 | Trombly Business Law 1320 Centre Street, Suite 202 Newton, MA 02429 Telephone (617) 243-0060 Facsimile (617) 243-0066 |
| Amy M. Trombly, Esq. | amy@tromblybusinesslaw.com |
June 8, 2007
Delivered by electronic submission via EDGAR
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E., Mail Stop 7010
Washington, DC 20549
| Attn: | Ms. Kathleen Krebs | |
| Re: | CommercePlanet, Inc. | |
| Registration Statement on Form SB-2 | ||
| File Number: 333-141375 |
I am securities counsel for CommercePlanet, Inc. (the “Company”). The Company is including revisions on Amendment 3 of the Registration Statement on Form SB-2 pursuant to a conversation with Ms. Kathleen Krebs on June 6, 2007.
If you have any further questions or comments, please feel free to contact us. We are happy to cooperate in any way we can.
| Regards, | ||
| /s/ Amy M. Trombly | ||
| Amy M. Trombly | ||
| Counsel for CommercePlanet, Inc. | ||
| cc: | CommercePlanet, Inc. |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Amendment No. 3
CommercePlanet, Inc. | ||
| (Exact name of registrant as specified in its charter) |
UT | 5960 | 87-0520575 | ||
| (State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
CommercePlanet, Inc.
30 S. La Patera Lane, Suite 8
Goleta, CA 93117
(805) 964-9126
(Address and telephone number of principal executive offices and principal place of business)
Michael Hill
CommercePlanet, Inc.
30 S. La Patera Lane, Suite 8
Goleta, CA 93117
(805) 964-9126
(Name, address and telephone number of agent for service)
Copies of communications to:
Amy M. Trombly, Esq.
Trombly Business Law
1320 Centre St., Suite 202
Newton, MA 02459
(617) 243-0060
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 Check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ]
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The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted.
PROSPECTUS
COMMERCEPLANET, INC.
OFFERING UP TO 5,587,500 COMMON SHARES
This prospectus relates to the sale of up to 5,587,500 shares of our common stock by selling stockholders. We are not selling any securities in this offering and therefore will not receive any proceeds from this offering. We may receive proceeds from the possible future exercise of warrants. All costs associated with this registration will be borne by us. Our common stock is traded on the Over-The-Counter Bulletin Board under the trading symbol "CPNE.OB". On June 5, 2007, the last reported sale price of our common stock on the Over-The-Counter Bulletin Board was $1.33 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE
SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
You should rely only on the information provided in this prospectus or any supplement to this prospectus and information incorporated by reference. We have not authorized anyone else to provide you with different information. Neither the delivery of this prospectus nor any distribution of the shares of common stock pursuant to this prospectus shall, under any circumstances, create any implication that there has been no change in our affairs since the date of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offence.
Subject to completion, the date of this Prospectus is June 8, 2007.
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COMMERCEPLANET, INC.
The following information is a summary of the prospectus and it does not contain all of the information you should consider before making an investment decision. You should read the entire prospectus carefully, including the financial statements and the notes relating to the financial statements.
ABOUT US
We are a publicly traded media company that trades on the Over-the-Counter Bulletin Board of the National Quotation Service under the ticker symbol "CPNE.OB." We offer media products, lead generation services and marketing tools to our client partners through a turnkey media solution that utilizes our network of wholly-owned subsidiaries, Consumer Loyalty Group, Inc., Legacy Media, Inc., OS Imaging, Inc., and Interaccurate, Inc.
Each subsidiary specializes in a specific niche of the media industry. Their combined services are designed to address all the needs of their client partners including, membership loyalty offers, consumer marketing data management, affiliate list management, printing and fulfillment services, and Web/Data hosting and software development.
The Consumer Loyalty Group offers a suite of revenue generating consumer loyalty based products. These products encompass home based business opportunities, eCommerce retail sales, educational programs, financial programs and other high yield revenue producing offers. The products are utilized by our client partners on a per acquisition, revenue share or licensed (private branded) basis. Each offer has specifically been designed to generate a significant revenue stream for our client partners while simultaneously satisfying the consumer’s need for high quality products.
Legacy Media is a full service marketing company designed to address all of our client partner needs. There are four operating divisions of Legacy Media that focus on the four main components of lead generation and order acquisition. The four operating divisions are media placement, list management, affiliate network management, and marketing tools. Legacy Media leverages relationships with the other subsidiary companies to create and implement highly productive marketing campaigns on behalf of our client partners.
OS Imaging offers a full range of services including graphic design, printing services, data merge, mailing and finishing. Graphic design and printing capabilities allow OS Imaging to assist our client partners in defining, developing, and creating the most powerful marketing message possible. Additionally, OS Imaging offers a wide array of fulfillment services including: assembly, pick and pack, mailing and warehousing and inventory management services.
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Interaccurate, Inc. designs and implements cutting-edge technology for secure electronic payment modules, advanced content search tools, and secure data hosting. Additionally, Interaccurate provides co-location services in its secure, state of the art data center.
HOW TO CONTACT US
The address of our principal executive office is 30 S. LaPatera Lane, Suite 8, Goleta, CA 93117. Our telephone number is (805) 964-9126. Our website address is www.commerceplanet.com. Information contained on our website does not constitute part of this prospectus and our address should not be used as a hyperlink to our website.
