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Echo Automotive, Inc. (ECAU) SEC Filing 10-Q Quarterly report for the period ending Sunday, March 31, 2013

Echo Automotive, Inc.

CIK: 1453420 Ticker: ECAU
Document and Entity Information
3 Months Ended
Mar. 31, 2013
May 10, 2013
Document And Entity Information    
Entity Registrant Name Echo Automotive, Inc.  
Entity Central Index Key 0001453420  
Document Type 10-Q  
Document Period End Date Mar. 31, 2013  
Current Fiscal Year End Date --12-31  
Entity Filer Category Smaller Reporting Company  
Amendment Flag false  
Entity Current Reporting Status Yes  
Entity Voluntary Filers No  
Entity Well Known Seasoned Issuer No  
Entity Common Stock, Shares Outstanding   87,850,000
Document Fiscal Period Focus Q1  
Document Fiscal Year Focus 2013  


UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

 

OR

 

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

 

Commission File Number: 000-53681

 

ECHO AUTOMOTIVE, INC.

 

(A DEVELOPMENT STAGE COMPANY)

(Exact name of registrant as specified in its charter)

 

Nevada 98-0599680
(State or Other Jurisdiction of
Incorporation)
(I.R.S. Employer
Identification No.)

 

16000 N. 80th Street, Scottsdale, AZ 85260

(Address of Principal Executive Offices)

 

(855) 324-6288

(Registrant’s telephone number)

 

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:  Yes  S    No  £

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  S    No  £

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non–accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b–2 of the Exchange Act. (Check one):

 

Large accelerated filer  £ Accelerated filer  £ Non–Accelerated filer  £ Smaller Reporting Company  S

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act). Yes  £    No  S

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding at May 10, 2013
Common stock, par value $.001   75,000,000

 



 
  

 

Echo Automotive, Inc.

 

TABLE OF CONTENTS

 

 

 

      Page Numbers 
PART I - FINANCIAL INFORMATION    
       
Item 1. Financial Statements    
  Condensed Consolidated Balance Sheets   2
  Condensed Consolidated Statements of Operations   3
  Condensed Consolidated Statements of Changes in Stockholders’ Deficit   4
  Condensed Consolidated Statements of Cash Flows   5
  Notes to the Condensed Consolidated Financial Statements   6
Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations   10
Item 3. Quantitative and Qualitative Disclosures About Market Risk   14
Item 4. Controls and Procedures   14
       
PART II - OTHER INFORMATION    
       
Item 1. Legal Proceedings   16
Item1A. Risk Factors   16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   16
Item 3. Defaults Upon Senior Securities   16
Item 4. Mine Safety Disclosures   16
Item 5. Other Information   16
Item 6. Exhibits   17
       
SIGNATURES   19

 

1
  

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ECHO AUTOMOTIVE, INC.

(A Development Stage Company)

Condensed Consolidated Balance Sheets

 

   March 31,   December 31, 
   2013   2012 
   (unaudited)     
Assets        
Current assets:          
Cash  $22,513   $1,879 
Other current assets   69,994    59,027 
Total current assets   92,507    60,906 
           
Property and equipment, net   215,839    154,497 
Intangibles, net   46,250    47,500 
Total assets  $354,596   $262,903 
           
Liabilities and Stockholders’ Deficit          
           
Current liabilities:          
Accounts payable  $242,531   $210,760 
Accounts payable - related party   27,073     
Bank overdraft       37,616 
Accrued liabilities   200,484    189,450 
Related party advances   123,000    100,000 
Current portion of notes payable, net of debt discount of $26,307 and $0 for March 31, 2013 and December 31, 2012, respectively   433,693    150,000 
Total current liabilities   1,026,781    687,826 
           
Long-term portion of notes payable, net of current portion and debt discount of $0 and $9,214 for March 31, 2013 and December 31, 2012, respectively   250,000    581,786 
Total liabilities   1,276,781    1,269,612 
           
Contingencies and commitments          
           
Stockholders’ deficit:          
Common stock, par value $.001, 650,000,000 shares authorized; 75,000,000 issued and outstanding   75,000    75,000 
Additional paid in capital   2,582,373    2,060,417 
Stock subscription       (434,507)
Accumulated deficit   (3,579,558)   (2,707,619)
Total stockholders’ deficit   (922,185)   (1,006,709)
           
Total liabilities and stockholders’ deficit  $354,596   $262,903 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2
  

 

ECHO AUTOMOTIVE, INC.

