U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
Commission File Number 333-141054
Perf-Go Green Holdings, Inc.
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(Exact name of smaller reporting company as specified in its charter)
Delaware 20-3079717
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
645 Fifth Avenue, New York, New York 10022
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(Address of principal executive offices and Zip code)
(212) 848 0253
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(Issuer's telephone number including area code)
Perf-Go Green Holdings, Inc.,
7425 Brighton Village Drive,
Chapel Hill, North Carolina 27515
Former fiscal year end: October 31, 2007
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(Former name, former address and former fiscal year,
if changed since last report)
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 requirements for the past 90 days. Yes |X| No |_|
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
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date - August 1, 2008
Common Stock, $.0001 Par Value 33,163,664
------------------------------ ----------
Class Shares
PERF-GO GREEN HOLDINGS, INC. AND SUBSIDIARY
EXPLANATORY NOTE
The Current Report on Form 8-K initially filed with the Securities and Exchange
Commission ("SEC") on May 16, 2008 (the "Originally Filed 8-K") contained
audited financial statements of Perf-Go Green, Inc. ("Perf-Go Green") as of
March 31, 2008 and for the period from November 15, 2007 (inception) to March
31, 2008. Perf-Go Green was acquired by Perf-Go Green Holdings, Inc. in a
reverse acquisition on May 13, 2008. During the preparation of the unaudited
condensed consolidated financial statements for the three months ended June 30,
2008, we made a restatement to the Perf-Go Green balance sheet as of March 31,
2008 and the related statements of operations, changes in stockholders' equity
and cash flows for the period from November 15, 2007 (inception) to March 31,
2008. This restatement was required in order to assign a fair value to warrants
issued in connection with convertible debentures sold by Perf-Go Green in
January and February 2008 and to charge that fair value to expense upon
conversion of that debt in March 2008. Accordingly, retained earnings and
additional paid in capital have been restated as of March 31, 2008 and the net
loss for the period then ended has been increased. The effect of this
restatement is not material to the financial statements being presented in this
Form 10-Q. For a description of this restatement, see Note 11 to the
accompanying unaudited condensed consolidated financial statements.
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1. - Financial Statements
Condensed Consolidated Balance Sheets (unaudited with respect
to June 30, 2008 and not consolidated and "as restated"
with respected to audited March 31, 2008) 1
Condensed Consolidated Statements of Operations (unaudited) 2
Condensed Consolidated Statements of Cash Flows (unaudited) 3
Condensed Consolidated Statement of Stockholders' Deficit
(unaudited) 4
Notes to Condensed consolidated Financial Statements (unaudited) 5 - 13
Item 2. - Management's Discussion and Analysis of Financial
Condition And Results of Operations 14 - 20
Item 3. - Quantitative and Qualitative Disclosures about
Market Risk 20
Item 4T - Controls and Procedures 21 - 22
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
Item 1A. - Risk Factors 22
Item 6 - Exhibits 22 - 23
SIGNATURES 24
All items which are not applicable or to which the answer is negative have been
omitted from this report.
PART I: FINANCIAL INFORMATION
Item 1. - Financial Statements
PERF-GO GREEN HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, March 31,
2008 2008
------------ ------------
(unaudited) (audited,
as restated)
CURRENT ASSETS:
Cash and cash equivalents $ 5,280,000 $ 270,000
Deposits with vendor - related party 597,000 --
Prepaid expenses 44,000 33,000
------------ ------------
Total current assets 5,921,000 303,000
Deferred finance costs, net 1,939,000 --
Equipment, net of $3,000 of accumulated depreciation 140,000 2,000
------------ ------------
Total assets $ 8,000,000 $ 305,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 253,000 $ 200,000
Accrued expenses 338,000 55,000
Registration rights liability 893,000 --
Derivative liabilities 28,694,000 --
------------ ------------
Total current liabilities 30,178,000 255,000
LONG TERM LIABILITIES - Senior secured convertible debentures,
face amount $5,950,000, net of debt discount of $5,772,000 178,000 --
------------ ------------
Total liabilities 30,356,000 255,000
COMMITMENTS -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $0.0001 per share, 5,000,000 shares
authorized none issued -- --
Common stock, par value $0.0001 per share, 100,000,000 shares
authorized, 33,163,664 and 21,079,466 shares issued and outstanding 3,000 2,000
Additional paid in capital 11,917,000 1,473,000
Deficit accumulated during the development stage (34,276,000) (1,425,000)
------------ ------------
Total stockholders' deficit (22,356,000) 50,000
------------ ------------
Total liabilities and stockholders' deficit $ 8,000,000 $ 305,000
============ ============
See accompanying notes to the condensed consolidated financial statements.
1
PERF-GO GREEN HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months November 15, 2007
ended (inception) to
June 30, 2008 June 30, 2008
------------- -----------------
REVENUES $ 1,000 $ 1,000
------------ ------------
COSTS AND EXPENSES:
Cost of goods sold 1,000 1,000
General and administrative 10,815,000 11,442,000
------------ ------------
Total costs and expenses 10,816,000 11,443,000
LOSS FROM OPERATIONS (10,815,000) (11,442,000)
------------ ------------
OTHER EXPENSE (INCOME)
Derivative liabilities expense 26,310,000 26,310,000
Change in fair value of derivative liabilities (5,439,000) (5,439,000)
Damages accrued under registration rights agreement 893,000 893,000
Amortization of debt discount 178,000 178,000
Interest expense 54,000 852,000
Amortization of deferred finance costs 51,000 51,000
Interest income (11,000) (11,000)
------------ ------------
Total other expense, net 22,036,000 (22,834,000)
NET LOSS $(32,851,000) $(34,276,000)
============ ============
NET LOSS PER COMMON SHARE,
basic and diluted $ (1.20) $ (1.44)
============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 27,341,000 23,801,000
============ ============
See accompanying notes to the condensed consolidated financial statements.
2
PERF-GO GREEN HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months November 15, 2007
ended (inception) to
June 30, 2008 June 30, 2008
------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(32,851,000) $(34,276,000)
------------ ------------
Adjustments to reconcile net loss to net cash used in operating activities:
Derivative liabilities expense 26,310,000 26,310,000
Change in fair value of derivative liabilities (5,439,000) (5,439,000)
Officer, director and employee stock compensation expense 6,278,000 6,278,000
Stock compensation expense to consultants and employee 2,757,000 2,757,000
Amortization of debt discount and deferred finance costs on
Convertible Debentures 229,000 229,000
Interest and amortization of costs of bridge notes -- 798,000
Effect on cash of changes in operating assets and liabilities:
Prepaid expenses (11,000) (44,000)
Deposits with vendor - related party (597,000) (597,000)
Accounts payable, accrued liabilities and all other 337,000 594,000
Registration rights liability 893,000 893,000
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (2,094,000) (2,497,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in reverse acquisition 2,100,000 2,100,000
Placement agent fee paid in cash in connection with reverse merger (210,000) (210,000)
Purchase of equipment (141,000) (143,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,749,000 1,749,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of bridge notes -- 750,000
Proceeds from sale of senior secured convertible notes and warrants 5,950,000 5,950,000
Payment of placement agent fees for bridge notes, convertible notes and merger (595,000) (670,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,355,000 7,370,000
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,010,000 5,280,000
CASH:
Beginning of period 270,000 --
------------ ------------
End of period $ 5,280,000 $ 5,280,000
============ ============
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid for interest and taxes $ -- $ --
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of bridge notes and accrued interest into 1,579,466 shares
of common stock $ -- $ 761,000
============ ============
Derivative liabilities associated with Convertible Debentures and
Warrants at inception $ 27,457,000 $ 27,457,000
============ ============
Derivative liabilities associated with placement agent warrants at inception $ 1,875,000 $ 1,875,000
============ ============
Derivative liabilities associated with investor warrants, reissued, at inception $ 4,802,000 $ 4,802,000
============ ============
See accompanying notes to the condensed consolidated financial statements.
3
PERF-GO GREEN HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the period from inception November 15, 2007 (inception) to June 30, 2008
(unaudited)
Common Stock Additional
---------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
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Common stock issued to founders of
accounting acquirer at inception 19,500,000 $ 2,000 -- -- $ 2,000
Conversion of bridge notes to stock -
accounting acquirer 1,579,466 -- 761,000 -- 761,000
Issuance of warrants -- -- 712,000 -- 712,000
Net loss -- -- -- (1,425,000) (1,425,000)
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BALANCES, March 31, 2008 (audited) 21,079,466 $ 2,000 $ 1,473,000 ($ 1,425,000) $ 50,000
Common stock issued in reverse acquisition
and recapitalization 11,200,004 1,000 2,100,000 -- 2,101,000
Cash and warrants paid to placement
agent in May 2008 reverse merger -- -- (691,000) -- (691,000)
Officer, director and employee stock
compensation expense -- -- 6,278,000 -- 6,278,000
Common stock issued to investor relations
consultant for services 750,000 -- 1,927,000 -- 1,927,000
Other consultant stock option expense -- -- 494,000 -- 494,000
Shares issued to consultants and employee 134,194 -- 336,000 -- 336,000
Net loss -- -- -- (32,851,000) (32,851,000)
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BALANCES, June 30, 2008 (unaudited) 33,163,664 $ 3,000 $ 11,917,000 ($34,276,000) ($22,356,000)
==============================================================================
See accompanying notes to the condensed consolidated financial statements.
4
PERF-GO GREEN HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BACKGROUND, CHANGE OF CONTROL AND BASIS OF PRESENTATION:
Perf-Go Green Holdings, Inc., formerly known as ESYS Holdings, Inc. and La
Solucion, Inc., (the "Company") was incorporated in Delaware in April 2005. Its
business was originally intended to provide assistance to the non-English
speaking Hispanic population in building and maintaining a life in North
Carolina but it did not establish operations in connection with its business
plan.