THE OFFERING
| Common stock outstanding as of March 6, 2007 | 50,106,252 shares | |
| Common stock to be registered | 4,837,500 shares | |
| Common stock underlying warrants to be registered | 750,000 shares with a total dollar value of $18,750 at the time the warrant was issued*. | |
| Common stock to be outstanding after this Offering | 50,856,252 shares | |
| Use of Proceeds | We will not receive any proceeds from the sale of common stock by the selling stockholders. | |
| Stock Symbol | CPNE.OB |
* Total dollar value does not include warrants that were issued with an exercise price below the market price of the underlying common stock on the date of issuance. Additionally, this number is only theoretical because the shares underlying the warrants were not registered at the time of issuance and therefore could not be sold.
THE TRANSACTION
JLF Partners I, L.P., JLF Partners II, L.P., JLF Offshore Fund, Ltd., CAMOFI Master LDC, Crestview Capital Master, LLC and Bear Stearns Security Corp. FBO J. Steven Emerson IRA R/O II are selling shares of common stock in this prospectus. We will not receive any proceeds from the selling stockholders. These selling stockholders purchased their shares in two separate transactions. On February 7, 2006, Michael Hill, Ethan Brooks, Miguel Angel Vazquez, Aaron Gravitz, Charles Gugliuzza and David Foucar, all employees of CommercePlanet, Inc., sold a total of 3,037,500 shares of our common stock to JLF Partners I, L.P., JLF Partners II, L.P. and JLF Offshore Fund, Ltd. The shares were sold at a per share price of $1.90. On February 12, 2007, eFund Capital Partners LLC sold a total of 1,800,000 shares of our common stock to CAMOFI Master LDC, Crestview Capital Master, LLC and Bear Stearns Security Corp FBO J. Steven Emerson IRA R/O II. The shares were also sold at a per share price of $1.90.
In connection with the transaction with JLF Partners I, L.P., JLF Partners II, L.P. and JLF Offshore Fund, Ltd., we entered into a Registration Rights Agreement whereby we agreed to prepare and file a registration statement covering the resale of the shares they purchased within the earlier of the (i) 15th calendar day following the date on which we file our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006, or (ii) the 60th calendar day following the business day on which all of the conditions set forth in the purchase agreement dated February 7, 2007, by and among Michael Hill, Ethan Brooks, Miguel Angel Vazquez, Aaron Gravitz, Charles Gugliuzza, David Foucar, JLF Partners I, L.P., JLF Partners II, L.P. and JLF Offshore Fund, Ltd are satisfied.
In connection with the eFund Transaction, we entered into a Registration Rights Agreement with CAMOFI Master LDC, Crestview Capital Master, LLC and Bear Stearns Security Corp. FBO J. Steven Emerson IRA R/O II pursuant to which we agreed to prepare and file a registration statement covering the resale of the shares they purchased within the earlier of the (i) 15th calendar day following the date on which we file our Form 10-KSB, or (ii) the 60th calendar day following the business day on which all of the conditions set forth in the purchase agreement by and among eFund Capital Partners LLC, CAMOFI Master LDC, Crestview Capital Master, LLC and Bear Stearns Security Corp FBO J. Steven Emerson IRA R/O II are satisfied. We did not receive any consideration for entering into the Registration Rights Agreement. We entered into the Registration Rights Agreement because we believe the sale of shares to the selling stockholders could facilitate a more orderly disposition of these securities into the market.
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eFUND SHARES
We are registering 450,000 shares of common stock underlying warrants for eFund Capital Partners, LLC and 300,000 shares of common stock underlying warrants for eFund Small Cap Fund, L.P. EFund Capital Partners and eFund Small Cap Fund received the following warrants as inducement to purchase convertible promissory notes from us on the same dates the warrants were issued. Following is a list of warrants for which we are registering the underlying shares.
| · | 225,000 warrants were issued to eFund Capital Partners on April 2, 2004 with an exercise price of $1.53 and an expiration date of April 2, 2009. On April 2, 2004, the market price per share of our common stock was $1.38. |
| · | 225,000 warrants were issued to eFund Capital Partners on May 5, 2004 with an exercise price of $1.53 and an expiration date of May 5, 2009. On May 5, 2004, the market price per share of our common stock was $1.47. |
| · | 150,000 warrants were issued to eFund Small Cap Fund on August 18, 2004 with an exercise price of $1.03 and an expiration date of August 18, 2009. On August 18, 2004, the market price per share of our common stock was $1.05. The total dollar value of the securities underlying the warrant is $3,000. |
| · | 150,000 warrants were issued to eFund Small Cap Fund on September 25, 2004 with an exercise price of $1.25 and an expiration date of September 25, 2009. On September 25, 2004, the market price per share of our common stock was $1.28. The total dollar value of the securities underlying the warrant is $4,500. |
An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors and other information included in this prospectus. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected and you may lose some or all of your investment.
RISKS ABOUT OUR BUSINESS
WE FACE INTENSE COMPETITION, WHICH MAY REDUCE OUR SALES, OPERATING PROFITS, OR BOTH.
The market segments in which we compete are rapidly evolving and intensely competitive. We have many competitors in different industries, including both the retail and eCommerce services industries.
Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition, and significantly greater financial, marketing, and other resources than we have. They may be able to secure merchandise from vendors on more favorable terms and may be able to adopt more aggressive pricing policies. Competitors in both the retail and eCommerce service industries also may be able to devote more resources to technology development and marketing than we do.
Competition in the eCommerce channel may intensify. Other companies in the retail and eCommerce service industries may enter into business combinations or alliances that strengthen their competitive positions. As various internet market segments obtain large, loyal customer bases, participants in those segments may expand into the market segments in which we operate. In addition, new and expanded web technologies may further intensify the competitive nature of online retail. The nature of the internet as an electronic marketplace facilitates competitive entry and comparison shopping and renders it inherently more competitive than conventional retailing formats. This increased competition may reduce our sales, operating profits, or both.
WE DEPEND ON OUR RELATIONSHIPS WITH THIRD PARTIES, THE LOSS OF WHICH MAY RESULT IN LOSS OF CUSTOMERS.
We depend on our merchant and banking relationships, as well as strategic relationships with third parties, who provide payment processing to all our customers. Failure of these financial institutions and third parties to continue to provide services in a satisfactory way to our customers could result in our loss of the business of the merchants to whom we sell products and services. If these financial institutions and third parties do not continue to provide services to our customers, we may not be able to find other third party service providers. In that instance, our customers may terminate their agreements with us and move their business to our competitors, which could adversely affect our revenues and earnings.
IF WE CANNOT PASS ALONG INCREASED FEES FROM VISA AND MASTERCARD TO OUR CUSTOMERS, WE WILL HAVE TO ABSORB THE INCREASES WHICH WOULD INCREASE OUR OPERATING COSTS AND REDUCE OUR PROFIT MARGIN.
From time to time, VISA and MasterCard increase the fees that they charge processors. We may attempt to pass these increases along to our merchant customers, but this might result in the loss of those customers to our competitors who do not pass along the increases. Our revenues from merchant account processing are dependant upon our continued merchant relationships which are highly sensitive and can be canceled if customer charge-backs escalate and generate concern that the company has not held back sufficient funds in reserve accounts to cover these charge-backs. Cancellation by our merchant providers would most likely result in the loss of new customers and lead to a reduction in our revenues.
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We depend on credit card processing for a majority of our membership programs, to include but not be limited to Visa, Mastercard, American Express, and Discover. Significant changes to the merchant operating regulations, merchant rules and guidelines, card acceptance methods and or card authorization methods could significantly impact our revenues. Additionally, our membership programs are accepted under a negative option billing term, change in regulation of negative option billing could significantly impact our revenue.
WE RELY ON CO-MARKETING ALLIANCES TO GENERATE ADDITIONAL REVENUE FROM OUR EXISTING CUSTOMERS. IF WE CANNOT MAINTAIN THESE ALLIANCES, OUR REVENUES MAY DECLINE.
We have co-marketing arrangements with strategic partners in which we agree to market their services to our existing customers. For the year ended December 31, 2006, these "upsell" services accounted for approximately 9.4% of our total current revenue. If these partners either fail to provide adequate services to our customers or decline to renew our agreements, our gross revenue could decline which would affect our overall financial stability.
WE MAY EXPERIENCE BREAKDOWNS IN OUR HOSTING SERVICES, INFRASTRUCTURE OR PAYMENT PROCESSING SYSTEMS, WHICH MAY EXPOSE US TO LIABILITIES AND CAUSE CUSTOMERS TO ABANDON OUR PRODUCTS AND SERVICES.
We may experience interruption in hosting service due to upgrades being implemented into hosting software. In addition, interruption in service, transmission downtime, and/or outages may be caused at the wholesale communication distribution level (i.e. Verizon). This may expose us to liability, which may cause customers to abandon our service.
We would be unable to deliver our payment processing services or hosting services if our system infrastructures break down or are otherwise interrupted. Events that could cause system interruptions are:
| - | Acts of God, such as fire or earthquakes, | |
| - | power loss, |
| - | terrorist attacks, | |
| - | telecommunications failure, |
| - | unauthorized entry by hackers, or | |
| - | other events. |
Although we regularly back up data from operations and take other measures to protect against loss of data, there is still some risk that our services may breakdown or we will lose data. Despite the security measures we maintain, our infrastructure may be vulnerable to computer viruses, hackers, rogue employees or other sources of disruption. Any problem of this nature could result in significant liability to customers or financial institutions and also may deter potential customers from using our services. We attempt to limit this sort of liability through back-up systems, contractual provisions, insurance, and other security measures, however, these contractual limitations on liability may not be enforceable, and our insurance coverage may not be adequate to cover all liabilities we might sustain. Also, a breach of our eCommerce security measures could reduce demand for our services. The eCommerce industry is intensely focused on the need for internet security, particularly with respect to the transmission and storage of confidential personal and financial data. Any compromise or elimination of our security could erode customer confidence in our systems and could result in lower demand for our services or possible litigation.
IF WE ARE UNSUCCESSFUL IN MAKING, INTEGRATING, AND MAINTAINING COMMERCIAL AGREEMENTS, STRATEGIC ALLIANCES, AND OTHER BUSINESS RELATIONSHIPS, OUR BUSINESS COULD SUFFER.
