Securities Authority ("ISA") delayed the issuance
of
the Implementation Shares issuable from the Atia Group to Trafalgar, that the
Share Exchange Agreement shall not apply to 69,375,000 of the Implementation
Shares issuable under the CEF. All other terms of the Share Exchange Agreement
remain in full force and effect.
Disposal
of Atia Group LTD shares: On August 19, 2008 the Company entered into final
fee
agreement with C. Properties Ltd. (“Consultant”), where the Company had to pay
Consultant certain fees in accordance with the agreement entered with the
Consultant, the Consultant had agreed that, in lieu of cash payment, it would
receive an aggregate of up to 734,060,505 shares of stock of the Atia Group
Ltd.
(the “Atia Shares”). The Consultant was not advised on the restructuring of the
acquisition of DCG by the Company and in order to compensate the Consultant
and
avoid any potential litigation, the Company has agreed to waive the production
requirements set forth in the Consultant Agreement and transfer all of the
Atia
Shares immediately which such transfer shall be considered effective January
1,
2008.
Based
on
the agreement, the Company disposed all its holdings in AGL effective January
1,
2008, and the company financials reflect such disposal.
(d)
Lease Agreements
Future
minimum payments of obligations under operating lease at September 30, 2008
are
as follows:
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
$
|
7,500
|
|
$
|
30,000
|
|
$
|
30,000
|
|
$
|
30,000
|
|
$
|
—
|
|
$
|
—
|
|
The
Company head office is located at 9107 Wilshire Blvd., Suite 450, Beverly Hills,
CA 90210, based on a month-to-month basis, paying $219 per month. The
Company’s operation office is located at 1061 ½ N Spaulding Ave, West Hollywood,
CA 90046, paying $2,500 per month.
(e)
Legal
Proceedings
Except
as
set forth below, there are no known significant legal procedures that have
been
filed and are outstanding or pending against the Company.
From
time
to time, we are a party to litigation or other legal proceedings that we
consider to be a part of the ordinary course of our business. We are not
involved currently in legal proceedings other than detailed below that could
reasonably be expected to have a material adverse effect on our business,
prospects, financial condition or results of operations. We may become involved
in material legal proceedings in the future.
The
Company filed a complaint in the Superior Court for the County of Los Angeles,
against a foreign attorney. The case was filed on February 14, 2007, and service
of process has been done. In the complaint the Company is seeking judgment
against this attorney in the amount of approximately 250,000 Euros
(approximately $316,000 as of the date of actual transferring the funds), plus
interest, costs and fees. Defendant has not yet appeared in the action. The
Company believes that it has a meritorious claim for the return of monies
deposited with defendant in a trust capacity, and, from the documents in the
Company’s possession, there is no reason to doubt the validity of the claim.
During April 2007 defendant returned $92,694 (70,000 Euros at the relevant
time)
which netted to $72,694 post legal expenses; the Company has granted him a
15-day extension to file his defense. Post the extension and in lieu of not
filing a defense, the Company filed for a default judgment. On October 25,
2007
the Company obtained a California Judgment by court after default against the
attorney for the sum of $249,340.65. However, management does not have any
information on the collectibles of said judgment that entered in
court.
A
consultant that was terminated by an ex-affiliate of the Company, named the
Company as a defendant in a litigation that the Company has neither any interest
nor liability. The Company position is that naming the Company in said
litigation is malicious. The Company filled an answer to said complaint
requesting dismissal.
Other
than described above, as of September 30, 2008 the Company or its subs are
not
side to any litigation.
(f)
Navigator Acquisition – Registration Rights
The
Company entered into a registration rights agreement dated July 21, 2005,
whereby it agreed to file a registration statement registering the 441,566
shares of Company common stock issued in connection with the Navigator
acquisition within 75 days of the closing of the transaction. The Company also
agreed to have such registration statement declared effective within 150 days
from the filing thereof. In the event that Company failed to meet its
obligations to register the shares, it may have been required to pay a penalty
equal to 1% of the value of the shares per month. The Company obtained a written
waiver from the seller stating that the seller would not raise any claims in
connection with the filing of registration statement through May 30, 2006.
The
Company since received another waiver extending the registration deadline
through May 30, 2007 without penalty. As of September 30, 2008 (effective March
31, 2008), the Company was in default of said agreement and therefore made
a
settlement provision for compensation in the amount of $150,000 in the form
of a
note to represent agreed upon final compensation. Further, the Company
negotiated with said party to allow the potential conversion of said note into
common shares of the Company at the conversion rate of $0.75 per share, or
the
issuance of 200,000 shares. The parties have not concluded the negotiations
as
of the release date of this Report.
(g)
Indemnities Provided Upon Sale of Subsidiaries
On
April
15, 2005, the Company sold Euroweb Slovakia. According to the securities
purchase contract (the “Contract”); the Company will indemnify the buyer for all
damages incurred by the buyer as the result of seller’s breach of certain
representations, warranties, or obligations as set in the Contract up to an
aggregate amount of $540,000. The buyer shall not be entitled to make any claim
under the Contract after the fourth anniversary of the date of the Contract.
No
claims have been made to-date. At June 30, 2008 the Company accrued $35,000
as
the estimated fair value of this indemnity.
On
May
23, 2006, the Company sold Euroweb Hungary and Euroweb Romania. According to
the
share purchase agreement (the “SPA”), the Company will indemnify the buyer for
all damages incurred by the buyer as the result of seller’s breach of certain
representations, warranties or obligations as provided for in the SPA. The
Company shall not incur any liability with respect to any claim for breach
of
representation and warranty or indemnity, and any such claim shall be wholly
barred and unenforceable unless notice of such claim is served upon the Company
by buyer no later than 60 days after the buyer’s approval of Euroweb Hungary and
Euroweb Romania’s statutory financial reports for the fiscal year 2006, but in
any event no later than June 1, 2007. In the case of Clause 8.1.6 (Taxes) or
Clause 9.2.4 of SPA, the time period is five years from the last day of the
calendar year in which the closing date occurs. No claims have been made to
date. At September 30, 2008, the Company has accrued $201,020 as the estimated
fair value of this indemnity.
(h)
Sub-Prime Crisis
The
mortgage credit markets in the U.S. have been experiencing difficulties as
a
result of the fact that many debtors are finding it difficult to obtain
financing (hereinafter – the “Sub-prime crisis”). The sub-prime crisis resulted
from a number of factors, as follows: an increase in the volume of repossessions
of houses and apartments, an increase in the volume of bankruptcies of mortgage
companies, a significant decrease in the available resources for purposes of
financing through mortgages, and in the prices of apartments. The financing
of
the project of the Verge subsidiary is contingent upon the future impact of
the
sub-prime crisis on the financial institutions operating in the U.S. Said crisis
put ERC as well as Verge Living Corporation in a fragile none –cash situation,
which brought management to make provision for doubtful debts on all monitories
balances associated with real estate of ERC and Verge.
The
Sub-prime crisis has also had a significant negative impact on the pricing
of
natural gas and oil. The Company anticipates that the drop in the commodities
prices will present difficulties in obtaining financing for the drilling of
wells and there is no assurance that the Company will be able to implement
its
business plan in a timely manner.
In
order
to reduce the Company risks and more effectively manage its business and to
enable Company management to better focus on its business on developing the
natural gas drilling rights, the board of directors is pending a discussion
and
resolution limiting the Company business only to the USA. Adopting said
limitation will be in conflict with the Company employment and consulting
agreements with its chairman, and the Company entered into negotiation with
its
chairman for amending the terms of the agreements
(i)
Voluntarily delisting from The NASDAQ Stock Market
On
June
6, 2008, the Company provided NASDAQ with notice of its intent to voluntarily
delist from The NASDAQ Stock Market, which notice was amended on June 10, 2008.
The Company is voluntarily delisting to reduce and more effectively manage
its
regulatory and administrative costs, and to enable Company management to better
focus on its business on developing the natural gas drilling rights recently
acquired in connection with the acquisition of Davy Crockett Gas Company, LLC,
which was announced on May 9, 2008. The Company requested that its shares be
suspended from trading on NASDAQ at the open of the market on June 16, 2008,
which was done. Following clearance by the Financial Industry Regulatory
Authority ("FINRA") of a Form 211 application was filed by a market maker in
the
Company's stock.
(j)
Vortex Ocean One, LLC
On
June
30, 2008, the "Company formed a limited liability company with Tiran Ibgui,
an
individual ("Ibgui"), named Vortex Ocean One, LLC (the "Vortex One"). The
Company and Ibgui each own a fifty percent (50%) membership Interest in Vortex
One. The Company is the Manager of the Vortex One. Vortex One has been formed
and organized to raise the funds necessary for the drilling of the first well
being undertaken by the Company's wholly owned subsidiary. To date there has
been no production of the Well by Vortex One or DCG and a dispute has arisen
between the Parties with regards to the Vortex One and other matters, so in
order to fulfill its obligations to Investor and avoid any potential litigation,
Vortex One has agreed to issue the Shares directly into the name of the Ibgui.
Vortex One hereby agreed to cause the transfer of the Shares to Investor and
direct the transfer agent to issue 525,000 Shares in the name of the Ibgui
effective as of the Effective Date, which is November 4, 2008.
.
(k)
Pending Project under Due Diligence:
Barnett
Shale, Fort Worth area of Texas Project
- On
September 2, 2008, the Company entered into a Memorandum of Understanding (the
"MOU") to enter into a definitive asset purchase agreement with Blackhawk
Investments Limited, a Turks & Caicos company ("Blackhawk") based in London,
England. Blackhawk exercised its exclusive option to acquire all of the issued
and allotted share capital in Sandhaven Securities Limited ("SSL"), and its
underlying oil and gas assets in NT Energy. SSL owns approximately 62% of the
outstanding securities of NT Energy, Inc., a Delaware company ("NT Energy").
NT
energy holds rights to mineral leases covering approximately 12,972 acres in
the
Barnett Shale, Fort Worth area of Texas containing proved and probable
undeveloped natural gas reserves. SSL was a wholly owned subsidiary of Sandhaven
Resources plc ("Sandhaven"), a public company registered in Ireland, and listed
on the Plus exchange in London.
In
consideration of Blackhawk exercising its option to acquire the leases and
transferring such leases to the Company, the Company will pay $180,000,000
by
issuing Blackhawk or its designees shares of common stock of the Company, based
upon the average share price of the Company on the Over the Counter Bulletin
Board during the 30 days preceding the execution of the MOU, which was $1.50
per
share, representing 120,000,000 shares as the total consideration, under said
MOU. However, the number of shares to be delivered shall be adjusted on the
six
month anniversary of the closing of the asset acquisition (the "Closing"),
using
the volume weighted average price for the six months following the Closing.
Blackhawk, SSL, NT Energy, Sandhaven and the advisors described below as well
as
each of the officers, directors and affiliates of the aforementioned will agree
to not engage in any activities in the stock of the Company.
In
addition, the Company will be required to pay fees to two advisors of $6,000,000
payable with the Company shares, and, therefore, issue an additional 3,947,368
of the Company shares of common stock, along with 300% warrant coverage,
representing warrants to purchase an aggregate of 11,842,106 shares of common
stock on a cashless basis for a period of two years with an exercise price
of
$2.00 per share, if the transaction closes. Although both parties have agreed
to
obtain shareholder approval prior to the Closing, the Company is not required
by
any statute to do so.
The
above
transaction is subject to the drafting and negotiation of a final definitive
agreement, performing due diligence as well as board approval of the Company.
The due diligence period is 21 days from the execution of the MOU. There is
no
guarantee that the Company will be able to close the above transaction or that
the transaction will be closed on the above stated terms.
Upon
successful closing of the above transaction, the Company will grant TransGlobal
Financial LLC, a California limited liability company ("TransGlobal"), a 20%
carried interest in the transaction, as disclosed by the Company filing on
Form
8-K on July 17, 2008. Mr. Mike Mustafoglu, the Chairman of the Board of
Directors of the Company, is an executive officer, director and shareholder
of
Transglobal.
The
MOU
was amended on October 28, 2008 to reflect the terms below:
In
consideration of Blackhawk exercising its option to acquire the leases and
transferring such leases to the Company, the Company will pay $130,000,000
by
issuing Blackhawk or its designee’s shares of common stock of the Company using
a price per share of $1.50 resulting in the issuance of 86,666,667 shares of
common stock. However, the number of shares to be delivered shall be adjusted
on
the six month anniversary of the closing of the asset acquisition (the
"Closing"), using the volume weighted average price for the six months following
the Closing. Blackhawk, SSL, NT Energy, Sandhaven and the advisors described
below as well as each of the officers, directors and affiliates of the
aforementioned will agree to not engage in any activities in the stock of the
Company.
In
addition, the Company will be required to pay fees to two advisors of $4,400,000
payable with the Company shares, and, therefore, issue an additional 2,933,333
of the Company shares of common stock, along with 300% warrant coverage,
representing warrants to purchase an aggregate of 8,799,999 shares of common
stock on a cashless basis for a period of two years with an exercise price
of
$2.00 per share, if the transaction closes. Although both parties have agreed
to
obtain shareholder approval prior to the Closing, the Company is not required
by
any statute to do so.
(l)
Trafalgar Convertible Note:
In
connection with said note and as collateral for performance by the Company
under
the terms of said note, the Company issued to Trafalgar 4,500,000 common shares
to be placed as security for said note.
(m)
Short
Term Loan – by Investor:
On
September 5, 2008 the Company entered a short term loan memorandum, with Mehmet
Haluk Undes a third party, for a short term loan (“bridge”) of $220,000 to
bridge the drilling program of the Company. As a consideration for said
facility, the Company grants the investor with 100% cashless warrants coverage
for two years at exercise price of $1.50 per share. The investor made a loan
of
$220,000 to the company on September 15, 2008 (where said funds were wired
to
the company drilling contractor), that was paid in full on October 8, 2008.
Accordingly the investor is entitled to 200,000 cashless warrants from September
15, 2008 at exercise price of $1.50 for a period of 2 years.
10.
Stockholders’ Equity
(a)
Common Stock:
In
June
2006, the Company's Board of Directors approved a program to repurchase, from
time to time, at management's discretion, up to 700,000 shares of the Company's
common stock in the open market or in private transactions commencing on June
20, 2006 and continuing through December 15, 2006 at prevailing market prices.
Repurchases will be made under the program using our own cash resources and
will
be in accordance with Rule 10b-18 under the Securities Exchange Act of 1934
and
other applicable laws, rules and regulations. The Shemano Group acts as agent
for our stock repurchase program. As of June 30, 2008, the Company held 660,362
treasury shares, which were retired completely as canceled during August and
September 2008.
Pursuant
to the Sale Agreement of Navigator, the Company received 622,531 shares of
the
Company’s common stock as partial consideration. The Company shares were valued
at $1.34 per share, representing the closing price of the Company on the NASDAQ
Capital Market on February 16, 2007, the closing of the sale. The Company
canceled the common stock acquired during the disposition in the amount of
$834,192.
There
were no options or warrants exercised in the nine month period ended September
30, 2008 and year ended December 31, 2007
As
of
September 30, 2008, the Company has no treasury shares.
On
February 14, 2008, the Company raised Three Hundred Thousand Dollars ($300,000)
from private offerings pursuant to two (2) Private Placement Memorandums dated
as of February 1, 2008 ("PPMs"). One PPM was in the amount of One Hundred
Thousand Dollars ($100,000) and the other was in the amount of Two Hundred
Thousand Dollars ($200,000). The offering is for Company common stock which
shall be "restricted securities" and were sold at $1.00 per share. The money
raised from the Private Placement of the Company shares will be used for working
capital and business operations of the Company. The PPMs were done pursuant
to
Rule 506. A Form D has been filed with the Securities and Exchange Commission
in
compliance with Rule 506 for each Private Placement.
