NDB ENERGY, INC.
(Formerly “International Energy Inc.”)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Expressed in U.S. dollars)
(Unaudited)
Note 1. Organization and Description of Business
NDB Energy, Inc. (the “Company”) was incorporated under the laws of the State of Nevada on November 6, 1998, under the name “e.Deal.net, Inc.” On June 20, 2005, the Company amended its Articles of Incorporation to effect a change of name to International Energy, Inc. On June 27, 2011, the Company amended its Articles of Incorporation to effect a change of name to NDB Energy, Inc.
On June 9, 2005, the Company incorporated two wholly-owned subsidiaries; International Energy Corp. and e.Deal Enterprises Corp. Both subsidiaries are incorporated under the laws of the State of Nevada.
NDB Energy, Inc. is a development stage company which was previously engaged in an effort to develop processes and technologies permitting the commercially viable extraction of “biofuels” from algae. On September 17, 2007, through its wholly owned subsidiary, International Energy Corp., the Company commenced the development and acquisition of biofuel technologies by entering into a Research Agreement with The Regents of the University of California in the area of algal biochemistry and photosynthesis. The Company’s Research Project aimed to develop protocols for the growth of microalgal cultures and for the generation of long chain liquid hydrocarbons. These hydrocarbons are derived directly from the photosynthesis of the green microalgae. The Company has reviewed research outcomes from the Research Agreement, which expired on September 16, 2009, and determined that it was not in its best interest to renew the Research Agreement.
Effective as of July 29, 2011, NDB Energy, Inc. entered into an Asset Purchase Agreement with Mr. James Cerna, Jr. (“Mr. Cerna”) and Acqua Ventures, Inc., pursuant to which the Company acquired the lease to approximately 300 acres of undeveloped land in Gonzales County, Texas (the “GC Property”) for total compensation of 1,800,000 shares of the Company’s common stock (the “GC APA”).
Effective as of July 29, 2011, the Company entered into an Asset Purchase Agreement with Mr. Cerna pursuant to which the Company acquired two leases totaling approximately 120 contiguous acres of land and fourteen wells in Young County, Texas (the “YC Property”) for total cash compensation of $128,500 (the “YC APA”). Pursuant to the YC APA, the property acquired is subject to an operating agreement with Baron Energy, Inc., (“Baron”) an independent oil and gas production, exploitation, and exploration company headquartered in New Braunfels, Texas, with producing assets in the prolific oil producing Permian Basin of West Texas and North Central Texas, pursuant to which Baron operates the wells located on the property and receives a 25% working interest and a 20.3125% net revenue interest.
The Company is an emerging independent oil and gas company that explores for, develops, produces and markets crude oil and natural gas from various known prolific and productive geological formations, primarily in Gonzales and Young, Counties, Texas. The Company’s goal is to become a profitable organization focused in the development and production of crude oil and natural gas in established domestic oil fields.
The Company is focused on building and developing a portfolio of oil and gas assets by acquiring what it believes are undervalued, underdeveloped and underperforming properties, and for which it believes it can increase production economically and profitably. The Company only considers onshore, domestic, proven areas for its portfolio.
The Company intends to explore the GC Property to determine whether any oil and/or gas reserves exist. The Company does not know if an economically viable oil and gas reserve exists on the GC Property and there is no assurance that it will discover one. A great deal of exploration will be required before a final evaluation as to the economic, environmental and legal feasibility for the Company’s future exploration is determined. The Company’s plan of operation is to conduct exploration work on the GC Property in order to ascertain whether it possesses commercially exploitable quantities of oil and gas reserves.
Even if the Company completes its proposed exploration program and is successful in identifying an oil and gas reserve, the Company will have to spend substantial funds on further drilling and engineering studies before it will know whether it has a commercially viable oil and/or gas reserve.
The YC Property currently produces approximately 4-5 barrels of oil per day. For the remainder of 2011, the Company intends to conduct repairs and further develop the YC Property, including performing acid jobs on all the wells and increase the volume of fluids in the injection wells in an attempt to increase production. There is no guarantee that any efforts the Company undertakes to increase production will prove to be effective.
On June 12, 2011, the Company’s shareholders, pursuant to a written consent in lieu of a special meeting signed by the shareholders owning a majority of the Company’s issued and outstanding shares, authorized its officers to file the necessary documentation with the Secretary of State of Nevada to effect a one-for-five reverse stock split with all fractional shares being rounded up to the nearest whole share (the “Reverse Split”). The record date for the Reverse Split was set as of one business day prior to the effective date and the effective date for the Reverse Split was set for June 27, 2011, subject to regulatory approval.