Our business plan contemplates that we will enter into commercial agreements, strategic alliances, and other business relationships with third parties. We have entered into agreements to provide eCommerce services to other businesses and we plan to enter into similar agreements in the future. Under these agreements, we may perform services such as providing our technology services, including search, browse, and personalization services, permitting other businesses and individuals to offer products or services through our websites and powering third-party websites, either with or without providing accompanying fulfillment services. These arrangements are complex and require substantial personnel and resource commitments by us, which may constrain the number of agreements we are able to enter into and may affect our ability to integrate and deliver services under the relevant agreements. If we fail to implement, maintain, and successfully develop the various components of these commercial relationships, that may include fulfillment, customer service, inventory management, tax collection, payment processing, licensing of third party software, hardware, and content, and engaging third parties to perform hosting and other services, these initiatives may not be viable and cause the company to be in default of agreement or planned compensation. The amount of compensation we receive under certain of these agreements is dependent on the volume of sales that the other company makes. Therefore, if the other company's website or product or services offering is not successful, we may not receive all of the compensation we are otherwise due under the agreement, which may cause substantial loss of revenue, or may not be able to maintain the agreement. Moreover, we may not be able to succeed in our plans to enter into additional commercial relationships and strategic alliances on favorable terms, which will not enable us to stay competitive within the industry.
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As our commercial agreements expire or otherwise terminate, we may be unable to renew or replace these agreements on comparable terms, or at all. In the past, we amended several of our commercial agreements to reduce future cash proceeds to be received by us, shorten the term of our commercial agreements, or both. Some of our agreements involve high margin services, such as marketing and promotional agreements, and as these agreements expire they may be replaced, if at all, by agreements involving lower margin services. In addition, several past commercial agreements were with companies that experienced business failures and were unable to meet their obligations to us. We may in the future enter into further amendments of these agreements or encounter other parties that have difficulty meeting their contractual obligations to us, which could adversely affect our operating results.
IF WE LOSE KEY SENIOR MANAGEMENT PERSONNEL OUR BUSINESS COULD BE NEGATIVELY AFFECTED.
We depend on the continued services and performance of our senior management and other key personnel, particularly Michael Hill, our Chief Executive Officer and Director, Charlie Gugliuzza, our President and Director, Ethan Brooks, our Chief Technology Officer, David Foucar, our Chief Financial Officer and Aaron Gravitz, our Chief Operations Officer. We do not have "key person" life insurance policies. The loss of any of our executive officers or other key employees could harm our business.
IF OUR WEBSITES ARE NOT CONTINUALLY AVAILABLE TO OUR CUSTOMERS AND THE PUBLIC OR THERE IS LACK OF INTEGRATION AND REDUNDANCY IN OUR SYSTEMS, OUR SALES MAY DECREASE.
Customer access to our websites directly affects the volume of goods we sell and the services we offer and thus affects our net sales. We experience occasional system interruptions that make our websites unavailable or prevent us from efficiently fulfilling orders or providing services to third parties, which may reduce our net sales and the attractiveness of our products and services. If we are unable to continually add additional software and hardware and upgrade our systems and network infrastructure in an effective manner, it could cause system interruptions that adversely affect our operating results.
Our websites could be damaged or interrupted by fire, flood, power loss, telecommunications failure, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins, and similar events or disruptions. Any of these events could result in website interruption and delays that could prevent us from accepting and fulfilling customer orders.
If our websites are not continually available to our customers and the public or there is a lack of integration and redundancy in our system, our sales may decrease. We may experience interruption in hosting service due to upgrades, communication downtime, and or outages at the wholesale communication distribution level (i.e. Verizon). This may expose us to liability, which may cause customers to abandon our service. Some of our customers are acquired via internet advertising and interruption in service may extend a decrease in gross sales.
Should these problems occur, it would make our product offerings less attractive to our customers and our service offerings less attractive to third parties. While we do have backup systems for certain aspects of our operations, our systems are not fully redundant and our disaster recovery planning may not be sufficient for all eventualities. In addition, we may have inadequate insurance coverage or insurance limits to compensate us for losses from a major interruption. If any of this were to occur, it could damage our reputation and be expensive to remedy.
WE COULD BE LIABLE IF WE FAIL TO MITIGATE BREACHES OF SECURITY ON OUR WEBSITE AND FRAUDULENT ACTIVITIES OF USERS OF OUR PAYMENTS PROGRAM, WHICH COULD INCREASE OUR EXPENSES AND LOWER OUR OPERATING RESULTS.
A fundamental requirement for eCommerce is the secure transmission of confidential information over public networks. Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent credit card transactions and other security breaches, failure to mitigate fraud or breaches may adversely affect our operating results. The law relating to the liability of providers of online payment services is currently unsettled. We guarantee payments made through our payments program available to sellers on Marketplace and certain other programs up to certain limits for buyers, and we may be unable to prevent users from fraudulently collecting payments when goods may not be shipped to a buyer. As our payments program grows, our liability risk will increase. Any costs we incur as a result of liability because of our payments program's guarantee or otherwise could harm our business. In addition, the functionality of our payments program depends on certain third-party vendors delivering services. If these vendors are unable or unwilling to provide services, our payments program and our businesses that use it may not be viable.
