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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q. The following discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to future events or our future performance. Without limitation, the words "believe", "plans", "expects" and similar expressions are intended to identify forward-looking statements regarding our intent, belief, and current expectation. These statements are not guarantees of future performance and are subject to risks and uncertainties that cannot be predicted or quantified. Consequently, actual results could differ materially from the expected or implied by such forward-looking statements. These forward-looking statements represent our judgment as of the date of the report. We disclaim, however, any intent or obligation to update any forward-looking statements.
We are a renewable energy technology company focused on developing and commercializing energy conversion technology in the emerging field of fossil fuel alternatives. Our business strategy is to grow through acquisitions of established companies that fit our business plan. The current market trends in the renewable energy industry have caused us to focus first on the biomass to fuel segment of the renewable energy industry.
In July, 2009, we exited the developmental stage and became operational with the acquisition of Comanche Livestock Exchange, LLC ("Comanche" or "CLE") in Comanche, Texas. Comanche Livestock Exchange, LLC was one of the two acquisition candidates that were identified in late 2008 for which we had signed letters of intent for acquisition. We acquired Comanche because of its long time presence in the livestock market and its strategic location in the middle of Texas, a state with a large livestock industry. To offer a renewable energy solution in the biomass to fuel segment, Green Energy Live, Inc. must have a market presence or access to the livestock industry to reach potential end users of a biomass to fuel energy system. Comanche gives us the inroad into this market segment with its extensive customer base and its well regarded reputation.
On March 18, 2010, we completed payment of the first $450,000 installment ("First Installment") of the $950,000 acquisition Promissory Note due to Mr. Dean Cagle, the former owner of CLE, under the CLE Stock Purchase Agreement. We accomplished this by a series of cash payments to Mr. Cagle in the fourth quarter of 2009, followed by conversions of the $65,900 remaining balance by Mr. Cagle to our common stock in the first quarter of 2010. A total of 98,253,700 common shares with a total market value of $1,309,667 were issued to Mr. Cagle as of result of these conversions. Of the total market value in common stock issued, $936,840 represented and was recorded as a premium payment on the original debt owed. $65,900 was recorded to debt payment, resulting in an excess of $306,927 in stock value received by Mr. Cagle over the recorded debt balance owed. The excess stock value paid to Mr. Cagle represents the amount of the mortgage note balance outstanding as of March 31, 2010 on the CLE land and buildings that had been assumed by us as a part of the acquisition of CLE, although it remains personally guaranteed by Mr. Cagle. Under the terms of the Purchase Agreement, the Promissory Note was to be reduced by any debt assumed by us at closing. However, it was the intent of both we and Mr. Cagle for the First Installment to be settled in its entirety prior to Mr. Cagle paying off the mortgage note. With the final settlement of the First Installment on March 18, 2010, Mr. Cagle is obligated to pay off the mortgage note in full, which we expect will occur in the second quarter of 2010. Until that time, we have recorded the excess stock value issued to Mr. Cagle as a note receivable. The remaining $500,000 balance on the Promissory Note is due in two annual installments of $250,000 beginning in August 2010.
We began discussions with Peck Electric, Inc. ("Peck"), in Burlington, Vermont back in 2008 and entered into a letter of intent for the acquisition of Peck Electric, which expired in 2009 but was recently renewed in February, 2010. Assuming that our proposed acquisition of Peck is consummated, we will have the technological expertise to install at the end user, any biodigester systems that are developed or acquired. In 2009, Peck began to install solar energy systems and has added this offering to its business mix, which we feel makes this a strong fit for the next acquisition. Solar energy installations are also becoming a leading alternative to fossil fuel usage. We also intend to seek out growth in this market by acquiring Peck Solar, a division of Peck Electric, Inc. Peck Solar is a leading solar installation and design firm in Vermont. Our ability to enter into a definitive agreement to acquire Peck, and our ability to complete any such acquisition, will depend upon our ability to raise capital on favorable terms, which is not assured.
