-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TPaUNcp4BqsZZWTZ7DVFAj8NSl5MZFc9A1X9L8DYocH+hULrzIskXBCQH9ZQCBVY 5R0mZmiJ6WPGsk3uJBJoig== 0001161697-08-000593.txt : 20080520 0001161697-08-000593.hdr.sgml : 20080520 20080520150404 ACCESSION NUMBER: 0001161697-08-000593 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080520 DATE AS OF CHANGE: 20080520 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNAMIC LEISURE CORP CENTRAL INDEX KEY: 0000934873 STANDARD INDUSTRIAL CLASSIFICATION: TRANSPORTATION SERVICES [4700] IRS NUMBER: 411508703 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-07953 FILM NUMBER: 08848400 BUSINESS ADDRESS: STREET 1: 5680A W. CYPRESS STREET CITY: TAMPA STATE: FL ZIP: 33607 BUSINESS PHONE: 813-877-6300 MAIL ADDRESS: STREET 1: 5680A W. CYPRESS STREET CITY: TAMPA STATE: FL ZIP: 33607 FORMER COMPANY: FORMER CONFORMED NAME: DYNECO CORP DATE OF NAME CHANGE: 19960521 10-Q 1 dlc_10-q.txt FORM 10-Q FOR 03-31-2008 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008 [ ] 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 333-07953 DYNAMIC LEISURE CORPORATION --------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-1508703 --------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5680A West Cypress Street Tampa, FL 33607 ------------------------- (Address of principal executive offices) (813) 877-6300 -------------- (Registrant's telephone number, including area code) 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 [X] 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 the 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 [X] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] APPLICABLE ONTO TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] As of May 15, 2008, the registrant had 16,888,557 shares of its $0.01 par value common stock outstanding. DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED MARCH 31, 2008 PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited): Consolidated Balance Sheets as of March 31, 2008 (Unaudited) and December 31, 2007 ........... 3 Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 (Unaudited) ........... 4 Consolidated Statement of Changes in Stockholders' Deficit for the three months ended March 31, 2008 (Unaudited) ............ 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (Unaudited) ........... 6 Notes to Consolidated Financial Statements (Unaudited) ........... 7 Item 2. Management's Discussion and Analysis or Plan of Operation ........ 36 Item 3. Quantitative and Qualitative Disclosure about Market Risk ........ 46 Item 4. Controls and Procedures .......................................... 47 Item 4T. Controls and Procedures .......................................... 47 PART II. OTHER INFORMATION Item 1. Legal Proceedings ................................................ 47 Item 1A. Risk Factors ..................................................... 48 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...... 61 Item 3. Defaults upon senior securities .................................. 62 Item 5. Other Information ................................................ 62 Item 6. Exhibits ......................................................... 62 Signatures ................................................................ 63 Exhibit Index ............................................................. 63 2 DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2008 DECEMBER 31, (UNAUDITED) 2007 ------------ ------------ ASSETS Current Assets Cash ........................................... $ 244,229 $ 198,500 Investments, restricted ........................ 84,997 84,997 Accounts receivable, net of an allowance of $9,984 and $9,984 ............... 217,359 135,076 Prepaid travel ................................. 431,384 387,847 Other current assets ........................... 258,799 54,139 ------------ ------------ Total Current Assets ......................... 1,236,768 860,559 ------------ ------------ Property and equipment, net ...................... 875,836 922,028 ------------ ------------ Other Assets Goodwill ....................................... 2,902,196 2,902,196 Intangible assets, net ......................... 3,379,573 3,565,085 Deposits ....................................... 110,893 100,595 Debt issue costs, net .......................... 230,866 271,112 ------------ ------------ Total Other Assets ........................... 6,623,528 6,838,988 ------------ ------------ Total Assets ................................. $ 8,736,132 $ 8,621,575 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Convertible promissory notes, net of discount of $162,903 and $211,022 ............ $ 4,192,889 $ 3,939,770 Notes payable, current portion ................. 386,588 386,588 Acquisitions payable ........................... 1,111,452 1,204,857 Convertible promissory note to related party ... 350,000 350,000 Accounts payable ............................... 2,079,557 2,165,901 Accounts payable to related parties ............ 410,855 471,284 Accrued compensation ........................... 36,550 16,133 Accrued interest ............................... 1,049,152 865,728 Other accrued liabilities ...................... 376,383 286,221 Capital lease obligation ....................... 38,750 37,852 Deferred revenue and customer deposits ......... 1,178,622 1,116,420 Due to employee ................................ 160,000 160,000 Warrant and option liability ................... 9,274,734 2,475,112 Embedded conversion option liability ........... 8,073,128 3,272,977 ------------ ------------ Total Current Liabilities .................... 28,718,660 16,748,843 ------------ ------------ Long-Term Liabilities Convertible promissory notes, net of current portion, net of discount of $2,006,411 and $1,346,542 ................. 1,483,589 1,163,458 Capital lease obligation, net of current portion 29,586 39,782 ------------ ------------ Total Long-Term Liabilities .................. 1,513,175 1,203,240 ------------ ------------ Total Liabilities ............................ $ 30,231,835 $ 17,952,083 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 12) Stockholders' Deficit Preferred stock, $0.01 par value, 20,000,000 shares authorized, none issued and outstanding .................. $ - $ - Common stock, $0.01 par value, 300,000,000 shares authorized, 16,888,557 and 15,733,557 issued and outstanding ....................... 168,886 157,336 Common stock issuable, $0.01 par value (2,250,000 and 836,957 shares) ............... 22,500 8,370 Additional paid-in capital, net of deferred consulting fees of $0 and $33,822 .................................. 7,743,390 7,673,448 Accumulated deficit ............................ (29,430,479) (17,169,662) ------------ ------------ Total Stockholders' Deficit .................. (21,495,703) (9,330,508) ------------ ------------ Total Liabilities and Stockholders' Deficit .. $ 8,736,132 $ 8,621,575 ============ ============ See accompanying notes to the unaudited consolidated financial statements. 3 DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2008 2007 (unaudited) (unaudited) ------------ ------------ Total revenues ................................... $ 2,248,336 $ 1,971,393 Cost of revenues ................................. 1,885,233 1,475,434 ------------ ------------ Gross Profit ................................... 363,103 495,959 Operating Expenses Employee Compensation .......................... 415,671 560,229 Financial consulting, includes $33,822 and $32,950 stock-based compensation ............. 39,777 190,927 Legal expense .................................. 35,694 40,084 Depreciation and amortization expense .......... 271,950 212,232 Internal accounting and external auditing expense ...................................... 76,276 112,350 Director fees, includes $14,800 and $134,848 stock-based compensation ..................... 14,800 134,848 Investor relations, includes $0 and $157,100 stock-based compensation ..................... 56,906 203,554 Other general and administrative expenses ...... 276,674 433,081 ------------ ------------ Total Operating Expenses ..................... 1,187,748 1,887,305 ------------ ------------ Loss from Operations ......................... (824,645) (1,391,346) Other Income (Expense) Interest income ................................ 645 855 Interest expense, includes $588,250 and $564,393 in debt discount amortization ....... (892,044) (763,882) Warrant and option valuation income (expense) .. (5,744,622) 2,974,005 Embedded conversion option valuation expense ... (4,800,151) (15,279) ------------ ------------ Total Other Income (Expense), net ............ (11,436,172) 2,195,699 ------------ ------------ Net Income (Loss) ............................ $(12,260,817) $ 804,353 ============ ============ Net Income (Loss) per Share: Basic .......................................... $ (0.68) $ 0.07 ============ ============ Diluted ........................................ $ (0.68) $ 0.06 ============ ============ Weighted average number of shares outstanding during the period: Basic ...................................... 17,928,194 12,324,495 ============ ============ Diluted .................................... 17,928,194 12,330,015 ============ ============ See accompanying notes to the unaudited consolidated financial statements. 4 DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT For the Three Months Ended March 31, 2008
Additional Common Stock Paid In Accumulated Total Common Stock Issuable Capital Deficit Stockholders' --------------------- ------------------- ---------- ------------ Equity Shares Amount Shares Amount Amount Amount Deficit ---------- -------- --------- ------- ---------- ------------ ------------ BALANCE AT DECEMBER 31, 2007 15,733,557 $157,336 836,957 $ 8,370 $7,673,448 $(17,169,662) $ (9,330,508) Common stock issued in conversion of promissory note ............ 375,000 3,750 - - 11,250 - 15,000 Common stock issued for services ........ 780,000 7,800 - - 72,822 - 80,622 Common stock issuable related to anti-dilution provisions ...... - - 1,413,043 14,130 (14,130) - - Net Loss at March 31, 2008 .. - - - - - (12,260,817) (12,260,817) ---------- -------- --------- ------ ---------- ------------ ------------ BALANCE AT MARCH 31, 2008 .. 16,888,557 $168,886 2,250,000 $22,500 $7,743,390 $(29,430,479) $(21,495,703) ========== ======== ========= ======= ========== ============ ============ See accompanying notes to the unaudited consolidated financial statements. 5
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2008 2007 (unaudited) (unaudited) ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ................................................... $(12,260,817) $ 804,353 Adjustments to reconcile net income (loss) to net cash used in operating activities: Change in accounts receivable allowance ......................... - 4,433 Depreciation .................................................... 46,192 14,778 Amortization of intangible assets ............................... 185,512 185,143 Amortization of debt issue costs ................................ 40,246 12,311 Amortization of debt discount to interest expense ............... 588,250 564,393 Common stock and warrants for services .......................... 80,622 324,898 Embedded conversion option valuation expense .................... 4,800,151 15,279 Warrant and option valuation expense (income) ................... 5,744,622 (2,974,005) (Increase) decrease in assets and liabilities: Accounts receivable ............................................. (82,283) (74,440) Prepaid assets .................................................. (43,537) 56,758 Other assets .................................................... (14,958) 44,245 Accounts payable ................................................ (146,773) 397,971 Accrued expenses ................................................ 294,003 254,636 Deferred revenue and customer deposit ........................... 62,202 (109,218) ------------ ------------ Net Cash Used in Operating Activities ........................... (706,568) (478,465) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Funds held in escrow ................................................ (200,000) - Change in investments ............................................... - 10,745 ------------ ------------ Net Cash Provided by (Used in) Investing Activities ............. (200,000) 10,745 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from convertible promissory notes .......................... 1,200,000 400,000 Repayment of convertible promissory notes ........................... (93,405) - Proceeds from employee advances ..................................... - 60,000 Debt issue costs .................................................... (145,000) (50,000) Repayment of capital leases ......................................... (9,298) (7,921) Proceeds from common stock issuance ................................. - 22,500 ------------ ------------ Net Cash Provided by Financing Activities ....................... 952,297 424,579 ------------ ------------ Net Increase (Decrease) in Cash ....................................... 45,729 (43,141) Cash at Beginning of Period ........................................... 198,500 203,911 ------------ ------------ Cash at End of Period ................................................. $ 244,229 $ 160,770 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for income taxes ........................ $ - $ - ============ ============ Cash paid during the period for interest ............................ $ 37,809 $ 7,731 ============ ============ Supplemental Disclosure of non-cash investing and financing activities: Conversion of debt to common stock .................................. $ 15,000 $ - ============ ============ Discount on promissory notes ........................................ $ - $ 1,403,353 ============ ============ Conversion option liability related to promissory note .............. $ 1,055,000 $ 400,000 ============ ============ Reclassification of FV of warrants and options from equity .......... $ - $ 85,447 ============ ============ See accompanying notes to the unaudited consolidated financial statements. 6
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2008 (UNAUDITED) NOTE 1 NATURE OF OPERATIONS Nature of Business The Company is engaged in the business of marketing, selling and distributing vacation packages that include cruises, domestic and international airline tickets, car rental services and accommodation products and services on a wholesale basis to travel agencies and other travel resellers and on a retail basis directly to consumers. The Company also sells certain stand-alone travel products on an agency basis. For the quarter ended March 31, 2008 and in 2007 substantially all of the Company's travel products were for destinations in the Caribbean and Mexico. NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated balance sheet as of December 31, 2007 has been derived from audited financial statements and the accompanying unaudited consolidated financial statements for the three months ended March 31, 2008, have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission for interim financial reporting requirements. They do not include all of the information and footnotes for complete consolidated financial statements as required by GAAP. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair consolidated financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year. For further information, refer to the Form 10-KSB for Dynamic Leisure Corporation for the year ended December 31, 2007 filed with the Securities and Exchange Commission on April 15, 2008. The results of operations for the three months ended March 31, 2008, are not necessarily indicative of the results to be expected for the year. Principles of Consolidation The consolidated financial statements include the accounts of Dynamic and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. For reporting purposes, the Company operated in only one industry for all periods presented in the accompanying consolidated financial statements and makes all operating decisions and allocates resources based on the best benefit to the Company as a whole. Reclassifications Certain amounts in the 2007 financial statements have been reclassified to conform with the 2008 presentation. Use of Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. 7 These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of our consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require Management's judgment in its application. There are also areas in which Management's judgment in selecting any available alternative would not produce a materially different result. Significant estimates in 2008 and 2007 include the valuation of accounts receivable, valuation of goodwill, valuation and amortization of intangible assets, valuation of stock-based transactions, valuation of discounts on debt, valuation of beneficial conversion features in convertible debt, valuation of derivatives, estimates of allowances for customer refunds and the estimate of the valuation allowance on deferred tax assets. Cash and Cash Equivalents For the purpose of the cash flow statement, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. In addition, receivables from merchant banks for credit card transactions are included as cash equivalents as they are considered deposits in transit. Credit card receivables included in cash and cash equivalents at March 31, 2008 and December 31, 2007 were $34,860 and $6,830, respectively. The Company places its cash with a financial institution and, at times, such deposits may be in excess of the FDIC insurance limit. At March 31, 2008, the Company had one such amount that was in excess of such limits by $61,500; however, the Company has not experienced any losses on such accounts to date. Accounts Receivable Accounts Receivable result from either the sale of travel products or agreements with various hotels, including co-op advertising support. The Company evaluates the collectibility of accounts receivable while working with its individual customers and vendors. A majority of the accounts receivable for travel products are collected prior to travel departure. Prepaid Travel The Company is required to pay for certain travel (mainly airlines and hotels) in advance. Payments made to these vendors in advance are recorded as an asset in the prepaid travel account. The Company recognizes the expense when the associated revenue is recognized. Property and Equipment Property and equipment is stated at cost. Depreciation is computed using the straight-line method and is expensed based upon the estimated useful lives of the assets which ranges from three to seven years. Expenditures for additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. Goodwill and Other Intangibles The Company accounts for goodwill in a purchase business combination as the excess of the cost over the fair value of net assets acquired. Business combinations can also result in other intangible assets being recognized. Amortization of intangible assets, if applicable, occurs over their estimated useful lives. Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") requires testing goodwill for impairment on an annual basis (or interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value). The Company conducts the annual review during the fourth quarter of the calendar year. The Company conducted its review as of December 31, 2007. For purposes of the review, the Company is considered one reporting unit as defined in SFAS 142. The fair value of the Company's equity was determined by multiplying the market price of the Company's common stock by the number of shares outstanding at December 31, 2007. The fair value of the Company's outstanding common stock exceeded the carrying value of the Company's assets net of liabilities; therefore, no impairment was 8 recognized during the year ended December 31, 2007. No events occurred during the three months ended March 31, 2008 that caused the Company to perform an interim test of goodwill for impairment. The Company accounts for goodwill in a purchase business combination as the excess of the cost over the fair value of net assets acquired. Business combinations can also result in other intangible assets being recognized. Amortization of intangible assets, if applicable, occurs over their estimated useful lives. Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") requires testing goodwill for impairment on an annual basis (or interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value). The Company conducts the annual review during the fourth quarter of the calendar year. No impairment was recognized during the three months ended March 31, 2008. Impairment of Other Long-Lived Assets The Company reviews other long-lived assets and certain identifiable assets related to those assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the undiscounted future cash flows of the long-lived assets are less than their carrying amounts, their carrying amounts are reduced to fair value and an impairment loss is recognized. No impairment was recognized during the three months ended March 31, 2008 or in 2007. Letters of Credit and Restricted Investments At March 31, 2008, the Company had two outstanding letters of credit totaling approximately $97,400 payable to the Airlines Reporting Corporation (ARC), which allows the Company to purchase airline tickets through ARC's computerized ticket system. The terms of the letter of credit agreements require the Company to maintain certificates of deposit with the issuer of the letters of credit in the amount of the letters of credit. These certificates of deposit are reflected as short-term investments, restricted, on the accompanying balance sheet. Short-term investments at March 31, 2008, also includes $10,000 restricted to cover a letter of credit for a seller of travel license. Deferred Revenue and Customer Deposits Deferred revenue and customer deposits primarily represents money received from customers as either a deposit on, or full payment for, trips not yet traveled or services not yet earned. Revenue Recognition The Company follows the criteria for the United States Securities and Exchange Commission Staff Accounting Bulletin 104 and EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent" for revenue recognition. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery of product has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. The Company records merchant sales transactions at the gross purchase price generally on the date of travel. The Company considers a transaction to be a "merchant sales transaction" where the Company is the primary obligor to the customer and the Company acts as the merchant of record in the package transaction, which consists of several products from different vendors. In these transactions the Company also controls selling prices, and is solely responsible for making payments to vendors. The Company records transactions at the net purchase price where the Company is not the merchant of record or the product is not sold as a package. The Company records revenue and related costs of products when travel occurs or, for certain products, when the service is completed. It is the Company's policy to be paid by the customer in advance, with monies received in advance of travel recorded as a deferred revenue liability. The Company may receive cash or hotel room credits in exchange for providing cooperative advertising for its vendors. The Company records accounts receivable for these amounts and offsets the applicable advertising expense. Once the advertising expense is reduced to zero, any excess cooperative advertising fees are recorded as revenue. 9 Advertising Costs The Company expenses advertising costs as incurred. During the three months ended March 31, 2008 and 2007, the Company's advertising expense totaled $2,638 and $12,190, respectively. Accounting for Derivatives The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under Statement of Financial Accounting Standards 133 "Accounting for Derivative Instruments and Hedging Activities" and related interpretations including EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock". The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. If the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and its fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under SFAS 133 are reclassified to liability at the fair value of the instrument on the reclassification date. Stock-Based Compensation The Company accounts for stock-based compensation in accordance with Financial Accounting Standard 123 (revised 2004) ("SFAS 123(R)"), "Share-Based Payment" which replaced SFAS 123 "Accounting for Stock-Based Compensation" and superseded APB Opinion No. 25 "Accounting for Stock Issued to Employees." SFAS 123(R) requires the fair value of all stock-based employee compensation awarded to employees to be recorded as an expense over the related vesting period. Concentration of Credit Risk and Other Concentrations Nearly all of the Company's travel products sold year-to-date in 2008 and in 2007 were for destinations in the Caribbean and Mexico. This concentration potentially exposes us to both political and weather risks of this region. The Company has a diverse U.S. customer base, including consumers purchasing products through travel agencies and purchasing directly via the Internet. The Company has very little credit risk since the vast majority of its travel products are paid for in advance. The Company has negotiated contracts with airlines that allow the Company to price certain products more favorably than its competitors. The loss of such contracts could have a negative effect on the Company. Income Taxes The Company accounts for income taxes under the Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("Statement 109"). Under Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period, which includes the enactment date. 10 Basic and Diluted Net Income (Loss) Per Share Basic net income (loss) per common share ("Basic EPS") excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per share ("Diluted EPS") reflects the potential dilution that could occur if stock options or other contracts to issue common stock, such as convertible notes, were exercised or converted into common stock. At March 31, 2008, there were outstanding warrants, options, third-party debt and related-party debt convertible into 98,780,968, 1,149,762, 136,243,980 and 388,889 common shares, respectively, which may dilute future earnings per share. There is no calculation of fully diluted earnings per share for the three months ending March 31, 2008, due to the Company reporting a net loss and the exercise or conversion of common stock equivalents would have been anti-dilutive. The following is a reconciliation of basic net income per share to diluted net income per share for the three months ended March 31, 2007: Earnings per share from continuing operations: - ---------------------------------------------- Income from continuing operations ............................ $ 804,353 Preferred stock dividends .................................... - ----------- Income from continuing operations applicable to common stock ............................................ 