(A Development Stage Company)

Condensed Consolidated Statements of Operations

(unaudited)

 

   Three Months Ended   Period from Inception 
   March 31,   (November 25, 2009) 
   2013   2012   to March 31, 2013 
         
             
Revenue  $600   $   $130,956 
Operating expenses:               
General and administrative   842,049    116,448    3,505,241 
Selling and marketing   4,779    1,020    86,472 
Total operating expenses   846,828    117,468    3,591,713 
Operating loss   (846,228)   (117,468)   (3,460,757)
                
Other expense               
Interest expense   25,711    8,545    118,801 
Total other expense   25,711    8,545    118,801 
                
Loss before taxes   (871,939)   (126,013)   (3,579,558)
                
Income tax provision            
                
Net loss  $(871,939)  $(126,013)  $(3,579,558)
                
Net loss per share               
Basic and diluted  $(0.01)  $      
                
Weighted average common shares outstanding               
Basic and diluted   75,000,000    26,016,342      

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3
  

 

ECHO AUTOMOTIVE, INC.

(A Development Stage Company)

Statements of Changes in Stockholders’ Deficit

(unaudited)

 

   Common Stock    Additional Paid   Stock   Accumulated       
   Shares   Amount   In Capital   Subscriptions   Deficit   Total 
Balance at November 25, 2009      $   $   $   $   $ 
                               
Member contributions   800,288    800    2,524            3,324 
                               
Net loss                   (5,555)   (5,555)
                               
Balance at December 31, 2009   800,288    800    2,524        (5,555)   (2,231)
                               
Member contributions   10,810,148    10,810    34,090            44,900 
                               
Member withdrawls   (722,282)   (722)   (2,278)           (3,000)
                               
Net loss                   (38,600)   (38,600)
                               
Balance at December 31, 2010   10,888,154    10,888    34,336        (44,155)   1,069.00 
                               
Member contributions   15,128,188    15,128    47,707            62,835 
                               
Net loss                   (300,542)   (300,542)
                               
Balance at December 31, 2011   26,016,342    26,016    82,043        (344,697)   (236,638)
                               
Member contributions   26,483,658    26,484    83,516            110,000 
                               
Common stock of Canterbury   22,500,000    22,500    1,777,532            1,800,032 
                               
Stock subscriptions assumed in the merger               (434,507)       (434,507)
                               
Extinguishment of related party payable           91,761            91,761 
                               
Issuance of warrants           25,565            25,565 
                               
Net loss                   (2,362,922)   (2,362,922)
                               
Balance at December 31, 2012   75,000,000    75,000    2,060,417    (434,507)   (2,707,619)   (1,006,709)
                               
Financing agreement           500,000            500,000 
                               
Issuance of warrants           21,956            21,956 
                               
Receipt of funds on stock subscription               434,507        434,507 
                               
Net loss                   (871,939)   (871,939)
                               
Balance at March 31, 2013   75,000,000   $75,000   $2,582,373   $   $(3,579,558)  $(922,185)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4
  

 

ECHO AUTOMOTIVE, INC.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

           Period from Inception 
   Three Months Ended March 31,   (November 25, 2009) 
   2013   2012   to March 31, 2013 
         
Cash flows from operating activities:               
Net loss  $(871,939)  $(126,013)  $(3,579,558)
Adjustments to reconcile net loss to net cash used in operating activities:               
Depreciation and amortization   19,028    2,566    62,769 
Accretion of debt discount   4,863        21,214 
Changes in operating assets and liabilities:               
Other current assets   (10,967)   1,500    (69,994)
Accounts payable   31,771        232,017 
Accounts payable - related party   27,073        27,073 
Bank overdraft   (37,616)        
Accrued liabilities   11,034    8,545    200,484 
Related party advance   23,000        123,000 
Net cash used in operating activities   (803,753)   (113,402)   (2,982,995)
                
Cash flows from investing activities:               
Purchases of intangibles           (50,000)
Purchases of property and equipment   (79,120)   (6,945)   (274,858)
Net cash used in investing activities   (79,120)   (6,945)   (324,858)
                
Cash flows from financing activities               
Proceeds from stock subscriptions   434,507        1,902,307 
Proceeds from notes payable       100,000    883,000 
Principal repayments on notes payable   (31,000)       (63,000)
Proceeds from financing agreement   500,000        500,000 
Advances from Company officers           159,250 
Repayments to Company officers on advances           (159,250)
Capital withdrawals           (3,000)
Capital contributions           111,059 
Net cash provided by financing activities   903,507    100,000    3,330,366 
                
Increase (decrease) in cash   20,634    (20,347)   22,513 
Cash, beginning of period   1,879    101,359     
Cash, end of period  $22,513   $81,012   $22,513 
                
Supplemental cash flow information               
                
Cash Paid for interest  $473    $   $473 
Extinguishment of related party payable  $   $   $91,761 
Debt extinguished with issuance of company stock  $   $   $110,000 
Fair value of warrants granted and recorded as debt discount  $21,956   $   $47,521 
Extinguishment of related party payable with stock subscription  $   $   $97,693 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5
  

 

ECHO AUTOMOTIVE, INC. AND SUBSIDIARY

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1 – Description of Business

 

Canterbury Resources, Inc. (“Canterbury”) was organized under the laws of the State of Nevada on September 2, 2008. Canterbury’s initial business plan was to acquire and explore mineral properties.