Although we currently do not possess any biodigester system at this time, we are actively seeking to acquire an existing biodigester renewable energy company to complete the pieces we need to have in place to offer a turnkey renewable energy solution. We have access to a very effective prospecting system that reviews dozens of companies on a monthly basis and we anticipate that we will have an acquisition candidate identified soon. However, any further acquisition will depend upon our ability to raise capital on favorable terms, which is not assured. We intend to finance these pending and planned acquisitions with an agreement for equity financing of up to $20,000,000 from Dutchess Capital Management, LLC. The Company has had an agreement with Dutchess since June of 2007 and the Company has determined that this agreement is to be updated and will be the funding source for the acquisitions. The Board met with Dutchess on April 28, 2010 to discuss the details. A final agreement is pending approval of the Board at the time of the filing of this Quarterly Report.
We have developed, acquired and maintained a portfolio of patent applications and an approved patent that form the proprietary base for our research and development efforts in the area of renewable energy. Assuming that our patent applications are granted, which is not assured, this technology base will provide a competitive advantage and will facilitate the successful development and commercialization of techniques and devices for use in a wide array of alternative energy approaches including bio-fuels, advanced fermentation, and a novel solar thermoelectric power generation technology. One of our three pending patents, entitled "The Direct Steam Injection Heater with Integrated Reactor and Boiler," was approved and issued on July 14, 2009. Another of the patents was initially denied and is currently under appeal for approval. In the event our appeal on this patent is denied, we believe this will have no material effect on the execution of our business plan. No final communication has been received for the two pending patents.
There are strong competitors in our field that have superior financial resources. However, based on our market research and industry analysis, we believe that we will have a competitive advantage in the biomass to fuel industry segment, if we are able to raise a substantial amount of capital to execute our business plan, which is not assured.
We have conducted basic research regarding a potential biomass to fuel energy system, which has not yet been developed or acquired. We are focused on leveraging our key assets, including our intellectual property, our engineering team, our market insight and our capital, to accelerate the advancement of our basic or planned technologies. In addition, we have made preliminary inquiries regarding possible strategic collaborations with members of academia, industry and foundations which, if consummated, would further accelerate the pace of our research efforts. We are currently headquartered in Wyoming, Michigan (near Grand Rapids, Michigan). In January 2010, the Company moved from temporary leased space into a leased office of approximately 2,450 square feet in a commercial office building. The lease is for one year and is renewable for three additional years and a new lease rate to be determined. The first year lease is $2,400 per month with the Company paying for all utilities for the leased space and the landlord pays for all external maintenance to the property.
Plan of Operation
Our initial funding was provided by the sale of shares pursuant to Regulation S from our founding through the third quarter of 2009. We began to actively look for other funding sources during the latter half of 2009 and received loans from shareholders and some convertible loans from various funding groups. During the first quarter of 2010, we received additional convertible loans and also issued stock to retire outstanding debt from various long term vendors. We are currently finalizing our equity financing agreement Dutchess Capital Management, LLC to purchase up to $20 million of our stock which we intend to used for existing and future acquisitions. Other funding sources are currently being explored.
Our plan is to focus our market penetration on the biodigester market of the green energy industry. Through our acquisitions, we hope to be able to offer turnkey solutions of alternate power for heavily concentrated livestock operations. In addition to the biodigester market, we will have a presence in the solar power as well as natural fertilizer markets if we are able to acquire Peck Electric. We are actively seeking to acquire a company that has an existing biodigester system installed and operating, but our ability to do so depends on raising a sufficient amount of capital.
We hope to utilize our bioreactor technology that targets the bioremediation market. We have applied for a patent for this technology, which has the flexibility to be applied across many industries. We plan to target companies capable of leveraging the technology and capital that conforms with our financial selection criteria. We intend to acquire an ongoing entity, develop a working prototype, and then implement our marketing plan to move our technology into commercial applications. Our ability to do so is contingent on obtaining a significant quantity of additional capital, which is not assured.
Our strategy for acquiring existing entities is to give us the revenue earned by the acquired entities and obtain sufficient capital to be eventually listed on an exchange, thereby maximizing shareholder value. We believe that such acquisitions will allow us access to lower cost funding for future growth. We are targeting companies to acquire in the range of $5 million to $25 million in annual revenue. As previously stated, we have signed a letter of intent to acquire Peck Electric, which will be audited in the 2nd quarter of 2010 with a view towards entering into a final acquisition agreement. We will continue using our prospecting system to identify other companies that are a good fit for our business plan. Again, our ability to do so is contingent on obtaining a significant quantity of additional capital, which is not assured.