On
March
30, 2008, the Company raised $200,000 from a private offering pursuant to a
Private Placement Memorandum ("PPM"). The private placement was for Company
common stock which shall be "restricted securities" and were sold at $1.00
per
share. The offering included 200,000 warrants to be exercised at $1.50 for
two
years (for 200,000 shares of Company common stock), and additional 200,000
warrants to be exercised at $2.00 for four years (for 200,000 shares of Company
common stock). Said Warrants may be exercised to common shares of the Company
only if the Company issues subsequent to the date of the PPM, 25,000,000 (twenty
five million) or more shares of its common stock. The money raised from the
private placement of the Company’s shares were used for working capital and
business operations of the Company. The PPM was done pursuant to Rule 506.
A
Form D has been filed with the Securities and Exchange Commission in compliance
with Rule 506 for each Private Placement. The investor is D’vora Greenwood
(Attia), the sister of Mr. Yossi Attia. Mr. Attia did not participate in the
board meeting which approved this PPM.
On
May 6,
2008 the Company issued 500,000 shares of its common stock, $0.001 par value
per
share, to Stephen Martin Durante in accordance with the instructions provided
by
the Company pursuant to the 2004 Employee Stock Incentive Plan registered on
Form S-8 Registration.
On
June
6, 2008, the Company raised $300,000 from the private offering pursuant to
a
Private Placement Memorandum ("PPM"). The private placement was for Company
common stock which shall be "restricted securities" and were sold at $1.00
per
share. The money raised from the private placement of the Company’s shares was
used for working capital and business operations of the Company. The PPM was
done pursuant to Rule 506. A Form D has been filed with the Securities and
Exchange Commission in compliance with Rule 506 for each Private Placement.
Based on information presented to the Company, and in lieu of the Company
position which was sent to the investor on June 18, 2008 the investor is in
default for not complying with his commitment to invest an additional $225,000
and the Company vested said 300,000 shares under a trustee.
On
June
11, 2008, the Company entered into a Services Agreement with Mehmet Haluk Undes
(the "Undes Services Agreement") pursuant to which the Company engaged Mr.
Undes
for purposes of assisting the Company in identifying, evaluating and structuring
mergers, consolidations, acquisitions, joint ventures and strategic alliances
in
Southeast Europe, Middle East and the Turkic Republics of Central Asia. Pursuant
to the Undes Services Agreement, Mr. Undes has agreed to provide the Company
services related to the identification, evaluation, structuring, negotiating
and
closing of business acquisitions, identification of strategic partners as well
as the provision of legal services. The term of the agreement is for five years
and the Company has agreed to issue Mr. Undes 525,000 shares of common stock
that was issued on August 15, 2008.
On
June
30, 2008 and concurrent with the formation and organization of Vortex One,
whereby the Company contributed 525,000 shares of common stock (the "Vortex
One
Shares"), a common stock purchase warrant purchasing 200,000 shares of common
stock at an exercise price of $1.50 per share (the "Vortex One Warrant") and
the
initial well that the Company intends to drill. However, the Vortex One warrants
may only be converted to shares of common stock if the Company issues 25,000,000
or more of its common stock so that there is at least 30,000,000 authorized
shares at the time of any conversion term. As of September 30, 2008 there are
86,626,919 common shares issued and 82,126,919 shares outstanding. Mr. Ibgui
contributed $525,000. The Vortex One warrants were immediately transferred
to
Ibgui. Eighty percent (80%) of all available cash flow shall be initially
contributed to Ibgui until the full $525,000 has been repaid and the Company
shall receive the balance. Following the payment of $525,000 to Ibgui, the
cash
flow shall be split equally.
In
July
2008, the Company issued 16,032 shares of its common stock, $0.001 par value
per
share, to Robin Ann Gorelick, the Company Secretary, in accordance with the
instructions provided by the Company pursuant to the 2004 Employee Stock
Incentive Plan registered on Form S-8 Registration.
On
July
28, 2008, the Company held a special meeting of the shareholders for four
initiatives, consisting of approval of a new board of directors, approval of
the
conversion of preferred shares to common shares, an increase in the authorized
shares and a stock incentive plan. All initiatives were approved by the majority
of shareholders. The 2008 Employee Stock Incentive Plan (the "2008 Incentive
Plan") authorized the board to issue up to 5,000,000 shares of Common Stock
under the plan.
On
August
23, 2008, the Company issued 100,000 shares of its common stock 0.001 par value
per share, to Robert M. Yaspan, the Company lawyer, in accordance with the
instructions provided by the Company pursuant to the 2008 Employee Stock
Incentive Plan registered on Form S-8 Registration
On
August
8, 2008, assigned holders of the Upswing Note gave notice to the Company of
their intention to convert their original note dated June 5, 2007 into 25
million common shares of the Company. The portion of the accrued interest from
inception of the note in the amount of $171,565 was not converted into shares.
The Company accepted these notices and issued the said shares.
On
August
1, 2008, all holders of the Company’s preferred stock notified the Company about
converting said 100,000 preferred stock into 50 million common shares of the
Company. The conversion of preferred shares to common shares marks the
completion of the acquisition of Davy Crockett Gas Company, LLC. The Company
accepted such notice and instructed the Company’s transfer agent on August 15,
2008 to issue said 50 million common shares to the former members of DCG, as
reported and detailed on the Company’s 14A filings.
Based
upon a swap agreement dated August 19, 2008, which was executed between C.
Properties Ltd. (“C. Properties”) and KSD Pacific, LLC (“KSD”), which is
controlled by Mr. Yossi Attia Family Trust, where KSD will sell to C.
Properties, and C. Properties will purchase from KSD, all its holdings of the
Company which amount to 1,505,644 shares of common stock of the Company for
a
purchase price of 734,060,505 shares of common stock of AGL.
In
connection of selling a convertible note to Trafalgar (see Note 5 ), the Company
issued on September 25, 2008 the amount of 54,706 common shares at $0.001 par
value per share to Trafalgar as a fee. As part of collateral to said note,
the
Company issued to Trafalgar 4,500,000 common stock 0.001 par values per shares,
as security for the Note.
(b)
Preferred Stock:
As
disclosed in Form 8-Ks filed on May 7, 2008 and May 9, 2008, on May 1, 2008,
the
Company entered into an Agreement and Plan of Exchange (the "DCG Agreement")
with Davy Crockett Gas Company, LLC ("DCG") and the members of Davy Crockett
Gas
Company, LLC ("DCG Members"). Pursuant to the DCG Agreement, the Company
acquired and, the DCG Members sold, 100% of the outstanding securities in DCG.
DCG is a limited liability company organized under the laws of the State of
Nevada and headquartered in Bel Air; California is a newly formed designated
LLC
which holds certain development rights for gas drilling in Crockett County,
Texas. In consideration for 100% of the outstanding securities in DCG, the
Company issued the DCG Members promissory notes in the aggregate amount of
$25,000,000 payable together with interest in May 2010 (the "DCG Notes"). An
additional amount of $5,000,000 in DCG Notes are issuable upon each of the
first
through fifth wells going into production. Further, the DCG Members may be
entitled to receive additional DCG Notes up to an additional amount of
$200,000,000 (the "Additional DCG Notes") subject to the revenue generated
from
the land rights held by DCG located in Crockett County, Texas less concession
fees and taxes.
On
June
11, 2008, the Company, the DCG Members and DCG entered into an amendment to
the
DCG Agreement, pursuant to which the DCG Members agreed to replace all notes
that they received as consideration for transferring their interest in DCG
to
the Company for an aggregate of 100,000 shares of Series A Preferred Stock
(the
"Series A Stock") with the rights and preferences set forth below.
The
shares of Series A Stock is convertible, at any time at the option of the
Company subject to increasing the authorized shares of the Company from 35
million to 400 million, into shares of common stock of the Company determined
by
dividing the stated value by the conversion price. The initial aggregate stated
value is $50,000,000 and the initial conversion price is $1.00 per share. In
the
event that the net operating income for the Crockett County, Texas property
for
any year is zero or negative, then the stated value shall be reduced by 10%.
Holders
of the Series A Stock are entitled to receive, without any further action from
the Company's Board of Directors but only if such funds are legally available,
non-cumulative dividends equal to 25% of the net operating income derived from
oil and gas production on the Crockett County, Texas property on an annual
audited basis.
In
the
event of any liquidation, winding up, change in control or fundamental
transaction of the Company, the holders of Series A Preferred will be entitled
to receive, in preference to holders of common stock, an amount equal to the
outstanding stated value and any accrued but unpaid dividends. We granted the
DCG Members piggyback registration rights. The Series A Stock is non-voting.
The
Company has the right, at anytime; to redeem the Series A Preferred Stock by
paying the holders the outstanding stated value as well as accrued dividends.
On
August
1, 2008, all holders of the Company’s preferred stock notified the Company of
their intention to convert said 100,000 preferred stock into 50 million common
shares of the Company. The conversion of preferred shares to common shares
marks
the completion of the acquisition of Davy Crockett Gas Company, LLC. The Company
accepted such notice and instructed the Company’s transfer agent on August 15,
2008 to issue said 50 million common shares to the former members of DCG, as
reported and detailed on the Company’s 14A filings.
11.
Stock Option Plan and Employee Options
2004
Plan:
a)
Stock
option plans
In
2004,
the Board of Directors established the “2004 Incentive Plan” (“the Plan”), with
an aggregate of 800,000 shares of common stock authorized for issuance under
the
Plan. The Plan was approved by the Company’s Annual Meeting of Stockholders in
May 2004. In 2005, the Plan was adjusted to increase the number of shares of
common stock issuable under such plan from 800,000 shares to 1,200,000 shares.
The adjustment was approved at the Company’s Annual Meeting of Stockholders in
June 2005. The Plan provides that incentive and nonqualified options may be
granted to key employees, officers, directors and consultants of the Company
for
the purpose of providing an incentive to those persons. The Plan may be
administered by either the Board of Directors or a committee of two directors
appointed by the Board of Directors (the "Committee"). The Board of Directors
or
Committee determines, among other things, the persons to whom stock options
are
granted, the number of shares subject to each option, the date or dates upon
which each option may be exercised and the exercise price per share. Options
granted under the Plan are generally exercisable for a period of up to ten
years
from the date of grant. Incentive options granted to stockholders that hold
in excess of 10% of the total combined voting power or value of all classes
of
stock of the Company must have an exercise price of not less than 110% of the
fair market value of the underlying stock on the date of the grant. The Company
will not grant a nonqualified option with an exercise price less than 85% of
the
fair market value of the underlying common stock on the date of the
grant.
The
Company has granted the following options under the Plan:
On
April
26, 2004, the Company granted 125,000 options to its Chief Executive Officer,
an
aggregate of 195,000 options to five employees and an aggregate of 45,000
options to two consultants of the Company (which do not qualify as employees).
The stock options granted to the Chief Executive Officer vest at the rate of
31,250 options on November 1, 2004, October 1, 2005, October 1, 2006 and October
1, 2007. The stock options granted to the other employees and consultants vest
at the rate of 80,000 options on November 1, 2004, October 1, 2005 and October
1, 2006. The exercise price of the options ($4.78) was equal to the market
price
on the date of grant. The options granted to the Chief Executive Officer were
forfeited/ cancelled in August 2006 due to the termination of his employment.
Of
the 195,000 options originally granted to employees, 60,000 options were
forfeited or cancelled during 2005, while the remaining 135,000 options were
forfeited or cancelled in August 2006 due to termination of the five employee
contracts. 15,000 options granted to one of the consultants were also forfeited
or cancelled in April 2006 due to the termination of the consultant’s
contract.
Through
December 31, 2005, the Company did not recognize compensation expense under
APB
25 for the options granted to the Chief Executive Officer and the five employees
as the options had a zero intrinsic value at the date of grant. The adoption
of
SFAS 123R on January 1, 2006 resulted in a compensation charge of $36,817 and
$21,241 for the years ended December 31, 2007 and 2006,
respectively.
In
accordance with SFAS 123, as amended by SFAS 123R, and EITF Issue No. 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services”, the Company
computed total compensation charges of $162,000 for the grants made to the
two
consultants. Such compensation charges are recognized over the vesting period
of
three years. Compensation expense for the year ended December 31, 2006 was
$9,921.
On
March
22, 2005, the Company granted an aggregate of 200,000 options to two of the
Company’s Directors. These stock options vest at the rate of 50,000 options on
each September 22 of 2005, 2006, 2007 and 2008, respectively. The exercise
price
of the options ($3.40) was equal to the market price on the date the options
were granted. Through December 31, 2005, the Company did not recognize
compensation expense under APB 25 as the options had a zero intrinsic value
at
the date of grant. The adoption of SFAS 123R on January 1, 2006 resulted in
a
compensation charge of $36,817 and $128,284 for the years ended December 31,
2007 and 2006, respectively. One of the directors was elected as Chief Executive
Officer from August 14, 2006.
On
June
2, 2005, the Company granted 100,000 options to a director of the Company,
which
vest at the rate of 25,000 options on December 2 of 2005, 2006, 2007, and 2008,
respectively. Through December 31, 2005, the Company did not recognize
compensation expense under APB 25 as the options had a zero intrinsic value
at
the date of grant. The adoption of SFAS 123R on January 1, 2006 resulted in
a
compensation charge of $89,346 for the year ended December 31, 2006. On November
13, 2006, the Director filed his resignation. His options were vested
unexercised in February 2007.
(b)
Other
Options
On
October 13, 2003, the Company granted two Directors 100,000 options each, at
an
exercise price (equal to the market price on that day) of $4.21 per share,
with
25,000 options vesting on each April 13, 2004, 2005, 2006 and 2007. There were
100,000 options outstanding as of December 31, 2006. The adoption of SFAS 123R
on January 1, 2006 resulted in a compensation charge of $6,599 and $31,824
during the years ended December 31, 2007 and 2006, respectively.
As
of
December 31, 2007, there were 330,000 options outstanding with a weighted
average exercise price of $3.77.
No
options were exercised during the nine months period ended September 30, 2008
and the year ended December 31, 2007.
The
following table summarizes information about shares subject to outstanding
options as of December 31, 2007, which was issued to current or former
employees, consultants or directors pursuant to the 2004 Incentive Plan and
grants to Directors:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Number
Outstanding
|
|
Range of
Exercise Prices
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Life in Years
|
|
Number
Exercisable
|
|
Weighted-
Average
Exercise Price
|
|
100,000
|
|
$
|
4.21
|
|
$
|
4.21
|
|
|
1.79
|
|
|
100,000
|
|
$
|
4.21
|
|
30,000
|
|
$
|
4.78
|
|
$
|
4.78
|
|
|
2.32
|
|
|
30,000
|
|
$
|
4.78
|
|
200,000
|
|
$
|
3.40
|
|
$
|
3.40
|
|
|
3.31
|
|
|
150,000
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330,000
|
|
$
|
3.40-$4.78
|
|
$
|
3.77
|
|
|
2.66
|
|
|
280,000
|
|
$
|
3.84
|
|
(c)
Warrants
On
June
7, 2005, the Company granted 100,000 warrants to a consulting company as
compensation for investor relations services at exercise prices as follows:
40,000 warrants at $3.50 per share, 20,000 warrants at $4.25 per share, 20,000
warrants at $4.75 per share and 20,000 warrants at $5 per share. The warrants
have a term of five years and increments vest proportionately at a rate of
a
total 8,333 warrants per month over a one year period. The warrants are being
expensed over the performance period of one year. In February 2006, the Company
terminated its contract with the consultant company providing investor relation
services. The warrants granted under the contract were reduced
time-proportionally to 83,330, based on the time in service by the consultant
company.