We could be liable if we fail to mitigate breaches of security on our website and fraudulent activities of users of our payments program, which could increase our expenses and lower our operating results. If an individual or group were to take unauthorized control of our hosting servers to generate "spam" or any other example of fraudulent activity, this could cause situation-specific internet service providers, or ISPs to block communications with our Internet service provider not allowing for communications with customers being serviced by the ISPs.
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IF GOVERNMENT REGULATION OF THE INTERNET AND ECOMMERCE RESULTS IN UNFAVORABLE CHANGES, OUR BUSINESS COULD BE HARMED.
We are subject to general business regulations and laws, as well as regulations and laws specifically governing the internet and eCommerce. Existing and future laws and regulations may impede the growth of the internet or other online services. These regulations and laws may cover taxation, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access, and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel, and personal privacy apply to the internet and eCommerce. Unfavorable resolution of these issues may harm our business. On November 11, 2004, the Federal Communications Commission ruled that providers of internet-based phone call services fall under jurisdiction of the federal government and cannot be regulated by states.
WE MAY BE SUBJECT TO LIABILITY FOR PAST SALES, THEREFORE DECREASING OUR FUTURE SALES.
In accordance with current industry practice, we do not collect sales taxes or other taxes with respect to shipments of most of our goods into states other than California. Our fulfillment center and customer service center networks, and any future expansion of those networks, along with other aspects of our evolving business, may result in additional sales and other tax obligations. One or more states or foreign countries may seek to impose sales or other tax collection obligations on out-of-jurisdiction companies that engage in eCommerce. A successful assertion by one or more states or foreign countries that we should collect sales or other taxes on the sale of merchandise or services could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers, and otherwise harm our business.
Currently, decisions of the U.S. Supreme Court restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the internet. However, a number of states, as well as the U.S. Congress, have been considering various initiatives that could limit or supersede the Supreme Court's position regarding sales and use taxes on internet sales. If any of these initiatives addressed the Supreme Court's constitutional concerns and resulted in a reversal of its current position, we could be required to collect sales and use taxes in states other than California. The imposition by state and local governments of various taxes upon internet commerce could create administrative burdens for us and could increase our costs and decrease our future sales.
IF WE DO NOT ADAPT QUICKLY ENOUGH TO CHANGING CUSTOMER REQUIREMENTS AND INDUSTRY STANDARDS, OUR EXISTING WEBSITES MAY BECOME OBSOLETE.
Technology in the eCommerce industry changes rapidly. We may not be able to adapt quickly enough to changing customer requirements and preferences and industry standards. Competitors often introduce new products and services with new technologies. These changes and the emergence of new industry standards and practices could render our existing websites and proprietary technology obsolete.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and uncertainties. We generally use words such as "believe," "may," "could," "will," "intend," "expect," "anticipate," "plan," and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the reasons described in our “Risk Factor” section. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and our future results, levels of activity, performance or achievements may not meet these expectations. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.
This prospectus relates to shares of our common stock that may be offered and sold from time to time by certain selling stockholders. We will not receive proceeds from the sale of shares of common stock in this offering.
The shares of common stock are being offered for sale by the selling stockholders at prices established on the Over-the-Counter Bulletin Board or in negotiated transactions during the term of this offering. These prices will fluctuate based on the demand for the shares.
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Based upon information available to us as of March 7, 2007, the following table sets forth the names of the selling stockholders, the number of shares owned, the number of shares registered by this prospectus and the number and percent of outstanding shares that the selling stockholders will own after the sale of the registered shares, assuming all of the shares are sold. The information provided in the table and discussions below has been obtained from the selling stockholders. The selling stockholders may have sold, transferred or otherwise disposed of, or may sell, transfer or otherwise dispose of, at any time or from time to time since the date on which it provided the information regarding the shares beneficially owned, all or a portion of the shares of common stock beneficially owned in transactions exempt from the registration requirements of the Securities Act of 1933. As used in this prospectus, "selling stockholder" includes donees, pledgees, transferees or other successors-in-interest selling shares received from the named selling stockholder as a gift, pledge, distribution or other non-sale related transfer.
Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated by the Commission under the Securities Exchange Act of 1934. Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to the shares, subject to community property laws where applicable.
Name and Address of Selling Security Holder | Number of Shares Beneficially Owned Before Offering | Number of Shares to be Offered Pursuant to this Prospectus (1) | Number of Shares Beneficially Owned After Offering | Percentage of Class Owned After Offering (2) | |||||||||
JLF Partners I, L.P. (3) c/o JLF Asset Management, LLC 2775 Via De La Valle, Suite 204 Del Mar, CA 92014 | 1,339,100 | 1,339,100 | 0 | * | |||||||||
JLF Partners II, L.P. (4) c/o JLF Asset Management, LLC 2775 Via De La Valle, Suite 204 Del Mar, CA 92014 | 94,900 | 94,900 | 0 | * | |||||||||
JLF Offshore Fund, Ltd. (5) c/o JLF Asset Management, LLC 2775 Via De La Valle, Suite 204 Del Mar, CA 92014 | 1,603,500 | 1,603,500 | 0 | * | |||||||||
CAMOFI Master LDC (6) c/o Centrecourt Asset Management LLC 350 Madison Ave., 8th Floor New York, NY 10017 | 500,000 | 500,000 | 0 | * | |||||||||
Crestview Capital Master, LLC (7) c/o Crestview Capital 95 Revere Drive, Ste. A Northbrook, IL 60062 | 300,000 | 300,000 | 0 | * | |||||||||
Bear Stearns Security Corp. FBO J. Steven Emerson IRA R/O II (8) 1522 Ensley Ave. Los Angeles, CA 90024 | 1,000,000 | 1,000,000 | 0 | * | |||||||||
eFund Capital Partners, LLC (9) 301 East Ocean, Suite 640 Long Beach, CA 90802 | 3,710,457 | 450,000 | 3,260,457 | 6.5% | |||||||||
eFund Small Cap Fund, L.P. (10) 301 East Ocean, Suite 640 Long Beach, CA 90802 | 3,300,000 | 300,000 | 3,000,000 | 6.0% | |||||||||
* Less than 1%
(1) Assumes all shares sold pursuant to this prospectus.