Eventually we plan to create an economically sustainable, socially beneficial, environmentally responsible ethanol process that uses an integrated approach to resource management for the economic and social betterment of the world's farmers, rural communities, and citizens. However, it is extremely expensive to enter this market. We are exploring ways to produce ethanol with non food bio resources at a much smaller scale than currently being done. Our approved patent addresses one of the phases of production that will allow for smaller scale and thus lower cost operations. Because of the volatile crude oil market swings of 2008, and a lack of sufficient capital, the Company is postponing any entry into the ethanol production until the market conditions for Ethanol stabilize.
We hope to develop new technologies to help America's farmers and livestock businesses to provide "Green Energy" for our future today. Currently, there are very few competitors in this industry segment. We have searched widely for a potential acquisition target in this market, but have been unable to locate companies that have done more than a one time installation of a biomass to fuel system. We have targeted this part of the Green Energy industry to concentrate its resources in 2010 because of the apparent lack of competition.
We believe that Green Energy's technology potentially could result in low-cost facilities that use biomass waste. Green Energy may have the ability to achieve significant market penetration within this industry segment.
The recycling of diverse consumables, such as the re-use of cooking oils and that of animal fats and their waste products, is one aspect of the bio-fuels industry. Converting animal waste to fuel would not upset the 'balance' of the agricultural panoply. In contrast, growing crops for biomass fuels such as ethanol can result in unwanted problems. In 2008, the price of corn increased significantly due to ethanol production. This in turn, affected the price of food in the United States as well as in other countries. We believe that ethanol is not a sustainable business model, thus we are turning to the use of animal waste as a biomass fuel source. Converting animal waste to fuel could prevent contamination of watersheds. Traditionally, disposing animal waste represents a cost to animal farmers, ranchers and feed lot owners thus affecting their profits. Using animal waste to create energy instead could enable operators to realize profits from animal waste if enough energy can be created to send out to the "grid". At the very least, if we are successful in acquiring or developing suitable technology, this animal waste can be used to reduce operators' demand and cost for utilities, thus reducing the overhead of their operations in two ways: eliminating the cost to dispose of animal waste and reducing their need to purchase electricity from utility companies. There are very few companies offering solutions in this market segment and we have determined that this is the best entry point for a new company with limited resources.
As an alternative to fossil fuel usage, solar to electric installations have gained business share and solar systems are becoming more reliable and aesthetically pleasing. Peck Solar, a division of Peck Electric, is a full service solar contractor capable of designing, installing, and assisting customers with financial incentives for anything from a 1kw residential system to a multi-megawatt commercial or municipal system. Peck Solar has been a leader in expert solar installation in Vermont and continues to gain expertise in solar installation. They are one of the only companies in New England that designs their solar installation systems in-house and they use only solar modules made in the USA. By branching out into Solar, Peck would bring this renewable energy segment to us should this acquisition is completed. However, the letter of intent we have issued is not a binding agreement and this acquisition is contingent upon the satisfactory completion of due diligence. Also, there is no assurance the acquisition will be completed, and the anticipated closing date may be extended if certain terms and conditions are not met. If the acquisition does occur, there is a risk that the benefits anticipated through such acquisition will not be realized due to, among other things, Green Energy's possible inability to successfully integrate Peck.
Director and Employee Compensation
In the first quarter of 2010, the Board instituted a new policy that will compensate Board members for their services for the first time since inception. Effective January 1, 2010, each Board member receives a $7,500 monthly stipend for Board service. The Chair of the Board receives a monthly stipend of $1,500 for the additional services required of the Chair. Each Audit Committee member receives $2,500 in a monthly stipend. The Chair of the Audit Committee receives $1,500 in a monthly stipend for the additional services required of the Chair. In addition to these monthly stipends, the Board approved a $60,000 lump sum compensation for each new Board member that join the Board in the future, and made these lump sum compensation awards effective for existing Board members as of January 1, 2010. In addition to the one time lump sum compensation approved for Board members, there was a $20,000 lump sum compensation approved for each new and existing audit committee members effective January 1, 2010. In addition, the Board approved a $12,000 lump sum compensation for each new and existing Chairs of Board and Audit Committee. These payments were approved so the Company can attract and maintain qualified Board members. The total amount of Board compensation expense for this plan was $335,500 for the first quarter of 2010. The commitment for this compensation for the remainder of 2010, based on the current Directors, is $274,500.
