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ASUV > SEC Filings for ASUV > Form 10-Q on 12-Jun-2014All Recent SEC Filings

Show all filings for HARMONIC ENERGY, INC.

Form 10-Q for HARMONIC ENERGY, INC.


12-Jun-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements." These forward-looking statements generally are identified by the words "believes," "project," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to:
changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Company Overview

We are a Nevada corporation, formed May 1, 2007. We are currently developing a new business which will provide a comprehensive solution for the disposition and recycling of scrap tires through tire re-manufacturing and carbonization of scrap tire components. Tire re-manufacturing is a process that takes high quality used tires, removes the old tread and sidewall markings, and then applies new rubber to the tread and sidewall. The used casing along with the new rubber is vulcanized under high pressure and heat to produce a new tire. This is the same process used by new tire manufacturers except that they make the casing (the most costly part of the tire). Carbonization is a technology that heats tires in an oxygen free environment and turns spent tire casings into diesel fuel, carbon black, steel, and syn-gas.

On March 14, 2012, we entered into a License Purchase Agreement (the "Agreement") with Kouei International, Inc. ("Kouei International"). Under the Agreement, we have acquired the exclusive rights in North America and Europe to use the Tyrolysis™ technology owned by Kouei Industries Co., Ltd. of Japan ("Kouei Industries"). Kouei International holds these rights under license from Kouei Industries and, pursuant to the Agreement, has assigned them to us. The Tyrolysis™ technology is a comprehensive 'closed-loop' solution for the management of scrap tires, which allows for all scrap tires to be either re-manufactured into new tires or reduced, through a carbonization process, into marketable chemical products such as diesel fuel, and steel. The carbon char material will be upgraded to produce a general purpose carbon black that can be used again in the rubber, plastic and asphalt industries. Syn-gas is used for process heat within the system.

Under the Agreement, we agreed to pay Kouei International a total purchase price of $525,000 as follows:

º $175,000 - due within ninety (90) days of closing (which has been paid)
º $175,000 - due on or before June 30, 2013
º $175,000 - due on or before September 30, 2013

On June 18, 2013, we entered into a settlement agreement under which our obligation to make the second and third payments set forth above was forgiven.

The Agreement also calls for Kouei International to be paid ongoing royalties for the next five (5) years as follows:

º 3% of gross sales
º $2.50 per remanufactured passenger tire
º $3.50 per remanufactured light truck and truck tire

The Agreement provides us with full access to Kouei International's properties, books, records, information, technical drawings, contacts and equipment supplied by Kouei Industries. In addition, Kouei International will be contracted for a two year period to help with the transaction and successful implementation of the technology transfer. During this term, Kouei International may be required to provide its engineering expertise and/or participate in industry technology presentations.

Management is currently evaluating facilities locations in Europe and North America. We plan for our facilities to receive scrap tires and produce both re-manufactured tires and commodity chemicals produced through the Tyrolysis™ carbonization technology. We hope to have 6 to 10 plants operational in Europe and North America within the next 5 years.

Our planned facilities will need to be located near suitable sources of scrap tires and other scrap rubber materials. In preparation for a potential recycling plant to be located in Michigan, we entered into a Tire Feedstock Agreement (the "Agreement") with Enertech R.D., LLC ("Enertech") on April 11, 2012. Under the Agreement, we have agreed to purchase all of Enertech's output of scrap tires and other low-value rubber-based materials (referred to as "Feedstock") for a term of ten (10) years. We intend to use the Feedstock to supply a planned tire recycling facility. Enertech's estimated daily output of Feedstock is approximately 200 tons per day, though actual output will fluctuate in response to Enertech's flow of business operations. The maximum daily output that we are required to accept under the Agreement is 300 tons. If Enertech's output diminishes to less than 100 tons on each of five successive days, we may rescind the Agreement on 20 days written notice.

The Agreement requires us to pay Enertech a fee of $30 per ton for chipped, two-inch-minus scrap tires which are 90% to 95% steel free. The price per ton will be adjusted annually in accordance with future negotiations between the parties. The Feedstock will be delivered to us at a distance of up to 2 miles from Enertech's facility in Michigan. We will be required to pay for delivery costs for distances beyond two miles.

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The Agreement is conditional upon:

1. Our building and operating a tire recycling facility, located within 2 miles of Enertech's facility in Michigan, that is capable of processing Enertech's total Feedstock output, and

2. Our registering with the Michigan Environmental Protection Agency and complying with all permit and license requirements for the tire recycling facility which will accept Enertech's output of Feedstock.

On February 19, 2013, we entered into a Purchase Order (the "Agreement") with Carbon Black Sales ("CBS"). Under the Agreement, we have agreed to sell to CBS, and CBS has agreed to purchase from us, a minimum of 30,000 tons per year of refined carbon black made from tires during the term of the agreement. The Agreement is conditioned upon our having a tire recycling facility in commercial operation within the next three (3) years. The term of the Agreement is ten years from the date of our initial delivery of product to CBS. The carbon black to be supplied by us under the agreement must meet certain quality standards. The price per-ton for all carbon black sold to CBS under the Agreement will be 60% below the prices established by the Sid Richardson Carbon Ltd. price list for N660 carbon black. The site and specific facility from which the carbon black will be supplied to CBS will be confirmed in the future and prior to our first delivery of product. The Agreement calls for us to supply carbon black from the designated facility exclusively to CBS. CBS has agreed to purchase its carbon black exclusively from our designated facility and may not purchase from another supplier except upon our written consent, which will not be unreasonably withheld. CBS may terminate the Agreement if, for any period of forty-five (45) days after our initial delivery of product, we are unable to produce any additional product. We may terminate the Agreement if CBS is unable to take delivery of product for a period of ten (10) consecutive days.

