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ADRNF > SEC Filings for ADRNF > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for ADARNA ENERGY CORP

Form 10-Q for ADARNA ENERGY CORP


14-Nov-2012

Quarterly Report


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements included herewith and notes to the consolidated financial statements thereto and the risk factors contained herein.

CAUTIONARY INFORMATION REGARDING FORWARD LOOKING STATEMENTS

The SEC encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This report contains "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to our outlook or expectations for earnings, revenues, expenses, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on our business, results of operations or financial condition. Specifically, forward-looking statements may include statements preceded by, followed by or that include the words "estimate," "plan," "project," "forecast," "intend," "expect," "anticipate," "believe," "seek," "target," "may," "could," "should," "will," or similar expressions. Any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Forward-looking statements contained herein reflect management's judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Future performance cannot be ensured. Although we believe that our expectations regarding future events are based on reasonable assumptions, any or all forward-looking statements in this report may turn out to be incorrect. They may be based on inaccurate assumptions or may not account for known or unknown risks and uncertainties. Consequently, no forward-looking statement is guaranteed, and actual future results may vary materially from the results expressed or implied in our forward-looking statements. The cautionary statements in this report expressly qualify all of our forward-looking statements. In addition, we are not obligated, and do not intend, to update any of our forward-looking statements at any time unless an update is required by applicable securities laws. Factors that could cause actual results to differ from those expressed or implied in the forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A, Risk Factors of our annual report on Form 10-K for the year ended December 31, 2011. Specifically, we may experience significant fluctuations in future operating results due to a number of economic conditions, including, but not limited to, competition, the actions of third parties infringing our patents, commodity market risks, financial market risks, counter-party risks, risks associated with changes to federal policy or regulation or to the laws upon which our intellectual property rights are based, the timely completion of corn oil extraction projects by our licensees, the amount of corn oil recovered by our licensees, and other risk factors detailed in our reports filed with the SEC. Actual results may differ materially from projected results due, without limitation, to unforeseen developments.

In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this report or in any document incorporated by reference might not occur. Investors are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference in this report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

OVERVIEW

Adarna Energy Corporation ("we," "our," "us," "Adarna," or the "Company"), through its wholly owned subsidiary, Oxysonix Corporation, develops and markets technologies, processes and products that burn fuel better to produce more heat and power for less cost and emissions.

Despite an increased global focus on renewable resources, fossil fuels will continue to play a vital and dominant role in providing the majority of humanity's energy needs over at least the next 50 years. Most scientists agree that, unabated, the combustion of fossil fuels to meet those needs will pump enough carbon into the atmosphere to bring about severe climate change. Our collective challenge is to channel the flow of waste carbon in ways that stimulate economic growth and preserve quality of life while preventing the continued accumulation of carbon dioxide in Earth's atmosphere and oceans. Oxysonix was founded to contribute to the resolution of that challenge. We plan to do so by developing and commercializing processes and products that are designed to Burn Smarterô - to get more out of fuels, for better mileage and more heat and power for less cost, while reducing and reusing carbon emissions.

We are currently focused on refining and launching our first generation of products based on our patent-pending and proprietary fuel refining technologies, the completion of our pending merger transaction, and the completion of sufficient financing to subsidize these efforts.

The Company's technologies are designed to pretreat fuel on demand immediately prior to use - without chemicals or additives, to enhance combustion conditions and reactions by breaking larger molecules into smaller, more volatile components, resulting in a cleaner and more-complete burn. The better burn leads to more output for the same input, reduced emissions and contaminant loading in the combustion unit, which in turn leads to reduced wear and maintenance cost and increased service life.

Our technologies are designed to bolt-on and integrate into any liquid fuel combustion unit. They have wide application potential in residential and commercial heat and power production, transportation, maritime and military applications, however, we are exclusively focused for now on developing applications of these technologies for use in the transportation sector. We believe the composition and extent of this market provides a number of attractive benefits from a technology commercialization standpoint. Chief among these is the fact that the transportation markets are populated by large, well-capitalized stakeholders driven by competitive and other forces to increase fuel economy and decrease emissions. Further, the key performance metrics for any products that we successfully roll-out will be fuel economy and emissions. These measures are already universally recognized and used in transportation applications as standard metrics of performance and value.

Early-stage testing completed to date in transportation applications has demonstrated the potential for more than 30% gains in fuel economy and significantly reduced emissions in both diesel and gasoline engines. At current motor fuel prices, a 30% increase in mileage equates to about $1 per gallon saved at the pump, or about $1,000 saved per year for an average driver. There are more than about 275 million cars and trucks on the road in the U.S. alone.


Plan of Operations

We generate no revenue today. Our plan to do so over the next twelve months begins with the successful completion of additional performance testing to refine the design of our planned first generation of products, and to collect and provide extensive performance, safety and other data that will be needed for product launch. During that time, we additionally plan to enhance our existing domestic and international intellectual property protections, and to forge key alliances with industry other stakeholders to facilitate our planned eventual product launch and early-adopter sales. We ultimately plan to generate revenue in transportation applications by selling licenses to manufacturers and end users of products based on our technologies.