804,353 Effect of dilutive securities: Warrant/option valuation income ............................ (9,819) ----------- Income - diluted ............................................. $ 794,534 =========== Earnings per share: Basic income per share ..................................... $ 0.07 =========== Diluted income per share ................................... $ 0.06 =========== Weighted average common shares outstanding - basic ........... 12,324,495 Potential shares exercisable under non-plan option ........... 5,520 ----------- Weighted average shares outstanding - diluted ................ 12,330,015 =========== Potential shares excluded from above weighted average share calculations due to their anti-dilutive effect include: - ----------------------------------------------------------- Upon exercise of plan options ................................ 101,206 Upon exercise of non-plan options ............................ 850,000 Upon exercise of warrants .................................... 12,821,217 Upon conversion of convertible promissory notes .............. 8,075,220 Upon conversion of convertible promissory notes - related party ...................................... 388,889 Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate the value. For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The Company's financial instruments include cash, accounts receivable, accounts payable, accrued liabilities, notes payable and capital leases. The fair values of cash, accounts receivable, accounts payable and accrued liabilities approximated carrying values due to the short-term nature of these instruments. Fair values for notes payable and capital leases are not readily available, but the carrying values are believed to approximate fair value. 11 NOTE 3 GOING CONCERN For the three months ended March 31, 2008, the Company had a net loss of $12,260,817, used net cash in operations of $706,568 and had a working capital deficiency of $27,481,892, and a stockholders' deficiency of $21,495,703 at March 31, 2008. In addition, the Company was in default on convertible promissory notes totaling $4,155,792 and unsecured promissory notes of $156,434 as of March 31, 2008. These matters raise substantial doubt about our ability to continue as a going concern. Because the Company has not yet achieved or acquired sufficient operating capital and given these financial results along with the Company's expected cash requirements in 2008, additional capital investment will be necessary to develop and sustain the Company's operations. As of March 31, 2008, the Company had $7,845,792 in outstanding Convertible Notes payable to third parties (see Note 6) including the notes in default as described above, which are convertible into 136,243,980 shares of the Company's common stock. While the Company expects substantially all of these note holders to convert the Notes into shares of the Company's common stock, there is no guarantee that this will occur. As of March 31, 2008, the Company did not have adequate working capital to meet these obligations with cash payments. Management believes that its plans to raise additional capital will allow for adequate funding of the Company's cash requirements through December 31, 2008, although there is no assurance regarding this belief or that the Company will be successful in these efforts. The consolidated financial statements do not contain any adjustments, which might be necessary if the Company is unable to continue as a going concern. NOTE 4 PROPERTY AND EQUIPMENT Property and equipment consisted of the following: Estimated Useful Life March 31, December 31, in Years 2008 2007 ----------- ----------- ------------ Office furniture and equipment .. 3-5 $ 165,770 $ 165,770 Software ........................ 5-7 957,850 957,850 ----------- ----------- Total property and equipment .... $ 1,123,620 $ 1,123,620 Less accumulated depreciation ... (247,784) (201,592) ----------- ----------- Property and equipment, net ..... $ 875,836 $ 922,028 =========== =========== Depreciation expense was $46,192 and $14,778 for the three months ended March 31, 2008 and 2007, respectively. The Company owns the worldwide rights and source code to TourScape, proprietary software for use in the wholesale travel industry. The Company's historical cost for TourScape was $500,000 and other third party database software and related implementation costs totaled $420,097. The software was fully operational upon purchase and accordingly is capitalizable as internal use software pursuant to Statement of Position 98-1 "Accounting for Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). The Company completed its implementation of the software and placed it in service on March 31, 2007. The Company amortizes this software over seven years. If the Company determines at a future date to sell or license the software, proceeds received from the license of the software, net of direct incremental costs of marketing, will be applied against the carrying value of the software in accordance with SOP 98-1. 12 NOTE 5 INTANGIBLE ASSETS Intangible assets at March 31, 2008, are as follows: Accumulated Net Book Life Cost Amortization Value - ---------------------------- -------- ---------- ------------ ---------- Airline contracts .......... 7 yrs. $2,820,000 $ 758,032 $2,061,968 Hotel contracts ............ 7 yrs. 422,500 99,768 322,732 URLs ....................... 10 yrs. 1,011,000 187,239 823,761 Mailing list ............... 3 yrs. 150,000 24,108 125,892 General service agreement .. 2.5 yrs. 348,413 303,193 45,220 ---------- ---------- ---------- $4,751,913 $1,372,340 $3,379,573 ========== ========== ========== Amortization expense for the three months ended March 31, 2008 and 2007 totaled $185,512 and $185,143, respectively. Amortization of intangible assets in future years is expected to be as follows: 12 months --------- 2008 $ 607,132 (includes $185,512 recognized for three months ended 3/31/08) 2009 $ 607,132 2010 $ 607,132 2011 $ 607,132 2012 $ 607,132 Thereafter $1,136,557 The Company reviews other long-lived assets and certain identifiable assets related to those assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the undiscounted future cash flows of the long-lived assets are less than their carrying amounts, their carrying amounts are reduced to fair value and an impairment loss is recognized. The Company conducted a test of impairment as of December 31, 2007, as a result of losses incurred by the Company as a whole during 2007 and 2006. No impairment was recognized during the year ended December 31, 2007. No events occurred during the three months ended March 31, 2008, that caused the Company to perform an interim test of intangible assets for impairment. 13 NOTE 6 CONVERTIBLE NOTES PAYABLE WITH WARRANTS, NOTES PAYABLE, LOANS PAYABLE AND CAPITAL LEASES PAYABLE Convertible Promissory Notes - ---------------------------- Convertible notes consisted of the following at March 31, 2008:
Original Debt Discount Components ------------------------------------ Cumulative Beneficial Amortization Interest Balance Notes Balance Conversion Warrant as of Rate 12/31/2007 Converted Borrowings 3/31/2008 Feature Liability Total 3/31/2008 - -------- ---------- --------- ---------- ---------- ---------- ---------- ---------- ------------ 9% (S) $1,450,000 $ - $ - $1,450,000 $1,208,332 $ - $1,208,332 $ 1,208,332 10% (S) 2,250,000 - - 2,250,000 206,618 3,296,324 3,502,942 3,502,942 5% (U) 273,292 - - 273,292 77,372 232,944 310,316 310,316 10% (U) 10,000 - - 10,000 - - - - 10% (U) 10,000 - - 10,000 50,000 - 50,000 50,000 10% (U) 12,500 - - 12,500 - - - - 6% (S) 995,000 15,000 - 980,000 400,000 600,000 1,000,000 667,745 8% (U) 150,000 - - 150,000 - 73,500 73,500 73,500 10% (U) 50,000 - - 50,000 50,000 - 50,000 50,000 10% (U) 150,000 - - 150,000 150,000 - 150,000 150,000 12% (S) 1,310,000 - - 1,310,000 - 1,127,500 1,127,500 379,152 12% (S) - - 1,000,000 1,000,000 - 1,000,000 1,000,000 74,194 12% (S) - - 200,000 200,000 - 200,000 200,000 37,095 ---------- --------- ---------- ---------- ---------- ---------- ---------- ------------ $6,660,792 $ 15,000 $1,200,000 $7,845,792 $2,142,322 $6,530,268 $8,672,590 $ 6,503,276 ========== ========= ========== ========== ========== ========== ========== ============ (S) - Secured (U) - Unsecured
Unamortized Net Book Principal Discount Value ----------- ----------- ----------- Current maturities ....... $ 4,355,792 $ 162,903 $ 4,192,889 Long-term portion ........ 3,490,000 2,006,411 1,483,589 ----------- ----------- ----------- Total at March 31, 2008 .. $ 7,845,792 $ 2,169,314 $ 5,676,478 =========== =========== =========== Terms and original debt discount assumptions for convertible notes outstanding at March 31, 2008:
Original Warrant and OptionLiability Convertible Promissory Notes Black-Scholes Valuation Assumptions - ---------------------------------------------------------------------- -------------------------------------------------- Interest Balance Unamortized Maturity Conversion Exercise Expected Vola- Discount Rate 03/31/2008 Discount Date Payments Price Shares Price Life(Yr) tility Rate - -------- ---------- ----------- -------- -------- ---------- ---------- -------- -------- ------ -------- 9% (S) $1,450,000 $ - 3/6/07 (A) $1.50 - $ - - - - 10% (S) 2,250,000 - 3/5/08 (C) 0.04 2,000,000 1.00 3.0 271% 5.07% - - - - - (D) 1.00 250,000 1.00 2.25 142% 5.03% - - - - - (E) 1.00 3,000,000 1.50 3.0 190% 4.60% 5% (U) 273,292 - 12/4/07 (F) 0.75 304,000 0.90 3.0 354% 3.96% 10% (U) 10,000 - 6/30/06 (G) 0.90 - - - - - 10% (U) 10,000 - 6/30/06 (G) 0.90 - - - - - 10% (U) 12,500 - 6/30/06 (G) 0.90 - - - - - 6% (S) 980,000 332,255 10/25/09 (H) (H) 5,000,000 1.50 3.0 154% 4.58% 8% (U) 150,000 - 12/31/07 (I) (I) - - - - - 10% (U) 50,000 - 6/29/09 (J) (J) 132,979 0.376 0.3 218% 4.94% 10% (U) 150,000 - 6/29/09 (J) (J) 398,936 0.376 0.3 218% 4.94% 12% (S) 1,310,000 748,348 6/29/09 (K) (K) 3,000,000 0.85 2.0 218% 4.89% 12% (S) 1,000,000 925,806 7/22/10 (L) (L) 12,500,000 0.05 2.5 213% 2.71% 12% (S) 200,000 162,905 1/22/09 (M) (M) 2,500,000 0.05 1.0 213% 2.71% ---------- ----------- $7,845,792 $ 2,169,314 ========== ===========
Notes in default: $4,155,792 ========== 14 (A) - This note went into default for nonpayment on its maturity date. (B) - Not used. (C) - Balance is past due and is in default. Conversion price was reset to $0.04 from $0.128 related to anti-dilution provisions effective March 6, 2008. (D) - Relates to $250,000 additional borrowings from MMA on 9/20/2006 and part of the original $2,000,000 convertible note payable. (E) - Relates to Note Modification Agreement for issuance of warrants to purchase 3,000,000 shares of the Company's common stock. (F) - Balance is past due and is in default. This note was modified on June 4, 2007, whereby the note's interest rate reduced to 5% per annum, all accrued interest was added to the principal balance and $150,000 of the note balance was converted into 200,000 shares of common stock. (G) - Balance is past due and loan is in default. The Company is in negotiations to extend the maturity date or have the note converted. (H) - Balance is due on the maturity date plus all accrued interest. The debt is convertible at a 45% discount to market or $0.05 per share as of March 31, 2008. (I) - Balance is past due and is in default. The conversion price was reset to a variable price on June 15, 2007, and June 29, 2007, based upon terms set forth in the convertible debenture agreement. The debt is now convertible at the lower of $0.23 per share or 80% of the lowest daily closing bid price of the Company's common stock for five (5) trading days immediately prior to conversion. (J) - Balance is due at maturity plus all accrued interest. The debt is convertible at the lower of $0.23 per share or 80% of the lowest daily closing bid price of the Company's common stock for five (5) trading days immediately prior to conversion. (K) - Balance is due at maturity plus all accrued interest. The debt is convertible at the lower of $0.23 per share or 80% of the lowest daily closing bid price of the Company's common stock for five (5) trading days immediately prior to conversion. (L) - Requires interest-only payments for the first six months from the closing date after which this debenture is to be redeemed over the remaining 24 months through monthly principal and interest. The debt is convertible at the lower of $0.10 per share or 85% of the lowest daily closing bid price of the Company's common stock for five (5) trading days immediately prior to conversion. (M) - Requires redemption over twelve months after closing through monthly principal and interest. Should the Company raise in excess of $500,000 during the life of the debentures, the Company is required to redeem 30% of the outstanding principal balance of the debenture. Interest is payable in cash or common stock at a value equal to the closing bid price on the date the interest is due or when the interest is paid at the option of Trafalgar. The debt is convertible at the lower of $0.10 per share or 85% of the lowest daily closing bid price of the Company's common stock for five (5) trading days immediately prior to conversion. All debt discounts are amortized over the terms of the respective Notes. The amortization of the debt discount was $588,250 and $564,393 for the three months ended March 31, 2008 and 2007, respectively, and was included in interest expense in the accompanying consolidated financial statements. In total as of March 31, 2008, the Company was in default on third-party convertible promissory notes of $4,155,792. 15 April 2007 - Miller Note - ------------------------ On April 16, 2007, the Company issued unsecured convertible promissory notes in the principal amount totaling $150,000 to Miller Investments, LLC. The notes bear interest at 8% per annum and matured on August 13, 2007. On October 25, 2007, the Company entered into an agreement with Miller Investments to extend the maturity date on the Note from August 15, 2007 to December 15, 2007. In consideration for this loan extension, the Company agreed to issue Miller Investments 150,000 shares of the Company's common stock valued at $34,500 or $0.23 per share (the closing market price of the Company's common stock on the day of issuance). This value will be recorded as debt discount and amortized to interest expense over the extended term of the loan. On December 1, 2007, the Company entered into an agreement with Miller Investments to extend the maturity date on the Note to December 31, 2007. In consideration for this loan extension, the Company agreed to issue Miller Investments 300,000 shares of the Company's common stock valued at $39,000 or $0.13 per share (the closing market price of the Company's common stock on the day of issuance). This value was recorded as debt discount and is being amortized to interest expense over the extended term of the loan. At the option of the holder, the notes are convertible at any time into shares of the Company's common stock at the lesser of (i) $1.00 per share or (ii) the price per share paid by investors in the Company's next financing transaction. The qualifying financing occurred on June 29, 2007, wherein the Company consummated a financing with Trafalgar Capital Specialized Investment Fund, Luxembourg ("Trafalgar"), that was later amended on August 1, 2007. As a result, the conversion price of the Miller unsecured convertible promissory note was to conform to a conversion price in Trafalgar debentures which was the lesser of (a) $0.23 per share or (b) an amount equal to 80% of the lowest daily closing bid price of the Company's common stock, as quoted by Bloomberg, LP, for the five (5) trading days immediately prior to conversion. The Holder is entitled to piggyback registration rights, subject to certain limitations as described in the notes. In addition, the Company has granted the holder the right to purchase additional notes from the Company in the principal amount of $150,000 on the same terms and conditions within thirty (30) days after the date of the notes. The fair value of the embedded conversion option associated with this debt was not material as of December 31, 2007, and has not been recorded in the embedded conversion option liability account on the accompanying balance sheet. At March 31, 2008, the secured convertible term notes were bifurcated and recorded as two liability instruments--a debt instrument and an embedded conversion option liability at fair value due to the variable conversion price. June 2007 - Pisani and Seaside Capital Notes - -------------------------------------------- On June 15, 2007, the Company issued unsecured convertible promissory notes in the principal amount totaling $50,000 and $150,000 to Michael Pisani and Seaside Capital II, LLC, respectively. The terms of these notes were structured so that if in the event the Company consummated an equity or debt financing, prior to the maturity date of October 15, 2007, pursuant to which it sells shares of its common stock (or securities convertible into or exercisable for shares of its common stock) with an aggregate sales price of not less than $1,000,000, excluding these notes (a "Qualified Financing"), then the outstanding principal amount of and all accrued interest under these notes shall automatically convert into securities identical to and at the same price and on the same terms as the securities issued in the Qualified Financing. On July 11, 2007, the Company consummated a Qualified Financing with Trafalgar Capital Specialized Investment Fund, Luxembourg ("Trafalgar"), and the Qualified Financing was later amended on August 1, 2007. As a result, the terms of these notes are identical to the convertible debentures issued to Trafalgar, as amended. 16 Due to the variable conversion price, the secured convertible term notes were bifurcated and recorded as two liability instruments--a debt instrument and an embedded conversion option liability at fair value. The notes, as conformed to the Trafalgar debentures, mature on June 29, 2009, bear interest at 12% per annum, compounded monthly (9.5% after effectiveness of a Registration Statement required under the Trafalgar agreement) and are convertible into common stock at the lesser of (a) $0.23 per share or (b) an amount equal to 80% of the lowest daily closing bid price of the Company's common stock, as quoted by Bloomberg, LP, for the five (5) trading days immediately prior to conversion. The Company has the right to redeem the debenture at 120% of principal and accrued and unpaid interest. MMA Capital, LLC Convertible Debt - --------------------------------- On January 13, 2006, the Company issued a Secured Convertible Promissory Note with the principal balance of $2,000,000 to MMA Capital, LLC ("MMA"). As described below, on September 20, 2006, the parties amended this Note to increase the principal amount by $250,000 to a total of $2,250,000. On August 16, 2006, the Company entered into an agreement with MMA to defer interest payments due on the Note each quarter until January 11, 2007, the maturity date of the loan. On March 5, 2007, the maturity date of this note was extended to March 5, 2008. The notes were not repaid on the maturity date and are in default. In consideration for this August 16, 2006 deferral, the Company agreed to increase the interest rate retroactively from 8% to 10% and to issue MMA 100,000 shares of the Company's common stock. In accordance with EITF 96-19, this transaction was treated as a modification of debt since the extra consideration given in the agreement did not amount to more than a ten percent change in the present value of the amount due to MMA over the life of the promissory note. As a result, the increase in interest rate and the additional consideration will be accounted for prospectively from the date of the modification. At the option of the holder, the outstanding principal amount of the Note and accrued but unpaid interest may be converted into shares of the Company's common stock at the conversion rate of $1.00 per share, subject to adjustment in the event the Company issues shares for a consideration less than $1.00 per share and to reflect the occurrence of forward or reverse stock splits, corporate reorganizations or certain other corporate events. In connection with this transaction, the Company agreed to file a registration statement under the Securities Act of 1933, as amended, (the "Act") to register the shares issuable upon conversion of the Note. It constitutes an event of default under the Note and subjects the Company to liquidated damages if the Company does not complete an effective registration statement within 180 days of the effective date of the execution of a common stock subscription agreement, which would be executed when the lender provides notice of conversion of all or a portion of the debt, and if the Company does not maintain that effective registration statement for at least 90 days. For each week of non-compliance, liquidated damages are 2% of the product of (a) the sum of the holder's shares of stock not registered on a timely basis and (b) the weekly average closing price of the shares of the Company's common stock. The Company's obligations under the promissory note are collateralized by a security interest in substantially all of the Company's assets. In connection with the transaction, the Company issued to MMA a warrant to purchase up to 2,000,000 shares of the Company's common stock at an exercise price of $1.00 per share. The warrant is exercisable for a period of three years and the number of warrant shares and the exercise price are subject to adjustment in the event the Company issues or sells shares for a consideration less than $1.00 per share and to reflect the occurrence of forward or reverse stock splits, corporate reorganizations or certain other corporate events. If, at the time of exercise, there is not an effective registration statement covering the sale of the shares issuable upon exercise of the warrant, the warrant holder may exercise the warrant on a cashless basis, whereby the holder surrenders a portion of the warrants in lieu of paying the exercise price in cash. 17 A finder's fee equal to 8% of the proceeds ($160,000) was paid in cash to Forte Capital Partners LLC, in connection with the transaction. The transaction was exempt from the registration requirements of the Act by reason of Section 4(2) as a transaction by an issuer not involving any public offering. The $160,000 was recorded as a deferred debt issuance cost asset and is being amortized over the debt term. On September 20, 2006, the Company and MMA entered into a Second Modification of Secured Convertible Promissory Note, pursuant to which the principal of the Note was increased by $250,000 to $2,250,000. Further, on September 20, 2006, the Company and MMA entered into a Modification of Warrant to Purchase Shares of Common Stock, pursuant to which the number of warrant shares was increased by 250,000 shares to 2,250,000 shares. On March 5, 2007, the Company entered into a Settlement Agreement with MMA pursuant to which in consideration for the Company's issuance to MMA of a warrant exercisable for 3,000,000 shares of the Company's Common Stock with an exercise price of $1.50 per share (the "MMA Warrant"), MMA agreed to (i) extend the maturity date of the Company's outstanding promissory note payable to MMA to March 5, 2008; and (ii) to dismiss its action against the Company filed on November 22, 2006 in the United States District Court for the Northern District of California entitled MMA Capital, LLC v. Dynamic Leisure Corporation, Case No. C 06 7263 CRB (the "Action") with prejudice and to fully and finally waive all contract breaches alleged in the Action. The fair value of the warrant to purchase 3,000,000 shares of the Company's common stock of $1,266,122 was recorded as debt discount and warrant liability on the Company's consolidated balance sheet and the debt discount is being amortized over the remaining term of the promissory note. In addition, with respect to the registration statement on Form SB-2 filed with the Commission on December 18, 2006 (Commission File No. 333-139438) (the "MMA Registration Statement"), the Company agreed to use its commercially reasonable efforts to respond to any comments issued by the Staff of the Commission within ten (10) business days and to file any required amendments within five business days of receiving notice from the Commission that the Post-Effective Amendment to Registration Statement on Form SB-2 (Commission File No. 333-124283) is effective. In addition, the Company agreed not to withdraw the MMA Registration Statement without first obtaining written approval from MMA, to use commercially reasonable efforts to cause the MMA Registration Statement to become effective, and to maintain the effectiveness of the MMA Registration Statement, subject to certain exceptions, until the earlier of (i) one year; (ii) the date on which all securities covered by the MMA Registration Statement as amended from time to time, have been sold; or (iii) the date on which all the securities covered by the MMA Registration Statement as amended from time to time, can be sold in any three-month period without registration in compliance with Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). The Company's failure to comply with the provisions of Settlement Agreement shall be deemed to be an event of default, which if not cured within fifteen (15) days after receipt of written notice of such event of default, entitles MMA to nominate one person to the Company's Board of Directors (the "First MMA Nominee") and the Company is required to appoint MMA's nominee to its Board of Directors within two days thereafter. MMA is entitled to nominate one additional person to the Company's Board of Directors and the Company is required to appoint such nominee to its Board of Directors within two days thereafter, if an event of default is not cured by the Company within fifteen (15) days of the date the First MMA Nominee is nominated. The maximum number of nominees that MMA is entitled to under this provision is two. The MMA Warrant is exercisable for a term of three years for up to 3,000,000 shares of the Company's Common Stock at an initial exercise price of $1.50 per share. The exercise price and number of shares of Common Stock issuable upon exercise of the Warrant (the "Warrant Shares") are subject to adjustment for stock splits, stock combinations and certain reorganizations. The Warrant exercise price, but not the number of Warrant Shares is subject to a "full-ratchet" adjustment upon the issuance by the Company of shares of Common Stock for no consideration or for a consideration per share less than the 18 Warrant exercise price, subject to certain enumerated exceptions. The Company has agreed to register the sale of the Warrant Shares on a registration statement pursuant to the Securities Act. The MMA Warrant was issued in a private placement transaction, exempt from registration under the Securities Act, pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder. Per SFAS 133 and EITF 00-19 and related interpretations, the convertible note at the January 13, 2006 issuance date was classified as one financial instrument as it is considered conventional convertible debt. In addition, the warrant was classified as a liability ("warrant liability") (see Note 7) due to the liquidated damages provision in the registration rights agreement at its initial fair value with a corresponding charge to debt discount. The beneficial conversion value associated with the convertible debt is recorded as a debt discount and additional paid in capital. In accordance with SFAS 133, the warrants underlying the warrant liability were and are revalued quarterly based on assumptions in effect on that date using the Black-Scholes model. See Note 7 for the assumptions related to the revaluation and the related effect on the warrant liability and warrant valuation income (expense) during the period. In December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for Registration Payments" which was effective immediately. This FSP amends EITF 00-19 to require potential registration payment arrangements be treated as a contingency pursuant to FASB Statement 5 rather than at fair value. We considered the effect of this standard on the above warrant classification as a liability and determined that the accounting may have changed as a result of this standard; however, due to the new financing that occurred on November 9, 2006 as discussed below, the warrants must remain classified as a liability at March 31, 2008; therefore, there was no effect of implementing this standard. On November 8, 2007, the Company issued common stock pursuant to the conversion of a convertible debenture held by another investor at a conversion price of $0.128 per share. As a result, the conversion price of the MMA convertible debentures decreased to a fixed conversion price of $0.128, and the shares of common stock purchasable under the MMA warrants for 2,250,000 shares increased to 17,578,125 shares, and the warrant exercise price decreased to $0.128 per share. There is no accounting effect related to the reset of the conversion price of the convertible debentures. The reset of the shares and exercise price related to the warrants was accounted for as a change in the fair value of warrants recorded in the warrant and option liability account with a decrease in the warrant and option liability income account. On March 6, 2008, the Company issued common stock pursuant to the conversion of a convertible debenture held by another investor at a conversion price of $0.04 per share. As a result, the conversion price of the MMA convertible debentures decreased to a fixed conversion price of $0.04, and the shares of common stock purchasable under the MMA warrants for 2,250,000 shares increased to 56,250,000 shares, and the warrant exercise price decreased to $0.04 per share. There is no accounting effect related to the reset of the conversion price of the convertible debentures. The reset of the shares and exercise price related to the warrants was accounted for as a change in the fair value of warrants recorded in the warrant and option liability account with a decrease in the warrant and option liability income account. DynEco March 2, 2005 Convertible Notes and Modification and Waiver Agreements - ----------------------------------------------------------------------------- On January 13, 2006, and June 4, 2007, the Company and Alpha Capital Aktiengesellschaft, JM Investors, LLC, Libra Finance, S.A. and RG Prager Corporation entered into Modification and Waiver Agreements pursuant to which Convertible Promissory Notes issued by the Company to these parties in the aggregate principal balance of $327,000 on March 2, 2005. Pursuant to the January 13, 2006 Modification and Waiver Agreement, interest on these Notes at the rate of 5% per annum was to be paid quarterly, commencing March 31, 2006, and monthly principal amortization payments of approximately $29,700 were to commence on June 1, 2006. 