 

Exchange Agreement

 

On September 21, 2012 Echo Automotive LLC (“Echo”) and DBPJ Stock Holding, LLC, sole member of Echo (the “Echo Member”) entered into an exchange agreement (the “Exchange Agreement”) with Canterbury. The Exchange Agreement resulted in the Echo Member receiving a total of 52,500,000 shares of common stock of Canterbury in exchange for 100% of the issued and outstanding units of Echo. In accordance with the terms of the Exchange Agreement, the shares received by the Echo Member represented 70% of the issued and outstanding common stock of Canterbury at the time of the Exchange Agreement. As part of the exchange, Canterbury changed its name to Echo Automotive, Inc.

 

Operations

 

Echo Automotive, Inc. (the Company) is developing a set of technologies that it believes will reduce overall fuel expenses in commercial fleet vehicles by augmenting existing powertrains with highly efficient electrical energy delivered by electric motors powered by Echo’s modular plug-in battery modules. Echo believes this technology will achieve an immediate return on investment for each individual vehicle in a fleet.

 

The Company’s operations have previously been funded by advances and subsequent equity conversions by the majority stockholders. Future funding is expected to be provided in part by equity investments from other accredited investors. There can be no assurance that any of these strategies will be achieved on terms attractive to us.

 

Note 2 – Basis of Presentation

 

As a result of the Exchange Agreement, Canterbury merged with Echo, with Echo being the accounting acquirer thus resulting in a reverse merger. Therefore the accompanying financial statements are on a consolidated basis subsequent to September 21, 2012, but only reflect the operations of Echo prior to September 21, 2012.

 

In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of financial position, results of operations, and cash flows. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2012. The accounting policies are described in the “Notes to the Consolidated Financial Statements” in the 2012 Annual Report on Form 10-K and updated, as necessary, in this Form 10-Q. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

 

The Company is a development stage company and has incurred significant losses during the three months ended March 31, 2013 and 2012 and for the period from inception (November 25, 2009) through March 31, 2013 and has experienced negative cash flows from operations since inception. These circumstances result in substantial doubt as to the ability of the Company to continue as a going concern as noted in Note 8.

 

Note 3 – Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Echo Automotive, LLC, beginning with the date of its acquisition. All significant intercompany accounts and transactions have been eliminated.

 

6
  

 

Fair Value

 

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC (“ASC 820-10”), fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. When determining fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.

 

The three levels of inputs that may be used to measure fair value are as follows:

 

Level 1. Quoted prices in active markets for identical assets or liabilities.

 

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), inputs that are other than quoted prices that are observable for the asset or liability or market corroborated inputs.

 

Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities, which may include internal data or valuation data received from the security issuer.

 

The Company’s financial instruments include cash, accounts payable, accrued liabilities, related party advances, and notes payable. The carrying value of these instruments approximates fair value due to the short-term nature of such instruments. The Company used inputs that would qualify as Level 2 inputs to make its assessment of the approximate fair value of the notes payable.

 

Note 4: Related Party Transactions

 

A shareholder of the Company made an advance of $23,000 during the three months ended March 31, 2013 for working capital purposes.  The advance is due on demand, non-interest bearing, and classified within related party advances in the accompanying condensed consolidated balance sheet as of March 31, 2013. 

 

The Company paid consulting fees to certain shareholders and directors of the Company that amounted to $70,000, $59,913 and $732,056 for the three months ended March 31, 2013 and 2012 and for the period from inception (November 25, 2009) through March 31, 2013, respectively. Accounts payable to these shareholders was $7,802 and $0 as of March 31, 2013 and December 31, 2012, respectively.

 

The Company incurred interest expense with related parties of $4,458, $1,688 and $28,694 for the three months ended March 31, 2013 and 2012 and for the period from inception (November 25, 2009) through March 31, 2013, respectively. The Company has accrued interest on related party notes payable of $28,694 and $24,236 recorded within accrued liabilities in the accompanying condensed consolidated balance sheets as of March 31, 2013 and December 31, 2012, respectively.

 

The shareholder associated with the $2,000,000 financing agreement discussed within Note 5 overpaid the Company $16,559 when making the final payment on the stock subscription in January 2013. Additionally, this shareholder paid for $10,514 of legal expenses on behalf of the Company. The total of these two transactions, $27,073, is included within accounts payable – related party in the accompanying balance sheet as of March 31, 2013.