On May 13, 2008, the Company entered into a Share Exchange Agreement (the "Share
Exchange") with Perf-Go Green, Inc. ("Perf-Go Green"), a privately-owned
Delaware corporation and its stockholders pursuant to which the Company acquired
all of the outstanding shares of common stock of Perf-Go Green. Perf-Go Green
was originally incorporated as a limited liability company on November 15, 2007
and converted to a "C" corporation on January 7, 2008. As consideration for the
Share Exchange, the Company issued an aggregate of 21,079,466 shares of common
stock, $0.0001 par value to the Perf-Go Green stockholders resulting in a change
in control of the Company with Perf-Go Green stockholders owning approximately
65% out of a total of 32,279,470 of the Company's outstanding common stock at
the date of the Share Exchange. In addition, the directors and officers of
Perf-Go Green were elected as directors and officers of the Company. As a result
of the Share Exchange, the Company has succeeded to the business of Perf-Go
Green as its sole business.
The accounting for the Share Exchange, commonly called a reverse acquisition,
calls for Perf-Go Green to be treated as the accounting acquirer. The acquired
assets and assumed liabilities of the Company were carried forward at their
historical values, which approximated fair value. Perf-Go Green's historical
financial statements, after the restatement discussed in Note 11, are carried
forward as those of the consolidated entity. The common stock and per share
amounts have been retroactively restated to the earliest period to reflect the
Share Exchange.
In connection with the Share Exchange, on May 13, 2008 and June 10, 2008, the
Company completed a private placement of its senior secured convertible
debentures in the principal amount of $5,950,000 and warrants to purchase shares
of the Company's common stock as described in Note 6.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Articles 8 and 10
of Regulation S-X for small business issuers and do not include all of the
information and disclosures required by accounting principles generally accepted
in the United States of America. The unaudited condensed consolidated financial
statements include the accounts of Perf-Go Green Holdings, Inc. and its wholly
owned subsidiary, Perf-Go Green, Inc. (collectively, the "Company") and all
significant intercompany transactions and balances have been eliminated in
consolidation. All adjustments which are of a normal recurring nature and, in
the opinion of management, necessary for a fair presentation have been included.
These unaudited condensed consolidated financial statements should be read in
conjunction with the more complete information and the Company's audited
consolidated financial statements as of March 31, 2008 and for the period from
November 15, 2007 (inception) to March 31, 2008 and the related notes thereto
included in Form 8-K filed on May 16, 2008.
All amounts in the accompanying financial statements are rounded to the nearest
thousand dollars.
NOTE 2 - DISCUSSION OF THE COMPANY'S ACTIVITIES/PRODUCTS AND GOING CONCERN
CONSIDERATION:
Company Activities/Products - The Company is focused on the development and
global marketing of eco-friendly, non-toxic, food contact compliant,
biodegradable plastic products. Our biodegradable plastic products offer a
practical and viable solution for reducing plastic waste from the environment.
The Company believes that our plastic products will break down in landfill
environments within twelve (12) to twenty four (24) months, leaving no visible
or toxic residue. The Company's activities have included capital raising to
support its business plan, recruiting board and management personnel,
establishing sources of supply and customer relationships. The Company is
considered to be in the development stage as defined in Statement of Financial
Accounting Standards ("SFAS") No. 7, "Accounting and Reporting By Development
Stage Enterprises," and is subject to the risks associated with activities of
development stage companies.
5
Going Concern Consideration - As indicated in the accompanying unaudited
condensed consolidated financial statements, at June 30, 2008, the Company had
approximately $5,280,000 in cash and approximately $24,256,000 in negative
working capital and a stockholders' deficit of approximately $22,356,000. A
significant portion of the Company's liabilities (approximately $28,694,000) are
derivative liabilities which are further described in Notes 6 and 7. The Company
would presently be unable to satisfy the cash settlement liability associated
with its derivative liabilities.
For the three months ended June 30, 2008, the Company had a loss from operations
of approximately $10,814,000 and a net loss of approximately $32,851,000 and
utilized approximately $2,094,000 of cash in operating activities. Further,
development stage losses are continuing subsequent to June 30, 2008. The Company
anticipates that it will continue to generate significant losses from operations
for the near future. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
The Company's plan to deal with this uncertainty is to commence revenue activity
in the second half of calendar 2008. The Company's cash flow projections
presently indicate that projected revenues will be sufficient to fund operations
over the coming twelve months. However, as a development stage enterprise, the
Company's ability to accurately project revenues and expenses can be
significantly impacted by unforeseen events, developments and contingencies that
cannot be anticipated. As such, there can be no assurance that management's
plans to generate revenue in order to sustain our operations over the coming
twelve months can be realized. No adjustment has been made in the accompanying
financial statements to the amounts and classification of assets and liabilities
which could result should the Company be unable to continue as a going concern.
NOTE 3 - NET LOSS PER COMMON SHARE:
Basic loss per share is computed by dividing net loss by weighted average number
of shares of common stock outstanding during each period. Diluted earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock, common stock equivalents and potentially dilutive
securities outstanding during each period. At June 30, 2008, the Company
substantial potential dilution from outstanding warrants and options that could
potentially dilute future earnings per share; however, a separate computation of
diluted loss per share is not presented, as these common stock equivalents would
be anti-dilutive.
NOTE 4 - INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash and cash equivalents at June 30, 2008 includes approximately $5,197,000
invested in an institutional money market fund with a brokerage firm. Such
amount is stated at its fair value as it has a quoted value in an active market.
In addition to the deposit insurance provided by the brokerage firm, the money
market fund carries additional insurance, however this represents a
concentration of assets.
NOTE 5 - DEPOSITS WITH VENDOR - RELATED PARTY:
The manufacturing of our biodegradable plastic products is outsourced to
Spectrum Bags, Incorporated, a division of IPS Industries, Inc., a manufacturer
and distributor of plastic bags and plastic products. In order to secure initial
product shipments expected in the second half of calendar 2008, we have made
deposits of approximately $597,000 with this vendor at June 30, 2008. One member
of our Board of Directors serves as the President of this vendor.
NOTE 6 - SENIOR SECURED CONVERTIBLE DEBENTURES AND WARRANTS, RELATED DERIVATIVE
LIABILITIES AND REGISTRATION RIGHTS LIABILITY:
Senior Secured Convertible Debentures and Warrants - During May and June 2008,
pursuant to the terms of a Subscription Agreement, the Company issued senior
secured convertible debentures to unaffiliated accredited investors (the
"Investors") in the aggregate original principal amount of $5,950,000 (the
"Convertible Debentures") and five-year warrants (the "Warrants") to purchase
shares of the Company's common stock. The Convertible Debentures are secured by
all of our assets and are due in May 2011, with respect to $2,775,000 principal
6
amount, and in June 2011, with respect to $3,175,000 principal amount. Interest
on the Convertible Debentures is computed at the rate of 10% per year and is
payable quarterly in arrears in cash or, under certain circumstances, in common
stock of the company. The Convertible Debentures contain various covenants
which, among other things, restrict the Company's ability to incur additional
debt or liens or engage in certain transactions as specified therein.
Additionally the Convertible Debentures define various events of default
including non-payment of interest or principal when due, failure to comply with
covenants, breach of representations or warranties, failure to obtain effective
registration of the common stock underlying the conversion feature or failure to
deliver registered common stock, when requested, within a specified timeframe as
well as other matters discussed therein. Various remedies exist for an event of
default including the acceleration of the maturity of the obligation, an
increase in the interest rate to 15%, accrual of certain costs of the debt
holders and a reduction of the conversion rate, among other things. The
Convertible Debentures also provide that in the event of a "fundamental
transaction" (as defined) such as a change in control, the holder may require
that such holder's Convertible Note be redeemed at an "alternative
consideration" (as defined) which can be, among other things, 135% of the
principal amount of the Convertible Note or 130% of the equity conversion value
of the Convertible Note.
The Convertible Debentures are convertible at the option of the holder into
shares of our common stock at the lower of the (a) "fixed conversion price" of
$0.75 per share (7,933,333 shares), subject to adjustment for stock splits,
stock dividends, or similar transactions, (b) "lowest conversion price"
representing the lowest price, conversion price or exercise price offered by the
Company in a subsequent equity financing, convertible security (subject to
certain exceptions) or derivative instruments or (c) "mandatory default amount"
representing the amount necessary to convert 110% of the face amount of the
Convertible Debentures plus accrued interest and costs at the lower of the price
of the common stock on the date of demand or the date of payment. The Company's
common stock price at the time of issuance of both the May and June 2008
Convertible Debentures exceeded the relevant conversion price (the fixed
conversion price). As a result, the Company assessed the applicability of EITF
No.'s 98-5 and 00-27 to determine if this constitutes a beneficial conversion
feature. However, since the conversion feature can result in a variable amount
of shares being issued, the conversion feature is considered an imbedded
derivative liability, not a beneficial conversion feature, that needs to be
separated from the "host contract" as described further below.
The Warrants entitle the holder to purchase approximately 7,933,333 shares
common stock at $1.00 per share subject to adjustment of the shares and exercise
price in the event of (a) stock dividends, splits or similar recapitalizations
or (b) a rights offering at less than market value to all stockholders, (c)
certain dividends or distributions and (d) the offering or issuance of common
stock or derivative instruments (warrants, options or conversion features),
subject to certain exceptions, at a price that is less than the exercise price
of the Warrants. The Company is obliged to issue registered shares of common
stock upon the exercise of the Warrants and if it cannot do so within three
business days, it is obliged to pay in cash the market value, plus brokerage
commissions, of the common stock. Because of the "pay in cash" feature and the
variability of the exercise price, the warrant is considered to be a derivative
liability as discussed further below.
Related Derivative liabilities - Under SFAS No. 133 and EITF No. 00-19, both the
embedded conversion option in the Convertible Debentures and the detachable
Warrants are deemed "freestanding financial instruments" that cannot be
classified as equity instruments at the commitment date related to their
issuance and instead are classified as "derivative liabilities subject to fair
value accounting."