19 The Company was in default of the terms of this Modification and Waiver Agreement for nonpayment of its quarterly interest payments. Accordingly, the Company began accruing default interest at the rate of 10% from the date of default of June 1, 2006. As consideration for the January 13, 2006, Modification and Waiver Agreement, the Company paid these noteholders a total of $232,210, consisting of $154,632 in principal payments and a premium in the amount of $77,578. The Company recorded the premium as additional expense in the fourth quarter of 2005. The notes are convertible at the conversion rate of $0.75 per share, subject to adjustments, including anti-dilution adjustments and an adjustment if the Company issues common stock or rights to purchase common stock at a price below $0.75 per share. As part of the terms of the Financing Transaction, the note holders released their security interest in the Company's assets. As additional consideration to induce the note holders to enter into the January 13, 2006, Modification and Waiver Agreement, the Company issued the investors an aggregate of 200,000 shares of its common stock. Pursuant to the terms of the Modification and Waiver Agreement (a) those provisions of the transaction documents dated March 2, 2005 providing exceptions to the adjustment provisions of the notes and warrants were eliminated, (b) the exercise price of the warrants to purchase up to 259,000 shares of the Company's common stock issued under the March 2, 2005 transaction documents was changed to $1.00 per share and the warrants are exercisable for three years from January 23, 2006 and (c) the number of shares issuable upon exercise of these warrants cannot be reduced to less than 300,000 shares, resulting in an issuance of 45,000 additional warrants. Under the Modification and Waiver Agreement, under certain circumstances, the Company may require the investors to exercise the warrants in full. The Company may prepay the remaining principal balance of the notes at 150% of the principle, plus interests and other amounts due, through the redemption date but only if an effective registration statement exists. During the first quarter of 2006, the Company recorded a non-cash loss relating to (i) the extinguishment of debt of $208,442, (ii) the value of the 200,000 shares of common stock issued (valued at $0.90 per share on the date of the Modification and Waiver Agreement, based on the closing price of common stock), (iii) issuance of additional warrants, and (iv) the write-off of deferred debt issue costs. The Company treated the modification as a cancellation of warrants (which resulted in a reclassification of $240,592 of warrant liability to equity) and issuance of new warrants. The new warrants were valued at $232,944 at the modification date. In accordance with SFAS 133, the warrants underlying the warrant liability are revalued quarterly based on assumptions in effect on that date using the Black-Scholes model. See Note 7 for the assumptions related to the revaluation and the related effect on the warrant liability and warrant valuation income (expense) during the period. On January 13, 2006, the Company agreed to file an amendment to the existing registration statement covering the sale of the shares issuable upon conversion of these notes and exercise of the warrants. Such registration statement was required to be filed on or before April 13, 2006 and become effective not later than 60 days after the date of filing, or the Company would be subject to the payment of liquidated damages to the note holders. The registration statement was filed on April 12, 2006 and was required to become effective by June 13, 2006. In addition, the Company agreed to file a new registration statement covering the sale of the shares issuable pursuant to the Modification and Waiver Agreement the sale of which was not covered by the existing registration statement. Such additional registration statement was required to be filed by May 13, 2006 and become effective not later than 60 days after the date of filing, or the Company would be subject to the payment of liquidated damages. The registration statement was filed on May 12, 2006 and was required to become effective by July 13, 2006. A Form 8-K/A, including the audited financial statements of the Company was filed on March 29, 2006, prior to April 5, 2006 as required. The post-effective amended registration statement and the additional registration statement did not become effective in the required 60 days due to comments received from the SEC with respect to the registration statement. The January 13, 2006, Modification and Waiver Agreement 20 provides for liquidated damages payable to the note holders of an amount equal to two percent (2%) of the Purchase Price of the Notes remaining unconverted for each thirty (30) days or part thereof, that a registration statement is not effective. The Modification and Waiver Agreement required the Company pay the liquidated damages in cash. The liquidated damages must be paid within ten (10) days after the end of each thirty (30) day period or shorter part thereof for which liquidated damages are payable. On June 4, 2007, the Company entered into a second Modification and Waiver Agreement with the note holders that combined all accrued interest and penalties on these notes as of June 4, 2007, aggregating $268,134 with the outstanding principal amount of the Notes of $155,158 and provided that interest would accrue on the new principal amount at the rate of 5% per annum beginning June 4, 2007. Penalties of $142,236 were recorded as interest expense on the settlement date. Interest is payable on any conversion date or on the maturity dates of the Notes, which have been extended to December 4, 2007. All principal and accrued interest is convertible at any time into shares of the Company's common stock at a fixed conversion price of $0.75, subject to adjustment. As long as the Notes are outstanding, if the Company issues any Common Stock, other than for certain enumerated exceptions as set forth in the Modification and Waiver Agreement, prior to the complete conversion of the Notes for a consideration less than $0.485 per share, the conversion price shall be reduced to such other lower issue price. In addition, the purchase price of the warrants is subject to adjustment if the Company issues any Common Stock other than for certain enumerated exceptions set forth in the Modification and Waiver Agreement, for a consideration less than $0.485 per share. In connection with the June 4, 2007 Modification and Waiver Agreement, the investors agreed to convert an aggregate of $150,000 due and payable under the Notes into 200,000 shares of the Company's common stock effective as of June 4, 2007. The notes were not paid on the maturity date and are in default. AJW - November 9, 2006 Convertible Term Notes - --------------------------------------------- On November 9, 2006, the Company entered into a Securities Purchase Agreement with AJW Partners, LLC. ("Partners"), AJW Offshore, Ltd. ("Offshore"), AJW Qualified Partners, LLC ("Qualified") and New Millenium Capital Partners, II, LLC ("Millenium"). Partners, Offshore, Qualified and Millenium are collectively referred to as the "Purchasers", whereby the Company sold to the Purchasers Secured Convertible Term Notes (the "Notes") in the aggregate principal amount of One Million Dollars ($1,000,000). The $1,000,000 was funded in two tranches ($600,000 on November 9, 2006, and $400,000 on January 5, 2007). The offering was made pursuant to Section 4(2) of the Act, as amended. The Notes bear interest at 6% per annum, unless the common stock of the Company is greater than $1.25 per share for each trading day of a month, in which event no interest is payable during such month. The Company's obligations under the Notes are collateralized by a security interest in substantially all of the Company's assets. The proceeds of the offering were used to repay certain indebtedness and for working capital. The Notes are convertible into common stock of the Company at a 50% discount to the average of the three lowest trading prices of the common stock during the 20 trading day period prior to conversion; provided, however, that the Notes are convertible into common stock of the Company at a 45% discount in the event that the Registration Statement covering the resale of securities underlying the Notes ("Registration Statement"), is filed on or before December 11, 2006; and (ii) a 40% discount in the event that the Registration Statement becomes effective on or before March 9, 2007. In connection with the offering, the Company issued an aggregate of 5,000,000 warrants to purchase common stock at a price of $1.50 per share ("Warrants"). The Warrants are exercisable for a period of seven years. The number of shares subject to the Warrant and the exercise price are subject to adjustment for stock splits, stock combinations and certain dilutive issuances, including the issuance of shares of Common Stock for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the 5-day average of the last reported sales of the Company's Common Stock. In addition, in certain circumstances the warrant exercise price will be adjusted if after the Registration Statement is declared effective, the closing price for the Company's Common Stock closes below $1.00. 21 Due to the variable conversion price, the secured convertible term notes were bifurcated and recorded as two liability instruments, a debt instrument and an embedded conversion option liability at fair value. The Company had an obligation to register shares of its common stock pursuant to the terms of a Registration Rights Agreement with the note holders. The Company believes that it no longer has an obligation to register these shares as a result of the July 31, 2007 settlement described below and the acquisition of Notes by Trafalgar Capital Specialized Investment Fund as described below. The Company has the right to redeem the Notes under certain circumstances, as well as the right to pay monthly cash payments to prevent any conversion of the Notes during such month. The Notes are secured by all of the Company's assets pursuant to the terms of a Security Agreement and Intellectual Property Security Agreement. On July 31, 2007, the Company entered into a settlement agreement with AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC and New Millenium Capital Partners, II, LLC, (collectively, the "Subscribers"). Pursuant to the settlement agreement, the Company agreed to pay $1,200,000 and to issue an aggregate of 500,000 shares of the Company's common stock to the Subscribers, in full satisfaction of all of the Company's obligations under the Securities Purchase Agreement, Security Agreement, Intellectual Property Security Agreement and Registration Rights Agreement dated November 9, 2006, by and between the Company and the Subscribers and secured convertible term notes in the aggregate principal amount of $1,000,000 issued by the Company in favor of the Subscribers. In addition, pursuant to the settlement agreement, the Company amended and restated the stock purchase warrants issued to the Subscribers pursuant to the warrant purchase agreement as follows: a) to remove the Company's obligation to secure the listing of the shares of common stock issuable upon the exercise of up to 5,000,000 warrants with a national securities exchange or automated quotation system upon which the Company common stock is then listed, b) to remove the anti-dilution provision c) to provide the holders of the warrants the right to receive securities or assets which may be issued or payable upon a consolidation, merger or sale of the Company, d) to provide the holders of the warrants the right to receive distribution of assets of the Company, including cash and e) to remove the cashless exercise option. On August 1, 2007, the Company amended an agreement with another investor related to the sale of convertible debt and warrants resulting in lowering the maximum conversion price of that convertible debt to $0.23 per share. As a result, the shares of common stock purchasable under the warrant for 5,000,000 shares increased to 6,929,812 shares and the exercise price decreased to $1.0823 per share. The reset of the shares and exercise price was accounted for as a change in the fair value of warrants recorded in the warrant and option liability account with a decrease in the warrant and option liability income account. On August 18, 2007, Trafalgar Capital Specialized Investment Fund, Luxembourg acquired the notes held by the Subscribers rather than the Company repaying the notes directly as agreed to in the Company's July 31, 2007 settlement agreement with the Subscribers. On August 6, 2007,the Company issued the Subscribers 500,000 shares of its common stock valued at $140,000 or $0.28 per share (the closing market price of the Company's common stock on the day of issuance) as provided for in the settlement agreement and on August 18, 2007 paid the Subscribers $210,000 in cash from proceeds from the issuance of a convertible debenture to Trafalgar in settlement of all accrued interest due the Subscribers and claims arising from the Notes. The value of the common stock and cash consideration totaled $350,000, and $43,160 was applied to accrued interest and the balance related to settlement charges recorded as interest expense totaling $306,840 recorded in August 2007. On November 11, 2007, Trafalgar converted $5,000 of secured convertible term notes it acquired on August 18, 2007, into 39,062 shares of the Company's common stock at a conversion rate of $0.128 per share. On March 6, 2008, Trafalgar converted $15,000 of secured convertible term notes it acquired on August 18, 2007, into 375,000 shares of the Company's common stock at a conversion rate of $0.04 per share (80% percent of the lowest bid price for the five (5) trading days immediately prior to the date of this conversion notice). 22 Trafalgar - July 11, 2007 Secured Convertible Debentures - -------------------------------------------------------- The Company entered into a Securities Purchase Agreement (the "Agreement") with Trafalgar Capital Specialized Investment Fund, Luxembourg ("Trafalgar") with respect to the purchase by Trafalgar of up to $2,400,000 of secured convertible debentures to be funded in three tranches with all outstanding principal and accrued interest due two years from the date each tranch is funded. On July 11, 2007, the Company closed on the first portion of the funding and issued a two-year $700,000 convertible debenture to Trafalgar. On August 18, 2007, the Company closed on the remaining funding, issued two-year convertible debentures aggregating $610,000 to Trafalgar and, as dicussed above, Trafalgar acquired the secured convertible debentures formerly held by AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC and New Millenium Capital Partners, II, LLC. The debentures bear interest at 12% per annum, compounded monthly (9.5% after effectiveness of a Registration Statement required under the agreement; see below), and is convertible into common stock at the lesser of (a) an amount equal to 100% of the Volume Weighted Average Price ("VWAP") as quoted by Bloomberg LP as of June 29, 2007 (the "Fixed Conversion Price"), or (b) an amount equal to 80% of the lowest daily closing bid price of the Company's Common Stock, as quoted by Bloomberg, LP, for the five (5) trading days immediately prior to conversion. The Company has the right to redeem the debenture at 120% of principal and accrued and unpaid interest. The funding is subject to customary commitment and other fees approximating an aggregate 10% of the funded amount, as defined in the agreement. In connection with the offering, the Company issued an aggregate of 3,000,000 warrants to purchase common stock at a price of 85% of the Fixed Conversion Price component of the convertible debentures, per share. The warrants are exercisable for a period of five years. The number of shares subject to the warrant and the exercise price are subject to adjustment for stock splits, stock combinations and certain dilutive issuances, including the issuance of shares of Common Stock for no consideration or for a consideration per share less than warrant price in effect immediately prior to such issuance. In connection with the Agreement, the Company entered into a registration rights agreement requiring the Company to register the securities underlying the convertible debentures and warrants. The Company must file within 55 days of June 29, 2007 and the registration statement must be effective within 90 days of June 29, 2007. If the filing or effectiveness dates are not complied with, or maintenance of effectiveness or other defaults occur, as defined in the Registration Rights Agreement, the Company will incur liquidated damages of 2% of the outstanding debenture value for each 30 days the default remains uncured. The registration was not effective as of March 31, 2008, and the Company has accrued liquidated damages on these notes totaling approximately $161,792 at March 31, 2008, which is included in other accrued liabilities on the accompanying balance sheet. On August 1, 2007, the Company entered into an Amendment to Securities Purchase Agreement, Secured Convertible Debenture and Security Agreement with Trafalgar under which (i) the exercise price of the Warrants issued to Trafalgar pursuant to the convertible debt financing which closed on July 11, 2007 (the "Financing") was reduced to $0.23 per share, provided, however, that if after registration of the shares issuable upon exercise of the Warrants, shares of the Company's common stock trade above $0.75 per share for 30 consecutive trading days, the exercise price of the Warrants will be increased to $0.50 per share; (ii) the Company agreed to issue to Trafalgar a warrant exercisable for an additional 5 million shares at $0.23 per share, provided, however, that if after registration of the shares issuable upon exercise of the Warrants, shares of the Company's common stock trade above $0.75 per share for 30 consecutive trading days, the exercise price of this Warrant will be increased to $0.646 per share and the number of shares exercisable pursuant to the Warrant will be reduced to 2 million; and (iii) the Fixed Price component of the variable conversion price discussed above of the Convertible Debenture was reduced to $0.23. 23 Trafalgar - January 24, 2008 Secured Convertible Debentures - ----------------------------------------------------------- On January 22, 2008, the Company entered into an agreement (the "Purchase Agreement") with Trafalgar Capital Specialized Investment Fund, Luxembourg ("Trafalgar") with respect to the purchase by Trafalgar of $1,200,000 of secured convertible debentures and the issuance of related warrants. On January 24, 2008, the Company issued two (2) convertible debentures to Trafalgar aggregating $1,200,000. The debentures bear interest at twelve percent (12%) per annum, compounded monthly, and are convertible into common stock at the lesser of (a) an amount equal to ten cents ($0.10) per share (the "Fixed Conversion Price"), or (b) an amount equal to eighty-five percent (85%) of the lowest daily closing bid price of the Company's common stock, as quoted by Bloomberg, LP, for the five (5) trading days immediately prior to conversion with each debenture subject to current exchange rate protection. In no event is Trafalgar entitled to convert the debentures or accrued interest into an amount of shares that would cause Trafalgar's ownership in the Company to exceed 4.99%. The $1,000,000 debenture requires interest-only payments for the first six (6) months from the closing date after which this debenture is to be redeemed over the remaining twenty-four (24) months through monthly principal and interest at a ten percent (10%) redemption premium. The $200,000 debenture requires redemption over twelve (12) months after closing through monthly principal and interest at a ten percent (10%) redemption premium. Should the Company raise in excess of $500,000 during the life of the debentures, it shall be required to redeem thirty percent (30%) of the outstanding principal balance of the debentures. Interest is payable in cash or common stock at a value equal to the closing bid price on the date the interest is due or when the interest is paid at the option of Trafalgar. The Purchase Agreement requires the Company to use proceeds from the $200,000 debenture for the purpose of acquiring a travel company based in the United Kingdom. Conditions to the Trafalgar purchase of the debentures included provisions whereby the Company shall a) cause each of its other lenders to file a Form UCC-3 within sixty (60) days of the date of the Purchase Agreement and the Company shall file a form UCC-1 or such other forms as may be required to perfect Trafalgar's interest in the pledged collateral as detailed in the related security agreement, providing Trafalgar with a senior lien on all of the Company's assets and intellectual property and provided proof of such filing to Trafalgar, b) establish a stock option plan for senior executives, including its Chief Executive Officer which shall allow the Company to grant to such employees options to acquire an aggregate of up to ten million (10,000,000) shares of the Company's common stock, provided that an option to acquire no less than seven million (7,000,000) of such shares is granted to the Company's Chief Executive Officer, c) take all necessary steps such that Trafalgar shall have the ability to appoint one member to the Company's Board of Directors and d) shall reduce the fixed conversion price to ten cents ($0.10) on all currently executed convertible debentures held by Trafalgar and the exercise price to ten cents ($0.10) on all currently executed warrants held by Trafalgar. As of May 15, 2008, no purchase agreement as been entered into by the Company to acquire a travel company based in the United Kingdom and the $200,000 is being held in escrow by Trafalgar and is recorded as a deposit on the Company's consolidated balance sheet. Due to the variable conversion price, the secured convertible term notes will be bifurcated and recorded as two liability instruments - a debt instrument and an embedded conversion option liability at fair value. In connection with the offering, the Company issued a warrant to purchase fifteen million (15,000,000) shares of the Company's common stock at one tenth of one cent ($0.001) per share ("Warrant"). The Warrant is exercisable for a period of five (5) years. The number of shares subject to the Warrant and the exercise price are subject to adjustment for stock splits, stock combinations and certain dilutive issuances, including the issuance of shares of common stock for no consideration or for a consideration per share less than warrant price in effect immediately prior to such issuance. In no event is Trafalgar entitled to acquire common stock through the exercise of this warrant in an amount of shares that would cause Trafalgar's ownership in the Company to exceed 4.99%. 