 

Note 5: Equity

 

$2,000,000 Financing Agreement

 

In May 2012, the Company entered into a financing agreement to raise up to $2,000,000 through the sale of shares of its common stock at $0.50 per share and warrants to purchase one share of common stock of the Company with an exercise price of $0.75 per share, no vesting requirement and a term of 18 months. As of December 31, 2012, the Company had received all but $434,507 of the $2,000,000. In January 2013, the Company received the outstanding $434,507 for the right to 869,014 shares of the Company’s common stock.

 

As of March 31, 2013 the Company had not issued any shares of its common stock related to the $2,000,000 financing agreement. See Note 6 for discussion on the issuance of the related warrants.

 

7
  

 

$500,000 Financing Agreement

 

During February and March 2013, the Company received gross proceeds of $500,000 from a private placement of 1,000,000 shares of the Company’s common stock at $0.50 per share and warrants to purchase 1,000,000 shares of the Company’s common stock with an exercise price equal to the lower (i) of $0.75 per share or (ii) the preceding 10 day volume-weighted volume average price per share of Company stock prior to the exercise date, no vesting requirement and a term of 18 months pursuant to a financing agreement with Newmarket Traders LTD.

 

As of March 31, 2013 the Company had not issued any shares of its common stock related to the $500,000 financing agreement. See Note 6 for discussion on the issuance of the related warrants.

 

Note 6: Warrants

 

The following summarizes the warrant activity for the three months ended March 31, 2013:

 

   Number of Units   Weighted- Average Exercise Price   Weighted- Average Remaining Contractual Term (in years)   Intrinsic value 
                     
Outstanding at December 31, 2012   342,000   $0.01           
Grants   5,022,500    0.75           
Outstanding at March 31, 2013   5,364,500   $0.70    1.6   $215,055 
                     
Exerciseable at March 31, 2013   5,364,500   $0.70    1.6   $215,055 

 

The weighted-average grant date fair value for the three months ended March 31, 2013 equaled $1.53 per share

 

On January 30, 2013, the Company issued 4,000,000 warrants to Hartford Equity, Inc. in conjunction with the $2,000,000 Financing Agreement discussed within Note 5. The grant-date fair value of these warrants was $914,388, which was calculated based on a pro-rata allocation of the grant-date fair value of the stock and warrants related to the $2,000,000 Financing Agreement to the proceeds received of $2,000,000. The grant-date fair value of the warrants used in the pro-rata allocation was calculated using the Black-Scholes pricing model with the assumptions below.

 

During February and March 2013, the Company issued a total of 1,000,000 warrants to Newmarket Traders LTD as discussed within Note 5. The grant-date fair value of these warrants was $224,298; which was calculated based on a pro-rata allocation of the grant-date fair value of the stock and warrants related to the $500,000 Financing Agreement to the proceeds received of $500,000. The grant-date fair value of the warrants used in the pro-rata allocation was calculated using the Black-Scholes pricing model with the assumptions below.

 

During the three months ended March 31, 2013 the Company issued 3,000 and 19,500 warrants to a related party lender and third party lender, respectively. The issuances were related to outstanding notes payable agreements with warrant features stating that for every $10 outstanding at the end of each calendar month the Company will issue the lender one warrant to purchase one share of the Company’s common stock at no more than $0.01 per share with no vesting requirement and a term of five years. The grant-date fair value of these warrants was $21,956, which was recorded as a debt discount. During the three months ended March 31, 2013 $2,597 of this debt discount was accreted to interest expense. The grant-date fair value of the warrants, and thus the debt discount, was valued using the Black-Scholes pricing model with the assumptions below.

 

Black-Scholes Pricing Model Assumptions
Exercise price $0.01 - $0.75
Stock price $0.60 - $1.94
Volatility 153.81% - 196%
Risk-free interest rate 0.20% - 0.88%
Expected Term 1.5 - 5 years

 

8
  

 

Note 7: Basic and Diluted Net Loss Per Share

 

Net loss per share was computed by dividing the net loss by the weighted average number of common shares outstanding during the period. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. For the three months ended March 31, 2013 and 2012, the assumed exercise of exercisable warrants and conversion of convertible notes payable are anti-dilutive due to the Company’s net loss and are excluded from the determination of net loss per common share – diluted. Accordingly, net loss per common share – diluted equals net loss per common share – basic in all periods presented.