Because the Convertible Debentures were issued with a variable conversion
feature and with detachable Warrants, the fair value of these attributes are
calculated and assigned before a value is assigned to the Convertible
Debentures. The Company computed the fair value by using a Black Scholes
calculation assuming a risk free rate of return of 2.7 - 3.2%, expected
volatility of 93% and expected life of the conversion feature (three years) and
the Warrants (five years), no dividends or forfeitures and the quoted market
price of the Company's stock on the day of the measurement. The resulting fair
values exceed the face amount of the Convertible Debentures and result in
recognition of an expense for derivative liabilities, as follows:
7
Fair value of conversion feature of Convertible Debentures
at issuance $ 13,739,000
Fair value of Warrants at issuance 13,718,000
------------
Total derivative liabilities at issuance in May and June 2008 27,457,000
Less: face amount of Convertible Debentures ("debt discount") (5,950,000)
------------
Expense for derivative liabilities upon issuance $ 21,507,000
============
These derivative liabilities are marked-to-market at each reporting period as
discussed further in Note 7.
The fair value of the conversion feature of the Convertible Debentures and the
Warrants that is assigned to debt discount ($5,950,000) is being amortized over
the life of the Convertible Debentures at the rate of approximately $496,000 per
quarter.
As a result of the above, the Convertible Debentures are recorded as follows:
Face amount of Debentures $ 5,950,000
Less:
Value assigned to conversion feature (2,908,000)
Value assigned to Warrants (3,042,000)
-----------
Value assigned to Debentures at the issuance $ --
Add: Amortization of debt discount 178,000
-----------
Carrying amount of $5,950,000 Debentures at June 30, 2008 $ 178,000
===========
In connection with the issuance of the Convertible Debentures and Warrants, the
company paid a placement agent (the "Placement Agent") a cash fee of $595,000
and issued them warrants, on the same terms as the Warrants, to purchase 793,333
shares (subject to adjustment) of common stock at $1.00 for five years. Because
such warrants have the same variable exercise price feature, and cash settlement
provisions, as the Warrants described above, these warrants are also considered
derivative liabilities. As such, their fair value at inception of approximately
$1,395,000 was charged to derivative liability expense and this amount is
required to be marked-to-market at each reporting period. The Company recorded
the aggregate of the cash and warrant compensation of approximately $1,990,000
as a deferred finance cost and is amortizing that cost over the three year term
of the Convertible Debenture at the rate of approximately $166,000 per quarter.
At June 30, 2008, approximately $51,000 of amortization has been recorded
leaving approximately $1,939,000 of unamortized deferred finance cost at June
30, 2008. See also, Note 7.
Registration rights liability - The Company also granted the Investors
registration rights for the common stock underlying the embedded conversion
feature in the Convertible Debentures and the Warrants. The Company can be
assessed liquidated damages, as defined in the related agreements, for the
failure to file a registration statement in a certain timeframe or for the
failure to obtain or maintain effectiveness of such registration statement. Such
penalties shall not exceed, in the aggregate, 15% of the aggregate Purchase
Price (as defined in the Convertible Debentures). In assessing the likelihood
and amount of possible liability for liquidated damages, the Company considered
the guidance of EITF No.'s 00-19-2 and 05-04 as well as SFAS No. 5. Because
obtaining effectiveness of the registration statement is not within the
Company's control, the Company has concluded to record a liability for
approximately $893,000 representing 15% of the proceeds of the Convertible
Debentures as registration rights liability. If the Company's registration
statement is ultimately declared effective within the period prescribed therein,
such liability would be reversed in the period that the determination of
effectiveness is resolved.
Other - In connection with the issuance of the Convertible Debentures and the
related reverse acquisition transaction, the Company agreed to pay a total of
approximately $750,000 to an investor relations firm, approximately $488,000 of
which was paid at June 30, 2008 and the balance, approximately $262,000, was
included in accrued liabilities.
8
NOTE 7 - DERIVATIVE LIABILITIES
Derivative liabilities at June 30, 2008 consist of the following:
Fair value of conversion feature of Convertible Debentures (Note 6) $10,623,000
Fair value of Warrants issued to Investors (Note 6) 11,601,000
-----------
subtotal 22,224,000
Fair value of warrants issued to placement agent in Convertible
Debentures (Note 6) 1,090,000
Fair value of warrant issued in connection with reverse acquisition (below) 579,000
Fair value of warrants issued to reverse acquisition equity investors (below) 4,801,000
-----------
Total derivative liabilities at June 30, 2008 $28,694,000
===========
In connection with the Share Exchange discussed in Note 1, the Company paid the
Placement Agent a cash fee of $210,000 and issued them warrants to purchase
common stock on the same terms as the Warrants discussed in Note 6. As such
these warrants entitle the holder to purchase approximately 420,000 shares
common stock at $1.00 per share subject to adjustment of the shares and exercise
price in the event of (a) stock dividends, splits or similar recapitalizations
or (b) a rights offering at less than market value to all stockholders, (c)
certain dividends or distributions and (d) the offering or issuance of common
stock or derivative instruments (warrants, options or conversion features),
subject to certain exceptions, at a price that is less than the exercise price
of the warrants. The Company is obliged to issue registered shares of common
stock upon the exercise of the Warrants and if it cannot do so within three
business days, it is obliged to pay in cash the market value, plus brokerage
commissions, of the common stock. Because of the cash settlement feature and the
variability of the exercise price, the warrant is considered to be a derivative
liability Under SFAS No. 133 and EITF No. 00-19. Such warrants had a fair value
at inception of approximately $480,000, which amount was charged to derivative
liabilities expense.
At the time of the Share Exchange, certain investors in a prior private
placement of common stock and warrants The Company granted the right to exchange
their existing warrants for new warrants on the same terms as the Warrants
discussed in Note 6 and in the preceding paragraph. Because of the variability
of the exercise price feature and the settlement in cash provisions, the warrant
is considered to be a derivative liability Under SFAS No. 133 and EITF No.
00-19. Such warrants had a fair value at inception of approximately $4,801,000,
which amount was charged to additional paid in capital as a direct cost of the
reverse acquisition.
Pursuant to fair value accounting, the derivative liabilities for the conversion
feature, the Warrants, the placement agent warrants and the warrants issued to
the December 2007 equity investors are required to be marked-to-market at each
reporting period during their term, with the resulting difference reported as a
component of income or expense. During the three months ended June 30, 2008, the
Company recorded a total change in fair value due to remeasurement of derivative
liabilities of approximately $5,439,000 as income.
The Company computed the fair value of its derivative instruments by using a
Black Scholes calculation assuming a risk free rate of return of 2.7 - 3.2%,
expected volatility of 93% and expected life of the conversion feature (three
years) and the Warrants (five years) and the quoted market price of the
Company's stock on the day of the measurement.
NOTE 8 - BRIDGE NOTES AND WARRANTS, AS RESTATED
In January and February 2008 the Perf-Go Green sold an aggregate $750,000 of
secured convertible notes, due in January 2009 (with respect to $350,000) and
February 2009 (with respect to $400,000) and bearing interest at 10% per year,
together with warrants to purchase the Perf-Go Green's common stock. The notes
were convertible at $0.48 per share and, together with approximately $11,000 of
accrued interest, were converted into 1,522,767 shares of the Company's common
stock on March 27, 2008.
9
The detachable warrants permit the holders to purchase an aggregate of 1,500,000
shares of common stock of the Company at a price of $0.75 until January 2013
(with respect to 700,000 shares) or February 2013 (with respect to 800,000
shares). Under EITF No. 00-19, the Company concluded that these warrants met the
definition of a freestanding financial instrument that could be classified as
equity. The Company determined the fair value of these warrants based upon a
Black Scholes valuation calculation with the following assumptions: one and one
half year expected life, 150% volatility, 2.11% risk free interest rate and a
market price of $0.48 for the underlying common stock. The market price was
determined based on the ultimate conversion of these notes into common stock at
that price shortly after issuance. The fair value, $669,000 was recorded to
deferred finance costs and then, upon the conversion of the notes in March 2008,
written off. See also, Note 11.
Pursuant to EITF No.'s 98-5 and 00-27 and APB No. 14, the Company determined
that the exercise price of the convertible debt of $0.50 exceeded the market
price of the common stock at each commitment date. As a result, no allocation of
fair value was required amongst the convertible notes and warrants. The Company
also determined that SFAS No. 133 and EITF 00-19 were not applicable, as the
embedded conversion option did not require bifurcation.
In connection with raising these proceeds, Perf-Go Green paid $75,000 as direct
offering costs to the placement agent. The Company also issued, as an additional
placement agent fee, warrants to purchase 150,000 shares of the Company's common
stock. The Company determined the valuation of these warrants, approximately
$43,000, by applying EITF 96-18 and using the Black-Scholes option-pricing
formula and a risk free interest rate of 1.9 - 2.7%, expected volatility of
150%, a five year expected term and a weighted average fair value of $0.75.
These costs were initially capitalized as debt issue costs and were being
amortized over the life of the related convertible debt instrument. Upon
conversion of the notes on March 27, 2008, the remaining unamortized portion of
debt issue costs was charged to interest expense on the statement of operations.
NOTE 9 - STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - On January 15, 2008, the Company issued 19,900,000 shares of
common stock (retroactively reflecting the Share Exchange) to its founders as
founders stock for pre incorporation services valued at $0.0001 per share.
Stock based compensation - In December 2004, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No.
123R, "Share-Based Payment." SFAS No. 123R is a revision of SFAS No. 123,
"Accounting for Stock Based Compensation". Among other items, SFAS No. 123R
requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments in the financial statements based on
the grant date fair value of those awards. Stock awards to consultants and other
non-employees are accounted for based on an estimate of their fair value at the
time of grant and, in the instance of options and warrants, are based upon a
Black-Scholes option pricing model.