24 The Company entered into an Investor Registration Rights Agreement that requires the Company to prepare and file no later than April 10, 2008 ("Scheduled Filing Deadline") with the SEC a registration statement under the 1933 Act and have this registration statement declared effective no later ninety (90) days ("Scheduled Effective Date") after the Scheduled Filing Deadline. In the event the Company fails to file or obtain effectiveness of the registration statement as agreed, the Company shall pay Trafalgar liquidated damages equal to two percent (2%) of the liquidated value of the debentures outstanding for each thirty (30) day period (or any part thereof) after the Scheduled Filing Deadline or the Scheduled Effective Date. The liquidated damages are capped at fifteen percent (15%). As of May 15, 2008, the Company has not filed with the SEC a registration statement covering these securities, and the Company has begun to accrue liquidated damages as of April 10, 2008. Convertible Promissory Note, Related Party - ------------------------------------------ On January 3, 2006, the Company issued a Convertible Promissory Note with an annual interest rate of 10% in the principal amount of $350,000 to Street Venture Partners, LLC, a related party, in conjunction with the purchase of the Casual Car General Service Agreement (GSA). The Note went into default for nonpayment on January 3, 2007, and the maturity date was extended on March 30, 2007 to July 1, 2008. As of March 31, 2008, the Note had an outstanding balance of $350,000. Other Notes Payable - ------------------- Notes payable consisted of the following: MARCH 31, DECEMBER 31, 2008 2007 --------- ------------ Notes Payable - Bearing interest at rates ranging from 5% to 15% unsecured and due at various dates through August 2007 ... $ 156,434 $ 156,434 Notes payable assumed from DynEco ....... 20,154 20,154 Line of credit - IRT/ITR ................ 210,000 210,000 --------- --------- $ 386,588 $ 386,588 Less current portion .................... (386,588) (386,588) --------- --------- Notes payable, net of current portion $ - $ - ========= ========= At March 31, 2008, the Company was in default of the repayment terms on certain 5% to 15% unsecured notes aggregating $156,434. This amount is included in notes payable, current portion on the accompanying consolidated balance sheet at March 31, 2008. 25 Capital Lease Obligation - ------------------------ The Company's capital leases consisted of the following: MARCH 31, DECEMBER 31, 2008 2007 --------- ------------- Total Capital Leases .................... $ 68,336 $ 77,634 Less Current Capital Leases ............. (38,750) (37,852) --------- --------- Long-term portion of Capital Leases .. $ 29,586 $ 39,782 ========= ========= Future maturities of capital lease obligations are as follows: 2008 $37,852 (including $9,298 recognized for the three months ended March 31, 2008) 2009 $20,998 2010 $11,897 2011 $ 6,887 NOTE 7 WARRANT AND OPTION LIABILITY The Company has recorded warrant and option liability related to convertible notes in connection with the Modification and Waiver Agreement of January 13, 2006, the MMA Capital LLC financing due to the liquidated damages provision in the registration rights agreement and outstanding convertible notes with a variable conversion price issued on and subsequent to November 9, 2006. These transactions require liability treatment under EITF 00-19 (see Note 6 and discussion within FSP EITF 00-19-2). EITF 00-19 requires liability treatment for all outstanding warrants and non-employee options as a result of the variable conversion price provision contained in these Convertible Notes. The Company recorded a warrant liability related to Convertible Notes in connection with the Modification and Waiver Agreement of January 13, 2006 and the MMA Capital LLC financing due to the liquidated damages provision in the registration rights agreement requiring liability treatment under EITF 00-19 (see Note 6 and discussion within FSP EITF 00-19-2). The Company also recorded warrant and option liability related to the Convertible Notes with a variable conversion price issued on November 9, 2006. EITF 00-19 requires liability treatment for all outstanding warrants and non-employee options as a result of the variable conversion price provision contained in these Convertible Notes. During the three months ended March 31, 2008, the warrant and option liability was increased for the fair value of warrants to purchase 15,000,000 shares of the Company's common stock issued pursuant to the Trafalgar January 24, 2008, financing and additional shares issuable under warrants resulting from anti-dilution provisions in the warrant agreements that were triggered during the quarter. The remaining warrant and option liability will continue to be revalued until the expiration date of the debt or at such time EITF 00-19 and related interpretations provide for the reclassification of these financial instruments to equity, with any changes in valuation recorded as warrant and option valuation income or expense. 26 The Company's warrant and option liability and related revaluation assumptions are as follows:
11/9/06 Warrant 3/2/05 Variable All Other Total and Option Convertible Conversion Trafalgar Warrants Warrant Valuation Note MMA Price Capital and and Option (Income) Holders Capital Notes Notes Options Liability Expense ----------- ----------- ----------- ---------- ----------- ----------- ----------- Balance at 12/31/2007 ...... $ 11,620 $ 1,104,720 $ 377,076 $ 631,097 $ 350,599 $ 2,475,112 $ - Value of warrants granted with debt issuance ... - - - 1,199,421 - 1,199,421 144,421 Increase related to anti-dilution provisions ...... - 1,604,697 146,154 - 207,320 1,958,171 1,958,171 Change in Value ... (2,825) 2,541,690 82,970 665,239 354,956 3,642,030 3,642,030 ----------- ----------- ----------- ---------- ----------- ----------- ----------- Balance at 3/31/2008 ....... $ 8,795 $ 5,251,107 $ 606,200 $2,495,757 $ 912,875 $ 9,274,734 $ 5,744,622 =========== =========== =========== ========== =========== =========== =========== 11/9/06 3/2/05 Variable All Other Convertible Conversion Trafalgar Warrants Note MMA Price Capital and Holders Capital Notes Notes Options ----------- -------------- ---------- --------------- --------------- January 24, 2008 (including issuance of warrant for 1,326,443 additional shares for reset provisions) - ----------------------------------------------------------------------------------------------------- Warrants/options .... 8,256,255 15,000,000 Exercise price ...... $0.9084 $0.001 Market price ........ $0.08 $0.08 Expected life (years) 2.1 5.0 Volatility .......... 245% 245% Discount rate ....... 2.5% 2.9% March 31, 2008 (including issuance of warrant for 38,671,875 and 4,296,875 warrants for reset provisions on March 6, 2008) - -------------------------------------------------------------------------- Warrants/options .... 304,500 59,250,000 8,256,255 23,000,000 7,970,213 Exercise price ...... $1.00 $0.04 to $1.50 $0.9084 $0.001 to $0.23 $0.04 to $11.25 Market price ........ $0.11 $0.11 $0.11 $0.11 $0.11 Expected life (years) 0.8 0.8 to 1.9 1.9 4.5 0.5 to 3.6 Volatility .......... 213% 213% 213% 213% 213% Discount rate ....... 1.7% 1.7% 2.0% 2.9% 2.2% to 2.8%
27 NOTE 8 EMBEDDED CONVERSION OPTION LIABILITY The Company recorded an embedded conversion option liability related to Convertible Notes with variable conversion prices issued on November 9, 2006, June 15, 2007, July 11, 2007, August 18, 2007 and January 24, 2008. Such variable conversion prices require liability treatment for embedded conversion option consisting of conversion prices equal discounts to the market price of the Company's common stock as of the end of each accounting period ranging from 15% to 45%. The remaining embedded conversion option liability will continue to be revalued until the expiration date of the debt with any changes in valuation recorded as conversion option valuation income or expense. The Company's embedded conversion option liability and related revaluation assumptions are as follows:
Trafalgar 11/9/06 1/5/07 4/16/07 6/15/07 Capital Total Variable Variable Variable Variable Variable Embedded Conversion Conversion Conversion Conversion Conversion Conversion Conversion Option Price Price Option Option Price Option (Income) Note Note Note Note Notes Liability Expense ---------- ---------- ---------- ---------- ---------- ----------- ---------- Balance at 12/31/2007 .... $ 803,426 $ 535,618 $ - $ 254,491 $1,679,442 $ 3,272,977 $ - Debt issued to Trafalgar ........ $ - - - - 1,309,446 1,309,446 1,309,446 Change in Value ... 686,744 492,085 193,777 179,924 1,938,175 (3,490,705) 3,490,705 ---------- ---------- ---------- ---------- ---------- ----------- ---------- Balance at 3/31/2008 ..... $1,490,170 $1,027,703 $ 193,777 $ 434,415 $4,927,063 $ 8,073,128 $4,800,151 ========== ========== ========== ========== ========== =========== ========== Trafalgar 11/9/06 1/5/07 4/16/07 6/15/07 Capital Variable Variable Variable Variable Variable Conversion Conversion Conversion Conversion Conversion Price Price Option Option Price Note Note Note Note Notes ---------- ---------- ---------- ---------- ---------------- January 24, 2008 - ---------------- Principal ............ $1,200,000 Shares upon conversion 23,529,412 Exercise price ....... $0.051 Market price ......... $0.08 Expected life (years) 2.5 to 1.0 Volatility ........... 245% Discount rate ........ 2.71% March 31, 2008 - -------------- Principal ............ $600,000 $400,000 $150,000 $200,000 $2,510,000 Shares upon conversion 15,064,935 10,389,310 3,125,000 4,166,667 50,821,087 Exercise price ....... $0.039 $0.039 $0.06 $0.048 $0.048 to $0.051 Market price ......... $0.15 $0.15 $0.11 $0.11 $0.11 Expected life (years) 1.6 1.6 0.1 1.25 0.8 to 2.3 Volatility ........... 213% 213% 213% 213% 213% Discount rate ........ 2.05% 2.05% 1.74% 1.74% 1.74% to 2.1%
28 NOTE 9 STOCKHOLDERS' DEFICIT Common Stock Issued For Services - -------------------------------- On March 6, 2008, the Company granted its Directors Daniel Brandano, David Shapiro and Jay Vahl 240,000, 340,000 and 200,000 shares of fully vested common stock, respectively, for services as board members valued at $78,800 in the aggregate. For accounting purposes, the shares were valued at $46,800 or $0.06 per share (based on the closing price of the Company's common stock on the date of grant). The Company recorded as accrued expenses to related parties and charged operations as of December 31, 2007 in the amount of $32,000 related to these director fees with the balance charged to operations during the three months ended March 31, 2008. During 2007, the Company has entered into agreements with third parties to provide various services including investor relation services, equity research about the Company and financial consulting services. Pursuant to these agreements, the Company issued vested shares of common stock. The fair value of the shares of common stock on the grant dates are being recognized over the terms to the agreements. During the three months ended March 31, 2008, a total of $33,822 was recorded as equity and charged to operations as an expense for shares issued in 2007. Common Stock Issued Upon Conversion of Debt - ------------------------------------------- On March 6, 2008, Trafalgar converted $15,000 of secured convertible term notes it acquired on August 18, 2007 into 375,000 shares of the Company's common stock at a conversion rate of $0.04 per share (80% percent of the lowest bid price for the five (5) trading days immediately prior to the date of this conversion notice). Common Stock Issued Because Of Anti-Dilution Provisions - ------------------------------------------------------- On January 22, 2008, the Company recorded 1,413,043 shares of common stock as issuable with a charge to additional paid-in capital for the shares' par value of $14,130. The shares are issuable to Miller Investments pursuant to a 2006 stock subscription agreement with anti-dilution provisions invoked by the January 22, 2008, sale of convertible debentures to Trafalgar. Common Stock Warrants, Options and Valuation - -------------------------------------------- The Company had outstanding vested and unvested warrants and options as follows: MARCH 31, Exercisable Securities 2008 ---------------------- ------------ Warrants ............. $ 98,780,968 Options .............. 1,149,762 ------------ $ 99,930,730 ============ The Company estimates the value of awards of share-based payments using the Black-Scholes option pricing method that uses assumptions in effect on the date of grant. The assumptions of volatility are based on historical volatility since the Company does not have traded options on which to base any estimate of implied volatility. The assumptions of expected term are based on the contractual term since the Company has no reliable history to measure the expected term. The risk-free rate for periods within the expected term of the option is based on the U.S. treasury yield curve in effect at the time of the grant. 29 Common Stock Warrants Issued to Non-Employees - --------------------------------------------- The following is a summary of warrant activity: Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Non-Employee Warrants Shares Price Term Value - --------------------- ---------- -------- ----------- --------- Outstanding at December 31, 2007 . 308,000 $ 1.16 1.83 - Granted .......................... - - - - Exercised ........................ - - - - Forfeited or expired ............. - - - - ---------- ------ ---- ---- Outstanding at March 31, 2008 .... 308,000 $ 1.16 1.83 - ========== ====== ==== ==== Exercisable at March 31, 2008 .... 308,000 $ 1.16 1.83 - ========== ====== ==== ==== Warrants Issued for Cash or Related to Debt - ------------------------------------------- The following is a summary of warrant activity for warrants sold for cash or related to debt: Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Warrants Issued for Cash Shares Price Term Value - ------------------------ ---------- -------- ----------- --------- Outstanding at December 31, 2007 . 39,177,775 $ 0.58 2.80 - Granted .......................... 15,000,000 $ 0.001 5.00 - Increase related to anti-dilution provisions ....... 44,295,193 $ 0.07 2.90 - Exercised ........................ - - - - Forfeited or expired ............. - - - ---------- ------- ---- ---- Outstanding at March 31, 2008 .... 98,472,968 $ 0.22 2.72 - ========== ======= ==== ==== Exercisable at March 31, 2008 .... 98,472,968 $ 0.22 2.72 - ========== ======= ==== ==== The weighted average valuation assumptions for grants with the sale of common stock or issuance of debt for cash during 2008 are as follows: 2008 ------ Expected volatility .......... 222% Weighted average volatility .. 222% Expected dividends ........... 0 Expected term (in years) ..... 2.2 Risk-free rate ............... 2.11% On January 24, 2008, pursuant to Trafalgar's purchase of secured convertible debentures, the Company issued an aggregate of 15,000,000 warrants to purchase common stock at a price of $0.001 per share. The warrants are exercisable for a period of five (5) years. The number of shares subject to the warrant and the exercise price are subject to adjustment for stock splits, stock combinations and certain dilutive issuances, including the issuance of shares of common stock for no consideration or for a consideration per share less than warrant price in effect immediately prior to such issuance. 30 On March 6, 2008, Trafalgar converted $15,000 of secured convertible term notes at a conversion rate of $0.04 per share. As a result, shares of common stock purchasable under warrant agreements with MMA and Miller Investments increased from 17,578,125 and 1,953,125 to 56,250,000 and 6,250,000 shares, respectively, and the exercise price of these warrants decreased from $0.128 to $0.04 per share. Additionally, shares of common stock purchasable under warrant agreements with AJW Partners, LLC and affiliates increased from 6,929,812 to 8,256,255 shares, and the exercise prices of these warrants decreased from approximately $1.08 to approximately $0.91 per share. There is no accounting effect related to the reset of the conversion price of the convertible debentures. The reset of the shares and exercise price related to the warrants was accounted for as a change in the fair value of warrants recorded in the warrant and option liability account with a charge to the warrant and option liability expense account on March 8, 2008. Non-Plan Common Stock Options to Non-Employees - ---------------------------------------------- At March 31, 2008, the Company had the following non-plan options outstanding and exercisable:
Outstanding Options Exercisable Options ---------------------------------- ---------------------- Weighted Weighted Weighted Range of Average Average Average Exercise Number Remaining Exercise Number Exercise March 31, Price Outstanding Life Price Exercisable Price - --------- --------------- ----------- --------- -------- ----------- -------- 2008 $0.485 to $0.70 1,050,000 3.4 Years $ 0.66 1,050,000 $ 0.66
A summary of the changes in non-plan stock options outstanding is presented below: Weighted Average Shares Exercise Price --------- -------------- Options outstanding as of December 31, 2007........ 1,050,000 $ 0.66 Options granted ................................... - - Options exercised ................................. - - Options cancelled ................................. - - Options forfeited ................................. - - --------- -------- Non-plan options outstanding at March 31, 2008 .... 1,050,000 $ 0.66 ========= ======== Weighted average fair value of options granted during the period ended March 31, 2008 ......... $ - ======== The Company estimates the value of awards of share-based payments using the Black-Scholes option pricing method that uses assumptions in effect on the date of grant. The assumptions of volatility are based on historical volatility since the Company does not have traded options on which to base any estimate of implied volatility. The assumptions of expected term are based on the contractual term since the Company has no reliable history to measure the expected term. The risk free rate for periods within the expected term of the option are based on the U.S. treasury yield curve in effect at the time of the grant. Stock-Based Compensation Plans - ------------------------------ On January 13, 2006, in conjunction with the a recapitalization on that date, the Company assumed obligations under outstanding non-qualified option plans consisting of the 2001 Equity Incentive Plan and two expired plans, the 1993 Corporate Stock Option Plan and the 1993 Advisors Stock Option Plan from a predecessor. There were no grants under these plans during 2006, 2007 or year-to-date 2008. The Company does not anticipate issuing any options under these non-qualified option plans. 31 In May 2007, the Company's Board of Directors approved the 2007 Stock Option/Stock Issuance Plan. No grants of options have been made from this plan as of March 31, 2008; however, 1,050,000 shares of common stock have been granted under this plan as of this period end. At March 31, 2008, the Company had the following plan options outstanding and exercisable: Outstanding Options Exercisable Options ------------------------------------ ----------------------- Weighted Weighted Weighted Range of Average Average Average Exercise Number Remaining Exercise Number Exercise Price Outstanding Life Price Exercisable Price - -------- ----------- --------- -------- ----------- -------- $ 3.00 42,500 1.3 Years $ 3.00 42,500 $ 3.00 $ 11.40 50,595 1.9 Years $ 11.40 50,595 $ 11.40 $ 3.60 6,667 2.0 Years $ 3.60 6,667 $ 3.60 ------- ------- 99,762 99,762 ======= ======= The following is a summary of the changes in plan options outstanding: Weighted Average Shares Exercise Price --------- -------------- Options outstanding at December 31, 2007 .......... 99,762 $ 7.30 Options exchanged in recapitalization ............. - $ - Options granted ................................... - $ - Options exercised ................................. - $ - Options forfeited ................................. - $ - --------- -------- Plan options outstanding at March 31, 2008 ........ 99,762 $ 7.30 ========= ======== Plan options exercisable at March 31, 2008 ........ 99,762 ========= Weighted average fair value of options granted during the period ............................... $ - ======== Predecessor 2001 Equity Incentive Plan Under the 2001 Equity Incentive Plan, a total of 1,000,000 shares of our common stock were reserved for issuance upon exercise of incentive and non-qualified stock options, stock bonuses and rights to purchase awarded from time-to-time, to our officers, directors, employees and consultants. Absent registration under the Securities Act of 1933, as amended, or the availability of an applicable exemption there from, shares of common stock issued upon the exercise of options or as restricted stock awards will be subject to restrictions on sale or transfer. As of March 31, 2008, options to purchase 22,278 shares are outstanding under the 2001 Equity Incentive Plan. Predecessor 1993 Corporate Stock Option Plan Under the 1993 Corporate Stock Option Plan, a total of 750,000 shares of our common stock were reserved for issuance upon exercise of stock options granted, from time-to-time, to our officers, directors, and employees. This Corporate Stock Option Plan has expired. As of March 31, 2008, options to purchase 70,817 shares are outstanding under the 1993 Corporate Stock Option Plan. Predecessor 1993 Advisors Stock Option Plan Under the 1993 Advisors Stock Option Plan, a total of 750,000 shares of our common stock reserved for issuance upon exercise of stock options granted, from time-to-time, to our advisors and consultants. 32 Absent registration under the Securities Act of 1933, as amended, or the availability of an applicable exemption therefrom, shares of common stock issued under the above plans upon the exercise of options are subject to restrictions on sale or transfer. As of the date of this report, options to purchase 6,667 shares had been granted and are outstanding under the 1993 Advisors Stock Option Plan. The 1993 Advisors Stock Option Plan has terminated, and no further awards may be made thereunder; however, outstanding awards of 6,667 shares are outstanding under this plan until their termination date on December 31, 2008. 2007 Stock Option/Stock Issuance Plan In May 2007, the Company's Board of Directors approved the 2007 Stock Option/Stock Issuance Plan and reserved a total of 5,500,000 shares of common stock for issuance under this plan. On May 23, 2007, the Company filed a Form S8 registering the shares issuable under this plan with the Securities and Exchange Commission. The plan allows the issuance of stock options and outright grants of common stock, from time-to-time, to its officers, directors, employees and independent contractors who provide services to the Company. As of December 31, 2007, a total of 1,050,000 shares of common stock have been granted to independent contractors/consultants. No grants of options have been made from the Plan as of March 31, 2008. Share-Based Compensation - ------------------------ For the three months ended March 31, 2008, the Company recognized compensation costs for employees, directors, consultants and others totaling $48,622. This amount increased the Company's operating expenses and equity during the period. NOTE 10 INCOME TAXES For financial statement purposes, no tax expense or benefit has been reported as the Company has had cumulative net operating losses since inception, and realization of tax benefits on accumulated net operating losses is uncertain. Accordingly, a valuation allowance has been established for the full amount of the deferred tax asset. The utilization of net operating loss carryforwards are dependent upon the Company's ability to generate sufficient taxable income during the carryforward period. In addition, utilization of the carryforward may be limited due to ownership changes as defined in the Internal Revenue Code. NOTE 11 RELATED PARTIES AND SIGNIFICANT SHAREHOLDERS Street Venture Partners, LLC - ---------------------------- Street Venture Partners, LLC is a privately-held company owned equally by Daniel G. Brandano, the Company's CEO and Chairman, and his spouse. As of March 31, 2008, Street Venture Partners LLC owned 1,066,666 shares or approximately 6.3% of the Company's issued and outstanding common stock. Claudale Ltd. - ------------ Claudale Limited is a Gibraltar-based company that manages a family trust (which owns no shares of the Company's common stock) for Mr. Daniel G. Brandano, the Company's CEO and Chairman. Mr. Brandano has no ownership interest in Claudale Limited and disclaims beneficial ownership or control of any shares of the Company's common stock owned by Claudale Limited. At March 31, 2008, Claudale Ltd. owned 693,333 shares or approximately 4.1% of the Company's issued and outstanding common stock. 33 Brian J. Brandano - ----------------- On October 1, 2007, the Company entered into a month-to-month consulting agreement with Brian J. Brandano for management services as directed by the corporate controller for which the Company pays $1,500 per week. At March 31, 2008, Brian J. Brandano owned 292,243 shares or approximately 1.7% of the Company's issued and outstanding common stock. Brian J. Brandano is the son of Daniel G. Brandano, the Company's CEO and Chairman, and was employed by the Company until July 2006. Payable to Employee (Stephen A. Hicks) - -------------------------------------- At March 31, 2008, the Company owed $160,000 to Stephen A. Hicks, the former 100% shareholder of IRT/ITR, for advances made to IRT/ITR prior to its acquisition by the Company. There is currently no interest being charged for the use of the advance, nor is any interest anticipated to be paid. NOTE 12 COMMITMENTS AND CONTINGENCIES Neither the Company nor its subsidiaries have material commitments or contingencies for purchasing goods or services that are not reported in the Company's consolidated financial statements, notes, or other disclosures at March 31, 2008. Operating Leases - ---------------- The Company currently leases office space in its Tampa, Florida, and New York City locations. Monthly rent expense under the Tampa, Florida lease is approximately $13,700 per month, and the lease expires June 2011. Monthly rent expense under the New York City lease was approximately $11,500 per month, and the lease expired in April 2008. The Company entered into a new lease in New York City for approximately $5,000 per month, and the lease expires April 14, 2010. Rent expense for the three months ended March 31, 2008 was $97,370. Future lease obligations are as follows for the years ended December 31: 2008 ..... $250,202 2009 ..... $207,361 2010 ..... $180,729 2011 ..... $ 95,549 Legal Proceedings - ----------------- The Company filed a lawsuit in Hillsborough County, Florida, Circuit Court on March 2, 2007 against Stephen Hicks. The complaint seeks recovery of damages or alternative relief arising from breach of a contract under which the Company acquired IRT/ITR. The complaint alleges non-compliance with certain terms and conditions providing for integration of the companies. On March 5, 2007, counsel for Stephen Hicks notified the registrant that it was allegedly in breach of a convertible debenture payable under the March 6, 2006 Purchase Agreement between the registrant and Hicks (the "Agreement") that provided for the registrant's acquisition of IRT/ITR. The Agreement calls for payment of a convertible debenture in the amount of $1,450,000 as of March 6, 2007. In the event of any failure to pay on the convertible debenture, the Agreement provides for a continuing obligation to pay interest at a nine percent (9%) annual rate. On October 30, 2007, Stephen Hicks filed an answer and counterclaim to the Company's complaint filed March 2, 2007, alleging breach of the Agreement regarding the convertible debenture payable and other financial matters pursuant to the Agreement. The Company has classified the convertible debenture as a current liability and has recorded accrued interest of $269,670 related to this obligation on its consolidated balance sheet as of March 31, 2008. The Company believes it has recorded all other financial obligations due under the Agreement. 