 

   Three Months Ended March 31, 
   2013   2012 
         
Convertible notes payable   1,654,524    804,524 
Warrants   5,364,500    0 

 

Note 8 – Going Concern

 

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. For the three months ended March 31, 2013, the Company had a net loss of $871,939 as compared to a net loss of $126,013 for the three months ended March 31, 2012. Additionally, the Company has incurred a net loss of $3,579,558 for the period from inception (November 25, 2009) to March 31, 2013. As of March 31, 2013, the Company had not emerged from the development stage. These circumstances result in substantial doubt as to the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to begin operations and achieve a level of profitability. The Company intends to finance operations by issuing additional common stock, warrants and through bridge financing. The failure to achieve the necessary levels of profitability and obtain the additional funding would be detrimental to the Company. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.


 

Note 9 – Commitments and Contingencies

 

Litigation

 

The Company may from time to time be involved in legal proceedings arising from the normal course of business. There are no pending or threatened legal proceedings as of March 31, 2013.

 

Note Payable Default and Dispute

 

The Company is in dispute with a certain lender regarding the conversion terms of the outstanding notes payable agreement that is currently in default. The Company is attempting to utilize on-going dialogue with the lender to resolve the dispute and cure the default.

 

Note 10: Subsequent Events

 

License Agreement

 

On April 5, 2013 the Company entered into an amendment with CleanFutures (the “Amendment”) to the License Agreement dated February 1, 2012 (the “License Agreement”). The Amendment resulted from the mutual agreement with CleanFutures that the original intent of the License Agreement was not being met or adhered to. In accordance with the Amendment, the Company will issue 1,850,000 shares of the Company’s common stock to CleanFutures; in turn, the Company will receive certain rights, including perpetual use of the CleanFutures Patent and future patent(s), a non-compete agreement in which CleanFutures will not be permitted to do business with any of the Company’s competitors, and CleanFutures has agreed to certain covenants that will assure that CleanFutures will for perpetuity not interfere with the Company’s business. This Amendment superseded the existing License Agreement. The Company has not yet issued the shares of common stock related to this agreement.

 

Asset Acquisition

 

Bright Automotive, Inc. (“Bright”) was established in 2008 as an offspring of the non-profit Rocky Mountain Institute to commercialize and develop the IDEA plug-in hybrid electric fleet vehicle. Bright ceased operations in March 2012 after failing to obtain a loan through the Advanced Technology Vehicles Manufacturing Loan Program. The Company successfully hired key members of the Bright team and acquired certain facilities and intellectual property in a bid to accelerate EchoDrive™’s commercialization in spring of 2012. In the first quarter of 2013, Bright’s assets, including all of its intellectual properties and patents, were auctioned off and were purchased by Advanced Technical Asset Holdings, LLC (“ATAH”), a company wholly owned by a shareholder of the Company, for a total purchase price of $500,000, comprised of $250,000 of cash and $250,000 of promissory notes. On April 5, 2013 the Company acquired ATAH for 6,000,000 shares of the Company’s common stock, a fair market value of $3,120,000, as part of an exchange agreement with ATAH in which the Company received full ownership of the assets described above, $100,000 cash, and a promissory note for $400,000. The Company is in the process of evaluating the purchase price allocation. As part of the asset acquisition between Bright and ATAH, Bright is due 277,778 shares of the Company’s common stock. The Company has not yet issued the shares of common stock related to this transaction.

 

9
  

 

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

 

Forward-Looking Statements

 

This Report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report. Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning, among others, capital expenditures, earnings, litigation, regulatory matters, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we operate, results of litigation, and other circumstances affecting anticipated revenues and costs, and the risk factors set forth in our Annual Report on Form 10-K filed on April 16, 2013.

 

As used in this Form 10-Q, “we,” “us,” and “our” refer to Echo Automotive, Inc., which is also sometimes referred to as the “Company.”

 

You Should Not Place Undue Reliance on These Forward-Looking Statements

 

The forward-looking statements made in this report on Form 10-Q relate only to events or information as of the date on which the statements are made in this report on Form 10-Q. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents that we reference in this report, including documents referenced by incorporation, completely and with the understanding that our actual future results may be materially different from what we expect or hope.

 

Overview

 

We were organized under the laws of the State of Nevada on September 2, 2008 under the name Canterbury Resources, Inc. On August 27, 2012 we effected a stock dividend of four shares of common stock of the Company for each share of common stock issued and outstanding. Effective September 24, 2012, we amended our Articles of Incorporation to change our name from “Canterbury Resources, Inc.” to “Echo Automotive, Inc.”

 

On October 11, 2012 we closed a voluntary exchange transaction (the “Exchange” or “Exchange Transaction”) with Echo Automotive, LLC, an Arizona limited liability company (“Echo LLC”) and DBPJ Stock Holding, LLC, an Arizona limited liability company and sole member of Echo (the “Echo LLC Member”) pursuant to an Exchange Agreement dated September 21, 2012 (the “Exchange Agreement”) by and among the Company, Echo LLC, and the Echo LLC Member. As a result of the Exchange, the Echo LLC Member acquired 70% of our issued and outstanding common stock, Echo LLC became our sole wholly-owned subsidiary, and we acquired the business and operations of Echo LLC.