The fair value of each option grant under SFAS No. 123R is estimated on the date
of the grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: risk free interest rate of 3.2%; no dividend
yield; expected option lives based on their terms (generally five years) and
expected volatility of approximately 93%. The expected volatility for the
current period was developed by using historical volatility of the Company stock
history since the reverse acquisition. Since the history of our stock trading
has been relatively short, the baseline volatility calculation was increased by
50%. The risk-free interest rate was developed using the U.S. Treasury yield
curve for periods equal to the expected term of the options grant date.
The grant date fair value of the options issued under the Plan was approximately
$14,700,000 and, because a significant number of options vested immediately,
approximately $6,770,000 was charged to operations for stock compensation
expense under the Plan, including approximately $6,278,000 for directors,
officers and employees and approximately $494,000 to consultants. In addition to
stock compensation from options, we issued 884,194 shares to consultants
resulting in approximately $2,234,000 in stock compensation. Stock compensation
cost is included in general and administrative expenses in the unaudited
condensed consolidated financial statements
In June 2008, the Company adopted the 2008 Share Incentive Plan (the "Plan")
which permits the granting of stock options and other forms of stock based
compensation to employees and consultants of the Company. Under the Plan, the
Company has reserved 10,000,000 shares of common stock for issuance under the
Plan. There were no stock options outstanding at March 31, 2008. The following
table summarizes the stock options issued to directors, officers, employees and
consultants under the Plan for the three months ended June 30, 2008 (unaudited)
under the Plan.
10
Weighted
Number of Average
Options Exercise Price
------------ -------------
Stock Options
Balance at March 31, 2008 -- $ --
Granted 7,961,600 $ 1.15
Exercised -- $ --
Cancelled/Forfeited -- $ --
Balance at June 30, 2008 7,961,600 $ 1.15
============= =========
Options exercisable at June 30, 2008 3,062,614 $ .92
============= =========
Weighted average fair value of options
granted during the three months ended
June 30, 2008 (unaudited) $ 14,700,000 $ 1.85
============= =========
The following table summarizes information about the exercise prices,
exercisability and remaining life of the options granted.
Options Exercisable
--------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Exercise Outstanding at Contractual Average Exercisable at Average
Price June 30, 2008 Life Exercise Price June 30, 2008 Exercise Price
----------------- -------------- -------------- -------------- -------------- --------------
$0.50 - $1.00 4,610,000 < 1 Year .92 3,062,614 .92
$1.01 - $2.00 3,351,600 > 1 Year
-------------- --------------
$0.50 - $2.00 7,961,600 3,062,614
============== ==============
Monthly stock grants - In addition to stock grants and options discussed above,
the Company has initiated a monthly stock grant program for a director, an
officer, a related vendor and a consultant calling for the issuance of
approximately 52,000 shares per month over the coming year. The cost of these
share issuances will be valued at the fair market value of the Company's common
stock on the date of grant.
Warrants and Convertible Debentures - The Company has the following warrants and
convertible debentures outstanding that grant the right of the holder to obtain
our common stock as indicated:
- 7,933,333 shares issuable (subject to adjustment as described in
Note 6) at $0.75 (subject to adjustment) under convertible
debentures until May and June 2011 - 7,933,333 shares issuable
(subject to adjustment as described in Note 6) at $1.00 (subject to
adjustment) under Warrants issued with Convertible Debentures until
May and June 2013
- 4,200,000 shares issuable (subject to adjustment) under warrants at
$1.00 (subject to adjustment) issued to purchasers of our
predecessor's common stock until May 2013
- 1,650,000 shares issuable at $0.75 to investors in our Bridge Notes
and a placement agent until January and February 2013
- 1,213,333 shares issuable (subject to adjustment) to a placement
agent in the Convertible Notes and Warrants and reverse acquisition
at $1.00 (subject to adjustment) until May and June 2013.
These items permit the holders to purchase 22,929,999 shares of the Company's
common stock before adjustment. Possible adjustments include the items discussed
in Notes 6 and 7 and would include increases for payment of interest in kind on
the Convertible Debentures.
In tabular form, the warrants and convertible securities are as follows:
Number shares
subject to
Warrants and Weighted
Convertible Average
Debentures(a) Exercise Price
Shares Under Warrants and Convertible
Debentures:
Balance at November 15, 2007 (inception) -- $ --
Granted 22,929,999 $ 0.90
Exercised -- $ --
Cancelled/Forfeited -- $ --
---------- ----------
Balance at June 30, 2008 22,929,999 $ 0.90
---------- ----------
Exercisable at June 30, 2008 22,929,999 $ 0.90
---------- ----------
(a) Before adjustment as discussed above.
Predecessor equity roll forward -
The following table reconciles equity previously reported by the predecessor
public company to the equity being reported as retroactively restated to the
earliest period presented.
Common Stock Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
--------------------------------------------------------------------------
Balance, March 31, 2008 previously reported 19,500,000 $ 3,000 1,472,000 1,425,000 $ 50,000
Share cancellation, principal shareholders
in May 2008 (21,008,400) (2,000) 2,000 -- --
Issuance of shares in reverse acquisition
treated as a recapitalization 21,079,466 2,000 2,047,000 -- 2,050,000
Net loss -- -- -- (1,425,000) (1,425,000)
--------------------------------------------------------------------------
BALANCES, March 31, 2008 32,279,470 $ 3,000 $ 3,522,000 ($1,425,000) $ 2,100,000
==========================================================================
11
NOTE 10 - INCOME TAXES
The Company adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 provides recognition
criteria and a related measurement model for tax positions taken by companies.
In accordance with FIN 48, a tax position is a position in a previously filed
tax return or a position expected to be taken in a future tax filing that is
reflected in measuring current or deferred income tax assets and liabilities.
Tax positions shall be recognized only when it is more likely than not
(likelihood of greater than 50%), based on technical merits, that the position
will be sustained upon examination.
Tax positions that meet the more likely than not threshold should be measured
using a probability weighted approach as the largest amount of tax benefit that
is greater than 50% likely of being realized upon settlement. The Company
adopted FIN 48, which had no effect on the Company's financial positions and
results of operations at this time given its limited operations and activities.
No amounts were accrued for the tax exposures or payment of interest and
penalties at June 30, 2008 and there was no change to this balance at June 30,
2008.
The Company has a net operating loss carryforward for tax purposes totaling
$2,700,000 at June 30, 2008, expiring through the year 2028. Internal Revenue
Code Section 382 places a limitation on the amount of taxable income that can be
offset by operating loss carryforwards after a change in control (generally
greater than a 50% change in ownership, as defined).
The difference between the net operating loss carryforward and the deficit
accumulated during the development stage results largely from the
non-deductibility, for tax purposes, of derivative expense and income and stock
and stock based compensation.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
income tax assets will not be realized. The ultimate realization of deferred
income tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred income tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based on consideration of these items, management has determined
that enough uncertainty exists relative to the realization of the deferred
income tax asset balances to warrant the application of a full valuation
allowance as of June 30, 2008.
12
NOTE 11 - RESTATEMENT OF MARCH 31, 2008 FINANCIAL STATEMENTS OF PERF-GO GREEN
In the original issuance of the financial statements as of March 31, 2008 and
for the period from November 15, 2007 (inception) to March 31, 2008, the Company
did not assign a fair value to the warrants issued in connection with the
convertible notes and warrants sold by Perf-Go Green in January and February
2008 described in Note 8. Generally accepted accounting principles requires that
a fair value be assigned to those warrants and that such amount be recorded as
debt discount and amortized over the life of the related debt. Because the notes
were converted to equity shortly after issuance, generally accepted accounting
principles require that the remaining debt discount be charged to operations.
The Company has determined that the fair value of those warrants was
approximately $669,000 as discussed further in Note 8. Accordingly, the prior
financial statements have been restated as follows:
Statement of Operations for the period from November 15, 2007
(inception) to March 31, 2008:
Originally
reported Restatement As restated
----------- ----------- -----------
Other expense, net $ (128,690) $ (669,300) $ (797,990)
Net loss $ (755,715) $ (669,300) $(1,425,015)
Net loss per share $ (0.04) $ (0.04) $ (0.08)
Balance sheet as of March 31, 2008:
Originally
reported Restatement As restated
----------- ----------- -----------
Additional paid in capital $ 804,028 $ 669,300 $ 1,473,328
Deficit accumulated during
the development stage $ (755,715) $ (669,300) $(1,425,015)
Total stockholders equity $ 50,345 $ 0 $ 50,345
Statement of Cash Flows for the Period from November 15, 2007
(inception) to March 31, 2008:
Originally Restatement
reported adjustment As restated
----------- ----------- -----------
Net loss $ (755,715) $ (669,300) $(1,425,015)
Warrants issued as
compensation in connection
with convertible debt
funding $ 42,697 $ 669,300 $ 711,997
Net cash used in operations $ (402,370) $ 0 $ (402,370)
NOTE 12 - EMPLOYMENT AGREEMENTS
During the three months ended June 30, 2008, the Company entered into employment
agreements with three officers and four employees. The agreement with the
officers calls for their employment over a three year period and calls for
aggregate base salaries for the three agreements of approximately $425,000 per
year for three years plus eligibility for an annual bonus up to 20% of base
compensation and annual increases of approximately 20%. The agreement with the
four employees call for their employment with the Company over a one or two year
period and call for aggregate compensation for the four agreements of
approximately $ 366,000 per year (approximately $577,000 over the full term).
13
NOTE 13 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Development stage
The Company's financial statements are presented as those of a development stage
enterprise. Activities during the development stage primarily include debt
financing, product design and the development of mass-market product
distribution networks for the eventual distribution of the products. There have
been nominal sales since our inception.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates in 2009 included the valuation of stock issued for
compensation and services, stock based compensation arrangements with employees
and third parties, warrants issued as compensation, fair value of derivative
financial instruments, estimated useful life of equipment, and a 100% valuation
allowance for deferred taxes due to the Company's continuing and expected future
losses.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments purchased with a maturity of three months or less and money
market accounts to be cash equivalents.