34 The Company is currently in discussions with Mr. Hicks regarding the settlement of the matters arising on March 2, 2007 and October 30, 2007. In January 2008, the Company has been named as a principal party to proceedings brought in the name of MMA Capital, LLC ("MMA") in United States District Court for the Northern District of California alleging breach of the Secured Convertible Promissory Note and Security Agreement executed by the parties on or about January 11, 2006. The complaint also alleges breach of the Confidential Settlement Agreement executed by the parties on or about March 5, 2007. On February 23, 2008, the Company filed a counterclaim against MMA Capital, LLC in United States District Court for the Northern District of California alleging breach of the Secured Convertible Promissory Note, Security Agreement and Confidential Settlement Agreement. Section 6 of the Confidential Settlement Agreement encouraged the Company to obtain additional or alternative financing and that if the Company obtained additional or alternative financing from any lender, which exceeded $3,000,000, MMA would subordinate its security position in the collateral to the security position of the other lender. The Company alleges MMA breached the Agreements by attempting to prevent and interfere with its efforts to obtain additional financing with Trafalgar, by MMA refusing to agree to subordinate its security interest in the collateral to the security interest of Trafalgar despite Trafalgar already lending or investing more than $3,000,000 to the Company. The Company also alleges MMA's interference by, among other things, attempting to dissuade Trafalgar from providing additional financing or investment and filing a bad faith temporary restraining order that interfered with the Company's prospective economic advantage by preventing the Company from obtaining all or more financing and/or investment from Trafalgar and other investors or lenders. As a direct and proximate result of MMA's alleged interference, the Company has been damaged in an amount in excess of $2,500,000. The Counterclaim alleges MMA's actions were wanton, willful and despicable, entitling the Company to punitive damages also. The parties are in discussions to settle this matter. In January 2008, the Company has been named as a principal party to proceedings brought in the name of Bay West Tampa Investors, LLC in Hillsborough County, Florida, Circuit Court seeking collection of payments under the corporate office real estate lease. This matter was settled on February 6, 2008, and full payment of obligations due at the time under the real estate lease was made on March 14, 2008. From time to time, we may become subject to proceedings, lawsuits and unasserted claims in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. As of the date of this report, we do not believe that any of these matters would be material to the Company's financial condition or operation. NOTE 13 SUBSEQUENT EVENTS On May 1, 2008, the Company engaged Creative Capital Worldwide, LLC ("CCW") to provide investor relations advisory services on a non-exclusive basis. The advisory agreement ("Agreement") provides for a monthly fee of $5,000 plus the issuance of 750,000 shares of the Company's common stock valued at $52,500 or $0.07 per share determined using the market stock price as of the date of the Agreement. The fair value of $52,500 will be amortized over the two-month fixed term of the Agreement. The Agreement provides for piggy-back registration rights for one (1) year. The Agreement may be terminated upon ten (10) days' prior written notice on or after June 21, 2008, but not later than June 30, 2008. Thereafter, the Agreement may be terminated upon thirty (30) days' written notice. At the Company's option, this Agreement may be renewed for a period of six (6) months beginning on July 1, 2008. 35 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion and analysis provides information that Management believes is useful in understanding our operating results, cash flows and financial condition. The discussion should be read in conjunction with, and is qualified in its entirety by reference to, the unaudited Condensed Financial Statements and Notes thereto appearing elsewhere in this report and the audited Financial Statements and related Notes to Financial Statements contained in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007. Certain disclosures in this Quarterly Report on Form 10-Q include certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Statements that include words such as "believe," "expect," "should," intend," "may," "anticipate," "likely," "contingent," "could," "may," "estimate," or other future-oriented statements, are forward-looking statements. Such forward-looking statements include, but are not limited to, statements regarding our business plans, strategies and objectives, and, in particular, statements referring to our expectations regarding our ability to continue as a going concern, realize improved gross margins, and timely obtain required financing. These forward-looking statements involve risks and uncertainties that could cause actual results to differ from anticipated results. The forward-looking statements are based on our current expectations and what we believe are reasonable assumptions given our knowledge of the markets; however, our actual performance, results and achievements could differ materially from those expressed in, or implied by, these forward-looking statements. Factors, within and beyond our control, that could cause or contribute to such differences include, among others, the following: the success of our capital-raising and cost-cutting efforts, and implementing new technology; political and regulatory environments and general economic and business conditions; the effects of our competition; the success of our operating, marketing and growth initiatives; development and operating costs; the amount and effectiveness of our advertising and promotional efforts; brand awareness; the existence of adverse publicity; changes in business strategies or development plans; quality and experience of our management; availability, terms and deployment of capital; labor and employee benefit costs, as well as those factors in our filings with the Securities and Exchange Commission, particularly the discussions under "Risk Factors." Readers are urged to carefully review and consider the various disclosures made by us in this report and those detailed from time to time in our reports and filings with the SEC. Our fiscal year ends on December 31. References to a fiscal year refer to the calendar year in which such fiscal year ends. OVERVIEW Dynamic Leisure Corporation is engaged in the business of marketing, selling and distributing a variety of vacation packages, cruises, domestic and international airline tickets, car rental services and accommodation products and services on a wholesale basis to travel agencies and other travel resellers and on a retail basis directly to consumers. The Company also sells certain stand-alone travel products on an agency basis. For the three months ended March 31, 2008 and its fiscal year ended December 31, 2007, substantially all of the Company's travel products were for destinations in the Caribbean and Mexico. Through our websites and customer service center, customers can search for, inquire about, price and purchase vacation packages and other travel-related products. We have experienced travel consultants and customer service representatives available to both our wholesale and retail customers via toll-free telephone or e-mail to assist customers in selecting and purchasing vacation packages and stand-along travel related products. Through our websites, www.Changes.com and www.eCasual.com, consumers can search for and price cruises and vacation packages. Through our website www.IslandResortTours.com, travel agencies and other travel resellers can search for and price vacation packages for their clients. At March 31, 2008, we have eight (8) travel consultants and customer service representatives headquartered in our 10,000 square foot facility in Tampa, Florida and five (5) travel consultants and customer service representatives in our New York office with whom both our wholesale and retail customers may contact via toll-free telephone or email to purchase vacation packages. 36 Our strategy now is focused primarily on the acquisition and integration of key assets in the leisure travel industry to provide an ongoing business base, including the implementation of our proprietary dynamic packaging travel software, TourScape. The Company intends to grow by continuing to focus on the leisure travel markets of the Caribbean and Mexico, by expanding its travel products for destinations in Florida, California, Las Vegas, Hawaii, Europe, and Central and South America, and by developing a more prominent Internet presence. We are a Minnesota corporation with our principal executive offices located at 5680A W. Cypress Street Tampa, Florida 33607. Our telephone number is (813) 877-6300. RESULTS OF OPERATIONS REVENUE Revenues increased for the three months ended March 31, 2008 compared to the corresponding period ended March 31, 2007 as follows: Percent Percent of of 2008 Revenue 2007 Revenue Change ---------- ------- ---------- ------- ------ Vacation packages .... $2,018,665 90% $1,755,555 89% 15% Airline tickets and related fees ......... 229,671 10% 215,838 11% 6% ---------- ------- ---------- ------- ------ Total ................ $2,248,336 100% $1,971,393 100% 14% ========== ======= ========== ======= ====== Our revenue was primarily derived from the sale of vacation packages recorded on a gross basis and the sale of airline tickets recorded on a net revenue basis. Our revenues from vacation package sales increased $263,110 or 15% as a result of our focus on expanding these types of revenues. COST OF REVENUE Cost of revenues increased for the three months ended March 31, 2008, compared to the corresponding period ended March 31, 2007, as follows: Percent Percent of of Related Related 2008 Revenue 2007 Revenue ---------- ------- ---------- ------- Vacation packages .............. $1,826,478 90% $1,424,251 81% Airline tickets and related fees 58,755 26% 51,183 24% ---------- ------- ---------- ------- Total .......................... $1,885,233 84% $1,475,434 75% ========== ======= ========== ======= Cost of revenues related to the sale of vacation packages includes the cost of hotel rooms, airline tickets, rental cars, transfers and other related fees bundled into a single travel product purchased by our customers. Cost of revenues related to the sale of airline tickets and related fee revenue reported on a net basis consists of commissions payable to independent travel agents and certain third-party processing fees. The cost of revenues increased for the three months ended March 31, 2008, compared to the corresponding period of 2007, and the percentage of cost of revenues to revenues increased. The increase in the percentage of cost of revenue to revenue is the result of increased competition in the Caribbean and eastern Mexico. The Company believes it can lower its costs of revenues as a percentage of revenue by continuing to expand the sales of vacation packages to destinations with higher margins such as Florida, Hawaii, Europe and South America. The Company further expects its cost of revenues as a percentage of revenue to decrease in the future through improved utilization of its wholesale bulk air contracts and the full utilization of its TourScape software system; however, competitive pressures are expected to limit the Company's ability to substantially increase margins and reduce cost of revenues. 37 GROSS PROFIT Gross profit decreased for the three months ended March 31, 2008, compared to the corresponding period ended March 31, 2007, as follows: Percent Percent of of Related Related 2008 Revenue 2007 Revenue Change -------- ------- -------- ------- ------ Vacation packages .............. $192,187 10% $331,304 19% -% Airline tickets and related fees 170,916 74% 164,655 76% -% -------- ------- -------- ------- ------ Total .......................... $363,103 16% $495,959 25% -% ======== ======= ======== ======= ====== Our gross profit decreased for the three months ended March 31, 2008, compared to the corresponding period of 2007, and the percentage of gross profit to revenues decreased. The decrease in the total amount of gross profit and the percentage gross profit to revenue is the result of increased competition in the Caribbean. The Company believes it can increase its gross profit as a percentage of revenue by continuing to expand the sales of vacation packages to destinations with higher margins such as Florida, Hawaii, Europe and South America.. The Company further expects its gross profit as a percentage of revenue will increase in the future through improved utilization of its wholesale bulk air contracts, and the full utilization of its TourScape software system; however, competitive pressures are expected to limit the Company's ability to substantially increase margins. OPERATING EXPENSES Our operating expenses decreased throughout the Company for the year ended March 31, 2008, compared to the corresponding period ended March 31, 2007, as follows:
2008 2007 ------------------------------- ------------------------------- Stock- Stock- Percent Based Percent Based of Compen- of Compen- Total Revenue sation Total Revenue sation Change ---------- ------- ---------- ---------- ------- ---------- ------ Employee compensation .......... $ 415,671 18% $ - $ 560,229 28% $ - (26%) Financial consulting ........... 39,777 2% 33,822 190,927 10% 32,950 (79%) Legal expense .................. 35,694 2% - 40,084 2% - (11%) Depreciation & amortization .... 271,950 12% - 212,232 11% - 28% Internal accounting and external auditing expense ............. 76,276 3% - 112,350 6% - (32%) Director fees .................. 14,800 1% 14,800 134,848 7% 134,848 (89%) Investor relations ............. 56,906 3% - 203,554 10% 157,100 (72%) Other G&A expenses ............. 276,674 12% - 433,081 22% - (36%) ---------- ------- ---------- ---------- ------- ---------- ------ Total .......................... $1,187,748 53% $ 48,622 $1,887,305 96% $ 324,898 (37%) ========== ======= ========== ========== ======= ========== ======
Operating expenses for the three months ended March 31, 2008, were $1,187,748 compared to $1,887,305 for the corresponding period for 2007 or a decrease of 37% between periods. Operating expenses exclusive of stock-based compensation decreased by $423,281, a decrease of 27% between periods. Operating expenses related to stock-based compensation decreased by $276,276 or 85% between periods. This decrease is a result of fewer awards of common stock for services and the decrease in the trading value of the Company's common stock between the periods. 38 Employee compensation decreased by $144,558 for the three months ended March 31, 2008, compared to the corresponding period for 2007 or a decrease of 26% between periods. The Company reduced its headcount by not replacing individuals who voluntarily terminated employment with the Company during the fourth quarter of 2007 and first quarter 2008 to conserve working capital in an effort to align its expense structure with its current volume of business. Financial consulting expense decreased for the three months ended March 31, 2008, compared to the corresponding period for 2007 by $151,150 or 84%. The reduction is the result of the Company engaging fewer consultants in an effort to align its expense structure with its current volume of business. Legal expense decreased for the three months ended March 31, 2008, compared to the corresponding period for 2007. Legal expense changes from quarter to quarter based upon the timing of security filings, convertible debt financings and assistance with resolving legal disputes. The change between these periods was not significant. Depreciation expense increased $31,414 for the three months ended March 31, 2008, compared to the corresponding period for 2007 as a result of the Company's Tourscape software being placed in service in March 2007. The amortization of deferred loan costs and intangible assets increased $27,935 and $369, respectively. Deferred loan cost amortization increased as a result of the additional costs subject to amortization being recorded after March 31, 2007. Internal accounting and external auditing expenses decreased $36,074 during the three months ended March 31, 2008, compared to the corresponding period for 2007 as a result of efficiencies developed by the Company's accounting professionals between periods. Director fees decreased in total as a result of a lower market price of the Company's common stock on the date of grant of stock-based compensation during the three months ended March 31, 2008, compared to the corresponding period for 2007. Investor relations expense decreased during the three months ended March 31, 2008, compared to the corresponding period for 2007 as a result of the Company's efforts to conserve working capital and focus expenditures on revenue-generating activities. Other general and administrative costs decreased $156,407 or 34% during the three months ended March 31, 2008, compared to the corresponding period for 2007 as a result of the Company's efforts to conserve working capital. As we increase the volume of our business, enter into additional contracts with suppliers, and sell more products directly to customers over the Internet, we anticipate general and administrative expenses as a percentage of revenue to decrease even further. The Company has utilized its securities in the past as consideration to purchase certain services from business and financial consultants, investor relation firms, attorneys and directors. As a result, operating expenses for three months ended March 31, 2008, included $48,622 in stock-based compensation representing the fair value of grants to common stock, warrants and options to these parties compared to $324,898 in the corresponding period in 2007. The Company expects to continue to use its securities to purchase services in the future as the board of directors deems appropriate. Should this occur, the Company will recognize stock-based compensation expense based on the fair value of securities issued for services. 39 OTHER INCOME / EXPENSE Our interest expense increased for the three months ended March 31, 2008, compared to the corresponding period ended March 31, 2007, as follows: 2008 2007 ---------- ---------- Regular interest expense ............................. $ 303,794 $ 199,489 Amortization of debt discount on convertible debt .... 588,250 564,393 ---------- ---------- Total ................................................ $ 892,044 $ 763,882 ========== ========== Interest expense decreased between periods primarily because of greater levels of interest-bearing debt outstanding during the three months ended March 31, 2008, compared to the corresponding period for 2007. Our warrant and option valuation expense and embedded conversion option valuation expense changed between the three months ended March 31, 2008, and the corresponding period in 2007 as follows: 2008 2007 ------------ ---------- Warrant and option valuation income (expense)....... $ (5,744,622) $2,974,005 Embedded conversion option valuation income (expense)................................. (4,800,151) (15,279) ------------ ---------- Total .............................................. $(10,544,773) $2,958,726 ============ ========== The fair value adjustment for outstanding warrants and options as of March 31, 2008, resulted in the recognition of non-cash expense of $5,744,622 for the three months ended March 31, 2008, compared to non-cash income of $2,974,005 for the corresponding period of 2007. The fair value of outstanding warrants and options recorded as liabilities and the related increase or decrease in warrant and option valuation income (expense) is directly related to the number of potentially dilutive securities being valued, the trading price of the Company's common stock at the balance sheet date and the Company's common stock volatility factor. At March 31, 2008 and 2007, the Company had 99,830,968 and 13,721,217 options and warrants subject of liability treatment, the trading value of the Company's common stock was $0.04 and $0.35 per share and the volatility factor was 213% and 190%, respectively. The embedded conversion option valuation as of March 31, 2008, resulted in the recognition of non-cash expense of $4,800,151 for the three months ended March 31, 2008, compared to $15,279 for the corresponding period of 2007. Expense or income is the result of the change in value of conversion option associated with the issuance of convertible notes totaling $3,840,000 with a conversion price at 15% to 45% discount off the trading price of the Company's common stock. The valuation of the embedded conversion option is a non-cash expense to the Company. NET INCOME (LOSS) The Company had a net loss during the three months ended March 31, 2008, of $12,260,817 compared to a net income $804,353 in the corresponding period in 2007. The net loss for the three months ended March 31, 2008, includes non-cash general and administrative expenses of $48,622 from stock-based compensation, depreciation and amortization expense of $271,950, non-cash interest expense of $588,250 attributed to the issuance of securities and related amortization of the resulting debt discount, non-cash embedded conversion option revaluation expense of $4,800,151 and non-cash expense from warrant and option liability revaluation of $5,744,622. The net income for the quarter ended March 31, 2007 includes non-cash income from warrant and option liability revaluation of $2,974,005, non-cash general and administrative expenses of $324,898 from stock-based compensation, depreciation and amortization expense of $212,232, and non-cash interest expense of $564,393 attributed to the issuance of securities and related amortization of the resulting debt discount. 40 LIQUIDITY AND CAPITAL RESOURCES Our capital requirements consist of general working capital needs, scheduled principal payments on our debt obligations and capital leases, planned capital expenditures and, currently, the funding of deficit operations. Our capital resources consist of cash generated from operations, short-term borrowings under promissory notes payable and the sale of our common stock. Our capital resources are impacted by our deficit operations and changes in the volume of advance payments from customers and the timing of related payments to suppliers. Our financial condition relies on continuing debt and equity investment until the Company is able to achieve profitability in our wholesale leisure travel business. At March 31, 2008, we had cash of $244,229. The following table reflects the cash flow activities during the three months ended March 31: 2008 2007 --------- --------- Cash used by operating activities .................. $(706,568) $(478,465) Cash provided by (used in) investing activities .... (200,000) 10,745 Cash provided by financing activities .............. 952,297 424,579 --------- --------- Increase (decrease) in cash ........................ $ 45,729 $ (43,141) ========= ========= Operating activities For the three months ended March 31, 2008, the Company used cash in operating activities of $706,568. Cash was used to fund the Company's net loss from operations of $12,260,817 offset by non-cash expenses for common stock and warrants issued for services of $80,622 and depreciation and amortization expense of $271,590, non-cash expense from warrant and option valuation expense of $5,744,622 and non-cash embedded conversion option valuation expense of $4,800,151. Cash used for operations included increased accounts receivable of $82,283 and prepaid assets of $43,537 and a decrease in accounts payable of $146,773. Cash was generated from operations by increasing accrued expenses by $294,003 and deferred revenue and customer deposits by $62,202. Investing activities For the three months ended March 31, 2008, the Company used cash in investing activities of $200,000. Cash was set aside in escrow with Trafalgar's attorney pending an investment in a U.K. travel company, as required in the January 22, 2008 Trafalgar secured convertible note agreement. The $200,000 was recorded in other current assets at March 31, 2008. Financing activities For the three months ended March 31, 2008, the Company provided cash from financing activities of $952,297. Cash was received from the proceeds of a $1,200,000 convertible promissory note. The Company used cash for the payment of debt issuance costs of $145,000 and principal payments on a promissory note of $93,405 and principal payments on capital leases of $9,298. Primary source of liquidity As of March 31, 2008, our primary source of liquidity was $244,229 of cash and $217,359 of accounts receivable. At March 31, 2008, the Company had a working capital deficit of $27,481,892, primarily due to warrant and option liability of $9,274,734, embedded conversion option liability of $8,073,128, acquisitions payable of $1,111,452, and the current maturity of convertible notes payable of $4,355,792 partially offset by debt discount of $162,903. The convertible notes payable consists of promissory notes convertible into approximately 136,243,980 shares of the Company's common stock as of March 31, 2008. While we expect these notes to be converted into the Company's common stock, thereby reducing liabilities, there is no assurance this will occur. As of March 31, 2008, the Company has vested and outstanding warrants, non-plan and plan options to purchase 98,780,968, 1,050,000 and 99,762 shares of the Company's common stock with weighted average exercise prices of $0.22, $0.66 and $7.25 per share, respectively. Exercise of any of these securities would provide 41 cash to the Company without additional financing fees. There is no assurance that any of these securities will be exercised. As of May 15, 2008, we were in default on $4,155,792 in convertible promissory notes and $156,434 in notes payable. We anticipate being able to extend the maturity or settle the balance owing on the convertible promissory notes through issuance of common stock; however, such extension of the maturity dates or conversion of these notes to common stock is not assured. We have relied upon convertible debt and equity financing in order to fund our operating deficit. Our inability to generate cash flow in excess of immediately needed funds has created a situation where we will require additional capital from external sources. There is no guarantee that we will be able to obtain any necessary financing on terms favorable to us, if at all. While we anticipate that all of our Convertible Note Payables will convert to shares of the Company's common stock, which would reduce our potential cash payment for the notes, the issuance of additional shares of our common stock would further dilute our existing shareholders' holdings. It is not expected that the internal sources of liquidity will improve until net cash is provided from operating activities and, until such time, we will rely upon external sources of liquidity, including additional private placements of the Company's common stock and exercise of various outstanding stock warrants and stock options. We are hopeful that the continued listing of our shares on the OTC Bulletin Board and expansion of our business opportunities in the leisure travel market will help increase the Company's market capitalization, encourage the exercise of outstanding warrants and attract new sources of financing. We have no understandings or commitments from anyone with respect to external financing, and we cannot predict whether we will be able to secure necessary funding when needed, or at all. As we continue to expand our business and deploy our technology in our leisure travel business, our current monthly cash flow requirements will exceed our near-term cash flow from operations. Even if we are not required to meet our financing and interest payment needs from cash, and instead our investors convert their outstanding convertible notes to common stock, our available cash resources and anticipated cash flow from operations are insufficient to satisfy our anticipated costs associated with new product development and expansion into new markets in the near future. There can be no assurance that we will be able to generate sufficient cash from operations in future periods to satisfy our capital requirements; therefore, we will have to continue to rely on external financing activities, including the sale of our equity securities, to satisfy our capital requirements for the foreseeable future. Due, in part, to our lack of historical earnings, our prior success in attracting additional funding has been limited to transactions in which our equity is used as currency. In light of the availability of this type of financing, and the lack of alternative proposals, our board of directors has determined that the continued use of our equity for these purposes may be necessary if we are to sustain operations. Equity financings of the type we have been required to pursue are dilutive to our stockholders and may adversely impact the market price for our shares. However, we have no commitments for borrowings or additional sales of equity, the precise terms upon which we may be able to attract additional funding is not known at this time, and there can be no assurance that we will be successful in consummating any such future financing transactions on terms satisfactory to us, or at all. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Stock-Based Compensation Plans On January 13, 2006, in conjunction with the recapitalization, the Company assumed DynEco's obligations under one active and two expired stock-based non-qualified compensation plans. The Board of Directors administers these plans. There were no grants under these plans during 2007 or 2006. Terms and prices are determined by the compensation committee or the board. On January 1, 2006, the Company implemented Statement of Financial Accounting Standard 123 (revised 2004) ("SFAS 123(R)"), "Share-Based Payment" which replaced SFAS 123 "Accounting for Stock-Based Compensation" and superseded APB Opinion No. 25 "Accounting for Stock Issued to Employees." SFAS 123(R) requires the fair value of all stock-based employee compensation awarded to employees to be recorded as an expense over the related vesting period. The statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. 42 In May 2007, the Company's Board of Directors approved the 2007 Stock Option/Stock Issuance Plan and reserved a total of 5,500,000 shares of common stock for issuance under this plan. On May 23, 2007, the Company filed a Registration Statement on Form S-8 with the Securities and Exchange Commission to register the shares issuable under this plan. The plan allows the issuance of stock options and outright grants of common stock, from time-to-time, to its officers, directors, employees and independent contractors who provide services to the Company. A total of 1,050,000 shares of common stock have been granted to independent contractors/consultants as of March 31, 2008. Beginning January 1, 2006 all employee stock compensation is recorded at fair value using the Black-Scholes Pricing Model. In adopting SFAS 123(R), the Company used the modified prospective application ("MPA"). MPA requires the Company to account for all new stock compensation to employees using fair value. For any portion of awards prior to January 1, 2006 for which the requisite service has not been rendered and the options remain outstanding as of January 1, 2006, the Company shall recognize the compensation cost for that portion of the award for which the requisite service was rendered on or after January 1, 2006. The fair value for these awards is determined based on the grant date. As of the date of the recapitalization, there was no further service obligations related to outstanding options. There was no cumulative effect of applying SFAS 123(R) at January 1, 2006. Goodwill and Other Intangibles The Company accounts for goodwill in a purchase business combination as the excess of the cost over the fair value of net assets acquired. Business combinations can also result in other intangible assets being recognized. Amortization of intangible assets, if applicable, occurs over their estimated useful lives. Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") requires testing goodwill for impairment on an annual basis (or interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value). The Company conducts the annual review for all of its reporting units during the fourth quarter of the calendar year. No impairment was recognized during the year ended December 31, 2007 or at March 31, 2008. Impairment of Other Long-Lived Assets The Company reviews other long-lived assets and certain identifiable assets related to those assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the undiscounted future cash flows of the long-lived assets are less than their carrying amounts, their carrying amounts are reduced to fair value and an impairment loss is recognized. No impairment was recognized at March 31, 2008. Revenue Recognition The Company follows the criteria for the United States Securities and Exchange Commission Staff Accounting Bulletin 104 and EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent" for revenue recognition. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery of product has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. The Company records merchant sales transactions at the gross purchase price generally on the date of travel. The Company considers a transaction to be a "merchant sales transaction" where the Company is the primary obligor to the customer and the Company acts as the merchant of record in the package transaction, which consists of several products from different vendors. In these transactions the Company also controls selling prices, and is solely responsible for making payments to vendors. The Company records transactions at the net purchase price where the Company is not the merchant of record or the product is not sold as a package. The Company records revenue and related costs of products when travel occurs or, for certain products, when the service is completed. It is the Company's policy to be paid by the customer in advance, with monies 43 received in advance of travel recorded as a deferred revenue liability. The Company may receive cash or hotel room credits in exchange for providing cooperative advertising for its vendors. The Company records accounts receivable for these amounts and offsets the applicable advertising expense. Once the advertising expense is reduced to zero, any excess cooperative advertising fees are recorded as revenue. The Company is not required to buy a specific number of lodging occupancies which allows the Company to avoid creating any inventory risk. The Company is not expressly required to buy a specific number of bulk airline tickets, although the Company's primary airline supplier eliminated approximately 80% of bulk rate contracts, which creates an implied minimum of ticket sales requirement. Accounting for Derivatives The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under Statement of Financial Accounting Standards 133 "Accounting for Derivative Instruments and Hedging Activities" and related interpretations including EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock". The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as an "other income or expense." Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under SFAS 133 are reclassified to liability at the fair value of the instrument on the reclassification. Warrant and Option Liability and Embedded Conversion Option Liability During our efforts to raise capital from external investments, we have issued secured and unsecured convertible promissory notes that include provisions requiring us to register related shares of common stock and one issuance of convertible debt contains a variable conversion price. Per SFAS 133 and EITF 00-19 we are required to record the fair value of all outstanding warrants and-non employee options and the fair value of the embedded conversion option as liabilities. The valuation of these liabilities is based on a Black-Scholes model and will vary, potentially significantly, based on factors such as the remaining time left to exercise the warrants, recent volatility in the price of the Company common stock, and the market price of our common stock. Changes in the valuation of the warrant and option liability and the embedded conversion option liability are recorded as other income or expense in the period of the change. In the three months ended March 31, 2008, the Company's revaluation of its warrant and option liability resulted in expense of $5,744,622 due to the reduction in the trading price of Company's common stock and the increase in common stock underlying warrants relate to the triggering of anti-dilution provisions. For the same period, the Company's initial recording and revaluation of its embedded conversion option liability resulted in expense of $4,800,151. The valuation of the warrant and option liability and embedded conversion option liability are non-cash income or expense items to the Company. The change in volatility is a result of the change in the expected term of outstanding warrants and options due to the passage of time, which results in a change in the time frame from which the stock price data points to compute volatility were selected. Since volatility has been computed based on historical volatility of the corporation, less data points are selected from the beginning of the period and more data points are selected from the end of the period being measured. 44 CONTRACTUAL OBLIGATIONS Operating Lease Obligations The Company currently leases office space in its Tampa, Florida, and New York City locations. Monthly rent expense under the Tampa, Florida lease is approximately $13,700 per month, and the lease expires June 2011. Monthly rent expense under the New York City lease is approximately $5,000 per month, and the lease expires April 2010. Purchase Obligations We are not a party to any significant long-term service or supply contracts. Letters of Credit At March 31, 2008, the Company had two outstanding letters of credit totaling approximately $97,400 payable to the Airlines Reporting Corporation (ARC), which allows the Company to purchase airline tickets through ARC's computerized ticket system. The terms of the letter of credit agreements require the Company to maintain certificates of deposit with the issuer of the letters of credit in the amount of the letters of credit. These certificates of deposit are reflected as short-term investments, restricted, on the accompanying balance sheet. Short-term investments at March 31, 2008, also includes $10,000 restricted to cover a letter of credit for a seller of travel license. AFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - -- an Interpretation of FASB Statement No. 109" ("FIN 48"): In June 2006, the FASB issued this statement which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48, which was effective for fiscal years beginning after December 15, 2006, also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company plans on reviewing in detail its tax situation to determine whether there are any uncertain tax positions, but presently believes there are no material matters. FASB Statement No. 141(R),"Business Combinations" ("SFAS 141(R)"): In December 2007, the FASB issued No. 141R which will change the accounting for and reporting of business combination transactions. The most significant changes in the accounting for business combinations under SFAS 141(R) include: (1) valuation of any acquirer shares issued as purchase consideration will be measured at fair value as of the acquisition date; (2) contingent purchase consideration, if any, will generally be measured and recorded at the acquisition date, at fair value, with any subsequent change in fair value reflected in earnings rather than through an adjustment to the purchase price allocation; (3) acquired in-process research and development costs, which have historically been expensed immediately upon acquisition, will now be capitalized at their acquisition date fair values, measured for impairment over the remaining development period and, upon completion of a successful development project, amortized to expense over the asset's estimated useful life; (4) acquisition related costs will be expensed as incurred rather than capitalized as part of the purchase price allocation; and (5) acquisition related restructuring cost accruals will be reflected within the acquisition accounting only if certain specific criteria are met as of the acquisition date; the prior accounting convention, which permitted an acquirer to record restructuring accruals within the purchase price allocation as long as certain, broad criteria had been met, generally around formulating, finalizing and communicating certain exit activities, will no longer be permitted. SFAS 141(R) is effective for reporting periods beginning on or after December 15, 2008. Earlier adoption is not permitted. The Company anticipates that adoption of this pronouncement will significantly impact how the Company accounts for business combination transactions consummated after the effective date, in the various areas outlined above. 45 SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"): In February 2007, the FASB issued SFAS 159 which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for us on January 1, 2008. The adoption of SFAS 159 had no impact on our consolidated financial position, cash flows or results of operations. SFAS No. 160, "Non-Controlling Interests in Consolidated Financial Statements" ("SFAS 160"): In December 2007, the FASB issued SFAS No. 160, this Statement amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is required to be adopted simultaneously with SFAS 141(R) and is effective for reporting periods on or after December 15, 2008. An earlier adoption is not permitted. Currently, the Company does not have any non-controlling interest in our subsidiary and accordingly, the adoption of SFAS had no impact on our consolidated financial position, cash flows or results of operations. In June 2007, the FASB ratified EITF Issue No. 07-03, "Accounting for Nonrefundable Advance Payments for Goods and Services Received for Use in Future Research and Development Activities." EITF 07-03 requires companies to defer nonrefundable advance payments for goods and services and to expense such advance payments as the goods are delivered or services are rendered. If the Company does not expect to have the goods delivered or services performed, the advance should be expensed. EITF 07-03 is effective for fiscal years beginning after December 15, 2007. The adoption of EITF Issue No. 07-03 had no impact on our consolidated financial position, cash flows or results of operations. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future affect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse change in foreign currency and interest rates. Exchange Rate Our reporting currency is United States Dollars ("USD"). In the event we generate revenues outside of the United States, foreign monetary rate fluctuations may have an impact on our financial reporting. The fluctuation of exchange rates of the foreign currency may have positive or negative impacts on our results of operations; however, Management believes that the net income effect of appreciation and devaluation of any such currency against the US Dollar would be limited to our net operating results. Interest Rate Interest rates in the United Sates are considered to be fairly low and stable, and inflation is considered to be controlled by the actions of the Federal Reserve Board based upon certain factors including trade surplus or deficit and consumer banking deposits, etc. Our current loans relate mainly to trade payables and are mainly short term; however our debt is likely to rise with the increase of the scope and scale of our business operations and expansion and, were interest rates to rise at the same time, this could become a significant impact on our operating and financing activities. We have not entered into derivative contracts either to hedge existing risks or for speculative purposes. 46 ITEM 4. CONTROLS AND PROCEDURES Not applicable to smaller reporting companies. ITEM 4T. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (and Principal Financial Officer and Accounting Officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, management and our Chief Executive Officer (and Principal Financial Officer and Accounting Officer) concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the 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 rules and forms. Changes in Internal Controls There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the foregoing evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company filed a lawsuit in Hillsborough County, Florida, Circuit Court on March 2, 2007, against Stephen Hicks. The complaint seeks recovery of damages or alternative relief arising from breach of a contract under which the Company acquired IRT/ITR. The complaint alleges non-compliance with certain terms and conditions providing for integration of the companies. On March 5, 2007, counsel for Stephen Hicks notified the registrant that it was allegedly in breach of a convertible debenture payable under the March 6, 2006 Purchase Agreement between the registrant and Hicks (the "Agreement") that provided for the registrant's acquisition of IRT/ITR. The Agreement calls for payment of a convertible debenture in the amount of $1,455,000 as of March 6, 2007. In the event of any failure to pay on the convertible debenture, the Agreement provides for a continuing obligation to pay interest at a nine percent (%) annual rate. On October 30, 2007, Stephen Hicks filed an answer and counterclaim to the Company's complaint filed March 2, 2007, alleging breach of the Agreement regarding the convertible debenture payable and other financial matters pursuant to the Agreement. The Company has classified the convertible debenture as a current liability and has recorded accrued interest of $269,670 related to this obligation on its consolidated balance sheet as of March 31, 2008. The Company believes it has recorded all other financial obligations due under the Agreement. The Company is currently in discussions with Mr. Hicks regarding the settlement of the matters arising on March 2, 2007 and October 30, 2007. 47 In January 2008, the Company has been named as a principal party to proceedings brought in the name of MMA Capital, LLC ("MMA") in United States District Court for the Northern District of California alleging breach of the Secured Convertible Promissory Note and Security Agreement executed by the parties on or about January 11, 2006. The complaint also alleges breach of the Confidential Settlement Agreement executed by the parties on or about March 5, 2007. On February 23, 2008, the Company filed a counterclaim against MMA Capital, LLC in United States District Court for the Northern District of California alleging breach of the Secured Convertible Promissory Note, Security Agreement and Confidential Settlement Agreement. Section 6 of the Confidential Settlement Agreement encouraged the Company to obtain additional or alternative financing and that if the Company obtained additional or alternative financing from any lender, which exceeded $3,000,000, MMA would subordinate its security position in the collateral to the security position of the other lender. The Company alleges MMA breached the Agreements by attempting to prevent and interfere with its efforts to obtain additional financing with Trafalgar, by MMA refusing to agree to subordinate its security interest in the collateral to the security interest of Trafalgar despite Trafalgar already lending or investing more than $3,000,000 to the Company. The Company also alleges MMA's interference by, among other things, attempting to dissuade Trafalgar from providing additional financing or investment and filing a bad faith temporary restraining order that interfered with the Company's prospective economic advantage by preventing the Company from obtaining all or more financing and/or investment from Trafalgar and other investors or lenders. As a direct and proximate result of MMA's alleged interference, the Company has been damaged in an amount in excess of $2,500,000. The Counterclaim alleges MMA's actions were wanton, willful and despicable, entitling the Company to punitive damages also. The parties are in discussions to settle this matter. In January 2008, the Company has been named as a principal party to proceedings brought in the name of Bay West Tampa Investors, LLC in Hillsborough County, Florida, Circuit Court seeking collection of payments under the corporate office real estate lease. This matter was settled on February 6, 2008, and full payment of obligations due at the time under the real estate lease was made on March 14, 2008. From time to time, we may become subject to proceedings, lawsuits and unasserted claims in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. As of the date of this report, we do not believe that any of these matters would be material to the Company's financial condition or operation. ITEM 1A. RISK FACTORS RISKS RELATED TO OUR BUSINESS An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in evaluating our company and its business before purchasing shares of our common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are all of the material risks that we are currently aware of that are facing our company. Additional risks not presently known to us may also impair our business operations. You could lose all or part of your investment due to any of these risks. ESTABLISHING, MAINTAINING AND ENHANCING OUR BRAND RECOGNITION WILL BE A CRITICAL ASPECT OF OUR EFFORTS TO ATTRACT AND EXPAND OUR ONLINE TRAVEL SALES. We believe that establishing, maintaining and enhancing our brand will be a critical aspect of our efforts to attract and expand our online sales. The number of Internet sites that offer competing services, many of which already have well-established brands in online services or the travel industry generally, increases the importance of establishing and maintaining brand recognition of our "Dynamic Leisure" and "eCasual" brands, and maintaining and enhancing brand recognition of Changes in L'Attitudes, Island Resort Tours, International Travel and Resorts, and any other brands that we may acquire through future acquisitions. 48 Promotion of our brands will depend largely on our success in providing a high-quality travel agent hosting experience and high level of customer service. In addition, to attract and retain travel agents and customers and to respond to competitive pressures, we intend to increase our spending substantially on marketing and advertising with the intention of expanding our brand recognition. We currently do not and may never have the available resources for marketing and advertising that may be required However, we cannot assure you that these expenditures if made will be effective to promote our brands or that our marketing efforts generally will achieve our goals. If we are unable to provide high-quality hosting services or customer support, if we fail to promote and maintain our brands or if we incur excessive expenses in these efforts, our business, operating results and financial condition would be materially adversely affected. IF WE ARE UNABLE TO INTRODUCE AND SELL NEW PRODUCTS AND SERVICES, OUR BRANDS COULD BE DAMAGED. We need to broaden the range of travel products and services and increase the availability of products and services that we offer in order to enhance our service. We will incur substantial expenses and use significant resources trying to expand the range of products and services that we offer. However, we may not be able to attract sufficient travel suppliers and other participants to provide desired products and services to our consumers. In addition, consumers may find that delivery through our service is less attractive than other alternatives. If we launch new products and services and they are not favorably received by consumers, our reputation and the value of our brands could be damaged. Our relationships with consumers and travel suppliers are mutually dependent since consumers will not use a service that does not offer a broad range of travel services. Similarly, travel suppliers will not use a service unless consumers actively make travel purchases through it. We cannot predict whether we will be successful in expanding the range of products and services that we offer. If we are unable to expand successfully, this could also damage our brand. If we are unable to broaden the range of travel products and services we offer and successfully introduce and sell those new products and services, our business may be harmed. Our business strategy is dependent on our further diversifying our revenues into lodging, car rentals, cruises, vacation packages and other travel related products. We cannot assure that our efforts will be successful or result in greater revenues or higher margins. THE SUCCESS OF OUR BUSINESS DEPENDS ON CONTINUED GROWTH OF ONLINE TRAVEL COMMERCE AND ATTRACTING CUSTOMERS IN A COST-EFFECTIVE MANNER. Our sales and revenues will not grow as we plan if consumers do not purchase significantly more travel products online than they currently do and if the use of the Internet as a medium of commerce for travel products does not continue to grow or grows more slowly than expected. Consumers have traditionally relied on travel agents and travel suppliers and are accustomed to a high degree of human interaction in purchasing travel products. The success of our business is dependent on significant increase in the number of consumers who use the Internet to purchase travel products. Our business strategy depends on our ability to broaden the appeal of our website to business and other travelers and to increase the overall number of consumer transactions conducted on our website in a cost-effective manner. In order to increase the number of consumer transactions, we must attract more visitors to our website and convert a larger number of these visitors into paying customers. Currently, our website has focused on serving the leisure traveler. Our ability to offer products and services that will attract a significant number of business travelers to use our services is not certain. If it does not occur, our growth may be limited. It may be necessary to spend substantial amounts on marketing and advertising to enhance our brand recognition and attract new customers to our website, and to successfully convert these new visitors into paying customers. We cannot assure you that our marketing and advertising efforts will be effective to attract new customers. If we fail to attract customers and increase our overall number of consumer transactions in a cost-effective manner, our ability to grow and become profitable may be impaired. 