As
part
of some Private Placement Memorandums (See Note - 10 Stockholder’s Equity) the
Company issued warrants that can be summarized in the following
table:
Name
|
|
Date
|
|
Terms
|
|
No.
of
Warrants
|
|
Exercise
Price
|
|
Party
1
|
|
|
3/30/2008
|
|
|
2
years from Issuing
|
|
|
200,000
|
|
$
|
1.50
|
|
Party
1
|
|
|
3/30/2008
|
|
|
2
years from Issuing
|
|
|
200,000
|
|
$
|
2.00
|
|
Party
2
|
|
|
6/05/2008
|
|
|
2
years from Issuing
|
|
|
300,000
|
|
$
|
1.50
|
|
Party
3
|
|
|
6/30/2008
|
|
|
2
years from Issuing
|
|
|
200,000
|
|
$
|
1,50
|
|
Mustafuglo –
Company
Chairmen
|
|
|
8/19/2008
|
|
|
5
years from issuing,
vesting
20% per
year
|
|
|
10,000,000
|
|
|
the
20 prior days
avg.
stock price
|
|
Party
4
|
|
|
9/5/2008
|
|
|
2
years from Issuing
|
|
|
200,000
|
|
$
|
1.50
|
|
Cashless
Warrants:
On
August
19, 2008, the Company entered into that certain Employment Agreement with Mike
Mustafoglu, effective July 1, 2008, pursuant to which Mr. Mustafoglu agreed
to
serve as the Chairman of the Board of Directors of the Company for a period
of
five years. Mr. Mustafoglu will receive (i) a salary of $240,000; (ii) a
performance bonus of 10% of net income before taxes, which will be allocated
by
Mr. Mustafoglu and other key executives at the sole discretion of Mr.
Mustafoglu; and (iii) a warrant to purchase 10 million shares of common stock
of
the Company at an exercise price equal to the lesser of $.50 or 50% of the
average market price of the Company’s common stock during the 20 day period
prior to exercise on a cashless basis (the “Mustafoglu Warrant”). The Mustafoglu
Warrant shall be released from escrow on an equal basis over the employment
period of five years. As a result, 2,000,000 shares of the Mustafoglu Warrant
will vest per year.
On
September 5, 2008 the Company entered a short term loan memorandum, with Mehmet
Haluk Undes a third party, for a short term loan (“bridge”) of up to $275,000 to
bridge the drilling program of the Company. As a consideration for said
facility, the Company grants the investor with 100% cashless warrants coverage
for two years at exercise price of 1.50 per share. The investor made a loan
of
$220,000 to the company on September 15, 2008 (where said funds were wired
to
the company drilling contractor), that was paid in full on October 8, 2008.
Accordingly the investor is entitled to 200,000 cashless warrants as from
September 15, 2008 at exercise price of $1.50 for a period of 2
years
(d)
Shares
On
May 6,
2008 the Company issued 500,000 shares of its common stock, $0.001 par value
per
share, to Stephen Martin Durante in accordance with the instructions provided
by
the Company pursuant to the 2004 Employee Stock Incentive Plan registered on
Form S-8 Registration
On
June
11, 2008, the Company entered into a Services Agreement with Mehmet Haluk Undes
(the "Undes Services Agreement") pursuant to which the Company engaged Mr.
Undes
for purposes of assisting the Company in identifying, evaluating and structuring
mergers, consolidations, acquisitions, joint ventures and strategic alliances
in
Southeast Europe, Middle East and the Turkic Republics of Central Asia. Pursuant
to the Undes Services Agreement, Mr. Undes has agreed to provide us services
related to the identification, evaluation, structuring, negotiating and closing
of business acquisitions, identification of strategic partners as well as the
provision of legal services. The term of the agreement is for five years and
the
Company has agreed to issue Mr. Undes 525,000 shares of common stock that shall
be registered on a Form S8 no later than July 1, 2008.
On
August
13, 2008, the Company issued 16,032 shares of its common stock, $0.001 par
value
per share, to Robin Ann Gorelick, the Company Secretary, in accordance with
the
instructions provided by the Company pursuant to the 2004 Employee Stock
Incentive Plan registered on Form S-8 Registration
Following
the above securities issuance, the 2004 Plan was closed, and no more securities
can be issued under this plan.
2008
Stock Incentive Plan:
On
July
28, 2008 - the Company held a special meeting of the shareholders for four
initiatives, consisting of approval of a new board of directors, approval of
the
conversion of preferred shares to common shares, an increase in the authorized
shares and a stock incentive plan. All initiatives were approved by the majority
of shareholders. The 2008 Employee Stock Incentive Plan (the "2008 Incentive
Plan") authorized the board to issue up to 5,000,000 shares of Common Stock
under the plan.
On
August
23 the Company issued 100,000 shares of its common stock 0.001 par value per
share, to Robert M. Yaspan, the Company lawyer, in accordance with the
instructions provided by the Company pursuant to the 2008 Employee Stock
Incentive Plan registered on Form S-8 Registration
12.
Treasury Stock
In
June
2006, the Company's Board of Directors approved a program to repurchase, from
time to time, at management's discretion, up to 700,000 shares of the Company's
common stock in the open market or in private transactions commencing on June
20, 2006 and continuing through December 15, 2006 at prevailing market prices.
Repurchases will be made under the program using our own cash resources and
will
be in accordance with Rule 10b-18 under the Securities Exchange Act of 1934
and
other applicable laws, rules and regulations. The Shemano Group is acting as
agent for our stock repurchase program.
Pursuant
to the unanimous consent of the Board of Directors in September 2006, the number
of shares that may be purchased under the Repurchase Program was increased
from
700,000 to 1,500,000 shares of common stock and the Repurchase Program was
extended until October 1, 2007, or until the increased amount of shares is
purchased.
Pursuant
to the Sale Agreement of Navigator, the Company got on closing (February 2,
2007) 622,531 shares of the Company’s common stock as partial consideration. The
Company shares were valued at $1.34 per share, representing the closing price
of
the Company on the NASDAQ Capital Market on February 16, 2007, the closing
of
the sale. The Company canceled the Emvelco common stock acquired during the
disposition in the amount of $834,192.
All,
the
Company 660,362 treasury shares were retired and canceled during August and
September 2008. As of September 30, 2008 the Company has no treasury shares
in
its possession.
13.
Change in the Reporting Entity
In
accordance with Financial Accounting Standards, FAS 154, Accounting
Changes and Error Corrections,
when an
accounting change results in financial statements that are, in effect, the
statements of a different reporting entity, the change shall be retrospectively
applied to the financial statements of all prior periods presented to show
financial information for the new reporting entity for those periods. Previously
issued interim financial information shall be presented on a retrospective
basis.
On
August
19, 2008 the Company entered into final fee agreement with C. Properties
(“Consultant”), where the Company had to pay Consultant certain fees in
accordance with the agreement entered with the Consultant, the Consultant has
agreed that, in lieu of cash payment, it will receive an aggregate of up to
734,060,505 shares of stock of the Atia Group Ltd. (the “Atia Shares”), and the
Consultant was not advised on the restructuring of the acquisition of DCG by
the
Corporation, and in order to compensate the Consultant and avoid any potential
litigation, the Company has agreed to waive the above production requirements
and transfer all the Atia Shares immediately, with such transfer considered
effective January 1, 2008.
Based
on
the agreement, the Company disposed all its holdings in AGL effective January
1,
2008, and these financials reflect such disposal. Further, the Company
previously issued interim financial statements dated as of March 31, 2008 and
for the three month period ending March 31, 2008. Those financial statements
included the consolidation of the AGL. Since the agreement with Consultant
was
retroactively applied to January 1, 2008, the following tables explain the
effect of the change of the Company’s financial balances without consolidating
AGL:
|
|
As of March 31, 2008
|
|
|
|
Previously issued
interim Q1
financial
statements
(Unaudited)
|
|
Effect of
change of
reporting entity
(Unaudited)
|
|
Revised
Balances
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
$
|
19,199,095
|
|
$
|
(3,336,133
|
)
|
$
|
15,862,962
|
|
Total
assets
|
|
|
59,042,685
|
|
|
(39,582,768
|
)
|
|
19,459,917
|
|
Total
current liabilities
|
|
|
(25,854,259
|
)
|
|
14,280,521
|
|
|
(11,573,738
|
)
|
Total
liabilities
|
|
|
(38,633,876
|
)
|
|
22,614,420
|
|
|
(16,019,456
|
)
|
Minority
interest in subsidiary’s net assets
|
|
|
(9,438,510
|
)
|
|
9,438,510
|
|
|
|
|
Total
stockholders' equity
|
|
|
(10,970,299
|
)
|
|
7,529,837
|
|
|
(3,440,462
|
)
|
Total
liabilities and stockholders' equity
|
|
$
|
(59,042,685
|
)
|
$
|
39,582,768
|
|
$
|
(19,459,917
|
)
|
|
|
Three Months Ended
March 31, 2008
|
|
|
|
Previously issued
interim Q1
financial
statements
(Unaudited)
|
|
Effect of
change of
reporting entity
(Unaudited)
|
|
Revised
Balances
(Audited)
|
|
Revenues
|
|
$
|
—
|
|
$
|
|
|
$
|
|
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
3,003,060
|
|
|
7,307,247
|
|
|
10,310,307
|
|
Operating
loss
|
|
|
(3,003,060
|
)
|
|
(7,307,247
|
)
|
|
(10,310,307
|
)
|
Net
(loss) income before minority interest
|
|
|
(2,911,208
|
|
|
(7,363,366
|
)
|
|
(10,274,573
|
)
|
Less
minority interest in loss of consolidated subsidiary
|
|
|
69,419
|
|
|
(69,419
|
)
|
|
|
|
Net
(loss) income
|
|
|
(2,841,789
|
)
|
|
(7,432,785
|
)
|
|
(10,274,573
|
)
|
Other
comprehensive income (loss)
|
|
|
427,022
|
|
|
(427,022
|
)
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
(2,414,767
|
)
|
$
|
(7,859,807
|
)
|
$
|
(10,274,573
|
)
|
Net
income (loss) per share, basic and diluted
|
|
$
|
(0.59
|
|
$ |
|
|
$
|
(2.14
|
)
|
Weighted
average number of shares outstanding, basic and
diluted
|
|
|
4,797,055
|
|
|
|
|
|
4,797,055
|
|
14.
Subsequent events
As
described in Note 3, On August 28, 2006, the Company entered into a $4,000,000
Revolving Line of Credit (“line of credit”) with a commercial bank. As security
for this credit facility, the Company deposited $4,000,000 into a certificate
of
deposit (“CD”) as collateral for a two year period. The CD earns interest at a
rate of 5.25% annually, and any interest earned on the CD is restricted from
withdrawal and must remain in the account for the entire term. On August 8,
2008
the Company requested the bank to pay-off said line from said CD, and not renew
it further. Partial pay-off was done during the nine month ended September
30,
2008 and the balance of the line was paid off in full on November
2008.
The
Company entered into a Securities Purchase Agreement (the "Agreement") with
Trafalgar Capital Specialized Investment Fund, Luxembourg ("Buyer") on September
25, 2008 for the sale of up to $2,750,000 in convertible notes (the "Notes").
Pursuant to the terms of the Agreement, the Company and the Buyer closed on
the
sale and purchase of $1,600,000 in Notes on September 25, 2008. The Buyer
exercised its option to close on a second financing for $400,000 in Notes on
October 28, 2008 and still holds an option to close on additional financing
for
$750,000 in Notes.
The
terms
of the second financing for $400,000 are identical to the terms of the
$1,600,000 Note, as disclosed in detail on the Company filing on October 2,
2008
on Form 8-K - Unregistered Sale of Equity Securities, Financial Statements
and
Exhibits. The Notes are convertible into our common stock, at the Buyer's
option, at a conversion price equal to 85% of the volume weighed average price
for the ten days immediately preceding the conversion but in no event below
a
price of $2.00 per share.
On
November 4, 2008 the Company instructed its transfer agent to issued 254,000
shares of its common stock 0.001 par value per share to two employees and one
consultant, in accordance with the instructions provided by the Company pursuant
to the 2008 Employee Stock Incentive Plan registered on Form S-8
Registration
On
November 7, 2008, the Company instructed its transfer agent to issue 224,896
shares of its common stock 0.001 par value per share to three directors, in
accordance with the instructions provided by the Company pursuant to the 2008
Employee Stock Incentive Plan registered on Form S-8 Registration. Said issuing
was done based on 30 days average for the share price. The balance of $170,846
included in these financial statements among credit balances.
15.
Supplemental Oil and Gas Disclosures
The
accompanying table presents information concerning the Company's natural gas
producing activities as required by Statement of Financial Accounting Standards
No. 69, “Disclosures about Oil and Gas Producing Activities." Capitalized costs
relating to oil and gas producing activities from continuing operations are
as
follows:
|
|
As of September 30, 2008
|
|
Proved undeveloped
natural properties
|
|
$
|
1,217,313
|
|
Unproved
properties
|
|
|
—
|
|
Total
|
|
|
1,217,313
|
|
Accumulated
depreciation, depletion, amortization , and impairment
|
|
|
—
|
|
Net
capitalized costs
|
|
$
|
1,217,313
|
|
All
of
these reserves are located in DCG field located in the United States of America.
There have been no natural gas development or production costs incurred in
the
period ended September 30, 2008.
Estimated
Quantities of Proved Oil and Gas Reserves
The
following table presents the Company's estimate of its net proved crude oil
and
natural gas reserves as of September 30, 2008 elated to continuing operations.
The Company's management emphasizes that reserve estimates are inherently
imprecise and that estimates of new discoveries are more imprecise than those
of
producing oil and gas properties. Accordingly, the estimates are expected to
change as future information becomes available. The estimates have been prepared
by independent natural gas reserve engineers.
|
|
MMCF
(thousand cubic feet)
|
|
Proved
undeveloped natural gas reserves at February 22, 2008
|
|
|
|
|
Purchases
of drilling rights for minerals in place for period February 22,
2008
(inception of DCG) to September 30, 2008 – 4 wells at 400 MCF
each
|
|
|
1,600
|
|
Revisions
of previous estimates
|
|
|
|
|
Extensions
and discoveries
|
|
|
|
|
Sales
of minerals in place
|
|
|
|
|
Proved
undeveloped natural gas reserves at September 30, 2008
|
|
|
1,600
|
|
Standardized
Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas
Reserves
The
following disclosures concerning the standardized measure of future cash flows
from proved crude oil and natural gas are presented in accordance with SFAS
No.
69. The standardized measure does not purport to represent the fair market
value
of the Company's proved crude oil and natural gas reserves. An estimate of
fair
market value would also take into account, among other factors, the recovery
of
reserves not classified as proved, anticipated future changes in prices and
costs, and a discount factor more representative of the time value of money
and
the risks inherent in reserve estimates.