The Reverse Split was declared effective by the Financial Industry Regulatory Authority (“FINRA”) on June 29, 2011. All share and per share amounts have been retrospectively restated to reflect the Reverse Split.
Note 2. Going Concern Uncertainties
The Company is a development stage company, has not generated any revenues, has an accumulated deficit of $3,180,547 as of June 30, 2011, and does not have positive cash flows from operating activities. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, which contemplates continuation of the Company as a going concern, which is dependent upon the Company’s ability to establish itself as a profitable business.
The Company faces all the risks common to companies that are in the development stage, including under-capitalization and uncertainty of funding sources, high initial expenditure levels, uncertain revenue streams, and difficulties in managing growth. Additionally, the Company has expended a significant amount of cash in developing its technologies. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management recognizes that in order to meet the Company’s capital requirements, and continue to operate, additional financing will be necessary. The Company expects to raise additional funds through private or public equity investments in order to support existing operations and expand the range and scope of its business operations. The Company will seek access to private or public equity but there is no assurance that such additional funds will be available for the Company to finance its operations on acceptable terms, if at all. Furthermore, there is no assurance that the net proceeds received from any successful financing arrangement will be sufficient to cover cash requirements of the Company’s operations. If the Company is unable to raise additional capital or generate positive cash flow, it is unlikely that the Company will be able to continue as a going concern.
The Company’s consolidated financial statements do not give effect to any adjustments which will be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements.
Note 3. Presentation of Interim Information
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (of a normal recurring nature) considered necessary for a fair presentation of the financial statements have been included. Operating results for the three months ended June 30, 2011, are not necessarily indicative of the results that may be expected for the year ended March 31, 2012 or any other interim period. For further information, refer to the financial statements and notes thereto included in the Company’s 2011 Annual Report on Form 10-K for the year ended March 31, 2011, filed with the Securities and Exchange Commission (the “SEC”).
Note 4. Summary of Significant Accounting Policies
Estimates
The preparation of the Company’s consolidated financial statements requires management to make estimates and use assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for the Company include accounting for research and development costs, accounting for stock-based compensation, and valuation of equity instruments. On an on-going basis, the Company evaluates its estimates. Actual results and outcomes may differ materially from these estimates and assumptions.
Research and Development
Research and development costs represent costs incurred to develop the Company’s technology, including salaries and benefits for research and development personnel, allocated overhead and facility occupancy costs, supplies, equipment purchase and repair and other costs. Research and development costs are expensed when incurred, except for nonrefundable advance payments for future research and development activities which are capitalized and recognized as expense as the related services are performed.
The Company did not incur any research and development expense during the three months ended June 30, 2011 and 2010. From inception (November 6, 1998) to June 30, 2011 the Company incurred research and development expense of $255,498.
Fair Value
The Company measures fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The Company utilizes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities. The Company has no assets or liabilities valued with Level 1 inputs.
Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. The Company has no assets or liabilities valued with Level 2 inputs.
Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Liabilities valued with Level 3 inputs are described in “Note 8. Warrants.”
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents and accounts payable approximate their fair value because of the short-term nature of these instruments and their liquidity. Management is of the opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments.
Stock-based Compensation
The Company measures all stock-based compensation awards using a fair value method on the date of grant and recognizes such expense in its consolidated financial statements over the requisite service period. The Company uses the Black-Scholes pricing model to determine the fair value of stock-based compensation awards on the date of grant. The Black-Scholes pricing model requires management to make assumptions regarding the warrant and option lives, expected volatility, and risk free interest rates. See “Note 7. Stock Options” and “Note 8. Warrants” for additional information on the Company’s stock-based compensation plans.
Recently Issued and Adopted Accounting Pronouncements
The Company reviews new accounting standards as issued. Although some of these accounting standards issued or effective after the end of the Company’s previous fiscal year may be applicable to the Company, it has not identified any standards that it believes merit further discussion. The Company believes that none of the new standards will have a significant impact on its consolidated financial statements.
Note 5. Net Loss Per Share
During the three months ended June 30, 2011 and 2010, the Company recorded a net loss. Therefore, the issuance of shares of common stock from the exercise of stock options would be anti-dilutive and basic and diluted net loss per share are the same for those periods. Excluded from the computation of diluted net loss per share for both of the three months ended June 30, 2011 and 2010, because their effect would be antidilutive, are stock options to acquire 20,000 and 1,610,000 shares of common stock, respectively, with weighted-average exercise prices of $3.08 and $0.68 per share, respectively.