49 Moreover, we rely on the Internet infrastructure which may be unable to support increased levels of demand. The internet infrastructure may not expand fast enough to meet the increased levels of demand. In particular, the expected benefits from our online operations may be reduced if internet usage does not continue to grow. In addition, activities that diminish the experience for internet users, such as spyware, spoof e-mails, viruses and spam directed at internet users, as well as viruses and "denial of service" attacks directed at internet companies and service providers, may discourage people from using the internet, including for commerce. If consumer use diminishes or grows at a slower rate, then our business and results of operations could be adversely affected. IF WE FAIL TO ATTRACT AND RETAIN SALES AGENTS IN A COST-EFFECTIVE MANNER, OUR ABILITY TO GROW AND BECOME PROFITABLE MAY BE IMPAIRED. Our business strategy depends on increasing our overall number of customer transactions in a cost-effective manner. In order to increase our number of transactions, we must attract additional sales agents. Although we have spent significant financial resources on sales and marketing and plan to continue to do so, these efforts may not be cost effective in attracting new sales agents or increasing transaction volume. If we do not achieve our marketing objectives, our ability to grow and increase revenues may be impaired. Presently, we have two sales agents, and although we will require more sales agents to achieve our business strategy, we cannot at this time estimate the number of additional sales agents that will be necessary. Moreover, violations by our travel agents of applicable laws or of our policies and procedures in dealing with customers could reflect negatively on our products and operations and harm our business reputation. In addition, it is possible that a court could hold us civilly or criminally accountable based on vicarious liability because of the actions of our travel agents. Adverse publicity concerning any actual or purported failure of us or our travel agents to comply with applicable laws and regulations, whether or not resulting in enforcement actions or the imposition of penalties, could harm the goodwill of our company and could reduce our ability to attract, motivate and retain travel agents, which would reduce our revenues. We cannot ensure that all travel agents will comply with applicable legal requirements. ADVERSE CHANGES OR INTERRUPTIONS IN OUR RELATIONSHIPS WITH THIRD PARTIES COULD AFFECT OUR ACCESS TO TRAVEL OFFERINGS, IMPAIR THE QUALITY OF OUR SERVICE AND REDUCE OUR REVENUES. Although our business is not substantially dependent on any agreement with any specific third party, such as a travel supplier, we rely on various agreements with our airline, hotel and auto suppliers. These agreements contain terms that could affect our access to inventory and reduce our revenues. All of the relationships we have are freely terminable by the supplier upon notice. None of these arrangements are exclusive and any of our suppliers could enter into, and in some cases may have entered into, similar agreements with our competitors. We cannot assure you that our arrangements with third parties will remain in effect or that any of these third parties will continue to supply us and our agents with the same level of access to inventory of travel offerings in the future. If access to inventory is affected, or our ability to obtain inventory on favorable economic terms is diminished, it may reduce our revenues. Our failure to establish and maintain representative relationships for any reason could negatively impact sales of our products and reduce our revenues. We also rely on third-party computer systems and other service providers, including the computerized central reservation systems of the airline, lodging and car rental industries to make airline ticket, lodging and car rental reservations and credit card verifications and confirmations. Third parties provide, for instance, our data center, telecommunications access lines and significant computer systems, support and maintenance services. Any interruption in these, or other, third-party services or deterioration in their performance could impair the quality of our service. We cannot be certain of the financial viability of all of the third parties on which we rely. If our arrangements with any of these third parties are terminated or if they were to cease operations, we might not be able to find an alternate provider on a timely basis or on reasonable terms, which could hurt our business. 50 OUR BUSINESS BENEFITS FROM FAVORABLE "NET" OR "BULK" CONTRACTS, AND CANCELLATION OR LIMITATION ON USE OF THESE CONTRACTS COULD ADVERSELY AFFECT OUR BUSINESS. We hold "net" or "bulk" air contracts with American Airlines, British Airways, Delta, Air France, US Air, Continental, SwissAir, Iceland Air and TACA. These contracts permit us to create and sell air and bundled travel packages that are less expensive to consumers and more profitable for us than packages based upon "scheduled" airfare. In spring 2006, one major airline informed us that it recently cancelled wholesale bulk contracts with many of our competitors. This airline is our primary airline supplier. Although no airline has cancelled or limited our bulk contracts, the contracts are terminable and modifiable at the will of the airlines, in which case our business could be adversely affected. OUR SUCCESS DEPENDS UPON IMPLEMENTING AND INTEGRATING OUR TOURSCAPE TECHNOLOGY. As part of our business model, the implementation and integration of the TourScape dynamic packaging technology is vital to increasing our company efficiencies and thus increasing overall revenues. TourScape is a technology platform designed to market and sell domestic and international leisure travel products, both retail and wholesale. TourScape permits user-friendly interface on the Internet and allows us to update product information for our reservation agents quickly. We have installed TourScape into our servers and computers and interfaced it with our websites. Because our employees helped design and refine the TourScape program, we believe that we can expand TourScape as our needs develop. However, if we cannot succeed in expending our TourScape technology, our profitability may not increase as planned, or at all. Our websites rely on our TourScape intellectual property and we cannot be sure that this intellectual property is protected from copying or use by others, including potential competitors. We regard much of our content and technology as proprietary and try to protect our proprietary technology by relying on trademarks, copyrights, trade secret laws and confidentiality agreements. In connection with our license agreements with third parties, we seek to control access to and distribution of our technology, documentation and other proprietary information. Even with all of these precautions, it is possible for someone else to copy or otherwise obtain and use our proprietary technology without our authorization or to develop similar technology independently. Effective trademark, copyright and trade secret protection may not be available in every country in which our services are made available through the internet, and policing unauthorized use of our proprietary information is difficult and expensive. We cannot be sure that any steps we take will prevent misappropriation of our proprietary information. This misappropriation could have a material adverse effect on our business. In the future, we may need to go to court to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation might result in substantial costs and diversion of resources and management attention. In the event we do not protect our TourScape technology effectively, this would allow competitors to duplicate our product and services and this could make it more difficult for us to compete with them. Since we currently do not have any patents or trademarks, our success and ability to compete in the online travel industry depend, in part, upon our TourScape technology. We rely primarily on provisions in our contracts to protect our technology. We attempt to negotiate beneficial intellectual property ownership provisions in our contracts. However, laws and our actual contractual terms may not be sufficient to protect our technology from use or theft by third parties. For instance, a third-party might try to reverse engineer or otherwise obtain and use our technology without our permission and without our knowledge, allowing competitors to duplicate our products. We may have legal or contractual rights that we could assert against such illegal use, but lawsuits claiming infringement or misappropriation are complex and expensive, and the outcome would not be certain. In addition, the laws of some countries in which we may wish to sell our products may not protect software and intellectual property rights to the same extent as the laws of the United States. Moreover, the intellectual property right laws afford us no protection since we have no patents or trademarks. 51 OUR SUCCESS DEPENDS ON MAINTAINING THE INTEGRITY OF OUR SYSTEMS AND INFRASTRUCTURE. SYSTEM INTERRUPTION AND THE LACK OF INTEGRATION AND REDUNDANCY IN OUR INFORMATION SYSTEMS MAY AFFECT OUR BUSINESSES. In order to be successful, we must provide reliable, real-time access to our systems for our sales agent, customers and suppliers. As our operations grow in both size and scope, we will need to improve and upgrade our systems and infrastructure to offer an increasing number of people and travel suppliers enhanced products, services, features and functionality. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of business increases, with no assurance that the volume of business will increase. Consumers and suppliers will not tolerate a service hampered by slow delivery times, unreliable service levels or insufficient capacity, any of which could reduce our revenues. We may experience occasional system interruptions that make some or all systems unavailable or prevent us from efficiently fulfilling orders or providing services to our travel agents or third parties. We rely on our travel agents and third party computer systems and service providers to facilitate and process a portion of our transactions. Any interruptions, outages or delays in our systems or third party providers' systems, or deterioration in their performance, could impair each company's ability to process transactions for its travelers and the quality of service that we can offer to our travel agents and travelers. We do not have backup systems for certain critical aspects of our operations, many other systems are not fully redundant and our disaster recovery planning may not be sufficient. Fire, flood, power loss, telecommunications failure, break-ins, earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins and similar events or disruptions may damage or interrupt computer or communications systems at any time. Any of these events could cause system interruption, delays and loss of critical data, and could prevent us from providing services to our travelers and/or third parties for a significant period of time. In addition, we may have inadequate insurance coverage or insurance limits to compensate for losses from a major interruption, remediation may be costly and have a material adverse effect on our operating results and financial condition. Furthermore, developing our website and other technology entails significant technical and business risks when using new technologies. We may fail to adapt our website, transaction processing systems and network infrastructure to consumer requirements or emerging industry standards. For example, our website allows searches and displays of ticket pricing and travel itineraries will be a critical part of our service, and may quickly become out-of-date or insufficient from our customers' perspective and in relation to the search and display functionality of our competitors' websites. If we face material delays in introducing new services, products and enhancements, our sales agents, customers and suppliers may forego the use of our products and use those of our competitors. WE MAY BE FOUND TO HAVE INFRINGED ON INTELLECTUAL PROPERTY RIGHTS OF OTHERS THAT COULD EXPOSE US TO SUBSTANTIAL DAMAGES AND RESTRICT OUR OPERATIONS. We could face claims that we have infringed the patents, copyrights or other intellectual property rights of others. In addition, we may be required to indemnify travel suppliers for claims made against them. Any claims against us could require us to spend significant time and money in litigation, delay the release of new products or services, pay damages, or develop new intellectual property. As a result, intellectual property claims against us could have a material adverse effect on our business, operating results and financial condition. RAPID TECHNOLOGICAL CHANGES MAY RENDER OUR TECHNOLOGY OBSOLETE OR DECREASE THE ATTRACTIVENESS OF OUR PRODUCTS TO TRAVEL AGENTS AND CONSUMERS. To remain competitive in the online travel industry, we must continue to enhance and improve the functionality and features of our website. The Internet and the online commerce industry are rapidly changing. In particular, the online travel industry is characterized by increasingly complex systems and infrastructures and new business models. If competitors introduce new products embodying new technologies, or if new industry standards and practices emerge, our existing web-site, technology and systems may become obsolete. 52 Our future success will depend on our ability to do the following: (i) enhance our existing products; (ii) develop and license new products and technologies that address the increasingly sophisticated and varied needs for prospective customers and supplies; and (iii) respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. OUR BUSINESS IS EXPOSED TO RISKS ASSOCIATED WITH ONLINE COMMERCE SECURITY AND CREDIT CARD FRAUD WHICH COULD REDUCE OUR REVENUES. A fundamental requirement for online commerce and communications is the secure transmission of confidential information, such as credit card numbers or other personal information, over public networks. Our security measures may be inadequate and, if any compromise of security were to occur, it could have a detrimental effect on our reputation and adversely affect our ability to maintain our existing travelers and/or attract new travelers. Consumer concerns over the security of transactions conducted on the Internet or the privacy of users may inhibit the growth of the Internet and online commerce. To transmit confidential information such as customer credit card numbers securely, we rely on encryption and authentication technology. Unanticipated events or developments could result in a compromise or breach of the systems we use to protect customer transaction data. Our servers and those of our service providers may be vulnerable to viruses or other harmful code or activity transmitted over the Internet. A virus or other harmful activity could cause a service disruption. In addition, we bear financial risk from products or services purchased with fraudulent credit card data. Although we have implemented anti-fraud measures, a failure to control fraudulent credit card transactions adequately could adversely affect our business. Because of our limited operating history, we cannot assure you that our anti-fraud measures are sufficient to prevent material financial loss. Since we cannot exert the same level of influence or control over our sales agents as we could were they our own employees, our sales agents could fail to comply with our policies and procedures, which could result in claims against us that could harm our financial condition and operating results. We are not in a position to directly provide the same direction, motivation and oversight for our sales agents as we would if such sales agents were our own employees. As a result, there can be no assurance that our sales agents will participate in our marketing strategies or plans, accept our introduction of new products and services, or comply with our policies and procedures. Moreover, our processing, storage, use and disclosure of personal data could give rise to liabilities as a result of government regulation, conflicting legal requirements or differing views of personal privacy rights. In the processing of our traveler transactions, we receive and store a large volume of personally identifiable information. This information is also increasingly subject to legislation and regulations in numerous jurisdictions around the world. This government action is typically intended to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. We could be adversely affected if legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, financial condition and results of operations. As privacy and data protection have become more sensitive issues, we may also become exposed to potential liabilities as a result of differing views on the privacy of travel data. These and other privacy developments that are difficult to anticipate could adversely affect our business, financial condition and results of operation. WE OPERATE IN A VERY COMPETITIVE ENVIRONMENT AND FACE INCREASING COMPETITION FROM A VARIETY OF COMPANIES WITH RESPECT TO PRODUCTS AND SERVICES WE OFFER. The market for the services we offer is intensely competitive. We compete with both established and emerging traditional and online sellers of travel services with respect to each of the services we offer. We face significant competition from other distributors of travel products, including: (i) local, regional, national and international traditional travel agencies; (ii) consolidators and wholesalers of airline tickets, lodging and other travel products, including 53 Orbitz, Cheaptickets.com, Hotwire, Hotels.com; and (iii) operators of GDSs, which control the computer systems through which travel reservations historically have been made. Some of our competitors may offer services and products on more favorable terms such as no fees and with unique access to loyalty programs. Many of these competitors, such as airlines, hotel and rental car companies, are also focusing on driving online demand to their own websites in lieu of intermediaries like us. The introduction of new technologies and the expansion of existing technologies may increase competitive pressures. Increased competition may result in reduced operating margins, as well as loss of travel agent partners, travelers, transactions and brand recognition. Some of our competitors may have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we have. We cannot assure you that we will be able to compete successfully against current, emerging and future competitors or provide differentiated products and services to our travel agent partners and traveler base. Increased competition could result in reduced operating margins, loss of segment share and damage to our brand. There can be no assurance that we will be able to compete successfully against current and future competitors or that competition will not have a material adverse effect on our business, results of operations and financial condition. DECLINES OR DISRUPTIONS IN THE TRAVEL INDUSTRY, SUCH AS THOSE CAUSED BY GENERAL ECONOMIC DOWNTURNS, TERRORISM, HEALTH CONCERNS OR STRIKES OR BANKRUPTCIES WITHIN THE TRAVEL INDUSTRY COULD REDUCE OUR REVENUES. Our business is affected by the health of the travel industry. Travel expenditures are sensitive to business and personal discretionary spending levels and tend to decline during general economic downturns. Events or weaknesses in the travel industry that could negatively affect our business include price escalation in travel-related industries, travel related strikes, airline bankruptcies or liquidations and fuel price escalation. Additionally, our business is sensitive to safety concerns and thus may decline after incidents of terrorism, during periods of political instability or geopolitical conflict in which travelers become concerned about safety issues, as a result of inclement weather such as the hurricane that affected the markets around the Gulf of Mexico in 2005 or when travel might involve health-related risks, such as the avian flu. Moreover, since 2001, the travel industry has experienced a protracted downturn, and there is a risk that a future downturn, or the continued weak demand for travel, could adversely affect the growth of our business. The long-term effects of events such as these could include, among other things, a protracted decrease in demand for air travel due to fears regarding terrorism, war or disease. These effects, depending on their scope and duration, which we cannot predict at this time, could significantly reduce our revenues. BECAUSE OUR MARKET IS SEASONAL, OUR QUARTERLY RESULTS WILL FLUCTUATE. Our business experiences seasonal fluctuations, reflecting seasonal trends for the products offered by our sales agents, as well as Internet services generally. For example, traditional leisure travel bookings are higher in the first two calendar quarters of the year in anticipation of spring and summer vacations and holiday periods, but online travel reservations may decline with reduced Internet usage during the summer months. In the last two quarters of the calendar year, demand for travel products generally declines and the number of bookings flattens or decreases. These factors could cause our revenues to fluctuate from quarter to quarter. Our results may also be affected by seasonal fluctuations in the inventory made available to us by travel suppliers. EVOLVING GOVERNMENT REGULATION COULD IMPOSE TAXES OR OTHER BURDENS ON OUR BUSINESS, WHICH COULD INCREASE OUR COSTS OR DECREASE DEMAND FOR OUR PRODUCTS. As a travel company selling air transportation products, we are subject to regulation by government agencies having jurisdiction over economic issues affecting the sale of air travel, including consumer protection issues and competitive practices. We must also comply with laws and regulations relating to our sales activities, including those prohibiting unfair and deceptive practices and those requiring us to register as a seller of travel products, comply with disclosure requirements and participate in state restitution funds. In addition, 54 many of our travel suppliers are heavily regulated and we are indirectly affected by such regulation. Such agencies have the authority to enforce economic regulations, and may assess civil penalties or challenge our operating authority. Increased regulation of the Internet or different applications of existing laws might slow the growth in the use of the Internet and commercial online services, which could decrease demand for our products, increase the cost of doing business or otherwise reduce our sales and revenues. The statutes and case law governing online commerce are still evolving, and new laws, regulations or judicial decisions may impose on us additional risks and costs of operations. In addition, new regulations, domestic or international, regarding the privacy of our users' personally identifiable information may impose on us additional costs and operational constraints. Federal legislation imposing limitations on the ability of states to impose taxes on Internet-based sales was enacted in 1998. The Internet Tax Freedom Act, which was extended by the Internet Nondiscrimination Act, exempted certain types of sales transactions conducted over the Internet from multiple or discriminatory state and local taxation through November, 2007. The majority of products and services we sell are already taxed: hotel rooms and car rentals at the local level, and air transportation at the federal level with state taxation preempted. Nevertheless, failure to renew this legislation could allow state and local governments to impose additional taxes on some aspects of our Internet-based sales, and these taxes could decrease the demand for our products or increase our cost of operations. Moreover, changing laws, rules and regulations and legal uncertainties may adversely affect our business, financial condition and results of operations. Our business, financial condition and results of operations could be adversely affected by unfavorable changes in or interpretations of existing, or the promulgation of new laws, rules and regulations applicable to us and our businesses, including those relating to the internet and online commerce, consumer protection and privacy, escheat and sales, use, occupancy, value-added and other taxes, could decrease demand for products and services, increase costs and/or subject us to additional liabilities. For example, there is, and will likely continue to be, an increasing number of laws and regulations pertaining to the internet and online commerce, which may relate to liability for information retrieved from or transmitted over the internet, user privacy, taxation and the quality of products and services. Furthermore, the growth and development of online commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on online businesses generally. In addition, the application of various domestic and international sales, use, occupancy, value-added and other tax laws, rules and regulations to our historical and new products and services is subject to interpretation by the applicable taxing authorities. While we believe that we are compliant with these tax provisions, there can be no assurances that taxing authorities will not take a contrary position, or that such positions will not have an adverse effect on our businesses, financial condition and results of operations. If the tax laws, rules and regulations were amended or if current interpretations of the laws were to change adversely to us, particularly with respect to occupancy or value-added taxes, the results could have an adverse affect on our businesses, financial condition and results of operations. WE HAVE ACQUIRED THREE BUSINESSES AND MAY ACQUIRE OTHER BUSINESSES, PRODUCTS OR TECHNOLOGIES. IF WE DO, WE MAY BE UNABLE TO INTEGRATE THEM WITH OUR BUSINESS OR WE MAY IMPAIR OUR FINANCIAL PERFORMANCE. During fiscal year 2006, we acquired three wholesale travel companies, Changes in L'Attitudes, Inc., Island Resort Tours, Inc. and International Travel and Resorts, Inc., and plan to acquire several more wholesale travel companies both in the U.S.A. and in Europe as soon as practicable. We are currently negotiating to purchase company assets and/or hire key personnel to expand our key destinations to Hawaii and to Europe and to increase revenues through increased bookings and utilization of our bulk air contracts. We are negotiating a non-binding term sheet for a travel company with European expertise based outside of London, England. These transactions will require additional funding that has currently not been obtained. 