The Company minimizes its credit risk associated with cash by periodically
evaluating the credit quality of its primary financial institution. The balance
at times may exceed federally insured limits. At June 30, 2008, the balance
exceeded the federally insured limit by approximately $5,196,000.
Accounts Receivable
Accounts receivable represents trade obligations from customers that are subject
to normal trade collection terms, without discounts or rebates. The Company
periodically evaluates the collectability of its accounts receivable and
considers the need to adjust an allowance for doubtful accounts based upon
historical collection experience and specific customer information. Actual
amounts could vary from the recorded estimates.
Equipment
Equipment is stated at cost, less accumulated depreciation on a straight-line
basis over the estimated useful life, which is five years.
Minority Interest
Under generally accepted accounting principles, when losses applicable to the
minority interest in a subsidiary exceed the minority interest in the equity
capital of the subsidiary, the excess is not charged to the minority interest
since there is no obligation of the minority interest to make good on such
losses. The Company, therefore, has included losses applicable to the minority
interest against its interest. If future earnings do materialize, the Company
will be credited to the extent of such losses previously absorbed. For financial
reporting purposes, minority interest will not be presented until the minority's
share of profit exceeds its previously recorded deficit.
14
Revenue recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin No. 104 for revenue recognition. The Company records
revenue when all of the following have occurred; (1) persuasive evidence of an
arrangement exists, (2) product delivery has occurred, (3) the sales price to
the customer is fixed or determinable, and (4) collectability is reasonably
assured.
Cost of Sales
Cost of sales represents costs directly related to the production and
installation of the Company's products. Primary costs include raw materials,
direct labor, and allocated payroll, commissions and rental charges.
Earnings per share
Basic earnings (loss) per share is computed by dividing net income (loss) by
weighted average number of shares of common stock outstanding during each
period. Diluted earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of common stock, common stock
equivalents and potentially dilutive securities outstanding during each period.
At June 30, 2008, the Company common stock equivalent options, warrants and
convertible debt that could potentially dilute future earnings per share;
however, a separate computation of diluted loss per share is not presented, as
these common stock equivalents would be anti-dilutive.
Stock-based compensation
All share-based payments to employees is recorded and expensed in the statement
of operations as applicable under SFAS No. 123R, "Share-Based Payment".
Non-employee stock based compensation
Stock-based compensation awards issued to non-employees for services are
recorded at either the fair value of the services rendered or the instruments
issued in exchange for such services, whichever is more readily determinable,
using the measurement date guidelines enumerated in Emerging Issues Task Force
Issue EITF No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" ("EITF 96-18").
Derivative Liabilities
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
requires bifurcation of embedded derivative instruments such as conversion
options and warrants, and measurement of their fair value for accounting
purposes. In determining the appropriate fair value, the Company uses the
Black-Scholes option-pricing model. In assessing the convertible debt
instruments, management first reviews the guidance of EITF No.'s 98-5, 00-27 and
05-2 as well as SFAS No. 150 to determine if the convertible debt host
instrument is conventional convertible debt and further if there is a beneficial
conversion feature requiring measurement. If the instrument is not considered
conventional convertible debt, the Company will continue its evaluation process
of these instruments as derivative financial instruments.
Once determined, derivative liabilities are adjusted to reflect fair value at
each reporting period end, with any increase or decrease in the fair value being
recorded in results of operations as an adjustment to fair value of derivatives.
In addition, the fair value of freestanding derivative instruments such as
warrants, are also valued using the Black-Scholes option-pricing model. In
assessing the nature of a financial instrument as freestanding, the Company has
applied the guidance pursuant to EITF No.'s 00-19. Finally, the Company has
applied the related guidance in EITF No.'s 00-19-2 and 05-4 as well as SFAS No.
5 when determining the existence of liquidated damage provisions. At June 30,
2008, the Company had various derivative instruments. (See Notes 6 and 7).
15
NOTE 14 - RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS:
Effective April 1, 2008, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 157, Fair Value Measurement ("SFAS 157"), for its
financial assets and liabilities that are re-measured and reported at fair value
at each reporting period, and non-financial assets and liabilities that are
re-measured and reported at fair value at least annually. In accordance with the
provisions of FSP No. FAS 157-2, Effective Date f FASB Statement No. 157, the
Company elected to defer implementation of SFAS 157 as it relates to our
non-financial assets and non-financial liabilities that are recognized and
disclosed at fair value in the financial statements on a nonrecurring basis
until April 1, 2009. The Company is evaluating the impact, if any, this Standard
will have on our financial position and results of operations.
SFAS 157 defines fair value, thereby eliminating inconsistencies in guidance
found in various prior accounting pronouncements, and increases disclosures
surrounding fair value calculations. SFAS 157 establishes a three tiered fair
value hierarchy that prioritizes inputs to valuation techniques used in fair
value calculations. SFAS 157 requires the Company to maximize the use of
observable inputs and to minimize the use of unobservable inputs in making fair
value judgments.
The Company's financial assets and liabilities measured at fair value on a
recurring basis include those securities classified as cash and cash equivalents
and all derivative liability instruments on the unaudited condensed consolidated
balance sheet. All securities owned are valued under the first tier of the
hierarchy where the assets are measured using quoted prices in active markets.
On April 1, 2008, the Company adopted SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." The adoption of SFAS No. 159 did
not have any material impact on the Company's financial position, results of
operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51" (SFAS 160). SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent,
changes in a parent's ownership of a noncontrolling interest, calculation and
disclosure of the consolidated net income attributable to the parent and the
noncontrolling interest, changes in a parent's ownership interest while the
parent retains its controlling financial interest and fair value measurement of
any retained noncontrolling equity investment. The Company's adoption of SFAS
No. 160 on April 1, 2008 did not have a material effect on its financial
position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No 141R, "Business Combinations" ("SFAS
141R"). SFAS 141R replaces SFAS 141 and establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements which will enable users to evaluate the nature and
financial effects of the business combination. Acquisition costs associated with
the business combination will generally be expensed as incurred. SFAS 141R is
effective for business combinations occurring in the fiscal years beginning
after December 15, 2008, which will require the Company to adopt these
provisions for business combinations occurring in fiscal 2009 and thereafter.
In January 2008, the SEC released SAB No. 110, which amends SAB No. 107 which
provided a simplified approach for estimating the expected term of a "plain
vanilla" option, which is required for application of the Black-Scholes option
pricing model (and other models) for valuing share options. At the time, the
Staff acknowledged that, for companies choosing not to rely on their own
historical option exercise data (i.e., because such data did not provide a
reasonable basis for estimating the term), information about exercise patterns
with respect to plain vanilla options granted by other companies might not be
available in the near term; accordingly, in SAB No. 107, the Staff permitted use
of a simplified approach for estimating the term of plain vanilla options
granted on or before December 31, 2007. The information concerning exercise
behavior that the Staff contemplated would be available by such date has not
materialized for many companies. Thus, in SAB No. 110, the Staff continues to
allow use of the simplified rule for estimating the expected term of plain
vanilla options until such time as the relevant data becomes widely available.
The Company does not expect its adoption of SAB No. 110 to have a material
impact on its financial position, results of operations or cash flows.
16
In March 2008, the FASB issued SFAS No. 161 "Disclosures about Derivative
Instruments and Hedging Activities--An Amendment of FASB Statement No. 133."
("SFAS 161"). SFAS 161 establishes the disclosure requirements for derivative
instruments and for hedging activities with the intent to provide financial
statement users with an enhanced understanding of the entity's use of derivative
instruments, the accounting of derivative instruments and related hedged items
under Statement 133 and its related interpretations, and the effects of these
instruments on the entity's financial position, financial performance, and cash
flows. This statement is effective for financial statements issued for fiscal
years beginning after November 15, 2008. The Company does not expect its
adoption of SFAS 161 to have a material impact on its financial position,
results of operations or cash flows.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" (SFAS 162"). SFAS 162 identifies the sources of
accounting principles and the framework for selecting principles to be used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. This statement is effective 60 days following the SEC's approval
of the Public Company Accounting Oversight Board's amendments to AU section 411,
The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles. The Company is currently evaluating the impact of SFAS 162, but does
not expect the adoption of this pronouncement will have a material impact on its
financial position, results of operations or cash flows.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
and are not expected to have a material impact on the financial statements upon
adoption.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Some of the statements contained in this Form 10-Q that are not historical facts
are "forward-looking statements" which can be identified by the use of
terminology such as "estimates," "projects," "plans," "believes," "expects,"
"anticipates," "intends," or the negative or other variations, or by discussions
of strategy that involve risks and uncertainties. We urge you to be cautious of
the forward-looking statements, that such statements, which are contained in
this Form 10-Q, reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties, and other factors affecting our
operations, market growth, services, products, and licenses. No assurances can
be given regarding the achievement of future results, as actual results may
differ materially as a result of the risks we face, and actual events may differ
from the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance or
achievements, or industry results to differ materially from those contemplated
by such forward-looking statements include without limitation those factors
discussed in our Form 8-K filed on May 16, 2008 for a discussion of certain
known risks; also see Part II, Item 1A.
Overview
Background and History; Share Exchange
Perf-Go Green Holdings, Inc., formerly known as ESYS Holdings, Inc. and La
Solucion, Inc., (the "Company") was incorporated in Delaware in April 2005. Its
business was originally intended to provide assistance to the non-English
speaking Hispanic population in building and maintaining a life in North
Carolina but it did not establish operations in connection with its business
plan.