Under
the
standardized measure, future cash inflows were estimated by applying period-end
prices at December 31, 2006 adjusted for fixed and determinable escalations,
to
the estimated future production of year-end proved reserves. Future cash inflows
were reduced by estimated future production and development costs based on
year-end costs to determine pre-tax cash inflows. Future income taxes were
computed by applying the statutory tax rate to the excess of pre-tax cash
inflows over the tax basis of the properties. Operating loss carry forwards,
tax
credits, and permanent differences to the extent estimated to be available
in
the future were also considered in the future income tax calculations, thereby
reducing the expected tax expense. Future net cash inflows after income taxes
were discounted using a 10% annual discount rate to arrive at the Standardized
Measure.
Set
forth
below is the Standardized Measure relating to proved undeveloped natural gas
reserves for the period ending September 30, 2008:
|
|
Period ending
September 30, 2008
(in thousands)
|
|
Future
cash inflows, net of royalties
|
|
$
|
231,230
|
|
Future
production costs
|
|
|
(38,702
|
)
|
Future
development costs
|
|
|
(25,800
|
)
|
Future
income tax expense
|
|
|
|
|
Net
future cash flows
|
|
|
166,728
|
|
Discount
|
|
|
(117,475
|
)
|
Standardized
Measure of discounted future net cash relating to proved
reserves
|
|
|
49,253
|
|
Changes
in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Natural Gas Reserves. The table above shows the first standardized measure
of
discounted future net cash flows for the Company. Accordingly, there are no
changes to disclose.
Drilling
Contract:
On
July
1, 2008, DC Gas entered into a Drilling Contract (Model Turnkey Contract)
("Drilling Contract") with Ozona Natural Gas Company LLC ("Ozona"). Pursuant
to
the Drilling Contract, Ozona has been engaged to drill four wells in Crockett
County, Texas. The drilling of the first well commenced immediately at the
cost
of $525,000 and the drilling of the subsequent three wells shall take place
in
secession. The drilling operations on the first well are due to funding provided
by Vortex One. Such drilling took place, and the Vortex One well has
successfully hit natural gas at a depth of 4,783 feet. Due to this success
with
the first well, the Company commenced drilling on its second well on August
18,
2008, and it’s remaining 2 other locations parallel The Company plans to
complete drilling of said four (4) wells within the next month and put them
into
production.
ITEM
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This
discussion should be read together with all prior filings of the Company (along
with Item 1 of this report), in order to get a comprehensive understanding
of
the Company strategy, which can be consider as modify substantially, and was
approved as final under all covenants via a special shareholders’ meeting on
July 28, 2008.
As
of
September 30, 2008, the Company and its subsidiaries’ major assets are in the
industry of Resources and Energy – oil and gas segment.
Operating
Assets:
As
a
result of the completion of the acquisition of DCG,, we are an independent
oil
and gas company based in Beverly Hills (Corporate Offices) and Los Angeles
(Operations Offices), California. DC Gas is engaged in the development,
production and marketing of natural gas and oil. Our operations are focused
in
West Texas where it intends to be a producer of oil and natural gas with
competitive finding and development costs. The Company acquired DC Gas as part
of its strategic acquisition plan and strategy as an emerging company that
focuses on innovative transactions and structures. DCG has obtained a reserve
evaluation report from an independent engineering firm, which classifies the
gas
reserves as “proven undeveloped”. According to the independent well evaluation,
each well contains approximately 400 MMCF (400 thousands cubic feet) of
recoverable natural gas, which may be increased with advanced recovery
techniques.
On
June
30, 2008, the Company formed a limited liability company with Tiran Ibgui,
an
individual ("Ibgui"), named Vortex Ocean One, LLC (the "Vortex One"). The
Company and Ibgui each own a fifty percent (50%) membership interest in Vortex
One. The Company is the Manager of the Vortex One. Vortex One has been formed
and organized to raise the funds necessary for the drilling of the first well
being undertaken by the Company's wholly owned subsidiary DCG (as reported
on
the Company's Form 8-Ks filed on May 7, 2008 and May 9, 2008 and amended on
June
16, 2008). The Company and Ibgui entered into a Limited Liability Company
Operating Agreement which sets forth the description of the membership
interests, capital contributions, allocations and distributions, as well as
other matters relating to Vortex One. The Company intends to continue to obtain
financing to develop the DCG rights via accredited investors in similar format
to the Vortex Ocean transaction. .
Assets
Sold – Real Estate:
Crescent
Heights project
The
Company formed and organized 610 N. Crescent Heights, LLC, a California limited
liability company (the "CH LLC") on August 13, 2007 as wholly owned subsidiary
to purchase and develop that certain property located at 610 North Crescent
Heights, Los Angeles, California 90048 (the "CH Property"). The CH Property
was
acquired for $900,000 not including closing costs. On November 13, 2007 the
CH
LLC finalized a construction loan with East West Bank of $1,440,000. The CH
Property is completed and is sold on August 15, 2008, as the LLC entered into
a
Sale and Escrow Instruction Agreements with third parties for $1,990,000 in
gross proceeds.
Dickens
project
The
Company formed and organized 13059 Dickens, LLC, a California limited liability
company (the "Dickens LLC") on November 20, 2007, to purchase and develop that
certain property located at 13059 Dickens Street, Studio City, California 91604
(the "Dickens Property"). On December 5, 2007, the Dickens LLC entered into
an
All Inclusive Deed of Trust, All Inclusive Promissory Note in the principal
amount of $1,065,652, Escrow Instructions and Grant Deed in connection with
the
purchase of the Dickens Property. Pursuant to the All Inclusive Deed of Trust
and All Inclusive Promissory Note, the Dickens LLC purchased the Dickens
Property for the total consideration of $1,065,652 from Kobi Louria ("Seller"),
an unrelated third party and fifty percent (50%) owner of the Dickens LLC.
The
Company and Seller formed the Dickens LLC to own and operate the Dickens
Property and to develop a single family residence at the location. The Dickens
LLC is owned 50/50 by the Company and Seller. Escrow closed on December 18,
2007. The Dickens Property is under construction. The Company reversed the
transaction on August 19, 2008 with its partner to be released from the project
at no cost or liability to the Company.
As
of
September 30, 2008 the Company does not have any interests in real estate
developments.
Assets
Sold – Via final disposition of the Company holdings in Atia Group Ltd
(“AGL”):
The
Acquisition of AGL
Based
on
series of agreements commencing June 5, 2007 and following by July 23, 2007
(as
reported on the Company's Form 8-K filed June 11, 2007), the Company, the
Company's chief executive officer Yossi Attia, and Darren Dunckel - CEO of
ERC
(collectively, the "Investors") entered into an Agreement (the "Upswing
Agreement") with a third party, Upswing, Ltd. (also known as Appswing Ltd.,
hereinafter referred to as "Upswing"). Pursuant to the Upswing Agreement, the
Investors intend to invest in an entity listed on the Tel Aviv Stock Exchange
-
the Atia Group Limited, f/k/a Kidron Industrial Holdings Ltd (herein referred
to
as AGL). In addition, the Investors intend to transfer rights and control of
various real estate projects to AGL. The Investors and AGL then effected a
transaction, pursuant to which the Investors and/or the Investors' affiliates
acquired about 76% of the AGL in consideration of the transfer of the rights
to
the various real estate projects (including Verge) to AGL (the "Transaction").
Upswing, among other items, advised the Investors on the steps necessary to
effectuate the contemplated transfer of real estate project rights to AGL.
Pursuant to the Notice, the Company, subject to performance under the Upswing
Agreement, further intends to exercise its option (the "Sitnica Option") to
purchase ERC's derivative rights and interest in Sitnica d.o.o. through ERC's
holdings (one-third (1/3) interest) in AP Holdings Limited ("AP Holdings"),
a
company organized under the Companies (Jersey) Law 1991, which equates to a
one-third interest in Sitnica d.o.o. (excluding ERC's interest in AP Holdings).
The Sitnica Option is exercisable in the amount of $4,000,000, payable by
reducing the outstanding loan amount owing to the Company under the Investment
Agreement by $3,550,000 and reducing the Company's deposit with Shalom Atia,
Trustee of AP Holdings, by $450,000. On October 15, 2007, Emvelco delivered
that
certain Notice of Exercise of Options ("Notice") to ERC, TIHG, Verge and Darren
C. Dunckel, individual, President of ERC and/or representative of the foregoing
parties. Pursuant to the Notice, Emvelco, subject to performance under the
Upswing Agreement, intends to exercise its option (the "Verge Option") to
purchase a multi-use condominium and commercial property in Las Vegas, Nevada,
via the purchase and acquisition of all outstanding shares of common stock
of
Verge. The Verge Option is exercisable in the amount of $5,000,000 payable
in
cash, but in no event is the option exercisable prior to Verge breaking ground,
plus conversion of $10,000,000 loans given to Verge into Equity as consideration
for 75,000 shares of Verge.
Said
transaction was closed on November 2, 2007. Upon closing, Verge became a fully
owned subsidiary of AGL and the Company owns 40.20% of AGL and consolidates
AGL’s results in prior financial statements. On August 19, 2008 the Company
entered into final fee agreement with C. Properties (“Consultant”), where the
Company had to pay Consultant certain fees in accordance with the agreement
entered with the Consultant, the Consultant has agreed that, in lieu of cash
payment, it will receive an aggregate of up to 734,060,505 shares of stock
of
the Atia Group Ltd. (the “Atia Shares”), and the Consultant was not advised on
the restructuring of the acquisition of DCG by the Corporation, and in order
to
compensate the Consultant and avoid any potential litigation, the Company has
agreed to waive the above production requirements and transfer ALL Atia Shares
immediately which such transfer shall be considered effective January 1, 2008.
Moreover, Based on a swap agreement dated August 19, 2008, was executed between
C. Properties and KSD Pacific, LLC (“KSD” - which controlled by Mr. Yossi Attia
Family Trust), where KSD will sell to C. Properties, and C. Properties will
purchase from KSD, all its holdings of the Company which amount to 1,505,644
shares of common stock of the Company for a purchase price of 734,060,505 shares
of common stock of AGL.
Based
on
series of agreements commonly know as a “reverse merger” which formalized On May
1, 2008, the Company entered into an Agreement and Plan of Exchange (the
"Agreement") with DCG and it’s members, the Company disposed all its holdings in
AGL, paying it as a fee as described above, effective January 1, 2008. The
two
main assets of AGL that were actually disposed by the Company are described
here:
On
June
19, 2006, ERC entered into the Investment Agreement with Verge, pursuant to
which ERC, within its sole discretion, has agreed to provide secured loans
to
Verge not to exceed the amount of $10,000,000. The loan is secured via first
trust deed as well as Lender ALTA title policy for $10,000,000. Verge is an
asset company developing the Verge Property, consisting of real property in
downtown Las Vegas, Nevada, where it intends to build up to 296 condominiums
(number of units may be changed due to realignment and redesign) plus commercial
space. Verge obtained entitlements to the Verge Property, and has advised that
it expects to break ground in 2008. Sales commenced during 2007. Each loan
provided to Verge is due on demand or upon maturity on January 14, 2008. The
Company and Verge agreed to extend the term of the agreement until funds are
available for repayment, which is expected in the year ending December 31,
2008.
Interest continues to accrue at 12% per annum. All loans are secured by a first
deed of trust, assignment of rents and security agreement with respect to the
property, along with ALTA (American Land Title Association) title policy. If
ERC
requests that the funds be paid on demand prior to maturity, then Verge shall
be
entitled to reduce the amount requested to be prepaid by 10%. The 10% discount
will be paid to Verge in the form of shares of common stock of Emvelco, which
will be computed by dividing the dollar amount of the 10% discount by the market
price of Emvelco’ S shares of common stock. The terms of the loans require that
ERC to be paid-off the greater of (i) the principal including 12% interest
per
annum or (ii) 33% of all gross profits derived from the Property. During the
first quarter the Company borrowed $1,660,000 from a third party, for the
benefit of Verge, and subordinate accordingly the Company security to said
third
party up too the amount it borrowed.
Said
line
of credit granted by the Company to Verge was increased via an Amendment to
the
Investment Agreement up to $20 Million with the same original
terms.
Based
on
series of agreements commencing June 5, 2007 and following by July 23, 2007
(as
reported on the Company's Form 8-K filed June 11, 2007), the Company, the
Company's chief executive officer Yossi Attia, and Darren Dunckel - CEO of
ERC
(collectively, the "Investors") entered into an Agreement (the "Upswing
Agreement") with a third party, Upswing, Ltd. (also known as Appswing Ltd.,
hereinafter referred to as "Upswing"). Pursuant to the Upswing Agreement, the
Investors intend to invest in an entity listed on the Tel Aviv Stock Exchange
-
the Atia Group Limited, f/k/a Kidron Industrial Holdings Ltd (herein referred
to
as AGL). In addition, the Investors intend to transfer rights and control of
various real estate projects to AGL. The Investors and AGL then effected a
transaction, pursuant to which the Investors and/or the Investors' affiliates
acquired about 76% of the AGL in consideration of the transfer of the rights
to
the various real estate projects (including Verge) to AGL (the "Transaction").
Upswing, among other items, advised the Investors on the steps necessary to
effectuate the contemplated transfer of real estate project rights to AGL.
Pursuant to the Notice, the Company, subject to performance under the Upswing
Agreement, further intends to exercise its option (the "Sitnica Option") to
purchase ERC's derivative rights and interest in Sitnica d.o.o. through ERC's
holdings (one-third (1/3) interest) in AP Holdings Limited ("AP Holdings"),
a
company organized under the Companies (Jersey) Law 1991, which equates to a
one-third interest in Sitnica d.o.o. (excluding ERC's interest in AP Holdings).
The Sitnica Option is exercisable in the amount of $4,000,000, payable by
reducing the outstanding loan amount owing to the Company under the Investment
Agreement by $3,550,000 and reducing the Company's deposit with Shalom Atia,
Trustee of AP Holdings, by $450,000.
On
October 15, 2007, Emvelco delivered that certain Notice of Exercise of Options
("Notice") to ERC, TIHG, Verge and Darren C. Dunckel, individual, President
of
ERC and/or representative of the foregoing parties. Pursuant to the Notice,
Emvelco, subject to performance under the Upswing Agreement, intends to exercise
its option (the "Verge Option") to purchase a multi-use condominium and
commercial property in Las Vegas, Nevada, via the purchase and acquisition
of
all outstanding shares of common stock of Verge. The Verge Option is exercisable
in the amount of $5,000,000 payable in cash, but in no event is the option
exercisable prior to Verge breaking ground, plus conversion of $10,000,000
loans
given to Verge into Equity as consideration for 75,000 shares of
Verge.
On
October 20, 2008 AGL sold all its holding with Verge to a third party for a
consideration of one million dollars to be paid on December 31, 2009. The
Company considers itself as a secured debtor in possession of Verge. AGL did
not
get consent from the Company of said sale. The Company based on US GAAP expensed
all the debts of Verge to bad debts. Such expenses does not waiver any of the
Company rights which secured with a second trust deed on Verge property.
The
Croatian subsidiary of AGL obtained the rights to 25 consecutive lots
(hereinafter - the "Land" or the "Assets") from the Atia Project at the value
of
these assets on the books of the Atia Project. In view of the fact that these
real estate assets are held for an as yet undetermined future use, Sitnica
reported this real estate as investment real estate in accordance with
Accounting Standard No. 16 of the Israel Accounting Standards Board.
Based
on
the agreement, the Company disposed all its holdings in AGL effective January
1,
2008, and the company financials reflect such disposal.