Our operating expenses have been reduced in the current period as compared to prior periods in which our now-discontinued carbon recycling research and development activities were conducted. However, our operating expenses over the next twelve months can be expected to increase and will consist of research and development and general and administrative costs incurred in connection with our planned performance tests. We have devised a rigorous performance testing plan to produce the analytical data and other information that we need to establish the precise operating conditions and value-proposition of integrating products based on our technologies into car and truck engines. We anticipate that this data will be essential to technical validation, optimization of our initial product design, expansion of our patent portfolio, solicitation of partners, and completion of early-adopter commercial sales. Development costs can be expected to further include capital costs and expenses incurred in the construction of prototype products as we iteratively refine the design of our planned first generation of products based on our technologies.

We do not intend to make significant additional hires during the next six months or to incur significant expenses in the construction of a new product development laboratory. We plan instead to rely on the scientists, engineers and technical staff of our existing investors at the direction of our chief technology officer, including Applied Combustion Research, LLC ("ACR") and Core Equity Group, LLC ("CEG"). Further, we plan to enter into a sponsored research arrangement with a university that has extensive additional combustion research capabilities. Collaborating in this manner is expected to mitigate cost and risk during our next phase of testing, and to provide us with cost-effective access to existing infrastructure, as well as an expanded team of experienced engineers and scientists that will be coordinated by our chief technology officer.

We are currently seeking to complete a financing to provide sufficient capital to complete our performance testing. Assuming that we are successful in that regard, we expect that the balance of the resources described above will be sufficient for our needs over the next twelve months.

Industry Overview

The vast majority of humanity's heat, power and other energy needs are met by burning fossil and other fuels. Nearly all transportation worldwide is powered by combustion. North America accounts for more than half of the total transportation energy use, and the United States is the largest transportation energy consumer in North America, accounting for more than about eighty percent of the regional total. Transportation accounts for sixty-five percent of U.S. oil consumption. According to the U.S. Bureau of Transportation statistics, more than 275 million consumer and commercial vehicles in America travel more than 1.5 trillion and about 1.1 trillion miles per year, respectively. In other sectors, the EIA has published its prediction that U.S. manufacturers will burn 10.3 billion gallons of fuel per year by 2035. The DOE has also recently predicted that residential delivered energy consumption will grow to more than 84.4 billion gallons by 2035. Of the 7.7 million households in the United States that burn heating oil to heat their homes, 5.3 million households, or nearly 70%, reside in the Northeast region of the country, making this area an especially concentrated target market for products based on our technologies.

Our Capital Structure and Pending Merger

Adarna previously capitalized its development activities with various forms of debt that was convertible into Adarna equity at variable prices. Adarna's prior operations involved use of the convertible debt proceeds in the development of its recently-discontinued technologies with a view towards creation of sufficient value to enable the cost-effective refinancing of the debt. The early-stage nature of those technologies presented prospective investors with too much risk to justify refinancing or the completion of additional financing without having to incur additional convertible debt. We accordingly decided to scale back development activities with those technologies and to seek out and acquire new later-stage technologies.

We discontinued our development activities entirely on April 1, 2012 in anticipation of our April 25, 2012, acquisition of U.S. patent application numbered 13/057,596 and related intellectual properties involving methods and devices for increasing liquid fuel combustion efficiency. We believe these new technologies to be later-stage and closer to market deployment than our discontinued technologies. Existing prototypes based on the new technologies have already demonstrated realization of meaning commercial milestones, such as the capability of increasing fuel economy by more than 30% and reducing emissions by more than 40-60% in transportation applications. Further, we estimate that products based on our new technologies can be cost-effectively manufactured and distributed through existing supply-chains.


We consequently plan to capitalize our development moving forward by the sale of our equity at fixed prices in lieu of the continued use of debt convertible into equity at variable prices. We have also taken steps to eliminate the majority of Adarna's convertible debt and to refinance and restructure the balance. Additionally, we have filed to complete a 10,000 for 1 reverse stock split and a merger with our wholly-owned subsidiary, Oxysonix Corporation (the "Merger"). Oxysonix will be the surviving entity of the Merger. Each ten thousand outstanding shares of Adarna common stock, $0.0001 par value per share, will be automatically converted into one share of Oxysonix common stock, $0.0001 par value per share. All shares of Adarna preferred stock will also be converted into common stock on the effective date of the merger, resulting in a total of 4,971,774 shares of Oxysonix common stock issued and outstanding out of a total of 50,000,000 authorized common shares; and 20,000 shares of non-voting and non-convertible Series 1 Preferred Stock issued and outstanding out of a total of 10,000,000 authorized preferred shares. We believe that completion of this transaction this year will facilitate the completion of more cost-effective financing moving forward. The following table is provided to show the impact of the Merger on our authorized, issued and outstanding shares:

                                             Pre-Merger                      Pro Forma Post-Merger
Security                              Authorized         Outstanding       Authorized      Outstanding
Common Stock                       5,000,000,000       4,917,738,646       50,000,000        4,971,774
Series D Preferred Stock               1,200,000           1,110,845               --               --
Series F Preferred Stock                 800,000             800,000               --               --
Series 1 Preferred Stock                  20,000              20,000           20,000           20,000
Preferred Stock - Undesignated         3,275,000                  --        9,980,000               --

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The financial statements included herein have been prepared by the Company, in accordance with Generally Accepted Accounting Principles. This requires the Company's management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. These estimates and assumptions will also affect the reported amounts of certain revenues and expenses during the reporting period. In the opinion of management, all adjustments which, except as described elsewhere herein are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Actual results could differ materially based on any changes in the estimates and assumptions that the Company uses in the preparation of its financial statements and any changes in the Company's future operational plans.

The Company accounts for convertible debt in accordance with FASB Accounting Standards Codification, Topic 480, as the conversion feature embedded in the convertible debenture could result in the note principal and related accrued interest being converted to a variable number of the Company's common shares. We calculate the fair value of the conversion feature at the time of issuance and record a conversion liability for the calculated value, which is added to the carrying value of the debenture. We also recognize changes in value for accretion of the conversion liability from present value to fair value over the term of the note.

RESULTS OF OPERATIONS

Operating expenses were approximately $237,000 for the nine months ended September 30, 2012 and approximately $337,000 for the nine months ended September 30, 2011. The amount for the nine months ending September 30, 2012 consisted primarily of expenses related to the management of our discontinued operations and expenses related to the acquisition of our newly acquired subsidiary and continued research and development in our fuel savings device. For the period ending September 30, 2011, expenses consisted primarily of general and administrative expenses incurred in connection with the management of our recently discontinued operations.

Total other expense for the nine months ended September 30, 2012 was approximately $32,000 as compared to other expense for the same period last year of about $471,000. Interest expense decreased from about $373,000 for the first nine months of 2011 to about $32,000 during 2012. This decrease was due to the restructuring, refinancing and elimination of convertible debt previously incurred in relation to the Company's discontinued former operations. The Company previously capitalized its development activities with various forms of debt that was convertible into equity at variable prices. Management's current financing plan is based on the anticipated sale of equity at fixed prices and the complete elimination of any form of convertible debt.


Loss from continuing operations during the nine months ended September 30, 2011 was about $809,000. The Company's loss from continuing operations decreased to about $237,000 during the first nine months of this year. Management expects the specific components of the loss in the current period to be eliminated during the balance of 2012, however, we do not currently generate revenue and anticipate incurring increased expenses in connection with the execution of our planned performance testing and other initiatives as described above in Plan of Operations. We realized a gain of about $458,000 in connection with our discontinued operations for the nine months ended September 30, 2012. That gain resulted primarily from extinguishment of debt. Loss from discontinued operations for the nine months ended September 30, 2011 was $32,000.

Net loss for the nine months ended September 30, 2012 was about $186,000 and was comprised of the $457,000 gain from discontinued operations and the $269,000 loss from our continuing operations. These amounts compare to a net loss for the nine months ended September 30, 2011 of about $809,000, consisting of the $777,000 loss from continuing operations and $32,000 loss from discontinued operations noted above.

The Company accounts for convertible debt in accordance with FASB Accounting Standards Codification, Topic 480, as the conversion feature embedded in the convertible debenture could result in the note principal and related accrued interest being converted to a variable number of the Company's common shares. We calculate the fair value of the conversion feature at the time of issuance and record a conversion liability for the calculated value, which is added to the carrying value of the debenture. We also recognize changes in value for accretion of the conversion liability from present value to fair value over the term of the note.

LIQUIDITY AND CAPITAL RESOURCES

The Company's capital requirements consist of general working capital needs as well as planned research and development expenditures involving our ongoing commercialization efforts with our technologies. The Company's capital resources consist primarily of cash generated from the issuance of debt and stock. The Company relied on the issuance of convertible debt during the nine months ended September 30, 2012 to cover its capital needs. Our plan moving forward involves continued investment in the research and development of our technologies as well as evaluation of additional early stage clean technologies for license or acquisition. We also plan to raise and invest additional capital in pilot-scale deployments of those of our technologies that demonstrate their qualification for scaling beyond the bench stage, with a goal of producing cash flow from the license or sublicense of developed technologies and through operating activities.

The Company had a working capital deficit of about $582,600 at September 30, 2012, which includes approximately $10,000 in liabilities associated with the conversion features embedded in convertible debentures issued by the Company, as well as about $169,000 in convertible debt due to third parties. The Company's working capital deficit net of these amounts would be about $403,600.

Off Balance Sheet Arrangements

None.

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