On May 13, 2008, the Company entered into a Share Exchange Agreement (the "Share
Exchange") with Perf-Go Green, Inc. ("Perf-Go Green"), a privately-owned
Delaware corporation and its stockholders pursuant to which the Company acquired
all of the outstanding shares of common stock of Perf-Go Green. Perf-Go Green
was originally incorporated as a limited liability company on November 15, 2007
and converted to a "C" corporation on January 7, 2008. As consideration for the
Share Exchange, the Company issued an aggregate of 21,079,466 shares of common
stock, $0.0001 par value (the "Common Stock") to the Perf-Go Green stockholders
resulting in a change in control of the Company with Perf-Go Green stockholders
owning approximately 65% out of a total of 32,279,470 of the Company's
outstanding common stock at the date of the Share Exchange. In addition, the
directors and officers of Perf-Go Green were elected as directors and officers
of the Company. As a result of the Share Exchange, the Company has succeeded to
the business of Perf-Go Green as its sole business.
The accounting for the Share Exchange, commonly called a reverse acquisition,
calls for Perf-Go Green, to be treated as the accounting acquirer. The acquired
assets and assumed liabilities of the Company were carried forward at their
historical values, which approximated fair value. Perf-Go Green's historical
financial statements, after the restatement discussed in Note 11 to the
unaudited condensed consolidated financial statements, are carried forward as
those of the combined entity. The common stock and per share amounts have been
retroactively restated the earliest period presented to reflect the Share
Exchange.
Business, Products and Plans
The Company is focused on the development and global marketing of eco-friendly,
non-toxic, food contact compliant, biodegradable plastic products. Our
biodegradable plastic products offer a practical and viable solution for
reducing plastic waste from the environment. The Company believes that its
plastic products will break down in landfill environments within twelve (12) to
twenty four (24) months, leaving no visible or toxic residue. Based solely on
environmental claims made by the Company that manufactures a oxo-biodegradable
plastic additive that speeds up the break down of our plastic products, we
believe our plastic products will break down in landfill environments within
twelve (12) to twenty four (24) months, leaving no visible or toxic residue. All
of the Company's products incorporate recycled plastic. The Company's products
make important strides towards the reduction of plastic from the environment.
18
We have partnered with Spectrum Bags, Incorporated, a division of IPS
Industries, Inc. ("Spectrum"), a mid-sized manufacturer and distributor of
plastic bags and plastic products to manufacture and distribute our plastic
products. The Company's President, Ben Tran, is a director of our Company and
shares in one of the patents on our handle tie-bags. Our products use an
oxo-biodegradable plastic additive licensed to Spectrum by a supplier to speed
biodegradation and we believe, based on that supplier's environmental claims
that our plastic products, when discarded in soil in the presence of
microorganisms, moisture and oxygen, will biodegrade, decomposing into simple
materials found in nature and will be 100% degradable. We believe this
degradable plastic additive technology will be suitable in the creation of many
mainstream consumer products.
During 2008, we intend to launch and market six (6) prominent plastic product
categories including: thirteen gallon, tall kitchen garbage bags; thirty gallon
garage, lawn and leaf garbage bags; commercial garbage bags (various sizes for
office buildings and for municipalities, parks and beaches); kitty litter liner
bags (three sizes); Doggie Duty(TM)Bags; and 10 foot by 20 foot plastic drop
cloths. We anticipate the sale and distribution of our initial product offering,
the thirteen-gallon tall kitchen trash bags, will begin in the third quarter of
calendar 2008. The Company has secured placement and premier featuring and
exposure with "brand-making" retailers such as Amazon.com and Drugstore.com,
Bashes Family of Stores and Walgreens drug stores. In addition, we are in
contact and in negotiations with a number of other named brand retailers.
We are implementing a major business to business/business to government strategy
for our commercial line of trash bags and retail check out bags. SOHO
Partnership in New York City, CEDA in Cooks County and the Parks Department of
Stamford, Connecticut are recently added customers.
We intend to deliver brand building messages through several marketing and
advertising vehicles, including television, radio, national print, online
marketing and search engine optimization, and retail store promotions. Our
products were showcased at the Chicago International Housewares Show held March
16th through March 18th. 22,000 buyers from around the world attended this
event. Our product received national attention by television networks and other
media outlets as a "Hot New Household Product." Our product was awarded as a
Design Defined Honoree for 2008 at the show. Additionally, we signed thirteen
representative firms that give will us reach to major national retailers in the
U.S. and Canada.
The Company's activities have included capital raising to support its business
plan, recruiting board and management personnel, establishing sources of supply
and customer relationships.
The Company is considered to be in the development stage as defined in Statement
of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting By
Development Stage Enterprises," and is subject to the risks associated with
activities of development stage companies. While we have raised a significant
amount of financing in connection with the Share Exchange, our operations are
unproven and therefore it is not certain that we will have sufficient cash to
continue our activities for the coming twelve months. We currently do not have
any commitments for new funding.
Recent Financings
The Company completed the following financings during the period from November
15, 2007 (inception) to June 30, 2008:
Equity Financing - In December 2007, Perf-Go Green Holdings, Inc. raised
$2,100,000 in proceeds in the private placement of 2,100,000 common shares and
warrants to purchase 4,200,000 shares of the Company's common stock as described
in Note 7 to the unaudited condensed consolidated financial statements. In June
2008, the warrants were reissued to conform to the same terms as the Warrants in
the Convertible Debenture and Warrants financing described below and in Note 6
to the unaudited condensed consolidated financial statements.
Bridge Notes and Warrants - In January and February 2008, Perf-Go Green, Inc.
raised an aggregate $750,000 proceeds through the sale of secured convertible
notes ("Bridge Notes") together with warrants to purchase 1,500,000 shares of
the Company's common stock. The Bridge Notes, together with approximately
$11,000 of accrued interest, were converted into 1,579,466 shares of the
Company's common stock in March 2008 as further described further in Note 7 to
the unaudited condensed consolidated financial statements.
19
Convertible Debentures and Warrants - In connection with the Share Exchange, on
May 13, 2008 and June 10, 2008, the Company raised an aggregate $5,950,000
proceeds a private placement of its senior secured convertible debentures in the
principal amount of $5,950,000 and warrants to purchase 7,933,333 shares
(subject to adjustment) of the Company's common stock as described further in
Note 6 to the condensed consolidated financial statements.
Because of the features of the Convertible Debentures and Warrants and the
warrants that were re-issued in May 2008 to the December 2007 equity investors,
together with certain placement agent warrants all as discussed in Notes 6 and 7
to the unaudited condensed consolidated financial statements, these instruments
are considered derivative liabilities and are marked-to-market each reporting
period.
Financial Condition, Liquidity and Capital Resources -
As indicated in the accompanying unaudited condensed consolidated financial
statements, at June 30, 2008, the Company had approximately $5,280,000 in cash
and approximately $24,256,000 in negative working capital and a stockholders'
deficit of approximately $22,357,000. A significant portion of the Company's
liabilities are derivative liabilities which are further described in Note 6.
The Company would be unable to satisfy the cash settlement liability associated
with its derivative liabilities.
For the three months ended June 30, 2008, the Company had a loss from operations
of approximately $10,815,000 and a net loss of approximately $32,851,000 and
utilized approximately $2,094,000 of cash in operating activities. Further,
development stage losses are continuing subsequent to June 30, 2008. We
anticipate that we will continue to generate significant losses from operations
for the near future. These conditions raise substantial doubt about our ability
to continue as a going concern.
The Company's plan to deal with this uncertainty is to commence revenue activity
in the second half of calendar 2008. The Company's cash flow projections
indicate that projected revenues will be sufficient to fund operations over the
coming twelve months. However, as a development stage enterprise, the Company's
ability to accurately project revenues and expenses can be significantly
impacted by unforeseen events, developments and contingencies that cannot be
anticipated. As such, there can be no assurance that management's plans to
generate revenue in order to sustain our operations over the coming twelve
months can be realized. No adjustment has been made in the accompanying
financial statements to the amounts and classification of assets and liabilities
which could result should the Company be unable to continue as a going concern.
We currently have no material commitments for capital expenditures.
Results of Operations -
We began operations on November 15, 2007 and are a development stage company.
Our activities during the development stage have included primarily capital
raising (resulting in the debt and equity-based financing described in Recent
Financings above), development and marketing of our biodegradable plastic
products, development of mass market product distribution networks for the
intended distribution of the products, recruiting personnel and beginning the
development of an infrastructure to support the planned business. As the Company
is devoting its efforts to product development, marketing and distribution,
there has been no revenue generated from sales as of the date of this report.
Our results of operations for the three months ended June 30, 2008 and for the
period from November 15, 2007 (inception) to June 30, 2008 are as follows:
20
November 15,
Three months 2007
ended (inception) to
June 30, 2008 June 30, 2008
------------- --------------
Revenues $ 1,000 $ 1,000
-----------------------------
Loss from operations 10,815,000 11,442,000
-----------------------------
Other expense 22,037,000 22,835,000
-----------------------------
Net loss $32,851,000 $34,276,000
=============================
Revenues in the three months ended June 30, 2008 and for the period from
November 15, 2007 to June 30, 2008 consist of initial sales at Amazon.com and
sales to a municipality. The Company expects to commence more substantial
revenue activity in approximately September 2008 as product that has been
ordered becomes available to ship to our initial customers including retailers
Walgreens and Bashas' as well as internet retailers Amazon.com and
Drugstore.com.
Loss from operations is driven by general and administrative costs of
approximately $10,814,000 for the three months ended June 30, 2008 and
$11,441,000 for the period from November 15, 2007 (inception) to June 30, 2008.
Included in general and administrative costs for the both the three months ended
June 30, 2008 and for the period from November 15, 2007 (inception) to June 30,
2008 are non-cash charges for stock compensation aggregating approximately
$9,032,000 including stock compensation for directors (approximately
$4,100,000), employees (approximately $2,203,000) and consultants, primarily an
investor relations consultant, (approximately $2,729,000). The large amount of
stock compensation results from the number of options and shares granted as well
as the fact that options to purchase approximately 2,843,600 shares contain
immediate vesting provisions and therefore are expensed in full at inception
(approximately $6,180,000). However, we have an ongoing cost for stock
compensation relative to (a) the vesting of options and warrants already granted
to purchase approximately 4,250,000 shares, (b) our commitment to make monthly
share grants to certain employees and consultants and (c) the vesting of options
and warrants for any new grants. The cost of the ongoing vesting of options
already granted is expected to be approximately $2,200,000 per quarter. The cost
of our commitment to make monthly share grants will be variable based upon the
share price at the end of each month of service and therefore is not known at
this time.