 

Through Echo LLC, we are now a development stage company with several technologies and methods that allow commercial fleet vehicles to significantly reduce their overall fuel expenses. Our business plan is based on providing the marketplace with a business proposition for reducing the use of fossil fuels by augmenting power trains within existing commercial fleet vehicles with highly efficient electrical assist delivered through electric motors powered by our modular plug-in batteries to achieve rapid real-world operating results including a rapid return on the investment for such amended vehicles.

 

As of the date of this Quarterly Report on Form 10-Q, we have generated minimal revenue and we do not generate adequate cash flows to support our existing operations. Moreover, the historical and existing capital structure is not adequate to fund our planned growth. Our operations to date have been funded by advances, private “family and friends” capital contributions, equity financings, and subsequent equity conversions by the majority stockholders. Our working and growth capital is dependent on more significant future funding expected to be provided in part by equity investments from other accredited investors including institutional investors. Future cash flows are subject to a number of variables, including the level of production, economic conditions and maintaining cost controls. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures.

 

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For the three months ended March 31, 2013 we had a net loss of $871,939 as compared to a net loss of $126,013 for the three months ended March 31, 2012.

 

Key factors affecting our results of operations include revenues, cost of revenues, operating expenses and income and taxation. 

 

Results of Operations

 

Comparison of the Three Months Ended March 31, 2013 to the Three Months Ended March 31, 2012

 

Revenues

 

We are in the research and development phase and currently have no customers. We had $600 and $0 of revenue during the three months ended March 31, 2013 and 2012.

 

General and Administrative Expenses

 

   General and Administrative Expenses 
   2013   2012   Change   Percent 
                     
Three Months Ended March 31,  $842,049   $116,448   $725,601    623%

 

Our general and administrative expenses increased in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 due increases in payroll expenses of approximately $439,000, consulting expenses of approximately $47,000, legal expenses of approximately $61,000, rent expense of approximately $40,000 and other miscellaneous expenses of approximately $139,000.

 

Selling and Marketing Expenses

 

   Selling and Marketing Expenses 
   2013   2012   Change   Percent 
                     
Three Months Ended March 31,  $4,779   $1,020   $3,759    369%

 

Selling and marketing expenses increased in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 due to significant sales, marketing and public relations efforts including, but not limited to, a major industry tradeshow, news releases providing business updates to the marketplace, marketing collateral for customer meetings, and sales calls which required the shipping of the Echo demonstration vehicle.

 

Operating Loss

 

   Operating Loss 
   2013   2012   Change   Percent 
                     
Three Months Ended March 31,  $(846,228)  $(117,468)  $(728,760)   620%

 

The increase in our operating loss for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 is due to the increase in general and administrative expenses and selling and marketing expenses, each of which is described above.

 

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Total Other Expense

 

   Total Other Expense 
   2013   2012   Change   Percent 
                     
Three Months Ended March 31,  $25,711   $8,545   $17,166    201%

 

In the three months ended March 31, 2013, the change in other expense is completely interest expense related.

 

Net Loss

 

   Net Loss 
   2013   2012   Change   Percent 
                     
Three Months Ended March 31,  $(871,939)  $(126,013)  $(745,926)   592%

 

Changes in net loss are attributable to our changes in operating loss and other expense, each of which we have described above.

 

From Inception (November 25, 2009) to March 31, 2013

 

We have generated $130,956 of revenue since inception (November 25, 2009). We are in the research and development phase and currently have no customers. Revenue from inception to March 31, 2013 is attributable to the sales of carbon credits and consulting services. We have incurred $3,591,713 of operating expenses from inception through March 31, 2013. These expenses are comprised of $3,505,241 of general and administrative expenses and $86,472 of selling and marketing expenses. The general and administrative expenses consist of payroll, consulting, legal, rent, and miscellaneous expenses. We also incurred $118,801 of interest expense. Our net loss from inception through March 31, 2013 is $3,579,558. 

 

Liquidity and Capital Resources

 

Net cash used in operating activities was $803,753 and $113,402 for the three months ended March 31, 2013 and 2012, respectively. The increase is mainly attributable to increases in net loss of approximately $746,000 and settlement of the bank overdraft of approximately $38,000, partially offset by non-cash depreciation, amortization, and accretion of debt discount of approximately $22,000 and increase to accounts payable and related party advances of approximately $82,000.

 

As of March 31, 2013, we had cash on hand of $22,513 and negative working capital of $934,274. We believe that our cash on hand and working capital will not be sufficient to meet our anticipated cash requirements for the next 12 months. To date, our working capital has been a combination of private investments, private loans, stockholder capital contributions, and advances through promissory notes.