Plan
of operation
The
Company operates in financial investment and investments in resources and energy
developments (Gas & Oil) for subsequent sales, Investment and Financing
Activities, directly or through its subsidiaries currently in the USA. The
Company’s plan of operation for the next 12 months will include the following
components:
We
plan
to finance and invest in development of existing operating projects (DCG and
Vortex), including obtaining financing of DCG for the purpose of commencing
or
continuing the drilling projects in 2008. Our plan is to proceed with financial
investments in energy (Gas & Oil) and resources. This phase of development
will include the following elements:
(a)
Attempting to raise bond or debt financing through DCG and/or the Company if
possible. Any cash receipt from financing will be utilized partly by the
Company’s financial investment in gas and oil in the US and overseas, based on
available opportunities,. In connection with DCG financing, the Company
anticipates spending approximately $1,200,000 on professional fees over the
next
12 months in order to facilitate our financial investment, by creating more
strength to the financial investments of the Company.
(b)
The
Company anticipates spending approximately $250,000 on professional fees over
the next 12 months in order to satisfy its reporting obligations.
(c)
Subject to obtaining adequate financing on acceptable terms, the Company
anticipates that it will be spending approximately $20,000,000 over the next
12
month period pursuing its stated plan of investment operation for the drilling
program. The Company’s present cash reserves are not sufficient to carry out its
plan of operation without substantial additional financing. The Company is
currently attempting to arrange for financing through mezzanine arrangements,
debt or equity that would enable it to proceed with its plan of investment
operation. However, there is no guarantee that we will be able to close such
financing transaction or, if financing is available, that the terms will be
acceptable to the Company.
(d)
As
disclosed on the Company 8-K and in this Report, DC Gas commenced drilling
of
its first well and had successfully hit natural gas at a depth of 4,783 feet,
though was not connected to the main pipe line as of September 30, 2008. The
Company commenced the drilling of its wells in the Wolfcamp Canyon reservoir
through operator Ozona Natural Gas Company LLC (“Ozona”). The Company plans to
drill and complete at least four (4) wells within the next month and put them
into production, if successful. The Company has an inventory of at least 86
drilling locations of which 48 are identified as Proved Undeveloped (PUD) and
the rest as Probable.
(e)
As
disclosed on the Company 8-K’s, the Company is in the process of due diligence
on two projects which the Company signed memorandum of understanding. - see
Note
9 - Commitments & Contingencies in the financial statements under “Pending
Projects under Due Diligence”. The
Company has no assurance or ability to predict if the contingent projects will
be closed under definitive agreements.
(e)
Gas
and Oil – Market, competition and Environmental Matters:
Market
Overview
We
believe the current market conditions for the energy sectors are adequate from
the demand side without sufficient growth in supply to meet the growing energy
needs. These trends are creating opportunities that DCG hopes to capitalize
on.
Some of these opportunities include the consolidation and rationalization of
global energy assets. The emergence of unconventional resources i.e. tight
gas
sands, shale gas, oil sands and coal bed methane to name a few. There are also
niche opportunities in established producing regions in emerging markets. In
the
renewable and alternative energy segments investment opportunities are growing
as a result of global trends that are influencing governmental policies.
Competition
We
operate in the highly competitive oil and gas areas of acquisition and
exploration, areas in which other competing companies have substantially larger
financial resources, operations, staffs and facilities. Such companies may
be
able to pay more for prospective oil and gas properties or prospects and to
evaluate, bid for and purchase a greater number of properties and prospects
than
our financial or human resources permit.
Environmental
Matters
Operations
on properties in which we have an interest are subject to extensive federal,
state and local environmental laws that regulate the discharge or disposal
of
materials or substances into the environment and otherwise are intended to
protect the environment. Numerous governmental agencies issue rules and
regulations to implement and enforce such laws, which are often difficult and
costly to comply with and which carry substantial administrative, civil and
criminal penalties and in some cases injunctive relief for failure to comply.
Some
laws, rules and regulations relating to the protection of the environment may,
in certain circumstances, impose ''strict liability'' for environmental
contamination. These laws render a person or company liable for environmental
and natural resource damages, cleanup costs and, in the case of oil spills
in
certain states, consequential damages without regard to negligence or fault.
Other laws, rules and regulations may require the rate of oil and gas production
to be below the economically optimal rate or may even prohibit exploration
or
production activities in environmentally sensitive areas. In addition, state
laws often require some form of remedial action, such as closure of inactive
pits and plugging of abandoned wells, to prevent pollution from former or
suspended operations.
Legislation
has been proposed in the past and continues to be evaluated in Congress from
time to time that would reclassify certain oil and gas exploration and
production wastes as ''hazardous wastes.'' This reclassification would make
these wastes subject to much more stringent storage, treatment, disposal and
clean-up requirements, which could have a significant adverse impact on
operating costs. Initiatives to further regulate the disposal of oil and gas
wastes are also proposed in certain states from time to time and may include
initiatives at the county, municipal and local government levels. These various
initiatives could have a similar adverse impact on operating costs.
The
regulatory burden of environmental laws and regulations increases our cost
and
risk of doing business and consequently affects our profitability. The federal
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
also known as the ''Superfund'' law, imposes liability, without regard to fault,
on certain classes of persons with respect to the release of a ''hazardous
substance'' into the environment. These persons include the current or prior
owner or operator of the disposal site or sites where the release occurred
and
companies that transported disposed or arranged for the transport or disposal
of
the hazardous substances found at the site. Persons who are or were responsible
for releases of hazardous substances under CERCLA may be subject to joint and
several liability for the costs of cleaning up the hazardous substances that
have been released into the environment and for damages to natural resources,
and it is not uncommon for the federal or state government to pursue such
claims.
It
is
also not uncommon for neighboring landowners and other third parties to file
claims for personal injury or property or natural resource damages allegedly
caused by the hazardous substances released into the environment. Under CERCLA,
certain oil and gas materials and products are, by definition, excluded from
the
term ''hazardous substances.'' At least two federal courts have held that
certain wastes associated with the production of crude oil may be classified
as
hazardous substances under CERCLA. Similarly, under the federal Resource,
Conservation and Recovery Act, or RCRA, which governs the generation, treatment,
storage and disposal of ''solid wastes'' and ''hazardous wastes,'' certain
oil
and gas materials and wastes are exempt from the definition of ''hazardous
wastes.'' This exemption continues to be subject to judicial interpretation
and
increasingly stringent state interpretation. During the normal course of
operations on properties in which we have an interest, exempt and non-exempt
wastes, including hazardous wastes, that are subject to RCRA and comparable
state statutes and implementing regulations are generated or have been generated
in the past. The federal Environmental Protection Agency and various state
agencies continue to promulgate regulations that limit the disposal and
permitting options for certain hazardous and non-hazardous wastes.
We
believe that the operator of the properties in which we have an interest is
in
substantial compliance with applicable laws, rules and regulations relating
to
the control of air emissions at all facilities on those properties. Although
we
maintain insurance against some, but not all, of the risks described above,
including insuring the costs of clean-up operations, public liability and
physical damage, there is no assurance that our insurance will be adequate
to
cover all such costs, that the insurance will continue to be available in the
future or that the insurance will be available at premium levels that justify
our purchase. The occurrence of a significant event not fully insured or
indemnified against could have a material adverse effect on our financial
condition and operations. Compliance with environmental requirements, including
financial assurance requirements and the costs associated with the cleanup
of
any spill, could have a material adverse effect on our capital expenditures,
earnings or competitive position. We do believe, however, that our operators
are
in substantial compliance with current applicable environmental laws and
regulations. Nevertheless, changes in environmental laws have the potential
to
adversely affect operations. At this time, we have no plans to make any material
capital expenditures for environmental control facilities.
The
Company believes that its liquidity will not be enough for implementing its
plan, If actual fund raising will not be adequate, the Company will not continue
spending its existing cash, and therefore it can avoid liquidity
problems. The Company’s actual expenditures and business plan may differ
from the one stated above. Its board of directors may decide not to pursue
this
plan as a whole or part of it. In addition, the Company may modify the plan
based on available financing.
Critical
Accounting Estimates
Our
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements that have been prepared
in
accordance with generally accepted accounting principles in the United States
of
America ("US GAAP"). This preparation requires management to make estimates
and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosure of contingent assets and liabilities. US
GAAP
provides the framework from which to make these estimates, assumptions and
disclosures. We choose accounting policies within US GAAP that management
believes are appropriate to accurately and fairly report our operating results
and financial position in a consistent manner. Management regularly assesses
these policies in light of current and forecasted economic conditions. Although
we believe that our estimates, assumptions and judgments are reasonable,
they
are based upon information presently available. Actual results may differ
significantly from these estimates under different assumptions, judgments
or
conditions for a number of reasons. Our accounting policies are stated in
details in Note 2 to the Consolidated Financial Statements. We identified
the
following accounting policies as critical to understanding the results of
operations and representative of the more significant judgments and estimates
used in the preparation of the consolidated financial statements: impairment
of
goodwill, allowance for doubtful accounts, acquisition related assets and
liabilities, accounting of income taxes and analysis of FIN46R as well as
FASB
67.
·
|
Investment
in Real Estate and Commercial Leasing Assets. Real estate held
for sale
and construction in progress is stated at the lower of cost or
fair value
less costs to sell and includes acreage, development, construction
and
carrying costs and other related costs through the development
stage.
Commercial leasing assets, which are held for use, are stated at
cost.
When events or circumstances indicate than an asset’s carrying amount may
not be recoverable, an impairment test is performed in accordance
with the
provisions of SFAS 144. For properties held for sale, if estimated
fair
value less costs to sell is less than the related carrying amount,
then a
reduction of the assets carrying value to fair value less costs
to sell is
required. For properties held for use, if the projected undiscounted
cash
flow from the asset is less than the related carrying amount, then
a
reduction of the carrying amount of the asset to fair value is
required.
Measurement of the impairment loss is based on the fair value of
the
asset. Generally, we determine fair value using valuation techniques
such
as discounted expected future cash flows. Based on said GAAP, the
Company
made a provision to doubtful debs, on all ERC balances.
|
Our
expected future cash flows are affected by many factors including:
a)
The
economic condition of the US and World wide markets – especially during these
current times of world wide financial crisis.
b)
The
performance of the underline assets in the markets where our properties are
located;
c)
Our
financial condition, which may influence our ability to develop our properties;
and
d)
Governmental regulations.
Because
any one of these factors could substantially affect our estimate of future
cash
flows, this is a critical accounting policy because these estimates could
result
in us either recording or not recording an impairment loss based on different
assumptions. Impairment losses are generally substantial charges. We are
currently in the beginning state of development of gas properties, therefore
no
impairment is required. Any impairment charge would more likely than not
have a
material effect on our results of operations.
The
estimate of our future revenues is also important because it is the basis
of our
development plans and also a factor in our ability to obtain the financing
necessary to complete our development plans. If our estimates of future cash
flows from our properties differ from expectations, then our financial and
liquidity position may be compromised, which could result in our default
under
certain debt instruments or result in our suspending some or all of our
development activities.
In
lieu
of our new strategy (developing Gas and Oil Properties), our accounting
including supplemental Oil and Gas Disclosures stated in details in Notes
to the
Consolidated Financial Statements. The disclosed information presents the
Company's natural gas producing activities as required by Statement of Financial
Accounting Standards No. 69, “Disclosures about Oil and Gas Producing
Activities.".
Commitments
and contingencies
Our
Commitments and contingencies are stated in details in Notes to the Consolidated
Financial Statements, which include as mandatory required supplemental
information about gas and oil. On this section management give a more detailed
disclosures to specific commitments and contingencies that were in place
(for
disposed properties) prior of completion of the DCG acquisition which changed
the Company strategic substantially.
Effective
July 1, 2006, the Company entered into a five-year employment agreement with
Yossi Attia as the President of ERC which commenced on July 1, 2006 and provides
for annual compensation of $240,000 and an annual bonus of not less than
$120,000 per year, as well as an annual car allowance for the same period.
Mr.
Attia will be entitled to a special bonus equal to 10% of the earnings before
interest, depreciation and amortization (“EBITDA”) of ERC, which such bonus is
payable in shares of common stock of the Company; provided, however, the
special
bonus is only payable in the event that Mr. Attia remains continuously employed
by ERC and Mr. Attia shall not have sold shares of common stock of the Company
on or before the payment date of the Special Bonus unless such shares were
received in connection with the exercise of an option that was scheduled
to
expire within one year of the date of exercise. In addition, on August 14,
2006,
the Company amended the Agreement to provide that Mr. Attia shall serve as
the
Chief Executive Officer of the Company for a term of two years commencing
August
14, 2006 and granting annual compensation of $250,000 to be paid in the form
of
Company shares of common stock. The number of shares to be received by Mr.
Attia
was calculated based on the average closing price 10 days prior to the
commencement of each employment year. Mr. Attia will receive 111,458 shares
of
the Company’s common stock for his first year service. No shares have been
issued to date. The financial statements accrued the liability toward Mr.
Attia
employment agreements. The board of directors of AGL approved the employment
agreement between AGL and Mr. Yossi Attia, the controlling shareholder and
CEO
of the Company. The agreement goes into effect on the date that the
aforementioned allotments are consummated and stipulates that Mr. Attia will
serve as the CEO of AGL in return for a salary that costs AGL an amount of
US$
10 thousand a month. Mr. Attia is also entitled to reimbursement of
expenses in connection with the affairs of AGL, in accordance with AGL policy,
as set from time to time. In addition, Mr. Attia is entitled to an annual
bonus
of 2.5% of the net, pre-tax income of the Company in excess of NIS 8 million.
The board of directors of AGL approved an employment agreement between the
Company and Mr. Shalom Attia, the controlling shareholder and CEO of AP Holdings
Ltd. The agreement goes into effect on the date that the aforementioned
allotments are consummated and stipulates that Mr. Shalom Attia will serve
as
the VP – European Operations of AGL in return for a salary that costs the
Company an amount of US$10 thousand a month. Mr. Attia is also entitled to
reimbursement of expenses in connection with the affairs of the Company,
in
accordance with Company policy, as set from time to time. In addition, Mr.
Shalom Attia is entitled to an annual bonus of 2.5% of the net, pre-tax income
of AGL in excess of NIS 8 million. The aforementioned agreements were ratified
by the general shareholders meeting of AGL on 30 October 2007.
Based
upon a swap agreement dated August 19, 2008, which was executed between C.
Properties Ltd. (“C. Properties”) and KSD Pacific, LLC (“KSD”), which is
controlled by Mr. Yossi Attia Family Trust, where KSD will sell to C.
Properties, and C. Properties will purchase from KSD, all its holdings of
the
Company which amount to 1,505,644 shares of common stock of the Company for
a
purchase price of 734,060,505 shares of common stock of AGL
On
September 1, 2008 Star Equity Investment LLC a third party acquired from
Mr.
Attia, a $1 million note due by the Company since January 1, 2008. Said note
is
bearing 12% interest commencing October 1st, 2008 and can be converted
(including interest) into common shares of the Company at a fixed price of
$0.75
per share.
Effective
July 1, 2006, Verge entered into a non written year employment agreement
with
Darren C Dunckel as the President of the Company which commenced on July
11,
2006 and provides for annual compensation in the amount of $120,000, the
employment expense which was capitalized related to such agreement was $120,000
for the year ended December 31, 2007.