The remaining operating expenses, approximately $1,783,000 for the three months
ended June 30, 2008 and approximately $ 2,409,000 for the period from November
15, 2007 (inception) to June 30, 2008, include the following:
November 15,
Three months 2007
ended (inception) to
June 30, 2008 June 30, 2008
------------- --------------
Investor and public relations $ 829,000 $ 852,000
---------------------------
Human resources 201,000 333,000
---------------------------
Legal and professional 204,000 350,000
---------------------------
Marketing and related 278,000 520,000
---------------------------
Travel and related 121,000 166,000
---------------------------
Occupancy, communications, and all other, net 150,000 188,000
---------------------------
Total other operating costs $1,783,000 $2,409,000
===========================
We expect that our operating expenses will continue to increase in subsequent
quarters as we focus our attention on product introduction and marketing,
investor and public relations and investments in our operating infrastructure.
21
Other expense includes the following:
November 15,
Three months 2007
ended (inception) to
June 30, 2008 June 30, 2008
------------- --------------
Derivative liability expense at inception $ 26,310,000 $ 26,310,000
------------------------------
Change in value of derivative liability (5,439,000) (5,439,000)
------------------------------
Damages accrued under registration rights
agreement 893,000 893,000
------------------------------
Amortization of debt discount 179,000 179,000
------------------------------
Interest expense and amortization 105,000 852,000
------------------------------
Interest income (11,000) (11,000)
------------------------------
Total other expense $ 22,036,000 $ 22,835,000
==============================
Derivatives - As discussed further in Notes 6 and 7 to the unaudited condensed
consolidated financial statements, the Company issued Convertible Debentures and
Warrants which contain features that have variability in the conversion or
exercise price and, with respect to the Warrants, contain a settlement in cash
feature if sufficient registered shares cannot be delivered upon exercise of the
Warrant. As such, these instruments are accounted for as Derivative liabilities.
In addition, warrants issued to a placement agent, and warrants that were issue
to replace warrants issued to investors in the December 2007 equity financings,
have the same features and are also accounted for as derivative liabilities.
Derivative liability expense for beneficial conversion feature of convertible
debt, warrants and other warrants of approximately $26,310,000 results from the
fair value of these derivative instruments, less the amount allocated to the
related convertible debt as debt discount ($5,950,000), at inception. The
Company computed the fair value of its derivative instruments at inception by
using a Black Scholes calculation assuming a risk free rate of return of 2.7 -
3.2%, expected volatility of 93% and expected life of the conversion feature
(three years) and the Warrants (five years) and the quoted market price of the
Company's stock on the day of the measurement. Fair value accounting requires
that these derivative liabilities be marked-to-market at each reporting period
and therefore, since the underlying market price of the stock generally
decreased from inception to June 30, 2008, the Company recorded other income for
the aggregate change in value of these derivative liabilities of approximately
$5,439,000. Each reporting period, a charge or credit will be recorded for the
change in fair value these derivative liabilities.
Registration rights - Under a registration rights agreement, the common stock
underlying the conversion feature of the Convertible Debentures and the Warrants
is required to be registered. The Company can be assessed liquidated damages, as
defined in the related agreements, for the failure to file a registration
statement in a certain timeframe or for the failure to obtain or maintain
effectiveness of such registration statement. Such penalties are generally
limited to approximately $893,000 in the aggregate. Because obtaining
effectiveness of the registration statement is not within the Company's control,
the Company has concluded to record a liability for approximately $893,000
representing the liquidated damages that may be assessed if the Company fails to
satisfy its registration obligations. If the Company's registration statement is
ultimately declared effective, such liability would be reversed in the period
that the determination of effectiveness is resolved.
Interest expense and amortization of debt discount - Interest expense on the
Convertible Debentures accrues at approximately $149,000 per quarter beginning
in May 2008. The amortization of debt discount represents the amortization of
the entire proceeds, $5,950,000 of the Convertible Debentures and Warrants,
which was allocated to debt discount, over the three year life of the
Convertible Debentures at the rate of approximately $496,000 per quarter
beginning in May 2008.
Interest income - Consists of interest earned on bank deposits and deposits in
an institutional money market fund with a broker-dealer.
22
Contractual Arrangements
Significant contractual obligations as of June 30, 2008 are as follows:
Amount Due in
-----------------------------------------------------------------------
Total Less than 1 1 to 3 4 to 5 More than 5
Type of Obligation Obligation year years years years
----------- ----------- ----------- ----------- -----------
Convertible Debentures (1) ... $ 5,950,000 $ -- $ 5,950,000 $ -- $ --
Derivative liabilities (2) ... 28,694,000 28,694,000 -- -- --
Employment contracts (3) ..... 2,381,000 791,000 1,591,000
----------- ----------- ----------- ----------- -----------
Total ................... $37,025,000 $29,485,000 $ 7,541,000 $ -- $
=========== =========== =========== =========== ===========
(1) See Note 6 to unaudited condensed consolidated financial statements for
additional information.
(2) See Note 7 to unaudited condensed consolidated financial statements for
additional information.
(3) See Note 11 to unaudited condensed consolidated financial statements for
additional information. Amounts include annual increases but not annual
bonus eligibility.
Off Balance Sheet Arrangements
The Company has no material off balance sheet arrangements that are likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
resources or capital expenditures.
Critical Accounting Principles -
We have identified critical accounting principles that affect our condenses
consolidated financial statements by considering accounting policies that
involve the most complex or subjective decisions or assessments as well as
considering newly adopted principals. They are:
Use of Estimates, Going Concern Consideration - The preparation of financial
statements in conformity with generally accepted accounting principles in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Among the estimates we have made in
the preparation of the financial statements is an estimate of our projected
revenues, expenses and cash flows in making the disclosures about our liquidity
in this report. As a development stage company, many variables may affect our
estimates of cash flows that could materially alter our view of our liquidity
and capital requirements as our business develops. Our unaudited condensed
consolidated financial statements have been prepared assuming we are a "going
concern". No adjustment has been made in the unaudited condensed consolidated
financial statements which could result should we be unable to continue as a
going concern.
Share-Based Payments - We follow SFAS 123(R), "Share-Based Payment" which
establishes standards for share-based transactions in which an entity receives
employee's or consultants services for (a) equity instruments of the entity,
such as stock options or warrants, or (b) liabilities that are based on the fair
value of the entity's equity instruments or that may be settled by the issuance
of such equity instruments. SFAS 123(R) requires that we expense the fair value
of stock options and similar awards, as measured on the awards' grant date. SFAS
123(R) applies to all awards granted after the date of adoption, and to awards
modified, repurchased or cancelled after that date.
We estimate the value of stock option awards on the date of grant using the
Black-Scholes option-pricing model (the "Black-Scholes model"). The
determination of the fair value of share-based payment awards on the date of
grant is affected by our stock price as well as assumptions regarding a number
of complex and subjective variables. These variables include our expected stock
price volatility over the term of the awards, expected term, risk-free interest
rate, expected dividends and expected forfeiture rates.
23
If factors change and we employ different assumptions in the application of SFAS
123(R) in future periods, the compensation expense that we record under SFAS
123(R) may differ significantly from what we have recorded in the current
period. There is a high degree of subjectivity involved when using option
pricing models to estimate share-based compensation under SFAS 123(R).
Consequently, there is a risk that our estimates of the fair values of our
share-based compensation awards on the grant dates may bear little resemblance
to the actual values realized upon the exercise, expiration, early termination
or forfeiture of those share-based payments in the future. Employee stock
options may expire worthless or otherwise result in zero intrinsic value as
compared to the fair values originally estimated on the grant date and reported
in our financial statements. Alternatively, value may be realized from these
instruments that are significantly in excess of the fair values originally
estimated on the grant date and reported in our financial statements. During the
three months ended June 30, 2008, we do not believe that reasonable changes in
the projections would have had a material effect on share-based compensation
expense.
The guidance in SFAS 123(R) and Securities and Exchange Commission's Staff
Accounting Bulletin No. 107 and 110 is relatively new, and best practices are
not well established. There are significant differences among valuation models,
and there is a possibility that we will adopt a different valuation model in the
future. Theoretical valuation models are evolving and may result in lower or
higher fair value estimates for share-based compensation. The timing, readiness,
adoption, general acceptance, reliability and testing of these methods is
uncertain. Sophisticated mathematical models may require voluminous historical
information, modeling expertise, financial analyses, correlation analyses,
integrated software and databases, consulting fees, customization and testing
for adequacy of internal controls. The uncertainties and costs of these
extensive valuation efforts may outweigh the benefits to investors.
Derivative liabilities - SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," requires bifurcation of embedded derivative instruments
and measurement of their fair value for accounting purposes. In addition,
freestanding derivative instruments such as certain warrants are also derivative
liabilities. We estimate the fair value of these instruments using the
Black-Scholes option pricing model which takes into account a variety of
factors, including historical stock price volatility, risk-free interest rates,
remaining term and the closing price of our common stock. Changes in the
assumptions used to estimate the fair value of these derivative instruments
could result in a material change in the fair value of the instruments. Although
we believe the assumptions used to estimate the fair values of the warrants are
reasonable, we cannot assure the accuracy of the assumptions or estimates.
Derivative liabilities are recorded at fair value at inception and then are
adjusted to reflect fair value as at each period end, with any increase or
decrease in the fair value being recorded in results of operations as an
adjustment to fair value of derivatives.