Management estimates that approximately $50 million in new equity will be required in order to procure the necessary equipment, facilities, and supplies for our planned business and to commence our planned tire recycling operations. We currently do not have any firm arrangements for equity or debt financing and we may not be able to obtain financing when required, in the amount necessary to commence our planned operations, or on terms which are feasible in the opinion of management.

Results of operations for the three and nine months ended April 30, 2014 and 2013, and for the period from May 1, 2007 (date of inception) through April 30, 2014.

We have not earned significant revenues since the inception of our business and we earned no revenues during the three and nine months ended April 30, 2014 and 2013. We are presently in the development stage of our business and we can provide no assurance that we will produce significant revenues or, if revenues are earned, that we will be profitable.

We have incurred net losses in the amount of $1,968,398 from our inception on May 1, 2007 through the period ending April 30, 2014. During the three months ended April 30, 2014, we incurred net expenses and a net loss of $85,019. Our expenses during the three months ended April 30, 2014 consisted of professional fees of $2,300, consulting fees of $81,369, general and administrative expenses of $371, interest expense of $2,093, and amortization of debt discount in the amount of $12,481. We also experienced other income in the form of $13,595 reflecting a change in the value of a derivative liability. By comparison, during the three months ended April 30, 2013, we incurred expenses and a net loss of $20,302. Our expenses during the three months ended April 30, 2013 consisted of professional fees in the amount of $10,328, general and administrative expenses of $9,224, and interest expense of $750.

During the nine months ended April 30, 2014, we incurred net expenses and a net loss of $446,349. Our expenses during the nine months ended April 30, 2014 consisted of professional fees of $23,406, consulting fees of $397,024, general and administrative expenses of $9,517, interest expense of $4,019, interest expense to a related party of $2,000, financing costs of $2,083, and amortization of debt discount in the amount of $33,473. We also experienced other income in the form of $25,173 reflecting a change in the value of a derivative liability. By comparison, during the nine months ended April 30, 2013, we incurred expenses and a net loss of $91,296. Our expenses during the nine months ended April 30, 2013 consisted of professional fees in the amount of $28,933, consulting fees of $43,000, general and administrative expenses of $18,363 and interest expense of $1,000.

Our losses are attributable to our operating expenses combined with a lack of significant revenues during our current stage of development. Prior to the generation of revenues, we expect that our expenses will continue to increase significantly as we progress with the development of our new business.

Liquidity and Capital Resources

As of April 30, 2014, we had current assets of $2,644, consisting of cash in the amount of $2,160 and prepaid expenses in the amount of $484. As of April 30, 2014, we had current liabilities of $301,583, consisting of accrued expenses of $168,945, accrued expenses to a related party of $338, accrued interest of $8,102, a note payable of $50,000, a convertible note payable, net of discount, in the amount of $58,306, and a derivative liability of $15,892. Thus, we had a working capital deficit of $298,939 as of January 31, 2014.

On January 9, 2013, we received financing in the amount of $50,000 under a Note issued to Legacy Global Markets. The Note bears interest at a rate of eight percent (8%) per year, with all principal and interest coming due on January 9, 2014. On January 9, 2014, the Note was acquired by Seahorse Investments, Ltd. and the maturity date was extended to January 9, 2015. All other loan terms remained the same.

On May 22, 2013, we issued a convertible note payable in the amount of $62,440 to Seahorse Investments, Ltd. Initially, we received $25,000 in funding under the note. The note bears interest at 7% per annum and was due on May 22, 2014. The due date of the note has been extended for one year on the same terms. The note is convertible into shares of our common stock at a price equal to 90% of the current market price of the shares on the date of conversion. The balance of the note was $25,000 as of July 31, 2013. Subsequent to July 31, 2013, we received the balance of $37,440.

We have not established profitable operations and will be dependent upon obtaining financing to pursue a long-term business plan. As discussed above, we will also require substantial new equity financing in the approximate amount of $50 million to successfully pursue the full scope of our planned tire recycling operations. We currently do not have any arrangements for financing and we may not be able to obtain financing when required. For these reasons our auditors stated in their report that they have substantial doubt we will be able to continue as a going concern.

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Off Balance Sheet Arrangements

As of April 30, 2014, there were no off balance sheet arrangements.

Going Concern

We have negative working capital, have incurred losses since inception, and not yet established a source of revenues. These factors create substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustment that might be necessary if we are unable to continue as a going concern.

Our ability to continue as a going concern is dependent on generating cash from the sale of our common stock and/or obtaining debt financing and attaining future profitable operations. Management's plans include selling our equity securities and obtaining debt financing to fund our capital requirement and ongoing operations; however, there can be no assurance we will be successful in these efforts.

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