 

Cash used in investing activities was $79,120 and $6,945 for the three months ended March 31, 2013 and 2012, respectively, consisting of the purchase of property and equipment.

 

Cash provided by financing activities was $903,507 and $100,000 for the three months ended March 31, 2013 and 2012, respectively. During the three months ended March 31, 2013, we received cash from a stock subscription in the amount of $434,507, received $500,000 from a financing agreement with Newmarket Traders LTD, and made repayments on debt of $31,000. During the year ended December 31, 2012, we secured notes payable in the amount of $100,000.

 

We had negative working capital of $934,274 as of March 31, 2013 compared to $626,920 as of December 31, 2012. Our cash position increase to $22,513 at March 31, 2013 compared to $1,879 at December 31, 2012, for the reasons described above.

 

As of March 31, 2013, we have outstanding notes payable totaling $710,000, of which $460,000, excluding the debt discount, is classified as short-term. Interest expense incurred on all debt, excluding the expense related to the accretion of the debt discount, was $20,848 and $8,545 for the three months ended March 31, 2013 and 2012, respectively.

 

In May 2012, we entered into a financing agreement to raise up to $2,000,000 through the sale of shares of our common stock at $0.50 per share and warrants to purchase one share of our common stock with an exercise price of $0.75 per share and a term of 18 months. As of March 31, 2013 we received the entire $2,000,000 under this private placement and issued the related 4,000,000 warrants; but had not yet issued the related 4,000,000 shares.

 

12
  

 

In February and March 2013, we entered into a financing agreement to raise $500,000 through the sale of shares of our common stock at $0.50 per share and warrants to purchase one share of our common stock with an exercise price of $0.75 per share and a term of 18 months. As of March 31, 2013 we received the entire $500,000 under this private placement and issued the related 1,000,000 warrants, but had not yet issued the related 1,000,000 shares.

 

We are currently seeking both short-term funding to finance current operations as well as significant amounts of long term capital to execute our business plan. We project that to keep operations at our current level, approximately $3.0 million in short term funding will be required over the next three months to cover our anticipated monthly expenses and the purchase of electric motors and battery cells. Our base monthly expenses total approximately $250,000. In order to successfully execute our business plan including the planned development and marketing of our current products, an additional $2.0 million will be required in long term financing which includes hiring additional personnel, electric motors, battery cells, and costs related to selling and marketing efforts.

 

Our current cash requirements are significant due to planned development and marketing of our current products, and we anticipate generating losses. In order to execute on our business strategy, we will require additional working capital commensurate with the operational needs of planned marketing, development and production efforts. We anticipate that we will be able to raise sufficient amounts of working capital through debt or equity offerings as may be required to meet short-term obligations. However, changes in operating plans, increased expenses, acquisitions, or other events, may cause us to seek additional equity or debt financing in the future. We expect to incur additional marketing, development and production expenses. Accordingly, we expect to continue to use debt and equity financing to fund operations for the foreseeable future as we look to expand our asset base and fund marketing, development and production of the EchoDrive™ product.

 

We generated minimal revenue and are in the developmental stage and therefore we do not internally generate adequate cash flows to support our existing operations. Moreover, the historical and existing capital structure is not adequate to fund our planned growth. We intend to finance our operations by issuing additional common stock, warrants and through bridge financing. There can be no assurance that we will be successful in procuring the financing we are seeking. Future cash flows are subject to a number of variables, including the level of production, economic conditions and maintaining cost controls. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures.

 

To meet future objectives, we will need to meet revenue targets and sell additional equity and debt securities, which most likely will result in dilution to current stockholders. We may also seek additional loans where the incurrence of indebtedness would result in increased debt service obligations and could require the Company to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand business operations and could harm our overall business prospects. In addition, we cannot be assured of profitability in the future.

 

Considering we have yet to emerge from the development stage, we do not generate adequate cash flows to support our existing operations, our reliance on capital from investors, the potential need to seek additional loans to meet future objectives, and other factors, we believe there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to begin operations and achieve a level of profitability. The Company intends to finance our operations by issuing additional common stock, warrants and through bridge financing. The failure to achieve the necessary levels of profitability and obtain the additional funding would be detrimental to the Company.

 

Off-Balance Sheet Arrangements

 

None.

 

Significant Accounting Policies

 

Our significant accounting policies are described in Note 3 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012, which are incorporated by reference herein.

 

Recently Issued Accounting Pronouncements

 

We have implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on our condensed consolidated financial statements unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that have been issued but not yet effective that might have a material impact on our financial position, results of operations, or condensed consolidated financial statements.