For purposes of earnings per share computations, shares of common stock that are issuable at the end of a reporting period are included as outstanding.
Following is the computation of basic and diluted net loss per share for the three months ended June 30, 2011 and 2010:
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Three Months Ended
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June 30,
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2011
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2010
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Numerator - net loss
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|
$ |
(92,831 |
) |
|
$ |
(59,010 |
) |
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Denominator - weighted average number
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of common shares outstanding - basic and diluted
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8,449,839 |
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|
|
8,449,839 |
|
| |
|
|
|
|
|
|
|
|
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Basic and diluted net loss per common share
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
Note 6. Capital Stock
Preferred Stock
At June 30, 2011, there were 1,000,000 shares of preferred stock (par value of $0.01 per share) authorized, of which no shares were issued and outstanding. The Board of Directors has the authority to divide the preferred stock into series and to fix and determine the relative rights and preferences of the shares of any such series so established to the full extent permitted by the laws of the State of Nevada and the Articles of Incorporation. Holders of the preferred stock are entitled to one vote for each share held of record. Holders of the preferred stock vote with holders of the common stock as one class.
Reverse Stock Split
On June 12, 2011, the Company’s shareholders, pursuant to a written consent in lieu of a special meeting signed by the shareholders owning a majority of the Company’s issued and outstanding shares, authorized its officers to file the necessary documentation with the Secretary of State of Nevada to effect the “Reverse Split”. The record date for the Reverse Split was set as of one business day prior to the effective date and the effective date for the Reverse Split was set for June 27, 2011, subject to regulatory approval.
The Reverse Split was declared effective by FINRA on June 29, 2011. All share and per share amounts have been retrospectively restated to reflect the Reverse Split.
Common Stock
On April 17, 2008, the Company completed a $2,400,000 self directed private placement (the “2008 Private Placement”). The 2008 Private Placement consisted of the sale of 800,000 units (the "Units") at a price of $3.00 per Unit. Each Unit consisted of one share (collectively “Unit Shares”) of the Company’s common stock and one Series B Warrant to purchase a share of common stock at $3.00 per share for a period of two years from the date of issuance. In connection with the 2008 Private Placement, the Company agreed to file a registration statement for the purpose of registering the Unit Shares and the shares issuable upon the exercise of the Series B Warrants, for resale by the Investors. On July 17, 2009, the Company received a Notice of Effectiveness from the Securities and Exchange Commission (the “SEC”) registering the Unit Shares and additional shares held by certain selling stockholders in private transactions.
The number of shares issuable upon exercise of the Series B Warrants and the exercise price of the Series B Warrants were adjustable in the event of stock splits, combinations and reclassifications, but not in the event of the issuance by the Company of additional securities, unless such issuance was at a price per share which was less than the then applicable exercise price of the Series B Warrants (“Dilutive Issuance”), in which event then the exercise price would have been reduced and only reduced to equal the lower issuance price and the number of shares issuable upon exercise thereof would have increased such that the aggregate exercise price payable thereunder, after taking into account the decrease in the exercise price, would have been equal to the aggregate exercise price prior to such adjustment. The potential adjustment to the Series B Warrants exercise price and number of underlying shares of common stock resulted in a settlement amount that did not equal the difference between the fair value of a fixed number of the Company’s common stock and a fixed exercise price. Accordingly, the Series B Warrants were not considered indexed to the Company’s own stock and therefore needed to be accounted for as a derivative. The Series B Warrants all expired on April 17, 2010, none of which were exercised. As of their expiration date, the Company had not sold any shares of common stock or common stock equivalents that would result in an adjustment to the exercise price or number of shares of common stock underlying the Series B Warrants. See “Note 8. Warrants.”
In connection with the 2008 Private Placement, the Company paid a commission of 20,000 Units (the “Commission Units”) to one registered broker dealer. The Commission Units did not have any registration rights but otherwise had the same terms and conditions as the Units.
At the time of grant, the fair value of the Series B Warrants as calculated using the Black-Scholes model was $5,330,000. The proceeds from the 2008 Private Placement allocated to the warrants were $1,066,000.