(2) Percentage calculations are based on 50,106,252 shares issued and outstanding as of March 7, 2007.
(3) Mr. Jeff Feinberg has voting and investment control over the securities held by JLF Partners I, L.P. The shares were purchased on February 7, 2006 from Michael Hill, Ethan Brooks, Miguel Angel Vazquez, Aaron Gravitz, Charles Gugliuzza and David Foucar, all employees of CommercePlanet, Inc. The shares were purchased at a per share price of $1.90.
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(4) Mr. Jeff Feinberg has voting and investment control over the securities held by JLF Partners II, L.P. The shares were purchased on February 7, 2006 from Michael Hill, Ethan Brooks, Miguel Angel Vazquez, Aaron Gravitz, Charles Gugliuzza and David Foucar, all employees of CommercePlanet, Inc. The shares were purchased at a per share price of $1.90.
(5) Mr. Jeff Feinberg has voting and investment control over the securities held by JLF Offshore Fund Ltd. The shares were purchased on February 7, 2006 from Michael Hill, Ethan Brooks, Miguel Angel Vazquez, Aaron Gravitz, Charles Gugliuzza and David Foucar, all employees of CommercePlanet, Inc. The shares were purchased at a per share price of $1.90.
(6) Mr. Richard Smithline has voting and investment control over the securities held by CAMOFI Master LDC. The shares were purchased on February 12, 2007 from eFund Capital Partners LLC at a per share price of $1.90.
(7) Mr. Stewart R. Flink, Mr. Robert Hoyt and Mr. Daniel I. Warsh have voting and investment control over the securities held by Crestview Capital Master, LLC. The shares were purchased on February 12, 2007 from eFund Capital Partners LLC at a per share price of $1.90.
(8) Mr. J. Steven Emerson has voting and investment control over the securities held by Bear Stearns Security Corp. FBO J. Steven Emerson IRA R/O II. The shares were purchased on February 12, 2007 from eFund Capital Partners LLC at a per share price of $1.90.
(9) Mr. Barrett Evans has voting and investment control over the securities held by eFund Capital Partners LLC. The shares being registered for eFund Capital Partners underlie warrants that were issued as inducement for investment. 225,000 warrants were issued to eFund Capital Partners on April 2, 2004 with an exercise price of $1.42 and an expiration date of April 2, 2009. 225,000 warrants were issued to eFund Capital Partners on May 5, 2004 with an exercise price of $1.42 and an expiration date of May 5, 2009.
(10) Mr. Barrett Evans has voting and investment control over the securities held by eFund Small Cap Partners L.P. The shares being registered for eFund Capital Partners underlie warrants that were issued as inducement for investment. 150,000 warrants were issued to eFund Small Cap Fund on August 18, 2004 with an exercise price of $1.03 and an expiration date of August 18, 2009. 150,000 warrants were issued to eFund Small Cap Fund on September 25, 2004 with an exercise price of $1.25 and an expiration date of September 25, 2009.
The following table sets forth the total profit or loss eFund (2) could have realized as a result of the discount for the securities underlying the warrants issued to eFund Capital Partners and eFund Small Cap Fund assuming eFund immediately exercised the warrants and sold the common stock on the date it received the warrants. The purpose of this chart is to illustrate potential profits or losses. At the time the warrants were issued, the shares of common stock underlying the warrants were not registered. Therefore, eFund could not have actually sold the shares at the time the warrants were issued.
Date of issuance | Market price per share of common stock on date of issuance * | Exercise price per share on date of warrant issuance * | Amount of shares of common stock underlying warrant * | Combined market price of the total number of shares underlying the warrants (1) | Total possible shares eFund (2) may receive and the combined exercise price of the total number of shares underlying the warrants (3) | Total discount to the market price as of the date of the issuance of the warrants (4) | |||||||||||||
| 4/2/2004 | $ | 1.38 | $ | 1.53 | 225,000 | $ | 310,500 | $ | 350,000 | No discount (-$38,500 | ) | ||||||||
| 5/5/2004 | $ | 1.47 | $ | 1.53 | 225,000 | $ | 330,750 | $ | 350,500 | No discount (-$19,750 | ) | ||||||||
| 8/18/2004 | $ | 1.05 | $ | 1.03 | 150,000 | $ | 157,500 | $ | 154,500 | $ | 3,000 | ||||||||
| 9/24/2004 | $ | 1.28 | $ | 1.25 | 150,000 | $ | 192,000 | $ | 187,500 | $ | 4,500 | ||||||||
TOTAL | 750,000 | $ | 990,750 | $ | 1,042,000 | $ | 7,500 (5 | ) | |||||||||||
* Adjusted for a 1 for 3 forward stock split effectuated on February 18, 2005.