 

13
  

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, the Company is not required to provide Part I, Item 3 disclosure.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (who is our Principal Executive Officer) and our Chief Financial Officer (who is our Principal Financial Officer and Principal Accounting Officer), of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e) or 15d-15(e)) as of March 31, 2013, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2013 in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and forms. This conclusion is based on findings that constituted material weaknesses. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim financial statements will not be prevented or detected on a timely basis.

 

In performing the above-referenced assessment, our management identified the following material weaknesses:

 

i)We have insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis.
   
ii)We do not have an audit committee. While not being legally obligated to have an audit committee, it is the management’s view that to have an audit committee, comprised of independent board members, is an important entity-level control over our financial statements.
   
iii)We did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud-related risks and the risks related to non-routine transactions, if any, on our internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.
   
iv)We lack personnel with formal training to properly analyze and record complex transactions in accordance with U.S. GAAP.
   
v)We have not achieved the optimal level of segregation of duties relative to key financial reporting functions.
   
vi)Our computer controls are weak due to lack of IT personnel and protocol infrastructure.

 

Our management feels the weaknesses identified above have not had any material effect on our financial results. However, the Company has taken steps to mitigate this risk, by retaining an external CPA firm to assist in the analysis of certain accounting matters and in the preparation of the Company’s quarterly filings with the Securities and Exchange Commission. Additionally, we are currently reviewing our disclosure controls and procedures related to these material weaknesses and expect to implement changes in the near term, including identifying specific areas within our governance, accounting and financial reporting processes to add adequate resources to potentially mitigate these material weaknesses. Our management team will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

14
  

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Changes in Internal Controls Over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the quarterly period ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.

 

15
  

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. To the best knowledge of our management, there are no material legal proceedings pending against us or any of our officers or directors.

 

Item 1A - Risk Factors

 

There have been no material updates to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

There are no sales or issuances of our securities without registration under the Securities Act of 1933, as amended, during the three months ended March 31, 2013, that were not previously disclosed in an Annual Report on Form 10-K or in a Current Report on Form 8-K.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

16
  

 

Item 6. Exhibits

 

Exhibit Number Description
   
3.1(a) Articles of Incorporation (incorporated by reference to the registrant’s Registration Statement on Form S-1 filed on March 20, 2009).
   
3.1(b) Text of Amendment to Articles of Incorporation (incorporated by reference to the registrant’s Current Report on Form 8-K filed on Sept. 27, 2012).
   
3.2 Bylaws, as amended (incorporated by reference to the registrant’s Registration Statement on Form S-1 filed on March 20, 2009)
   
10.1 Exchange Agreement, dated April 5, 2013, between the Company and Advanced Technical Asset Holdings, LLC (incorporated by reference to the registrant’s Current Report on Form 8-K filed on April 11, 2013)
   
10.2 License Agreement with CleanFutures, LLC dated April 5, 2013 (incorporated by reference to the registrant’s Annual Report on Form 10-K filed on April 16, 2013).
   
10.3 Securities Purchase Agreement with Newmarket Traders LTD dated February 4, 2013 (incorporated by reference to the registrant’s Annual Report on Form 10-K filed on April 16, 2013).
   
10.4 Securities Purchase Agreement with Newmarket Traders LTD dated February 7, 2013 (incorporated by reference to the registrant’s Annual Report on Form 10-K filed on April 16, 2013).
   
10.5 Securities Purchase Agreement with Newmarket Traders LTD dated February 25, 2013 (incorporated by reference to the registrant’s Annual Report on Form 10-K filed on April 16, 2013).
   
10.6 Securities Purchase Agreement with Newmarket Traders LTD dated March 7, 2013 (incorporated by reference to the registrant’s Annual Report on Form 10-K filed on April 16, 2013).
   
10.7 Lease Agreement with TREF Scottsdale LLC dated February 18, 2013 (incorporated by reference to the registrant’s Annual Report on Form 10-K filed on April 16, 2013).
   
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act*
   
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act*
   
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.*
   
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.*
   
101 Interactive Data File**

 

17
  

 

* Filed herewith.

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

 

18
  

 

SIGNATURES

 

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.

 

Echo Automotive, Inc.  
   
/s/ Rodney H McKinley  
Rodney H McKinley  
Chief Financial Officer  
(Principal Financial Officer)  
   
Dated: May 15, 2013  

 

19

 

 

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Ticker: ECAU
CIK: 1453420
Form Type: 10-Q Quarterly Report
Accession Number: 0001387131-13-001866
Submitted to the SEC: Wed May 15 2013 2:37:51 PM EST
Accepted by the SEC: Wed May 15 2013
Period: Sunday, March 31, 2013
Industry: Motor Vehicle Parts And Accessories

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