55 Our future growth may depend, in part, on acquisitions. To that extent, we may face the operational and financial risks that commonly accompany that strategy. We may experience operational and financial risks in connection with any potential acquisitions. In addition, businesses we may acquire may incur significant losses from operations or experience impairment of carrying value. We could face further operational risks, such as failing to assimilate the operations and personnel of the acquired businesses, disrupting their ongoing businesses, impairing management resources and their relationships with employees and travelers as a result of changes in their ownership and management Further, the evaluation and negotiation of potential acquisitions, as well as the integration of an acquired business, will divert management time and other resources. Some acquisitions may not be successful and their performances may result in the impairment of their carrying value. Certain financial and operational risks related to acquisitions that may have a material impact on our business are: (i) use of cash resources and incurrence of debt and contingent liabilities in funding acquisitions; (ii) stockholder dilution if an acquisition is consummated through an issuance of our securities; (iii) amortization expenses related to acquired intangible assets and other adverse accounting consequences; (iv) costs incurred in identifying and performing due diligence on potential acquisition targets that may or may not be successful; (v) difficulties and expenses in assimilating the operations, products, technology, information systems or personnel of the acquired company; (vi) impairment of relationships with employees, retailers and affiliates of our business and the acquired business; (vii) the assumption of known and unknown liabilities of the acquired company; (viii) entrance into markets in which we have no direct prior experience; and (ix) impairment of goodwill arising from our acquisitions. THE SUCCESS OF OUR BUSINESS DEPENDS UPON THE CONTINUING CONTRIBUTION OF OUR KEY PERSONNEL AND EMPLOYEES, INCLUDING MR. DANIEL BRANDANO, OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, WHOSE KNOWLEDGE OF OUR BUSINESS WOULD BE DIFFICULT TO REPLACE IN THE EVENT WE LOSE HIS SERVICES. Our operations are dependent on the efforts and relationships of Daniel Brandano and the other executive officers as well as the senior management of our organization. We will likely be dependent on the senior management of our organization for the foreseeable future. If any of these individuals becomes unable to continue in their role, our business or prospects could be adversely affected. For example, the loss of Mr. Brandano could inhibit the development and enhancement of our websites, could damage customer relations and our brand, and could restrict our ability to raise additional working capital if and when needed. Although we have entered into an employment agreement with Mr. Brandano, there can be no assurance that he will continue in his present capacity for any particular period of time. Moreover, our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees. If we do not succeed in attracting well-qualified employees or retaining or motivating existing employees, our business would be adversely affected. RISKS RELATED TO OUR COMPANY AND COMMON STOCK WE HAVE EXPERIENCED HISTORICAL LOSSES AND A SUBSTANTIAL ACCUMULATED DEFICIT. IF WE ARE UNABLE TO REVERSE THIS TREND, WE WILL LIKELY BE FORCED TO CEASE OPERATIONS. During the fiscal year ended December 31, 2007, and the three months ended March 31, 2008, we experienced net losses of $5,674,960 and $12,260,817, respectively. During the fiscal year ended December 31, 2006, we experienced net losses of $11,009,388. In addition, at March 31, 2008, we had a stockholders' deficit of $21,495,703. Our operating results for future periods will include significant expenses, including new product development expenses, potential marketing costs, professional fees and administrative expenses, and will be subject to numerous uncertainties. As a result, we are unable to predict whether we will achieve profitability in the future, or at all. 56 WE HAVE A WORKING CAPITAL DEFICIT AND SIGNIFICANT CAPITAL REQUIREMENTS. SINCE WE WILL CONTINUE TO INCUR LOSSES UNTIL WE ARE ABLE TO GENERATE SUFFICIENT REVENUES TO OFFSET OUR EXPENSES, INVESTORS MAY BE UNABLE TO SELL OUR SHARES AT A PROFIT OR AT ALL. During the fiscal year ended December 31, 2007, and the three months ended March 31, 2008, we experienced net losses of $5,674,960 and $12,260,817, respectively. Net cash used in operations for the fiscal year ended December 31, 2007 and the three months ended March 31, 2008 was $1,658,698 and $706,568, respectively. On March 31, 2008, we had a working capital deficit of $27,481,892. Because we have not yet achieved or acquired sufficient operating capital and given these financial results together with our expected cash requirements in 2008, additional capital investments will be necessary to develop and sustain our operations. WE HAVE HISTORICALLY BEEN UNSUCCESSFUL IN OUR ATTEMPTS TO RAISE SUFFICIENT CAPITAL TO FUND OUR PLANS. IF WE ARE UNABLE TO DO SO, WE MAY CEASE OPERATIONS. Historically, we have funded our operations through limited revenues and debt and equity financing. Although we were successful in obtaining a $2,000,000 financing in January 2006, sold common stock for cash of $1,005,500 during the two years ended December 31, 2007, and obtained bridge financing of approximately $4,170,000 from September 2006 through January 2008, we have been unsuccessful in attracting significant additional private funding for our business. We continue to incur operating expenses, including executive and staff salaries, lease obligations and acquisition costs, but we have not yet integrated our acquired businesses and technologies, acquired target companies according to our business model, obtained sufficient financing to carry out our plans, or received sufficient operating revenues to support our human and equipment infrastructures. Until such time, if ever, that we are successful in obtaining additional financing to carry out our strategy, there is significant risk that we may be required to cease operations. SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK INTO THE PUBLIC MARKET BY CERTAIN STOCKHOLDER MAY RESULT IN SIGNIFICANT DOWNWARD PRESSURE ON THE PRICE OF OUR COMMON STOCK AND COULD AFFECT YOUR ABILITY TO REALIZE THE CURRENT TRADING PRICE OF OUR COMMON STOCK. Sales of a substantial number of shares of our common stock in the public market by certain stockholders could cause a reduction in the market price of our common stock. As of the date of this Quarterly Report, we have 16,888,557 shares of common stock issued and outstanding plus 2,250,000 shares of common stock issuable. As of the date of this Quarterly Report, there are 16,888,557 outstanding shares of our common stock that are restricted securities as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). Although the Securities Act and Rule 144 place certain prohibitions on the sale of restricted securities, restricted securities may be sold into the public market under certain conditions. Further, as of the date of this Quarterly Report, there are an aggregate of 1,149,762 stock options outstanding and an aggregate of 98,780,968 warrants outstanding. Any significant downward pressure on the price of our common stock as the selling stockholders sell their shares of our common stock could encourage short sales by the selling stockholders or others. Any such short sales could place further downward pressure on the price of our common stock. THE TRADING PRICE OF OUR COMMON STOCK ON THE OTC BULLETIN BOARD WILL FLUCTUATE SIGNIFICANTLY AND STOCKHODLER MAY HAVE DIFFICULTY RESELLING THEIR SHARES. Our common stock trades on the Over-the-Counter Bulletin Board. There is a volatility associated with Bulletin Board securities in general and the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock: (i) disappointing results and/or revenues from our websites; (ii) failure to meet our revenue or profit goals or operating budget; (iii) decline in demand for our common stock; (iv) downward revisions in securities analysts' estimates or changes in general market conditions; (v) technological innovations by competitors or in competing technologies; (vi) lack of funding generated for operations; (vii) investor perception of our industry or our prospects; and (viii) general economic trends. 57 In addition, stock markets have experienced price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, investors may be unable to sell their shares at a fair price and you may lose all or part of your investment. ADDITIONAL ISSUANCE OF EQUITY SECURITIES MAY RESULT IN DILUTION TO OUR EXISTING STOCKHOLDERS. As of March 31, 2008, we have executed convertible promissory notes, granted stock options, issued warrants to the same promissory note holders and others and reserved options to be granted upon formation of a stock option plan to purchase an aggregate of 265,702,156 shares of our common stock. The stock options are exercisable at prices ranging from $0.485 per share to $11.40 per share, and the warrants are exercisable ranging from $0.001 per share to $11.25 per share. In addition, we have granted common stock in the past to financiers and consultants, and as we procure additional financing and acquire additional business assets, we shall undoubtedly grant additional shares, as well as warrants and stock options, to the financiers and shareholders of target companies. To the extent that additional shares are issued, notes are converted, and stock options and warrants are exercised, the shares that are issued may result in an oversupply of shares and an undersupply of purchasers, thereby diluting the market for our shares. Our Articles of Incorporation authorize the issuance of 300,000,000 shares of common stock and 20,000,000 shares of "blank check" preferred stock, which may adversely affect the voting power of the holders of our securities and may deter or delay changes in management. The board of directors has the authority to issue additional shares of our capital stock to provide additional financing in the future and the issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, your proportionate ownership interest and voting power will be decreased accordingly. Further, any such issuance could result in a change of control. To date, we have not issued any shares of preferred stock. Our Board of Directors, without further approval of our common stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights, liquidation preferences and other rights and restrictions relating to any series of our preferred stock. Issuances of additional shares of preferred stock, while providing flexibility in connection with possible financings, acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of other of our securities and may, under certain circumstances, have the effect of deterring hostile takeovers or delaying changes in management control. OUR COMMON STOCK IS CLASSIFIED AS A "PENNY STOCK" UNDER SEC RULES WHICH LIMITS THE MARKET FOR OUR COMMON STOCK. The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. A broker-dealer must also provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer, and sales person in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written 58 agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for stock that becomes subject to those penny stock rules. If a trading market for our common stock develops, our common stock will probably become subject to the penny stock rules, and shareholders may have difficulty in selling their shares. WE HAVE RECEIVED A GOING CONCERN OPINION FROM OUR INDEPENDENT AUDITORS REPORT ACCOMPANYING OUR DECEMBER 31, 2007 AND DECEMBER 31, 2006 FINANCIAL STATEMENTS. The independent registered public accounting firm's report accompanying our December 31, 2007 and 2006 audited consolidated financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The consolidated financial statements have been prepared "assuming that the Company will continue as a going concern." Our ability to continue as a going concern is dependent on raising additional capital to fund our operations and ultimately on generating future profitable operations. There can be no assurance that we will be able to raise sufficient additional capital or eventually have positive cash flow from operations to address all of our cash flow needs. If we are not able to find alternative sources of cash or generate positive cash flow from operations, our business and shareholders will be materially and adversely affected. RISKS RELATED TO HOLDING OUR SECURITIES THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CALLABLE SECURED CONVERTIBLE NOTES, WARRANTS AND STOCK OPTIONS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK. As of March 31, 2008, we had callable secured convertible notes outstanding or an obligation to issue callable secured convertible notes that may be converted into an estimated 136,632,869 shares of our common stock at current market prices, outstanding warrants or an obligation to issue warrants to purchase 98,780,968 shares of our common stock, outstanding options to purchase 1,149,762 shares of the Company's common stock and reserved options to be granted upon formation of a stock option plan to purchase an 10,000,000 shares of the Company's common stock. In addition, the number of shares of our common stock issuable upon conversion of the outstanding callable secured convertible notes may increase if there is an event of default. The sale of these shares may adversely affect the market price of our common stock. IF VARIOUS THIRD PARTIES CONVERT THEIR CONVERTIBLE NOTES BASED ON CURRENT CONVERSION TERMS, THE ADDITIONAL STOCK ISSUANCES UNDERLYING THE CONVERSIONS COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK. At March 31, 2008, the Company had multiple convertible promissory notes outstanding and payable to various third parties each with anti-dilution provisions. Following is a summary of the material conversion terms related to our largest convertible notes as of December 31, 2007: Note 1) a fixed conversion price of $0.04, Note 2) a variable conversion price of the lesser of (a) $0.23 per share or (b) an amount equal to 80% of the lowest daily closing bid price of the Company's common stock, as quoted by Bloomberg, LP, for the five (5) trading days immediately prior to conversion and Note 3) a variable conversion price convertible into common stock of the Company at a 45% discount to the average of the three lowest trading prices of the common stock during the twenty (20) trading-day period prior to conversion. The significant downward pressure on the price of our common stock as the selling stockholder converts and sells material amounts could have an adverse affect on our stock price. In addition, not only the sale of shares issued upon conversion or exercise of notes, warrants and options, but also the mere perception that these sales could occur may adversely affect the market price of our common stock. IF WE ARE REQUIRED TO ISSUE SECURITIES WHICH ARE PRICED AT LESS THAN THE CONVERSION PRICE OF OUR CONVERTIBLE SECURITIES OR THE EXERCISE PRICE OF WARRANTS SOLD, IT WILL RESULT IN ADDITIONAL DILUTION TO US. At March 31, 2008, we had debentures convertible into and warrants to purchase 136,632,869 and 98,780,968 shares of common stock, respectively. The convertible debentures and certain warrants contain provisions that will require us to reduce their conversion/exercise price in the event that we issue and/or sell 59 additional securities at a price less than the conversion price of our convertible debentures or the exercise price of these warrants. If this were to occur, current investors, other than the purchasers of the convertible securities and warrants, would sustain material dilution in their ownership interest of Dynamic Leisure Corporation. THE ISSUANCE OF SHARES UPON CONVERSION OF THE CALLABLE SECURED CONVERTIBLE NOTES AND EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS. The issuance of shares upon conversion of the callable secured convertible notes and exercise of warrants may result in substantial dilution to the interests of other stockholders since the selling stockholders may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholders may not convert their callable secured convertible notes and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholders from converting and/or exercising some of their holdings and then subsequently converting the remainder of their holdings. In this way, the selling stockholders may sell more than 4.99% while never holding more than the foregoing limit at any one time. There is no upper limit on the number of shares that may be issued which may in effect further dilute the proportionate equity interest and voting power of holders of our common stock, including investors in this offering. IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING CALLABLE SECURED CONVERTIBLE NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE CALLABLE SECURED CONVERTIBLE NOTES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS. On January 13, 2006, we issued a convertible promissory note in the amount of $2,000,000. This note bears simple interest at the rate of 8% per annum and was due and payable with interest on January 13, 2007 and was subsequently extended to March 5, 2008. In February and March 2006, we issued convertible promissory notes related to our acquisitions of CIL and IRT/ITR in the aggregate principal amount of $2,050,000. These notes bear interest at the rate of 9% and were due and payable with interest in February and March 2007. On September 20, 2006, we modified our $2,000,000 convertible promissory note, pursuant to which the principal of the note was increased by $250,000 to $2,250,000. On November 9, 2006, we entered into a Security Purchase Agreement involving the sale of an aggregate of $1,000,000 principal amount of callable secured convertible notes issuable in two tranches of $600,000 and $400,000 each and stock purchase warrants to buy 5,000,000 shares of our common stock. The callable secured convertible notes are due and payable, with 6% interest, three years from the date of issuance, unless sooner converted into shares of our common stock. The entire $1,000,000 was outstanding on March 31, 2007. On March 5, 2007, we modified our $2,250,000 convertible note to extend the maturity date to March 5, 2008 and granted the note holders a warrant to purchase 3,000,000 shares of our common stock at $1.50 per share. On June 29, 2007 and January 22, 2008, we issued to an investor secured convertible debentures of $1,310,000 and $1,200,000 and warrants to purchase 8,000,000 and 15,000,000 shares of our common stock, respectively. We were in default for non-payment of its promissory notes aggregating $4,150,792 as of March 31, 2008, along with certain other promissory notes totaling $107,500. Any event of default such as our failure to repay the principal or interest when due, our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, breach of any covenant, representation or warranty in the Securities Purchase Agreement or related convertible note, the assignment or appointment of a receiver to control a substantial part of our property or business, the filing of a money judgment, writ or similar process against us in excess of $50,000, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against us and the delisting of our common stock could require the early repayment of the callable secured convertible notes, including a default interest rate on the outstanding principal balance of the notes if the default is not cured within the specified grace period. We anticipate that the 60 full amount of the callable secured convertible notes will be converted into shares of our common stock, in accordance with the terms of the callable secured convertible notes. If we are required to repay the callable secured convertible notes, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the notes when required, the note holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such action would require us to curtail or cease operations. The Company was in default for non-payment of its promissory notes aggregating $4,155,792 as of March 31, 2008, along with certain other promissory notes totaling $156,434. Any event of default such as our failure to repay the principal or interest when due, our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, breach of any covenant, representation or warranty in the Securities Purchase Agreement or related convertible note, the assignment or appointment of a receiver to control a substantial part of our property or business, the filing of a money judgment, writ or similar process against us in excess of $50,000, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against us and the delisting of our common stock could require the early repayment of the callable secured convertible notes, including a default interest rate on the outstanding principal balance of the notes if the default is not cured within the specified grace period. We anticipate that the full amount of the callable secured convertible notes will be converted into shares of our common stock, in accordance with the terms of the callable secured convertible notes. If we are required to repay the callable secured convertible notes, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the notes when required, the note holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such action would require us to curtail or cease operations. On March 5, 2007, counsel for Stephen Hicks notified us that we were allegedly in breach of a convertible debenture payable under the March 6, 2006 Purchase Agreement between us and Hicks (the "Agreement") that provided for acquisition of IRT/ITR. The Agreement calls for payment of a convertible debenture in the amount of $1,450,000 as of March 6, 2007. If we are unable to resolve these matters, the note holders could proceed with these legal actions against us and foreclose on all of our assets to recover the amounts due. Any such action would require us to curtail or cease operations. WE MAY BE SUED OR BECOME A PARTY TO LITIGATION, WHICH COULD REQUIRE SIGNIFICANT MANAGEMENT TIME AND ATTENTION AND RESULT IN SIGNIFICANT LEGAL EXPENSES AND MAY RESULT IN AN UNFAVORABLE OUTCOME WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS. We may be subject to a number of lawsuits from time to time arising in the ordinary course of our business. For example, on March 2, 2007, we named Stephen Hicks as a principle party to proceedings seeking recovery of damages or alternative relief arising from breach of a contract under which we acquired IRT/ITR. The complaint alleges non-compliance with certain terms and conditions providing for integration of the companies. On March 5, 2007, counsel for Stephen Hicks notified us that we were allegedly in breach of a convertible debenture payable under the March 6, 2006 Purchase Agreement between us and Mr. Hicks that provided for our acquisition of IRT/ITR. The Purchase Agreement calls for payment of a convertible debenture in the amount of $1,450,000 as of March 6, 2007. The expense of defending this and other litigation may be significant. The amount of time to resolve these lawsuits is unpredictable and defending ourselves may divert management's attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows. In addition, an unfavorable outcome in such litigation could have a material adverse effect on our business, results of operations and cash flows. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES None. 61 ITEM 3. DEFAULTS UPON SENIOR SECURITIES On March 5, 2008, Secured Convertible Promissory Notes with the principal balance of $2,250,000 to MMA Capital, LLC ("MMA") were payable along with unpaid interest. The notes were not repaid on the maturity date and are in default. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS 10.1 Settlement Agreement dated July 31, 2007 by and between the Company and the Subscribers named therein and Form of Amended and Restated Stock Purchase Warrant (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on August 6, 2007) 10.2 Modification and waiver agreement dated October 25, 2007 between the Company and Miller Investments, LLC related to a convertible promissory note dated May 1, 2007. 31.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 62 SIGNATURES In accordance with the requirements of the Exchange Act the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 20, 2008 DYNAMIC LEISURE CORPORATION By: /s/ Daniel G. Brandano ---------------------- Daniel G. Brandano Chief Executive Officer EXHIBIT INDEX 10.1 Settlement Agreement dated July 31, 2007 by and between the Company and the Subscribers named therein and Form of Amended and Restated Stock Purchase Warrant (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on August 6, 2007) 10.2 Modification and waiver agreement dated October 25, 2007 between the Company and Miller Investments, LLC related to a convertible promissory note dated May 1, 2007. 31.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 63 EX-31 2 ex_31-1.txt CERTIFICATION OF CEO & CFO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF ACCOUNTING OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Daniel G. Brandano, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Dynamic Leisure Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 20, 2008 /s/ Daniel G. Brandano - ---------------------- Daniel G. Brandano Chief Executive and Accounting Officer EX-32 3 ex_32-1.txt CERTIFICATION OF CEO & CFO PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF ACCOUNTING OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C SECTION 1350) In connection with the Quarterly Report of Dynamic Leisure Corporation, a Minnesota corporation (the "Company"), on Form 10-Q for the fiscal quarter ended March 31, 2008, as filed with the United States Securities and Exchange Commission (the "Report"), I, Daniel G. Brandano, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Daniel G. Brandano - ---------------------- May 20, 2008 Daniel G. Brandano Chief Executive Officer And Chief Financial and Accounting Officer [A signed original of this written statement required by Section 906 has been provided to Dynamic Leisure Corporation and will be retained by Dynamic Leisure Corporation and furnished to the United States Securities and Exchange Commission or its staff upon request.] -----END PRIVACY-ENHANCED MESSAGE-----