| (1) | Calculated using the market price per share of common stock on the date of the issuance multiplied by the amount of shares of common stock underlying the warrants. |
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| (2) | Warrants issued on April 2, 2004 and May 5, 2004 were issued to eFund Capital Partners and warrants issued on on August 18, 2004 and September 24, 2004 were issued to eFund Small Cap Fund. |
| (3) | Calculated by using the exercise price on the date of the issuance of the warrants, adjusted for a 1 for 3 forward stock split effectuated on February 18, 2005, multiplied by the total possible number of shares eFund could have received. |
| (4) | Calculated by subtracting the total exercise price on the date of the issuance of the warrants from the combined market price of the total number of shares underlying the warrants on that date. |
| (5) | The total possible profit eFund could realize as a result of the discount for the securities underlying the warrants included in this Registration Statement. The calculation does not include warrants that were issued with an exercise price below the market price of the underlying common stock on the date of issuance. |
PRIOR REGISTRATION STATEMENTS FILED WITH DUTCHESS AND EFUND AS SELLING STOCKHOLDERS
In the last three years, we have only filed one other Registration Statement on Form SB-2 (File No. 333-119658). In that Registration Statement, we registered 1,511,771 shares of common stock for Dutchess and 648,530 shares of common stock for eFund. The SEC declared that Registration Statement effective in February 2005.
Resales by selling stockholders
We are registering the resale of the shares on behalf of the selling stockholders. The selling stockholders may offer and resell the shares from time to time, either in increments or in a single transaction. They may also decide not to sell all the shares they are allowed to resell under this prospectus. The selling stockholders will act independently of us in making decisions with respect to the timing, manner, and size of each sale.
Donees and pledgees
The term “selling stockholders” includes persons who receive shares from a selling stockholder after the date of this prospectus by gift. The term also includes persons who, upon contractual default by a selling stockholder, may seize shares which the selling stockholder pledged to such person. If a selling stockholder notifies us that a donee or pledgee intends to sell more than 500 shares, we will file a supplement to this prospectus.
Costs and commissions
We will pay all costs, expenses, and fees in connection with the registration of the shares. The selling stockholders will pay all brokerage commissions and similar selling expenses, if any, attributable to the sale of shares. These discounts, concessions or commissions as to a particular broker, dealer, underwriter or agent might be greater or less than those customary in this type of transaction.
Underwriters
The selling stockholders and any brokers, dealers or other agents that participate in the distribution may be deemed to be “underwriters” within the meaning of the Securities Act, and any discounts, commissions or concessions received by the selling stockholders and any brokers, dealers or other agents might be deemed to be underwriting discounts and commissions under the Securities Act. Neither we nor any selling stockholder can presently estimate the amount of any compensation. We know of no existing arrangements between any selling stockholder and any other selling stockholder, broker, dealer or other agent relating to the sale or distribution of the shares.
Types of sale transactions
The selling stockholders may sell the shares in one or more of the following types of transactions (which may include block transactions):
| - | in the over-the-counter market; | |
| - | in negotiated transactions; | |
| - | through put or call option transactions; |
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| - | through short sales; |
| - | any combination of such methods of sale; or | |
| - | any other method permitted pursuant to applicable law. |
The shares may be sold at market prices prevailing at the time of sale or at negotiated prices. These transactions may or may not involve brokers or dealers. The selling stockholders have informed us that they have not entered into any agreements, understandings, or arrangements with any underwriters or broker-dealers regarding sale of the shares. They have also informed us that no one is acting as underwriter or coordinating broker in connection with the proposed sale of shares.
The selling stockholders may pledge or grant a security interest in some or all of the warrants or shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended, amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
Prospectus delivery requirements
Because they may be deemed underwriters, the selling stockholders may be required to deliver this prospectus and any supplements to this prospectus in the manner required by the Securities Act. Under applicable rules and regulations under the Securities Exchange Act of 1934, as amended, any person engaged in the distribution of any of the shares may not simultaneously engage in market activities with respect to our common stock for the applicable period under Regulation M, to the extent applicable, prior to commencing the distribution. In addition, and without limiting the foregoing, the selling stockholders will be subject to the applicable provisions of the Exchange Act and the rules and regulations thereunder, including without limitation Rule 10b-5 and, to the extent applicable, Regulation M, which may limit the timing of purchases and sales of any of the shares by the selling stockholders. All of the foregoing may affect the marketability of the shares offered hereby.
State requirements
Some states require that any shares sold in that state only be sold through registered or licensed brokers or dealers. In addition, some states require that the shares have been registered or qualified for sale in that state, or that an exemption from the registration or qualification requirement exist and that the registrant has complied with the exemption.
Sales under Rule 144
Selling stockholders may also resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act. To do so, they must meet the criteria and conform to the requirements of Rule 144.