Note 7. Stock Options
On September 30, 2002, the stockholders of the Company approved its 2002 Incentive Stock Plan (the “2002 Plan”), which has 4,000,000 shares reserved for issuance thereunder, none of which are currently registered with the SEC. The 2002 Plan provides shares available for options granted to employees, directors and others. The options granted to employees under the Company’s 2002 Plan generally vest over one to five years or as otherwise determined by the plan administrator. Options to purchase shares expire no later than ten years after the date of grant.
The Company measures all stock-based compensation awards using a fair value method on the date of grant and recognizes such expense in its financial statements over the requisite service period. The grant date fair value of stock options is based on the price of a share of the Company’s common stock on the date of grant. In determining the grant date fair value of stock options, the Company uses the Black-Scholes option pricing model which requires management to make assumptions regarding the option lives, expected volatility, and risk free interest rates, all of which impact the fair value of the option and, ultimately, the expense that will be recognized over the life of the option.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a bond with a similar term. The Company does not anticipate declaring dividends in the foreseeable future. Volatility is calculated based on the historical weekly closing stock prices for the same period as the expected life of the option. The Company uses the “simplified” method for determining the expected term of its “plain vanilla” stock options. The Company recognizes compensation expense for only the portion of stock options that are expected to vest. Therefore, the Company applies an estimated forfeiture rate that is derived from historical employee termination data and adjusted for expected future employee turnover rates. To date, the Company has experienced minimal forfeitures, which did not impact the fair value of the stock option grants. If the actual number of forfeitures differs from those estimated by the Company, additional adjustments to compensation expense may be required in future periods.
The following table sets forth the share-based compensation expense resulting from stock option grants, including those previously granted and vesting over time, which was recorded in the Company’s Statements of Operations for the three months ended June 30, 2011 and 2010:
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Three Months Ended
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June 30,
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2011
|
|
|
2010
|
|
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|
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Director and management fees
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$ |
2,154 |
|
|
$ |
3,529 |
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Total
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|
$ |
2,154 |
|
|
$ |
3,529 |
|
Following is a summary of the Company’s stock option activity for the three months ended June 30, 2011:
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Weighted
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|
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Average
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Weighted
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Remaining
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Aggregate
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Average
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Contractual
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Intrinsic
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Number of Options
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Exercise Price
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Term
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Value
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Outstanding at June 30, 2011 and March 31, 2011
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20,000 |
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$ |
3.08 |
|
7.3 years
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$ |
- |
|
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Exercisable at June 30, 2011
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|
8,000 |
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|
$ |
3.08 |
|
7.3 years
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|
$ |
- |
|
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Available for grant at June 30, 2011
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3,970,000 |
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The aggregate intrinsic value in the table above represents the total pretax intrinsic value for all “in-the-money” options (i.e. the difference between the Company’s closing stock price on the last trading day of its first quarter of fiscal year 2012 and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options on June 30, 2011. The intrinsic value of the options changes based on the fair market value of the Company’s common stock.
As of June 30, 2011, the Company had $9,415 of total unrecognized compensation expense related to unvested stock options which is expected to be recognized over a period of 2.5 years.
The following table summarizes information about stock options outstanding and exercisable at June 30, 2011:
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Stock Options Outstanding |
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Stock Options Exercisable |
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Weighted
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Weighted
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Average
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Weighted
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Average
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Weighted
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Number of
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Remaining
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Average
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Number of
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Remaining
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Average
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Options
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Contractual
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Exercise
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Options
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Contractual
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Exercise
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Excercise Prices
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Outstanding
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Life (Years)
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Price
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Exercisable
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Life (Years)
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Price
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$ |
2.00 |
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10,000 |
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7.3 |
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$ |
2.00 |
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|
4,000 |
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|
7.3 |
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$ |
2.00 |
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|
4.15 |
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10,000 |
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|
|
7.2 |
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4.15 |
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|
4,000 |
|
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|
7.2 |
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|
4.15 |
|
| |
$ |
2.00 |
|
-
|
$4.15 |
|
|
20,000 |
|
|
|
7.3 |
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|
$ |
3.08 |
|
|
|
8,000 |
|
|
|
7.3 |
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|
$ |
3.08 |
|
The Company does not repurchase shares to fulfill the requirements of options that are exercised. Further, the Company issues new shares when options are exercised.
Note 8. Warrants
On April 17, 2008, the Company completed the 2008 Private Placement (see “Note 6. Capital Stock”). Pursuant to the 2008 Private Placement and payment of a commission to a broker dealer, the Company issued 820,002 Series B Warrants, each to purchase a share of common stock at $3.00 per share, expiring on April 17, 2010.