As
of the
date of closing this filing, the Company via its sub, completed the drilling
of
all 4 wells at the estimated cost of $2,100,000 for 4 wells (not including
option payments). The Company also exercised its fifth well option (by paying
per the master agreement $50,000 option fee on November 5, 2008). In lieu
of the
world financial markets crisis, the Company approached the land owners on
DCG
mineral rights, requesting an amendment to allow DCG an additional six (6)
months before it is required to exercise another option to secure a Term
Assignment of Oil and Gas Lease pursuant to the terms of the original Agreement
dated March 5, 2008. The land owner’s representative has not yet answered the
Company’s request as of the filing of this report.
Off
Balance Sheet Arrangements
There
are
no material off balance sheet arrangements.
Results
of Operations
Nine
Months Period Ended September 30, 2008 Compared to Nine Months Period Ended
September 30, 2007
Due
to
the new financial investment in Gas and Oil activity, which commenced in
May
2008, the consolidated statements of operations for the periods ended September
30, 2008 and 2007 are not comparable. The financial figures for 2007 only
include the corporate expenses of the Company’s legal entity registered in the
State of Delaware. This section of the report, should be read together with
Note
13 of the Company consolidated financials - Change
in the Reporting Entity: In
accordance with Financial Accounting Standards, FAS 154, Accounting
Changes and Error Corrections,
when an
accounting change results in financial statements that are, in effect, the
statements of a different reporting entity, the change shall be retrospectively
applied to the financial statements of all prior periods presented to show
financial information for the new reporting entity for those periods. Previously
issued interim financial information shall be presented on a retrospective
basis.
The
consolidated statements of operations for the periods ended September 30,
2008
and 2007 are compared (subject to the above description) in the sections
below:
Nine
months ended September 30,
|
|
2008
|
|
2007
|
|
Total
revenues
|
|
$
|
1,990,000
|
|
$
|
6,950,000-
|
|
Revenues
increased by 71% or $4,960,000 primarily due to the sale of the three properties
in 2007, the Laurel property, the Harper property, and the Edinburgh properties
compared to only one sale of property in 2008 for the 610 Crescent Heights
property.
Cost
of revenues (excluding depreciation and amortization)
The
following table summarizes cost of revenues (excluding depreciation and
amortization) for the nine months ended September 30, 2008 and
2007:
Nine
months ended September 30,
|
|
2008
|
|
2007
|
|
Total
cost of revenues
|
|
$
|
1,933,569
|
|
$
|
6,436,006
|
|
Cost
of
revenues decreased by 70% or $4,502,437 primarily due to the sale of the
three
properties in 2007, the Laurel property, the Harper property, and the Edinburgh
properties compared to only one sale of property in 2008 for the 610 Crescent
Heights property.
Compensation
and related costs
The
following table summarizes compensation and related costs for the nine months
ended September 30, 2008 and 2007:
Nine
months ended September 30,
|
|
2008
|
|
2007
|
|
Compensation
and related costs
|
|
$
|
1,049,065
|
|
$
|
328,547
|
|
Overall
compensation and related costs increased by 224% or $737,406 primarily due
to
the stock compensation expense recognized in 2008 for stock options granted
to
an executive officer of the Company in the amount of $729,537..
Consulting,
director and professional fees
The
following table summarizes consulting and professional fees for the nine
months
ended September 30, 2008 and 2007:
Nine
months ended September 30,
|
|
2008
|
|
2007
|
|
Consulting,
director and professional fees
|
|
$
|
12,655,015
|
|
$
|
597,281
|
|
Overall
consulting, professional and director fees increased by 2019%, or $12,057,814,
primarily as the result of a fee charge of $9,782,768 to C. Properties as
a fee
associated with the DCG transaction and a $1,848,348 charge to stock
compensation expense for various grants of shares and warrants in relation
to
the cost of several consultants, investment bankers, advisors, accounting
and
lawyers fee over last period.
Other
selling, general and administrative expenses
The
following table summarizes other selling, general and administrative expenses
for the nine months ended September 30, 2008 and 2007:
Nine
months ended September 30,
|
|
2008
|
|
2007
|
|
Other
selling, general and administrative expenses
|
|
$
|
168,813
|
|
$
|
354,689
|
|
Overall,
other selling, general and administrative expenses decreased by 52%, or
$185,877, due to the deconsolidation of Micrologic after June 30, 2007. The
former subsidiary of the Company incurred substantial S,G&A costs in 2007.
Micrologic was not consolidated into the Company’s financial statements in 2008.
Software
development expense
The
following table summarizes other selling, general and administrative expenses
for the nine months ended September 30, 2008 and 2007:
Nine
months ended September 30,
|
|
2008
|
|
2007
|
|
Software
development expense
|
|
$
|
—
|
|
$
|
136,236
|
|
Overall,
software development expenses decreased by 100.00%, or $136,236, due to the
deconsolidation of Micrologic after June 30, 2007. The former subsidiary
of the
Company incurred substantial software development costs in 2007. Micrologic
was
not consolidated into the Company’s financial statements in 2008.
Interest
income and expense
The
following table summarizes interest income and expense for the nine months
ended
September 30, 2008 and 2007:
Nine
months ended June 30,
|
|
2008
|
|
2007
|
|
Interest
income
|
|
$
|
473,597
|
|
$
|
1,425,314
|
|
Interest
expense
|
|
$
|
(1,674,334
|
)
|
$
|
(205,957
|
)
|
The
decrease in interest income is attributable to the Company investing strategy
pending establishment of the real estate development business, as well as
loans
Verge, together with capitalized 10 million dollars into Verge equity as
part of
the AGL transaction, which reduced materially the amounts entitled to interest
income. The increase in interest expense of 713% or $1,468,377 is primarily
due
to expense recognized for a debt discount relating to a convertible note
payable
transaction in the amount of $743,752. The remaining increase is due to the
interest accrued due to former DCG members as well as the increase line of
credits and short time borrowing outstanding during the nine months ended
September 30, 2008.
Three
Months Period Ended September 30, 2008 Compared to Three Months Period Ended
September 30, 2007
Due
to
the new financial investment in Gas and Oil activity, which commenced in
May
2008, the consolidated statements of operations for the periods ended September
30, 2008 and 2007 are not comparable. The financial figures for 2007 only
include the corporate expenses of the Company’s legal entity registered in the
State of Delaware.
The
consolidated statements of operations for the three months period ended
September 30, 2008 and 2007 are compared in the sections below:
Three
months ended September 30,
|
|
2008
|
|
2007
|
|
Total
revenues
|
|
$
|
1,990,000
|
|
$
|
6,950,000
|
|
Revenues
increased by 71% or $4,960,000 primarily due to the sale of the three properties
in 2007, the Laurel property, the Harper property, and the Edinburgh properties
compared to only one sale of property in 2008 for the 610 Crescent Heights
property. All four of the properties closed in the third quarter of 2007
and
2008, respectively.
Cost
of revenues (excluding depreciation and amortization)
The
following table summarizes cost of revenues (excluding depreciation and
amortization) for the three months ended September 30, 2008 and
2007:
Three
months ended September 30,
|
|
2008
|
|
2007
|
|
Total
cost of revenues
|
|
$
|
1,933,569
|
|
$
|
6,436,006
|
|
Cost
of
revenues decreased by 70% or $4,502,437 primarily due to the sale of the
three
properties in 2007, the Laurel property, the Harper property, and the Edinburgh
properties compared to only one sale of property in 2008 for the 610 Crescent
Heights property. All four of the properties closed in the third quarter
of 2007
and 2008, respectively.
Compensation
and related costs
The
following table summarizes compensation and related costs for the three months
ended September 30, 2008 and 2007:
Three
months ended September 30,
|
|
2008
|
|
2007
|
|
Compensation
and related costs
|
|
$
|
864,682
|
|
$
|
90,001
|
|
Overall
compensation and related costs increased by 880%, or $791,568 primarily due
to
the stock compensation expense recognized in the third quarter of 2008 for
stock
options granted to an executive officer of the Company in the amount of
$729,537..
Consulting,
director and professional fees
The
following table summarizes consulting and professional fees for the three
months
ended September 30, 2008 and 2007:
Three
months ended September 30,
|
|
2008
|
|
2007
|
|
Consulting,
director and professional fees
|
|
$
|
560,531
|
|
$
|
166,579
|
|
Overall
consulting, professional and director fees increased by 236% or $393,952,
primarily as the result a charge to stock compensation expense for various
grants of shares and warrants in relation to the cost of several consultants,
investment bankers, advisors, accounting and lawyers’ fees over last
period.
Other
selling, general and administrative expenses
The
following table summarizes other selling, general and administrative expenses
for the three months ended September 30, 2008 and 2007:
Three
months ended September 30,
|
|
2008
|
|
2007
|
|
Other
selling, general and administrative expenses
|
|
$
|
30,977
|
|
$
|
151,259
|
|
Overall,
other selling, general and administrative expenses decreased by 80%, or
$120,202, due to the deconsolidation of Micrologic after June 30, 2007. The
former subsidiary of the Company incurred substantial S,G&A costs in 2007.
Micrologic was not consolidated into the Company’s financial statements in
2008.
Software
development expense
The
following table summarizes other selling, general and administrative expenses
for the three months ended September 30, 2008 and 2007:
Three
months ended September 30,
|
|
2008
|
|
2007
|
|
Software
development expenses
|
|
$
|
—
|
|
$
|
37,336
|
|
Overall,
software development expenses decreased by 100.00%, or $37,336, due to the
deconsolidation of Micrologic after June 30, 2007.
Interest
income and expense
The
following table summarizes interest income and expense for the three months
ended September 30, 2008 and 2007:
Three
months ended September 30,
|
|
2008
|
|
2007
|
|
Interest
income
|
|
$
|
116,982
|
|
$
|
536,139
|
|
Interest
expense
|
|
$
|
(862,347
|
)
|
$
|
(68,628
|
)
|
The
decrease in interest income is attributable to the Company investing strategy
pending establishment of the real estate development business, as well as
loans
Verge, together with capitalized 10 million dollars into Verge equity as
part of
the AGL transaction, which reduced materially the amounts entitled to interest
income. The increase in expense is primarily due to an amount recognized
for a
debt discount relating to a convertible note payable transaction in the amount
of $743,752. The remaining increase is due to interest accrued due to former
DCG
members as well as the increase line of credits and short time borrowing
outstanding during the three months ended September 30, 2008.
Liquidity
and Capital Resources
The
Company currently anticipates that its available cash resources will be
sufficient to meet its presently anticipated working capital requirements
for at
least the next 12 months.
As
of
September 30, 2008, our cash, cash equivalents and marketable securities
were
$2,152,057, an increase of approximately $1,782,451 from the end of fiscal
year
2007. The increase in our cash, cash equivalents and marketable securities
is
primarily the result of the sale of real estate property and closing the
first
phase loan from Trafalgar.
Cash
flow
provided from operating activities for the nine months ended September 30,
2008
was $2,510,809 and cash flow used in operating activities was $1,845,079
for the
nine months ended. September 30, 2007 the change is primarily due to the
sale of
the 610 Crescent Heights property on September 30, 2008, whereby the restricted
cash was released from escrow and amounts due were not paid until October
2008.
Cash
flow
used in investing activities for the nine months ended September 30, 2008
and
2007 was $440,211 and $5,823,895, respectively. The change was primarily
due to
the significant reduction in loan advances to ERC and Verge of approximately
$8,600,000 offset slightly by the cash received from the sale of discontinued
operations of Navigator of $3,200,000 in 2007.
Cash
used
in financing activities was approximately $288,147 for the nine months ended
September 30, 2008 and cash provided by financing activities was $4,884,570
for
the nine months ended September 30 2007. This change is due to the repayment
of
a bank loan in 2008, which was provided in 2007.
The
Company holds restricted Certificate of Deposit (CD) with the Bank to access
a
revolving line of credit. This deposit is interest bearing and approximated
$4.196 million as of September 30, 2008. On November 8, 2007, the lines of
credits were increased and extended as the following: $4,180,000 until October
16, 2008 and $4,229,000 until September 1, 2008. Both lines bear interest
of
5.87% and are secured by restricted cash deposited in CD’s with the bank.
On August 2008, the company notified the bank, not to extend the deposits,
and pay it off from the CD.
In
the
event the Company makes future acquisitions or investments, additional bank
loans or fund raising may be used to finance such future acquisitions. The
Company may consider the sale of non-strategic assets.
Inflation
and Foreign Currency
The
Company maintains its books in local currency: on sold assets - Kuna for
Sitnica, N.I.S for AGL and US Dollars for the Parent Company registered in
the
State of Delaware.
The
Company’s operations are primarily in the United States through its wholly owned
subsidiaries. Some of the Company’s customers were in Croatia. As a result,
fluctuations in currency exchange rates may significantly affect the Company's
sales, profitability and financial position when the foreign currencies,
primarily the Croatian Kuna, of its international operations are translated
into
U.S. dollars for financial reporting. In additional, we are also subject
to
currency fluctuation risk with respect to certain foreign currency denominated
receivables and payables. Although the Company cannot predict the extent
to
which currency fluctuations may or will affect the Company's business and
financial position, there is a risk that such fluctuations will have an adverse
impact on the Company's sales, profits and financial position. Because differing
portions of our revenues and costs are denominated in foreign currency,
movements could impact our margins by, for example, decreasing our foreign
revenues when the dollar strengthens and not correspondingly decreasing our
expenses. The Company does not currently hedge its currency exposure. In
the
future, we may engage in hedging transactions to mitigate foreign exchange
risk.
Effect
of Recent Accounting Pronouncements
In
December 2007, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 110 (“SAB 110”). SAB 110 amends and replaces
Question 6 of Section D.2 of Topic 14, “Share-Based Payment,” of the Staff
Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses
the
views of the staff regarding the use of the “simplified” method in developing an
estimate of the expected term of “plain vanilla” share options and allows usage
of the “simplified” method for share option grants prior to December 31,
2007. SAB 110 allows public companies which do not have historically sufficient
experience to provide a reasonable estimate to continue to use the “simplified”
method for estimating the expected term of “plain vanilla” share option grants
after December 31, 2007. The Company will continue to use the “simplified”
method until it has enough historical experience to provide a reasonable
estimate of expected term in accordance with SAB 110.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) 141-R, “Business Combinations.” SFAS 141-R retains the fundamental
requirements in SFAS 141 that the acquisition method of accounting (referred
to
as the purchase method) be used for all business combinations and for an
acquirer to be identified for each business combination. It also establishes
principles and requirements for how the acquirer: (a) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree;
(b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase and (c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141-R
will
apply prospectively to business combinations for which the acquisition date
is
on or after the Company’s fiscal year beginning October 1, 2009. While the
Company has not yet evaluated the impact, if any, that SFAS 141-R will have
on
its consolidated financial statements, the Company will be required to expense
costs related to any acquisitions after September 30, 2009.
In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements.” This Statement amends Accounting Research
Bulletin 51 to establish accounting and reporting standards for the
noncontrolling (minority) interest in a subsidiary and for the deconsolidation
of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary
is
an ownership interest in the consolidated entity that should be reported
as
equity in the consolidated financial statements. The Company has not yet
determined the impact, if any, that SFAS 160 will have on its consolidated
financial statements. SFAS 160 is effective for the Company’s fiscal year
beginning October 1, 2009.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures
about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. In February 2008, the FASB issued FASB Staff Position
No. FAS 157–2, “Effective Date of FASB Statement No. 157”, which provides a
one year deferral of the effective date of SFAS 157 for non–financial assets and
non–financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, effective
January 1, 2008, we adopted the provisions of SFAS No. 157 with respect to
our financial assets and liabilities only. Since the Company has no investments
available for sale, the adoption of this pronouncement has no material impact
to
the financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—
including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
items
at fair value. This statement provides entities the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Effective January 1, 2008,
we adopted SFAS No. 159 and have chosen not to elect the fair value option
for any items that are not already required to be measured at fair value
in
accordance with accounting principles generally accepted in the United
States.