At June 30, 2008, we had four such derivative instruments principally related to
our issuance of Convertible Debentures and Warrants as discussed further in
Notes 6 and 7 to the unaudited condensed consolidated financial statements. The
Convertible Debentures and Warrants have features which make their conversion or
exercise price variable and the Warrants contain provisions calling for cash
settlement in certain circumstances. Such derivatives had an aggregate fair
value at inception of approximately $32,220,000, after reflecting $5,950,000 as
debt discount. At June 30, 2008, we re-measured the fair value of such
derivative instruments and recorded a reduction of our derivative liabilities of
approximately $7,490,000 bringing the resulting derivative liabilities to
approximately $24,730,000.
Recently Issued Accounting Pronouncements
See Note 13 to unaudited condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the sensitivity of income or loss to changes in interest
rates, foreign exchanges, commodity prices, equity prices, and other market
driven rates or prices.
24
Foreign Currency Risk
Currently, we have no exposure to foreign currency risk as all our sales
transactions, assets and liabilities are denominated in the U.S. dollar.
Interest Rate Risk
Our exposure to interest rate risk is limited to interest earned from our money
market accounts and our interest expense on short-term and long-term borrowings.
Currently, this exposure is not significant. Substantial increases in short-term
and long-term borrowings to fund growth or make investments, combined with
actual changes in interest rates could adversely affect our future results of
operations.
Item 4T. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's senior
management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act") that is designed
to ensure that the information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
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 officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
The Company has evaluated the effectiveness of the design and operation of
its disclosure controls and procedures under the supervision of and with the
participation of management, including the Chief Executive Officer and our Chief
Financial Officer as of the end of the period covered by this report. Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective.
(b) Changes in Internal Control Over Financial Reporting. Our management
is responsible for establishing and maintaining effective internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act ("ICFR"). Our ICFR should be designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
The Company's predecessor, Perf-Go Green Holdings, Inc., was previously a
shell company with the objective to acquire an operating business. As such, it
only had to maintain internal and disclosure controls on a very limited number
of activities. On May 13, 2008, Perf-Go Green Holdings, Inc. acquired Perf-Go
Green, Inc., a privately held, development-stage company, in a transaction
accounted for as a reverse acquisition (the "Share Exchange"). Upon the
consummation of the Share Exchange, Perf-Go Green Holdings, Inc.'s former
internal controls and management were entirely supplanted by those of Perf-Go
Green, Inc. In effect, this quarterly report on Form 10-Q for the three months
June 30, 2008 is the first annual or quarterly report that has been filed with
respect to the assets and operations of Perf-Go Green, Inc.
Our new and current management acknowledges that they are responsible for
establishing and maintaining effective internal control over financial reporting
for the Company. Because of the abbreviated period of less than two months
during which the Company, operating as Perf-Go Green, Inc., was a reporting
company during the quarter ended June 30, 2008, management had not completed, as
of June 30, 2008, an assessment of the Company's internal control over financial
reporting under a recognized control framework. That assessment process is
ongoing and will be completed during the fiscal year ending March 31, 2010.
Accordingly, the Company will include management's report on its assessment of
the effectiveness of the Company's internal control over financial reporting in
25
its annual report for that period. As of the date of this filing, management has
identified a material weaknesses in that the financial statements of Perf-Go
Green, Inc., a private company that we acquired in a reverse acquisition in May
2008, included in our Form 8-K filing on May 16, 2008 have been restated for an
accounting error. Such restatement, which is described in Note 11 to the
unaudited condensed consolidated financial statements, arose due to the failure
to record the fair value of warrants issued with convertible debentures as
required by generally accepted accounting principles. As we migrate our internal
controls as described below, in July 2008 we retained a financial reporting
consultant to assist us with our financial and SEC reporting. It is through this
process that the error was discovered and, as such, we consider this particular
weakness to be subsequently remediated by the addition of that resource.
Management has not made a report, we have not had an attestation report of
the Company's registered public accounting firm, regarding internal control over
financial reporting due to the temporary rules of the Securities and Exchange
Commission that permit a transition period for newly public companies as
described above.
We anticipate that our internal control system will be designed to provide
reasonable assurance to our management and Board of Directors regarding the
preparation and fair presentation of published financial statements. The steps
management expects to undertake include a top-down risk assessment of all risks
associated over financial reporting and disclosure, the identification and
ranking of risks and the corresponding financial accounts and business
processes. Additionally, the associated system applications will be identified,
as well as the controls over information technology and general computer
controls. Company-wide controls will also be identified and documented. This
control environment will be reviewed and assessed to allow management to
conclude regarding the effectiveness of the design of the controls as well the
operating effectiveness. In making its assessment of internal control over
financial reporting, management anticipates using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control--Integrated Framework. We have hired new accounting personnel.
In addition, we are in the process of implementing a comprehensive new
accounting software system and are in the process of retaining the services of a
consulting business specializing in audit, compliance, financial management, and
support
There are inherent limitations in any system of internal control. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that its objectives are met. Further, the
design of a control system must consider that resources are not unlimited and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgment in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the controls.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm its business. On April 11,
2008, David Conklin, a shareholder of the Company, asserted a claim against
Anthony Tracy, our Chairman of the Board of Directors and Chief Executive
Officer, alleging that, based on Mr. Conklin's prior contributions to other
companies operated by Anthony Tracy as well as prior agreements between Mr.
Conklin and Mr. Tracy, Mr. Conklin was entitled to be issued a ten (10%) percent
interest in the Company. This dispute was resolved on July 8, 2008. In
accordance with the terms of the Mutual Release and Settlement Agreement dated
July 8, 2008 by and among Mr. Tracy, Mr. Conklin and the Company, Mr. Conklin
was issued 888,830 shares of common stock of the Company. Such shares were taken
from Mr. Tracy's interest in the Company and no additional shares were issued by
the Company.
Item 1A. Risk Factors
Any investment in our common stock involves a high degree of risk. The following
additional risks were identified during the quarter ended June 30, 2008 as a
result of the Share Exchange and related financing activity:
26
We have issued a substantial number of securities convertible into shares of our
common stock which may result in substantial dilution to the ownership interests
of our existing stockholder.
In connection with our private placement of Convertible Debentures and Warrants,
at June 30, 2008, approximately 31,343,999 million shares of our common stock
were reserved for issuance, which equals 130% of the maximum shares of our
common stock issuable upon exercise or conversion (before adjustment as
permitted) of the following securities: (i) 13,992,333 million shares of common
stock issuable upon conversion of the Notes, and payment of interest thereon,
issued as part of the and (ii) 17,350,666 million shares of common stock
issuable (before adjustment as permitted) upon exercise in full of the Warrants
issued to the holders of the convertible notes, certain other investors and the
placement agent (without regard to any limitations on exercise). The exercise or
conversion of these securities will result in a significant increase in the
number of outstanding shares and substantially dilute the ownership interests of
our existing stockholders.
The conversion ratio of the Notes and the exercise price of the Warrants may be
substantially below the market price of our stock at the time of exercise.
The Notes are currently convertible into our common stock at a fixed ratio of
$0.75 per share. The Warrants issued are exercisable at a fixed exercise price
of $1.00 per share. Subject to certain exceptions, these conversion ratios and
exercise prices are subject to downward adjustment in the event we issue
additional shares of common stock at prices below the then-current conversion
ratio or exercise price. Conversion of the notes or exercise of the warrants is
only likely to occur at such time as the conversion ratio or exercise price, as
the case may be, is lower than the current market price for our common stock.
Issuance of common stock at a price below our current market price would have a
dilutive effect on current stockholders and could potentially have a negative
impact on our stock price
Any investment in our common stock involves a high degree of risk. Some of these
many known risks that affect an investment in our Company (there can be others)
are described in our Form 8-K filed on May 13, 2008 and include:
- Our management team does not have extensive experience in public
company matters, which could impair our ability to comply with legal
and regulatory requirements.
- Our internal financial reporting procedures are still being
developed and we will need to allocate significant resources to meet
applicable internal financial reporting standards.
- Failure to achieve and maintain effective internal controls in
accordance with Section 404 of the Sarbanes Oxley Act of 2002 could
prevent us from producing reliable financial reports or identifying
fraud. In addition, current and potential stockholders could lose
confidence in our financial reporting, which could have an adverse
effect on our stock price.
- There are additional requirements and costs associated with becoming
a public company which may prove to be burdensome, especially for a
smaller public company.
- We became public through the Share Exchange and we may not be able
to attract the attention of major brokerage firms.
- Affiliates of our Placement Agent are also stockholders of Perf
Holdings, and consequently, may have interests which differ from
those of our Company.
- There will be a limited trading market for our common stock.
- You may have difficulty trading and obtaining quotations for our
common stock.
- The market price of our common stock may, and is likely to continue
to be, highly volatile and subject to wide fluctuations.
- Our operating results may fluctuate significantly, and these
fluctuations may cause our stock price to decline.
- We do not expect to pay dividends in the foreseeable future.
- Investors will experience dilution upon the exercise of Warrants or
options.
- Directors and officers of the Company have a high concentration of
common stock ownership.
- Applicable SEC rules governing the trading of "penny stocks" limit
the trading and liquidity of our common stock, which may affect the
trading price of our common stock.
27
For a more complete listing and description of these and other risks that
the Company faces please see our Form 8-K filed on May 13, 2008.
Item 6. - Exhibits
31.1 Certification of Principal Executive Officer pursuant to Exchange
Act Rule 13a - 14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Exchange
Act Rule 13a - 14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PERF-GO GREEN HOLDINGS, INC.
----------------------------
(Registrant)
Date: August 11, 2008 By: /s/ Anthony Tracy
-----------------------------------------------------
Anthony Tracy, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
By: /s/ Arthur F. Stewart
-----------------------------------------------------
Arthur F. Stewart, Chief Financial Officer
(Principal Financial and Accounting Officer)
28
INDEX TO EXHIBITS
No. Description
--- -----------
31.1 Certification of Principal Executive Officer pursuant to Exchange
Act Rule 13a - 14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Exchange
Act Rule 13a - 14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C.
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.