On April 17, 2010, the remaining 576,667 Series B Warrants expired unexercised. As of June 30, 2011 there were no Series B Warrants outstanding.
Warrant Liability
On April 1, 2009, the Company adopted guidance which is now part of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-40, Contracts in Entity’s Own Equity. The Company determined that its Series B Warrants contained a Dilutive Issuance provision (see “Note 6. Capital Stock: Common Stock”). As a result, the Company reclassified 576,667 of its Series B Warrants to warrant liability, resulting in a cumulative adjustment to accumulated deficit as of April 1, 2009 of $684,032.
The Company’s Series B Warrants were considered derivative financial liabilities and were therefore required to be adjusted to fair value each quarter. In determining the fair value of its warrant liability, the Company utilized level 3 inputs in a three-tier hierarchy. Level 3 valuations are based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Please refer to “Note 4. Summary of Significant Accounting Policies.”
At March 31, 2010, the Company determined that the fair value of the 576,667 outstanding Series B Warrants was $0, substantially due to the shortness of their remaining term. All of the 576,667 Series B Warrants expired on April 17, 2010. The Company did not record a non-cash gain or loss during the three months ended June 30, 2011 or 2010.
The adjustments recorded each quarter to adjust the Series B Warrants to fair value resulted in a cumulative non-cash gain of $65,635 during the period from inception (November 6, 1998) to June 30, 2011.
Note 9. Subsequent Events
Effective as of July 29, 2011, the Company entered into an Asset Purchase Agreement pursuant to which the Company acquired the lease to approximately 300 acres of undeveloped land in Gonzales County, Texas for total compensation of 1,800,000 shares of the Company’s common stock.
Effective as of July 29, 2011, the Company entered into an Asset Purchase Agreement pursuant to which the Company acquired two leases totaling approximately 120 contiguous acres of land and fourteen wells in Young County, Texas for total cash compensation of $128,500.
Please refer to “Note 1. Organization and Description of Business” for further disclosure regarding the Asset Purchase Agreements discussed in the preceding two paragraphs.
Effective as of July 29, 2011, Mr. Amit S. Dang resigned as the Company’s President and Chief Executive Officer. Mr. Dang remains the Company’s Chief Financial Officer and a member of the Company’s Board.
To fill the vacancy created after Mr. Dang resigned from his executive positions, the Company entered into an at-will employment agreement with Mr. James Cerna, Jr., effective as of July 29, 2011 (the “JC Employment Agreement”), pursuant to which Mr. Cerna will serve as the Company’s Chief Executive Officer. The JC Employment Agreement may be terminated by either party upon written notice for any reason whatsoever. Mr. Cerna is being paid an annual salary of $180,000, payable in 24 equal bi-monthly payments. Mr. Cerna will be devoting his full time and attention to the Company’s affairs. Additionally, Mr. Cerna has been appointed as a member of the Company’s Board effective as of July 29, 2011.
Effective as of July 29, 2011, the Board voted to increase the size of the Company’s Board from four (4) to five (5) directors. Effective as of July 29, 2011, Ms. Joanne Lustre resigned as a member of the Company’s Board. The Board intends to fill the vacancy created by Ms. Lustre’s resignation as soon as practicable.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Except for the historical information presented in this document, the matters discussed in this Form 10-Q for the quarter ended June 30, 2011 contain forward-looking statements which involve assumptions and our future plans, strategies, and expectations. These statements are generally identified by the use of words such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project,” or the negative of these words or other variations on these words or comparable terminology. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished.
Such forward-looking statements include statements regarding, among other things, (a) the potential markets for our technologies, our potential profitability, and cash flows (b) our growth strategies (c) expectations from our ongoing research and development activities (d) anticipated trends in the technology industry (e) our future financing plans and (f) our anticipated needs for working capital. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in this Form 10-Q generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the matters described in this Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. In addition to the information expressly required to be included in this filing, we will provide such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.
Although forward-looking statements in this report reflect the good faith judgment of our management, forward-looking statements are inherently subject to known and unknown risks, business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect our actual results may vary materially from those expected or projected.
Except where the context otherwise requires and for purposes of this 10-Q only, “we,” “us,” “our,” “Company,” “our Company,” and “NDB Energy” refer to NDB Energy, Inc., a Nevada corporation, and its consolidated subsidiaries.