Results of Operations
Three months ended March 31, 2010 and March 31, 2009 Due to the acquisition of our first operating subsidiary, Comanche, on July 24, 2009, the results of operations for the three months ended March 31, 2010 are not comparable to that of the same period in 2009. Until July 24, 2009, we had been engaged in developmental activities such as acquisitions, patent development and financing, and had not generated any revenues while at the same time incurring significant development-related expenses.
We recorded revenue from planned principal operations of $138,339 for the three months ended March 31, 2010. There were no revenues recorded for the three month period ended March 31, 2009, as this was prior to us acquiring an operational business. Reported revenues for 2010 were derived entirely from the operations of Comanche.
Operating Expenses -
Consolidated operating expenses were $721,301 for the three months ended March 31, 2010 compared to $171,883 for the same period in 2009, an increase of $549,418 or 320%. Employee compensation increased during the three months ended March 31, 2010 by approximately $82,000 due primarily as a reflection of CLE's payroll (CLE was not acquired until July 2009) and increase of the CEO's compensation to $20,000 per month beginning January 1, 2010 versus $10,000 per month during this period in 2009. During the three months ended March 31, 2010, Board compensation was $335,500, versus no compensation to Board members during the same period in 2009. Of the increase in general and administrative expenses of approximately $142,000 for the three months ended March 31, 2010 over the same period in 2009, approximately $84,000 is attributable to the operating expenses of CLE. The increase of approximately $91,000 in professional fees during the three months ended March 31, 2010 over the same period in 2009 was a reflection of increased compliance reporting costs after the acquisition of CLE and professional costs associated with significantly increased financing activities of the Company.
Other Income/Expense -
Interest expense was $161,659 for the three months ended March 31, 2010 compared to $0 for same period in 2009. This was due substantially to interest relating to the CLE acquisition note executed in the 3rd quarter of 2009, along with interest on convertible notes issued in the 4th quarter of 2009 and 1st quarter of 2010. We incurred premium costs of $936,840 in the first quarter of 2010 resulting from issuing our common stock to extinguish debt relating to our acquisition of CLE. We also incurred premium costs in the first quarter of 2010 of $489,958 by issuing our common stock to extinguish certain of our accounts payable.
Liquidity and Capital Resources
At March 31, 2010, we had a deficit in working capital of $821,814 compared to $809,097 at December 31, 2009. Our cash and restricted cash balances at March 31, 2010 were $20,979 and $186,291, respectively, compared to our cash and restricted cash balances of $31,979 and $72,874 at December 31, 2009, respectively.
The increase in working capital deficit was attributable to both developmental activities occurring during the period relating to planned business expansion and the CLE acquisition which increased our current liabilities, the current portion of Seller-financed debt of the CLE acquisition and the convertible promissory notes issued. Our primary liquidity needs are to fund our working capital deficit acquisition debt service and acquisitions. Our primary source of liquidity is currently the issuance of convertible notes which we expect to be converted to common shares prior to their maturities.
To raise funds for working capital, during the period from January 4, 2010 to April 27, 2010, we issued a series of convertible notes to Asher Enterprises, Inc. receiving a total of $175,000 in cash in the 1st quarter of 2010, followed by $75,000 in the 2nd quarter to date. To raise further funds for our debt and working capital deficit, we have reached a tentative agreement with Duchess Equity Fund LP, subject to our Board's approval, for sale of up to 20,000,000 shares of our stock over a 36 month period. The agreement is contingent upon submission of an effective registration statement with the SEC. We believe that when we have an effective registration statement, this will facilitate raising capital and facilitate further sales. However, there is no guarantee that any effective registration statement will result in raising sufficient capital to meet our needs, if any at all. In addition, we are exploring other private equity and debt financing opportunities.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "special purpose entities" (SPEs).