Forward-Looking
Statements
When
used
in this Form, in other filings by the Company with the SEC, in the Company’s
press releases or other public or stockholder communications, or in oral
statements made with the approval of an authorized executive officer of the
Company, the words or phrases “would be,” “will allow,” “intends to,” “will
likely result,” “are expected to,” “will continue,” “is anticipated,”
“estimate,” “project,” or similar expressions are intended to identify
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995.
The
Company cautions readers not to place undue reliance on any forward-looking
statements, which speak only as of the date made, are based on certain
assumptions and expectations which may or may not be valid or actually occur,
and which involve various risks and uncertainties, including but not limited
to
the risks set forth above. See “Risk Factors.” In addition, sales and other
revenues may not commence and/or continue as anticipated due to delays or
otherwise. As a result, the Company’s actual results for future periods could
differ materially from those anticipated or projected.
Unless
otherwise required by applicable law, the Company does not undertake, and
specifically disclaims any obligation, to update any forward-looking statements
to reflect occurrences, developments, unanticipated events or circumstances
after the date of such statement.
Smaller
reporting companies are not required to provide the information required
by Item
305.
Item
4. Controls and Procedures
Not
applicable,
Item
4T. Controls and Procedures
The
term
disclosure controls and procedures means controls and other procedures of
an
issuer that are designed to ensure that information required to be disclosed
by
the issuer in the reports that it files or submits under the Exchange Act
(15
U.S.C. 78a, et
seq. )
is
recorded, processed, summarized and reported, within the time periods specified
in the Commission’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed
to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer’s management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate
to
allow timely decisions regarding required disclosure.
The
term
internal control over financial reporting is defined as a process designed
by,
or under the supervision of, the issuer’s principal executive and principal
financial officers, or persons performing similar functions, and effected
by the
issuer’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
·
|
Pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of the assets
of the
issuer;
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the
issuer
are being made only in accordance with authorizations of management
and
directors of the issuer; and
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the issuer’s assets that
could have a material effect on the financial statements.
|
Our
management, including our chief executive officer and principal financial
officer, does not expect that our disclosure controls and procedures or our
internal controls over financial reporting will prevent all error and all
fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives
of the
control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of
inherent limitations in all control systems, internal control over financial
reporting may not prevent or detect misstatements, and no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the registrant have been detected. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or
that
the degree of compliance with the policies or procedures may deteriorate.
Evaluation
of Disclosure and Controls and Procedures. Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the Exchange
Act. Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in
accordance with accounting principles generally accepted in the United
States. We carried out an evaluation, under the supervision and with
the participation of our management, including our chief executive officer
and
principal financial officer, of the effectiveness of the design and operation
of
our disclosure controls and procedures as of the end of the period covered
by
this report. The evaluation was undertaken in consultation with our
accounting personnel. Based on that evaluation, our chief executive
officer and principal financial officer concluded that our disclosure controls
and procedures are currently effective to ensure that information required
to be
disclosed by us in the reports that we file or submit under the Exchange
Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. As we develop new business or if we
engage in an extraordinary transaction, we will review our disclosure controls
and procedures and make sure that they remain adequate.
Changes
in Internal Controls over Financial Reporting. There
were no changes in the internal controls over our financial reporting that
occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
This
report does not include an attestation report of the registrant’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
registrant’s registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the registrant to provide
only management’s report in this report.
ITEM
1. LEGAL PROCEEDINGS
From
time
to time, we are a party to litigation or other legal proceedings that we
consider to be a part of the ordinary course of our business. We are not
involved currently in legal proceedings other than detailed below that could
reasonably be expected to have a material adverse effect on our business,
prospects, financial condition or results of operations. We may become involved
in material legal proceedings in the future.
The
Company filed a complaint in the Superior Court for the County of Los Angeles,
against a foreign attorney. The case was filed on February 14, 2007, and
service
of process has been done. In the complaint the Company is seeking judgment
against this attorney in the amount of approximately 250,000 Euros
(approximately $316,000 as of the date of actual transferring the funds),
plus
interest, costs and fees. Defendant has not yet appeared in the action. The
Company believes that it has a meritorious claim for the return of monies
deposited with defendant in a trust capacity, and, from the documents in
the
Company’s possession, there is no reason to doubt the validity of the claim.
During April 2007 defendant returned $92,694 (70,000 Euros at the relevant
time)
which netted to $72,694 post legal expenses; the Company has granted him
a
15-day extension to file his defense. Post the extension and in lieu of not
filing a defense, the Company filed for a default judgment. On October 25,
2007
the Company obtained a California Judgment by court after default against
the
attorney for the sum of $249,340.65. However, management does not have any
information on the collectibles of said judgment that entered in
court.
A
consultant that was terminated by an ex-affiliate of the Company, named the
Company as a defendant in a litigation that the Company has neither any interest
nor liability. The Company position is that naming the Company in said
litigation is malicious. The Company filed an answer to said complaint
requesting dismissal.
Other
than described above, as of September 30, 2008 the Company or its subs is
not
side to any litigation.
ITEM
2. Unregistered
Sales of Equity Securities and Use of Proceeds
Effective
August 14, 2006, the Company entered into a two-year employment agreement
with
Yossi Attia as the Chief Executive Officer of the Company, which provided
for
annual compensation in the amount of $250,000 to be paid in the form of Company
shares of common stock. The number of shares to be received by Mr. Attia
was
calculated based on the average closing price 10 days prior to the commencement
of each employment year. Mr. Attia will receive 111,458 Emvelco shares of
common
stock for his first year service. No shares have been issued in connection
with
his services in 2006 or for services in 2007 and 2008.
In
June
2006, the Company's Board of Directors approved a program to repurchase,
from
time to time, at management's discretion, up to 700,000 shares of the Company's
common stock in the open market or in private transactions commencing on
June
20, 2006 and continuing through December 15, 2006 at prevailing market prices.
Repurchases will be made under the program using our own cash resources and
will
be in accordance with Rule 10b-18 under the Securities Exchange Act of 1934
and
other applicable laws, rules and regulations. The Shemano Group acts as agent
for our stock repurchase program. As of June 30, 2008, the Company held 660,362
treasury shares, which were retired completely as canceled during August
and
September 2008.
Pursuant
to the Sale Agreement of Navigator, the Company received 622,531 shares of
the
Company’s common stock as partial consideration.. The Company shares were valued
at $1.34 per share, representing the closing price of the Company on the
NASDAQ
Capital Market on February 16, 2007, the closing of the sale. The Company
canceled the Company common stock acquired during the disposition in the
amount
of $834,192.
There
were no options or warrants exercised in the six month period ended September
30, 2008 and year ended December 31, 2007
As
of
September 30, 2008, the Company has no treasury shares.
On
February 14, 2008, the Company raised Three Hundred Thousand Dollars ($300,000)
from private offerings pursuant to two (2) Private Placement Memorandums
dated
as of February 1, 2008 ("PPMs"). One PPM was in the amount of One Hundred
Thousand Dollars ($100,000) and the other was in the amount of Two Hundred
Thousand Dollars ($200,000). The offering is for Company common stock which
shall be "restricted securities" and were sold at $1.00 per share. The money
raised from the Private Placement of the Company shares will be used for
working
capital and business operations of the Company. The PPMs were done pursuant
to
Rule 506. A Form D has been filed with the Securities and Exchange Commission
in
compliance with Rule 506 for each Private Placement.
On
March
30, 2008, the Company raised $200,000 from the private offering pursuant
to a
Private Placement Memorandum ("PPM"). The private placement was for Company
common stock which shall be "restricted securities" and were sold at $1.00
per
share. The offering included 200,000 warrants to be exercised at $1.50 for
two
years (for 200,000 shares of Company common stock), and additional 200,000
warrants to be exercised at $2.00 for four years (for 200,000 shares of Company
common stock). Said Warrants may be exercised to common shares of the Company
only if the Company issues subsequent to the date of this PPM, 25,000,000
(twenty five million) or more shares of its common stock. The money raised
from
the private placement of the Company’s shares will be used for working capital
and business operations of the Company. The PPM was done pursuant to Rule
506. A
Form D has been filed with the Securities and Exchange Commission in compliance
with Rule 506 for each Private Placement. The investor is D’vora Greenwood
(Attia), the sister of Mr. Yossi Attia. Mr. Attia did not participate in
the
board meeting which approved this PPM.
On
May 6,
2008 the Company issued 500,000 shares of its common stock, $0.001 par value
per
share, to Stephen Martin Durante in accordance with the instructions provided
by
the Company pursuant to the 2004 Employee Stock Incentive Plan registered
on
Form S-8 Registration.
On
June
6, 2008, the Company raised $300,000 from the private offering pursuant to
a
Private Placement Memorandum ("PPM"). The private placement was for Company
common stock which shall be "restricted securities" and were sold at $1.00
per
share. The money raised from the private placement of the Company’s shares will
be used for working capital and business operations of the Company. The PPM
was
done pursuant to Rule 506. A Form D has been filed with the Securities and
Exchange Commission in compliance with Rule 506 for each Private Placement.
Based on information which came to the Company, and in lieu of the Company
position which was sent to the investor on June 18, 2008 the investor is
in
default for not complying with his commitment to invest an additional $225,000;
therefore the company vested the respective 300,000 shares under a
trustee.
On
June
11, 2008, the Company entered into a Services Agreement with Mehmet Haluk
Undes
(the "Undes Services Agreement") pursuant to which the Company engaged Mr.
Undes
for purposes of assisting the Company in identifying, evaluating and structuring
mergers, consolidations, acquisitions, joint ventures and strategic alliances
in
Southeast Europe, Middle East and the Turkic Republics of Central Asia. Pursuant
to the Undes Services Agreement, Mr. Undes has agreed to provide the Company
services related to the identification, evaluation, structuring, negotiating
and
closing of business acquisitions, identification of strategic partners as
well
as the provision of legal services. The term of the agreement is for five
years
and the Company has agreed to issue Mr. Undes 525,000 shares of common stock
that shall be registered on a Form S8 no later than July 1, 2008. Such actual
issuance was made on August 15, 2008.
On
June
30, 2008 - Concurrent with the formation and organization of Vortex One,
whereby
the Company contributed 525,000 shares of common stock (the "Vortex One
Shares"), a common stock purchase warrant purchasing 200,000 shares of common
stock at an exercise price of $1.50 per share (the "Vortex One Warrant")
and the
initial well that the Company intends to drill. However, the Vortex One Warrants
may only be converted to shares of common stock if the Company issues 25,000,000
or more of its common stock so that there is at least 30,000,000 authorized
shares at the time of any conversion term. Ibgui contributed $525,000. The
Vortex One Warrants were immediately transferred to Ibgui. 80% of all available
cash flow shall be initially contributed to Ibgui until the full $525,000
has
been repaid and the Company shall receive the balance. Following the payment
of
$525,000 to Ibgui, the cash flow shall be split equally.
In
July,
2008 the Company issued 16,032 shares of its common stock, $0.001 par value
per
share, to Robin Ann Gorelick, the Company Secretary, in accordance with the
instructions provided by the Company pursuant to the 2004 Employee Stock
Incentive Plan registered on Form S-8 Registration.
On
July
28, 2008 - the Company held a special meeting of the shareholders for four
initiatives, consisting of approval of a new board of directors, approval
of the
conversion of preferred shares to common shares, an increase in the authorized
shares and a stock incentive plan. All initiatives were approved by the majority
of shareholders. The 2008 Employee Stock Incentive Plan (the "2008 Incentive
Plan") authorized the board to issue up to 5,000,000 shares of Common Stock
under the plan.
On
August
23 the Company issued 100,000 shares of its common stock 0.001 par value
per
share, to Robert M. Yaspan, the Company lawyer, in accordance with the
instructions provided by the Company pursuant to the 2008 Employee Stock
Incentive Plan registered on Form S-8 Registration
On
August
8, 2008, assigned holders of the Upswing Note gave notice to the Company
of
their intention to convert their original note dated June 5, 2007 into 25
million common shares of the Company. The portion of the accrued interest’s
to-date of the note in the amount of $171,565 was not converted into shares.
The
Company accepted these notices and issued the said shares.
On
August
1, 2008, all holders of the Company’s preferred stock notified the Company about
converting said 100,000 preferred stocks into 50 million common shares of
the
Company. The conversion of preferred shares to common shares marks the
completion of the acquisition of Davy Crockett Gas Company, LLC. The Company
accepted such notice and instructed the Company’s transfer agent on August 15,
2008 to issue said 50 million common shares to the former members of DCG,
as
reported and detailed on the Company’s 14A filings.
Based
upon a swap agreement dated August 19, 2008, which was executed between C.
Properties Ltd. (“C. Properties”) and KSD Pacific, LLC (“KSD”), which is
controlled by Mr. Yossi Attia Family Trust, where KSD will sell to C.
Properties, and C. Properties will purchase from KSD, all its holdings of
the
Company which amount to 1,505,644 shares of common stock of the Company for
a
purchase price of 734,060,505 shares of common stock of AGL
In
connection of selling a convertible note to Trafalgar (see Note 5 ) the Company
issued on September 25, 2008 the amount of 54,706 common stock 0.001 par
value
per share to Trafalgar as a fee. As part of collateral to said note, the
Company
issued to Trafalgar 4,500,000 common stock 0.001 par values per shares, as
security for the Note.
Effective
July 16, 2008, the Board of Directors of the Company approved that certain
Mergers and Acquisitions Consulting Agreement (the "M&A Agreement") between
the Company and TransGlobal Financial LLC, a California limited liability
company ("TransGlobal"). Pursuant to the M&A Agreement, TransGlobal agreed
to assist the Company in the identification, evaluation, structuring,
negotiation and closing of business acquisitions for a term of five years.
As
compensation for entering into the M&A Agreement, TransGlobal shall receive
a 20% carried interest in any transaction introduced by TransGlobal to the
Company that is closed by the Company. At TransGlobal's election, such
compensation may be paid in restricted shares of common stock of the Company
equal to 20% of the transaction value. Mike Mustafoglu, who is the Chairman
of
Transglobal Financial, was elected on July 28, 2008 at a special shareholder
meeting as the Company’s Chairman of the Board of Directors.
All
of
the above securities were offered and sold to the investors in a private
placement transaction made in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506
promulgated thereunder. Each of the investors are accredited investors as
defined in Rule 501 of Regulation D promulgated under the Securities Act
of
1933.
On
August
19, 2008, the Company entered into that certain Employment Agreement with
Mike
Mustafoglu, effective July 1, 2008, pursuant to which Mr. Mustafoglu agreed
to
serve as the Chairman of the Board of Directors of the Company for a period
of
five years. Mr. Mustafoglu will receive (i) a salary of $240,000; (ii) a
performance bonus of 10% of net income before taxes, which will be allocated
by
Mr. Mustafoglu and other key executives at the sole discretion of Mr.
Mustafoglu; and (iii) a warrant to purchase 10 million shares of common stock
of
the Company at an exercise price equal to the lesser of $.50 or 50% of the
average market price of the Company's common stock during the 20 day period
prior to exercise on a cashless basis (the "Mustafoglu Warrant"). The Mustafoglu
Warrant shall be released from escrow on an equal basis over the employment
period of five years. As a result, 2,000,000 shares of the Mustafoglu Warrant
will vest per year.