Overview
The following discussion and analysis of our financial condition and results of operations (“MD&A”) should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements included in this Form 10-Q.
The MD&A is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Background
We were incorporated under the laws of the State of Nevada on November 6, 1998, under the name “e.Deal.net, Inc.” On June 20, 2005, we amended our Articles of Incorporation to effect a change of name to International Energy, Inc. On June 27, 2011, we amended our Articles of Incorporation to effect a change of name to NDB Energy, Inc.
On June 9, 2005, we incorporated two wholly owned subsidiaries; International Energy Corp. and e.Deal Enterprises Corp. Both subsidiaries are incorporated under the laws of the State of Nevada.
We are a development stage company previously engaged in an effort to develop processes and technologies permitting the commercially viable extraction of “biofuels” from algae. On September 17, 2007, through our wholly owned subsidiary, International Energy Corp., we commenced the development and acquisition of biofuel technologies by entering into a Research Agreement with The Regents of the University of California in the area of algal biochemistry and photosynthesis. Our Research Project aimed to develop protocols for the growth of microalgal cultures and for the generation of long chain liquid hydrocarbons. These hydrocarbons are derived directly from the photosynthesis of the green microalgae. We have reviewed research outcomes from the Research Agreement, which expired on September 16, 2009, and determined that it was not in our best interest to renew the Research Agreement.
Effective as of July 29, 2011, we entered into an Asset Purchase Agreement with Mr. James Cerna, Jr. (“Mr. Cerna”) and Acqua Ventures, Inc., pursuant to which we acquired the lease to approximately 300 acres of undeveloped land in Gonzales County, Texas (the “GC Property”) for total compensation of 1,800,000 shares of our common stock (the “GC APA”).
Effective as of July 29, 2011, we entered into an Asset Purchase Agreement with Mr. Cerna pursuant to which we acquired two leases totaling approximately 120 contiguous acres of land and fourteen wells in Young County, Texas (the “YC Property”) for total cash compensation of $128,500 (the “YC APA”). Pursuant to the YC APA, the property acquired is subject to an operating agreement with Baron Energy, Inc., (“Baron”) an independent oil and gas production, exploitation, and exploration company headquartered in New Braunfels, Texas, with producing assets in the prolific oil producing Permian Basin of West Texas and North Central Texas, pursuant to which Baron operates the wells located on the property and receives a 25% working interest and a 20.3125% net revenue interest.
We are an emerging independent oil and gas company that explores for, develops, produces and markets crude oil and natural gas from various known prolific and productive geological formations, primarily in Gonzales and Young, Counties, Texas. Our goal is to become a profitable organization focused in the development and production of crude oil and natural gas in established domestic oil fields.
We are focused on building and developing a portfolio of oil and gas assets by acquiring what we believe are undervalued, underdeveloped and underperforming properties, and for which we believe we can increase production economically and profitably. We only consider onshore, domestic, proven areas for our portfolio.
We intend to explore the GC Property to determine whether any oil and/or gas reserves exist. We do not know if an economically viable oil and gas reserve exists on the GC Property and there is no assurance that we will discover one. A great deal of exploration will be required before a final evaluation as to the economic, environmental and legal feasibility for our future exploration is determined. Our plan of operation is to conduct exploration work on the GC Property in order to ascertain whether it possesses commercially exploitable quantities of oil and gas reserves.
Even if we complete our proposed exploration program and are successful in identifying an oil and gas reserve, we will have to spend substantial funds on further drilling and engineering studies before we will know whether we have a commercially viable oil and/or gas reserve.
The YC Property currently produces approximately 4-5 barrels of oil per day. For the remainder of 2011, we intend to conduct repairs and further develop the YC Property, including performing acid jobs on all the wells and increase the volume of fluids in the injection wells in an attempt to increase production. There is no guarantee that any efforts we undertake to increase production will prove to be effective.
We do not expect to generate any revenues for the foreseeable future and expect to continue incurring losses.
Results of Operations
Three Month Periods Ended June 30, 2011 and 2010
Operating Expenses
Below is a summary of our operating expenses for the three months ended June 30, 2011 and 2010:
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Three Months Ended
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June 30,
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Increase /
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2011
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2010
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(Decrease)
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Operating expenses
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Marketing and investor relations
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$ |
1,287 |
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$ |
1,275 |
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$ |
12 |
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Director and management fees
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14,754 |
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11,029 |
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3,725 |
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Professional fees
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65,930 |
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36,474 |
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29,456 |
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Salaries and benefits
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- |
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5,645 |
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(5,645 |
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Other operating expenses
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10,860 |
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4,587 |
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6,273 |
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Total operating expenses
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$ |
92,831 |
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$ |
59,010 |
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$ |
33,821 |
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Marketing and Investor Relations
Marketing and investor relations costs represent fees paid to publicize our technologies within the industry and investor community with the purpose of increasing company recognition. We utilize various third parties to manage our investor relations and facilitate our marketing programs, to increase company recognition and branding, and to provide shareholder communications.
Director and Management Fees
Non-employee directors receive $2,500 per quarter for their services as directors.
Director fees for both of the three month periods ended June 30, 2011 and 2010 include fees earned of $7,500. Additionally, we recorded stock compensation expense of $2,154 and $3,529 for the three months ended June 30, 2011 and 2010, respectively, for stock options previously granted to directors and vesting over time.
Effective August 27, 2010, Mr. Charles Bell resigned as a member of our Board and from all executive officer positions held with us. In order to fill the vacancies created by the resignation of Mr. Bell, on August 30, 2010, the Board appointed Mr. Amit S. Dang to the positions of Interim President and Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Accounting Officer), Secretary, and as one of our directors.
We entered into an Executive Services Agreement with Mr. Dang, dated August 30, 2010 (the “Agreement”) pursuant to which Mr. Dang will provide us with executive services. We may terminate the Agreement at any time, for or without cause, upon written notice to Mr. Dang. Mr. Dang is being paid $1,700 per month for his services. Mr. Dang will not be devoting his full time and attention to our affairs.
During the three months ended June 30, 2011 and 2010, we incurred $5,100 and $0, respectively, pursuant to the Agreement between us and Mr. Dang.
Professional Fees
Professional fees substantially consist of accounting fees, audit and tax fees, legal fees, and SEC related filings costs.
Professional fees increased $29,456 for the three months ended June 30, 2011, compared to the three months ended June 30, 2010, substantially due to an increase in legal fees of approximately $27,300 as a result of us changing our name to NDB Energy, Inc., effecting a one-for-five reverse stock split, changes in the composition of our management and the Board, and the execution of the Asset Purchase Agreements, effective July 27, 2011. Please refer to the “Background” section above.
Salaries and Benefits
Salaries and benefits consists entirely of amounts paid to and on behalf of Mr. Charles Bell, our former President, Chief Executive Officer, Chief Financial Officer and one of our directors. Effective August 27, 2010, Mr. Bell resigned as a member of our Board and from all executive officer positions held with us. In order to fill the vacancies created by the resignation of Mr. Bell, on August 30, 2010, the Board appointed Mr. Dang a director and as our Interim President and Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Accounting Officer) and Secretary. Compensation provided to Mr. Dang is included in “Director and Management Fees” as discussed in the same titled section above.
Other Operating Expenses
Other operating expenses include travel and entertainment, rent, telephone, office supplies, postage and printing, information technology related fees and other administrative costs.
Other operating expenses increased $6,273 for the three months ended June 30, 2011, compared to the three months ended June 30, 2010, partially due to an increase in filing fees incurred related to changing our name to NDB Energy, Inc. and effecting a one-for-five reverse stock split. Also contributing to the increase is rent expense incurred for the additional business office space we began utilizing in Southfield, Michigan, effective October 1, 2010.
Liquidity and Capital Resources
The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern. We have an accumulated deficit of $3,180,547 through June 30, 2011, and do not have positive cash flows from operating activities. We are a development stage company with only a limited operating history upon which to base an evaluation of our current business and future prospects. We have only begun engaging in the oil and gas exploration and development business and we do not have an established history of locating and developing properties that have oil and gas reserves. As a result, the revenue and income potential of our business is unproven. In addition, because of our limited operating history, we have limited insight into trends that may emerge and affect our business. Errors may be made in predicting and reacting to relevant business trends and we will be subject to the risks, uncertainties and difficulties frequently encountered by early-stage companies in evolving markets. We may not be able to successfully address any or all of these risks and uncertainties. Failure to adequately do so could cause our business, results of operations and financial condition to suffer.