As
disclosed in Form 8-Ks filed on May 7, 2008 and May 9, 2008, on May 1, 2008,
the
Company entered into an Agreement and Plan of Exchange (the "DCG Agreement")
with Davy Crockett Gas Company, LLC ("DCG") and the members of Davy Crockett
Gas
Company, LLC ("DCG Members"). Pursuant to the DCG Agreement, the Company
acquired and, the DCG Members sold, 100% of the outstanding securities in
DCG.
DCG is a limited liability company organized under the laws of the State
of
Nevada and headquartered in Bel Air; California is a newly formed designated
LLC
which holds certain development rights for gas drilling in Crockett County,
Texas. In consideration for 100% of the outstanding securities in DCG, the
Company issued the DCG Members promissory notes in the aggregate amount of
$25,000,000 payable together with interest in May 2010 (the "DCG Notes").
Additional $5,000,000 in DCG Notes are issuable upon each of the first through
fifth wells going into production. Further, the DCG Members may be entitled
to
receive additional DCG Notes up to an additional amount of $200,000,000 (the
"Additional DCG Notes") subject to the revenue generated from the land rights
held by DCG located in Crockett County, Texas less concession fees and taxes.
On
June
11, 2008, the Company, the DCG Members and DCG entered into an amendment
to the
DCG Agreement, pursuant to which the DCG Members agreed to replace all notes
that they received as consideration for transferring their interest in DCG
to
the Company for an aggregate of 100,000 shares of Series A Preferred Stock
(the
"Series A Stock") with the rights and preferences set forth below.
The
shares of Series A Stock is convertible, at any time at the option of the
Company subject to increasing the authorized shares of the Company from 35
million to 400 million, into shares of common stock of the Company determined
by
dividing the stated value by the conversion price. The initial aggregate
stated
value is $50,000,000 and the initial conversion price is $1.00 per share.
In the
event that the net operating income for the Crockett County, Texas property
for
any year is zero or negative, then the stated value shall be reduced by 10%.
Holders
of the Series A Stock are entitled to receive, without any further action
from
the Company's Board of Directors but only if such funds are legally available,
non-cumulative dividends equal to 25% of the net operating income derived
from
oil and gas production on the Crockett County, Texas property on an annual
audited basis.
In
the
event of any liquidation, winding up, change in control or fundamental
transaction of the Company, the holders of Series A Preferred will be entitled
to receive, in preference to holders of common stock, an amount equal to
the
outstanding stated value and any accrued but unpaid dividends. We granted
the
DCG Members piggyback registration rights. The Series A Stock is non-voting.
The
Company has the right, at anytime; to redeem the Series A Preferred Stock
by
paying the holders the outstanding stated value as well as accrued
dividends.
The
Company entered into a Securities Purchase Agreement (the "Agreement") with
Trafalgar Capital Specialized Investment Fund, Luxembourg ("Buyer") on September
25, 2008 for the sale of up to $2,750,000 in convertible notes (the "Notes").
Pursuant to the terms of the Agreement, the Company and the Buyer closed
on the
sale and purchase of $1,600,000 in Notes on September 25, 2008, with escrow
instruction to be closed on October 1, 2008. The Buyer, at its sole discretion,
has the option to close on a second financing for $400,000 in Notes (which
has
been exercised as described below) and a third financing for $750,000 in
Notes.
Pursuant to the terms of the Agreement, the Company agreed to pay to the
Buyer a
commitment fee of 4% of the commitment amount, a structuring fee of $15,000,
a
facility draw down fee of 4%, issue the Buyer 150,000 shares of common stock,
pay a due diligence fee to the Buyer of $15,000 and pay an advisory fee of
$100,000 to TAS Holdings Limited.
The
Notes
bear interest at 8.5% with such interest payable on a monthly basis with
the
first two payments due at closing. The Notes are due in full in September
2010.
In the event of default, the Buyer may elect to convert the interest payable
in
cash or in shares of common stock at a conversion price using the closing
bid
price of when the interest is due or paid. The Notes are convertible into
common
stock, at the Buyer's option, at a conversion price equal to 85% of the volume
weighted average price for the ten days immediately preceding the conversion
but
in no event below a price of $2.00 per share. If on the conversion or redemption
of the Notes, the Euro to US dollar spot exchange rate (the "Exchange Rate")
is
higher that the Exchange Rate on the closing date, then the number of shares
shall be increased by the same percentage determined by dividing the Exchange
Rate on the date of conversion or redemption by the Exchange Rate on the
closing
date. The Company is required to redeem the Notes starting on the fourth
month
in equal installments of $56,000 with a final payment of $480,000 with respect
to the initial funding of $1,600,000. We are also required to pay a redemption
premium of 7% on the first redemption payment, which will increase 1% per
month.
The Company may prepay the Notes in advance, which such prepayment will include
a redemption premium of 15%. In the event the Company closes on a funding
in
excess of $4,000,000, the Buyer, in its sole election, may require that the
Company redeem the Notes in full. On any principal or interest repayment
date,
in the event that the Euro to US dollar spot exchange rate is lower than
the
Euro to US dollar spot exchange rate at closing, then we will be required
to pay
additional funds to compensate for such adjustment.
Pursuant
to the terms of the Notes, the Company shall default if (i) the Company fails
to
pay amounts due within 15 days of maturity, (ii) failure of the Company to
comply with any provision of the Notes upon ten days written notice; (iii)
bankruptcy or insolvency or (iv) any breach of the Agreement and such breach
is
not cured upon ten days written notice. Upon default by the Company, the
Buyer
may accelerate full repayment of all Notes outstanding and all accrued interest
thereon, or may convert all Notes outstanding (and accrued interest thereon)
into shares of common stock (notwithstanding any limitations contained in
the
Agreement and the Notes). The Buyer has a secured lien on three of our wells
and
would be entitled to foreclose on such wells in the event an event of default
is
entered. In the event that the foregoing was to occur, significant adverse
consequences to the Company would be reasonably anticipated.
So
long
as any of the principal or interest on the Notes remains unpaid and unconverted,
the Company shall not, without the prior written consent of the Buyer, (i)
issue
or sell any common stock or preferred stock, (ii) issue or sell any Company
preferred stock, warrant, option, right, contract, call, or other security
or
instrument granting the holder thereof the right to acquire Common Stock,
(iii)
incur debt or enter into any security instrument granting the holder a security
interest in any of the assets of the Company or (iv) file any registration
statement on Form S-8.
The
Buyer
has contractually agreed to restrict their ability to convert the Notes and
receive shares of our common stock such that the number of shares of the
Company
common stock held by a Buyer and its affiliates after such conversion or
exercise does not exceed 9.9% of the Company's then issued and outstanding
shares of common stock.
The
Buyer
exercised its option to close on a second financing for $400,000 in Notes
on
October 28, 2008 and still holds an option to close on additional financing
for
$750,000 in Notes. The terms of the second financing for $400,000 are identical
to the terms of the $1,600,000 Note, as disclosed in detail on the Company
filing on October 2, 2008 on Form 8-K - Unregistered Sale of Equity Securities,
Financial Statements and Exhibits. The Notes are convertible into our common
stock, at the Buyer's option, at a conversion price equal to 85% of the volume
weighed average price for the ten days immediately preceding the conversion
but
in no event below a price of $2.00 per share.
As
of the
date hereof, the Company is obligated on the Notes issued to the Buyer in
connection with this offering. The Notes are a debt obligation arising other
than in the ordinary course of business, which constitute a direct financial
obligation of the Company.
The
above
securities were offered and sold in a private placement transaction made
in
reliance upon exemptions from registration pursuant to Section 4(2) under
the
Securities Act of 1933 and Rule 506 promulgated thereunder. Each of the
investors were an accredited investor as defined in Rule 501 of Regulation
D
promulgated under the Securities Act of 1933.
ITEM
3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On
July
28, 2008 the Company held SPECIAL
MEETING OF STOCKHOLDERS, for
the
purposes of considering and voting upon:
|
1.
|
A
proposal to approve the potential issuance of up to 50,000,000
shares of
our common stock, par value $0.001 per share upon the conversion
of our
Series A Convertible Preferred Stock and the resulting change of
control
that will occur in connection with the share
issuance.
|
|
2.
|
A
proposal to approve an amendment to our certificate of incorporation
to
increase the authorized shares of our common stock from 35,000,000
to
400,000,000.
|
|
3.
|
A
proposal elect six (6) directors of the Company to serve until
the 2008
Annual Meeting of Stockholders or until their successors have been
duly
elected and qualified;
|
|
4.
|
A
proposal to adopt the 2008 Stock Incentive Plan;
and
|
|
5.
|
Such
other business as properly may come before the special meeting
or any
adjournments or postponements
thereof.
|
All
four
initiatives received overwhelming support by the shareholders who participated
in the vote.
ITEM
5.
OTHER INFORMATION
On
July
28, 2008 - the Company held a special meeting of the shareholders for four
initiatives, consisting of approval of a new board of directors, approval
of the
conversion of preferred shares to common shares, an increase in the authorized
shares and a stock incentive plan. All initiatives were approved by the majority
of shareholders. The 2008 Employee Stock Incentive Plan (the "2008 Incentive
Plan") authorized the board to issue up to 5,000,000 shares of Common Stock
under the plan. Any stockholder of the Company who wishes to obtain a copy
of
the actual plan document may do so upon written request to the Company's
Secretary at the Company's principal offices
Exhibits
(numbers below reference Regulation
S-B, Item 601)
3.1
|
Certificate
of Incorporation filed November 9, 1992(1)
|
3.2
|
Amendment
to Certificate of Incorporation filed July 9, 1997(2)
|
3.3
|
Restated
Certificate of Incorporation filed May 29,
2003
|
3.4
|
Restated
By-laws (filed as an exhibit to the Form 10-QSB for the quarter
ended
September 30, 2004)
|
3.5
|
Certificate
of Designation of Preferences, Rights, and Limitations of Series
A
Preferred Stock of Emvelco Corp.
(9)
|
3.6
|
Certificate
of Amendment to the Restated Certificate of Incorporation
(13)
|
4.1
|
Securities
Purchase Agreement entered by and between Vortex Resources Corp.
and
Trafalgar Capital Specialized Investment Fund, Luxembourg dated
September
25, 2008 (14)
|
4.2
|
Convertible
Note issued to Trafalgar Capital Specialized Investment Fund, Luxembourg
(14)
|
4.3
|
Security
Agreement entered by and between Vortex Resources Corp. and Trafalgar
Capital Specialized Investment Fund, Luxembourg dated September
25, 2008
(14)
|
4.4
|
Pledge
Agreement entered by and between Vortex Resources Corp. and Trafalgar
Capital Specialized Investment Fund, Luxembourg dated September
25, 2008
(14)
|
10.1
|
Shares
Purchase Agreement between PanTel Tavkozlesi es Kommunikacios rt.,
a
Hungarian company, and Euroweb International Corp., a Delaware
corporation
(3)
|
10.2
|
Guaranty
by Euroweb International Corp., a Delaware corporation, in favor
of PanTel
Tavkozlesi es Kommunikacios rt., a Hungarian company
(3)
|
10.3
|
Shares
Purchase Agreement between Vitonas Investments Limited, a Hungarian
corporation, Certus Kft., a Hungarian corporation, Rumed 2000 Kft.,
a
Hungarian corporation and Euroweb International Corp., a Delaware
corporation, dated as of February 23, 2004.
(4)
|
10.4
|
Share
Purchase Agreement by and between Euroweb International Corp. and
Invitel
Tavkozlesi Szolgaltato Rt. (5)
|
10.5
|
Investment
Agreement, dated as of June 19, 2006, by and between Euroweb RE
Corp. and
AO Bonanza Las Vegas, Inc. (6)
|
10.6
|
Sale
and Purchase Agreement, dated as of February 16, 2007, by and between
Emvelco Corp. and Marivaux Investments Limited
(7)
|
10.7
|
Stock
Transfer and Assignment of Contract Rights Agreement, dated as
of May 14,
2007 among Emvelco Corp., Emvelco RE Corp., The International Holdings
Group Ltd., and Verge Living Corporation
(8)
|
10.
8
|
Memorandum
of Understanding, dated as of May 31, 2007, among Emvelco Corp.,
Emvelco
RE Corp., and Yossi Attia
|
10.9
|
Agreement
and Plan of Exchange with Davy Crockett Gas Company, LLC and the
members
of Davy Crockett Gas Company, LLC dated May 1, 2008
(9)
|
10.10
|
Form
of Convertible Note dated May 1, 2008
(9)
|
10.11 |
Services
Agreement dated June 11, 2008 by and between EMVELCO Corp. and
Mehmet
Haluk Undes (10)
|
10.12
|
Amendment
No. 1 to the Agreement and Plan of Exchange with Davy Crockett
Gas
Company, LLC and the members of Davy Crockett Gas Company, LLC
dated June
11, 2008 (9)
|
|
Limited
Liability Company Operating Agreement of Vortex Ocean One, LLC,
a Nevada
limited liability company (11)
|
10.14
|
Form
of Subscription Agreement (11)
|
10.15
|
Form
of Common Stock Purchase Agreement
(11)
|
10.16
|
Drilling
Agreement (11)
|
10.17
|
Employment
Agreement by and between Emvelco Corp. and Michael M. Mustafoglu
(15)
|
10.18
|
Mergers
and Acquisitions Consulting Agreement between the Company and TransGlobal
Financial LLC (12)
|
31
1
|
Certification
of the Chief Executive Officer, Principal Accounting Officer and
Principal
Financial Officer of VORTEX RESOURCES CORP. pursuant to Section
302 of the
Sarbanes-Oxley Act of 2002.
|
32
2
|
Certification
of the Chief Executive Officer, Principal Accounting Officer and
Principal
Financial Officer of VORTEX RESOURCES CORP. pursuant to Section
906 of the
Sarbanes-Oxley Act of 2002.
|
(1)
Exhibits are incorporated by reference to Registrant's Registration Statement
on
Form SB-2 dated May 12, 1993 (Registration No. 33-62672-NY, as
amended)
(2)
Filed
with Form 10-QSB for quarter ended June 30, 1998.
(3)
Filed
as an exhibit to Form 8-K on February 27, 2004.
(4)
Filed
as an exhibit to Form 8-K on March 9, 2004.
(5)
Filed
as an exhibit to Form 8-K on December 21, 2005.
(6)
Filed
as an exhibit to Form 8-K on June 23, 2006
(7)
Filed
as an exhibit to Form 8-K on February 20, 2007
(8)
Filed
as an exhibit to Form 8-K on May 16, 2007
(9)
Filed
as
an exhibit to the Form 8K Current Report filed May 7, 2008
(10)
Filed
as
an exhibit to the Form 8K Current Report filed June 13, 2008
(12)
Filed
as
an exhibit to the Form 8K Current Report filed July 17, 2008
(13) Filed
as
an exhibit to the Form 8K Current Report filed August 1, 2008
(14)
Incorporated by reference to the Form 8K Current Report filed with the
Securities and Exchange Commission on October 2, 2008.
(15)
Incorporated by reference to the Form 10Q filed with the Securities and
Exchange
Commission on August 19, 2008
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, as amended, the Registrant has duly caused this Report to be signed
on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, California, on November 14, 2008.
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VORTEX
RESOURCES CORP.
|
|
|
|
|
By:
|
/s/Yossi
Attia
|
|
Yossi
Attia
|
|
Chief
Executive Officer and Principal Financial
Officer
|