We face all the risks common to development stage companies, including under-capitalization and uncertainty of funding sources, high initial expenditure levels, uncertain revenue streams, and difficulties in managing growth. These conditions raise substantial doubt about our ability to continue as a going concern. Management recognizes that in order to meet our capital requirements, and continue to operate, additional financing will be necessary. We expect to raise additional funds through private or public equity investments in order to expand the range and scope of our business operations. We will seek access to private or public equity but there is no assurance that such additional funds will be available for us to finance our operations on acceptable terms, if at all. If we are unable to raise additional capital or generate positive cash flow, it is unlikely that we will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our principal source of liquidity is cash in the bank. At June 30, 2011, we had cash and cash equivalents of $653,712. We have financed our operations primarily from funds received pursuant to a private placement completed in April 2008, raising gross proceeds of $2,400,000 and cash received from the exercise of warrants.
Net cash used in operating activities was $70,846 for the three months ended June 30, 2011, compared to net cash used in operating activities of $50,240 for the prior year. The increase in cash used in operating activities of $20,606 was substantially due to an increase in the amount paid for professional fees. Please refer to “Results of Operations” above for discussion regarding the increase in this expense.
Other Contractual Obligations
As of June 30, 2011, our contractual obligations consist of future minimum lease payments of $1,153 pursuant to our corporate office lease in Washington, DC and our business office lease in Southfield, Michigan. In addition, we have future minimum payments of $3,563 pursuant to an agreement with a third party for investor and shareholder relations services.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Recently Issued and Adopted Accounting Pronouncements
We review new accounting standards as issued. Although some of these accounting standards issued or effective after the end of our previous fiscal year may be applicable to us, we have not identified any standards that we believe merit further discussion. We believe that none of the new standards will have a significant impact on our consolidated financial statements.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our 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”), as of the end of the period covered by this quarterly report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2011 that our disclosure controls and procedures were effective such that the information required to be disclosed in our United States Securities and Exchange Commission (the “SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
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Exhibit No.
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Description of Exhibit
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3.1
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Articles of Incorporation (2)
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3.2
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Articles of Incorporation, as amended (1)
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3.3
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Certificate of Amendment to the Articles of Incorporation (6)
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3.4
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Certificate of Change (6)
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4.1
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Securities Purchase Agreement dated April 17, 2008 by and among International Energy, Inc. and Purchasers named therein and who are signatories thereto (2)
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4.2
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Form of Registration Rights Agreement dated April 17, 2008 by and between International Energy, Inc. and entities named therein and who are signatories thereto (2)
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4.3
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Form of Series B Warrant (2)
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4.4
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Placement Agent Agreement with Palladium Capital Advisors, LLC (2)
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10.1
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Research Agreement with The Regents of the University of California dated September 17, 2007 (2)
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10.2
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Employment Agreement dated October 15, 2008 with Charles Bell (3)
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10.3
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Executive Services Agreement dated August 30, 2010 between International Energy, Inc. and Amit S. Dang. *
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10.4
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Asset Purchase Agreement between James J. Cerna, Jr., Acqua Ventures, Inc. and NDB Energy, Inc., dated July 29, 2011 (6)
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Exhibit No.
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Description of Exhibit
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10.5
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Asset Purchase Agreement between James J. Cerna, Jr., and NDB Energy, Inc., dated July 29, 2011 (6)
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10.6
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Employment Agreement dated July 29, 2011, between NDB Energy, Inc. and James J. Cerna, Jr. (6)
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31.1
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Certification of Principal Executive Officer Pursuant to Rule 13(a)-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
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31.2
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Certification of Principal Financial Officer Pursuant to Rule 13(a)-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
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32.1
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Certification of Principal Executive Officer Pursuant to 18 USC. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
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32.2
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Certification of Principal Financial Officer Pursuant to 18 USC. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
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99.1
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International Energy, Inc. – 2002 Incentive Stock Plan (4)
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(1)
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Incorporated by reference to the Company’s Report on Form 10-Q for the quarterly period ended December 31, 2009 filed with the Commission on February 22, 2010.
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(2)
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Incorporated by reference to the Company’s Registration Statement on Form S-1 filed with the Commission on June 23, 2008.
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(3)
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Incorporated by reference to the Company’s Registration Statement on Form S-1/A filed with the Commission on December 31, 2008.
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(4)
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Incorporated by reference to the Company’s Registration Statement on Form S-8 filed with the Commission on August 24, 2005.
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(5)
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Incorporated by reference to the Company’s Form 8-K filed with the Commission on June 29, 2011.
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(6)
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Incorporated by reference to the Company’s Form 8-K filed with the Commission on August 4, 2011.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.