Distribution arrangements with broker-dealers
If a selling stockholder notifies us that any material arrangement has been entered into with a broker-dealer for the sale of shares through:
| - | a block trade; | |
| - | special offering; |
| - | exchange distribution or secondary distribution; or | |
| - | a purchase by a broker or dealer. |
We will then file, if required, a supplement to this prospectus under Rule 424(b) under the Securities Act. The supplement will disclose:
| - | the name of each such selling stockholder and of the participating broker-dealer(s); | |
| - | the number of shares involved; |
| - | the price at which such shares were sold; | |
| - | the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable; |
| - | that such broker-dealer(s) did not conduct any investigation to verify the information in this prospectus; and |
| - | any other facts material to the transaction. |
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Additionally, if a selling stockholder enters into an agreement, after effectiveness of this registration statement, to sell its shares to a broker-dealer as principal and that broker-dealer is acting as an underwriter, we will file a post-effective amendment to this registration statement identifying the broker-dealer, providing information on the plan of distribution, revising the appropriate disclosures in the registration statement and we will file the agreement as an exhibit to the registration statement.
The SEC may deem the selling stockholders and any underwriters, broker-dealers or agents that participate in the distribution of the shares of common stock to be “underwriters” within the meaning of the Securities Act. The SEC may deem any profits on the resale of the shares of common stock and any compensation received by any underwriter, broker-dealer or agent to be underwriting discounts and commissions under the Securities Act. Each selling stockholder has purchased the shares of common stock in the ordinary course of its business, and at the time the selling stockholder purchased the shares of common stock, it was not a party to any agreement or other understanding to distribute the securities, directly or indirectly.
We may be involved from time to time in ordinary litigation that will not have a material effect on our operations or finances. We are not aware of any pending or threatened litigation against the Company or our officers and directors in their capacity as such that could have a material impact on our operations or finances.
The following table sets forth the name, age, positions and offices or employments for the past five years as of June 6, 2007, of our executive officers and directors. Members of the board are elected and serve for one year terms or until their successors are elected and qualify. All of the officers serve at the pleasure of the Board of Directors of the Company.
NAME | AGE | POSITION | |
| Michael Hill | 30 | Chief Executive Officer, Chairman of the Board of Directors | |
| David Foucar | 46 | Chief Financial Officer | |
| Charlie Gugliuzza | 32 | President, Director | |
| James T. Crane | 30 | Director | |
| Dominic Bohnett | 42 | Director | |
| Chris Cruttenden | 38 | Director |
MICHAEL HILL has been our Chief Executive Officer and Director since January 15, 2004. Mr. Hill was appointed to the position of Chairman of the Board of Directors on August 18, 2006. From 1999 until 2003, Mr. Hill acted as President and Chief Executive Officer of Intravantage Marketing, another Santa Barbara, California based marketing firm, while simultaneously serving as a consultant for several smaller organizations.
DAVID FOUCAR has been our Chief Financial Officer since June 13, 2006. Mr. Foucar served as Director from August 18, 2006 until May 9, 2007. Mr. Foucar has over 20 years of experience in finance and accounting including 10 years in the technology industry. From October 2003 until June 2006, Mr. Foucar was the President and Owner of Malibu West, a Financial Consulting firm. From March 2001 to October 2003, Mr. Foucar served as Director of Financial Planning and Analysis for Intel, Inc.’s Mobile Communications Division. His experience also includes management positions at Xircom, Inc., as well as financial management positions at Intel, Inc., Nestle USA, and Siemens AG. Mr. Foucar received his B.S. in Business Management and Economics from the University of La Verne, and an M.B.A. in Finance from California Lutheran University.
CHARLIE GUGLIUZZA has served as our Director since August 18, 2006. Mr. Gugliuzza has served as our President since September 7, 2006. From May 2006 until September 2006, Mr. Gugliuzza was employed as a consultant with Olive Tree Consulting. Prior to this position, Mr. Gugliuzza was the Chief Executive Officer of American Power Supplies from February 2004 to April 2005. He served as the Chief Operating Officer of Battery—Biz from January 2002 until January 2004. Mr. Gugliuzza received his B.A. in Political Science from the University of California at Irvine, and his J.D. from the University of Loyola—Los Angeles.
JAMES CRANE has served as our director since May 9, 2007. Mr. Crane serves as President of J. Crane & Company, P.C., a professional services firm he founded in 2001. Prior to founding J. Crane & Company, P.C., Mr. Crane worked as an external auditor and business consultant for an international public accounting firm. Mr. Crane focuses his time and efforts on emerging businesses, assisting them with SEC compliance and communication matters, accounting and accounting-related functions and debt and equity financing actions. Mr. Crane is a Certified Public Accountant. Mr. Crane received his Bachelor of Science in Accountancy from Bentley College. Mr. Crane currently also serves as a director on the Board of PlanetLink Communications, Inc., an SEC reporting company and has also served as an officer or director of several private companies.
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DOMINIC BOHNETT has served as our director since May 9, 2007. Mr. Bohnett has held multiple executive positions with publicly traded companies, such as President, STAR Telecom and Global Crossing, formerly Frontier. He has founded and operated StarDirect Communication, co-founded TeleSpan Communications, LLC, where he resides on the Board of Directors. Currently, Mr. Bohnett holds the position of President and Chief Executive Officer of TeleSpan Carrier Access, LLC, a private communications company specializing in fiber optics and Voice over Internet Protocol, or VoIP, services to wireless carriers and Internet Service Providers, or ISPs. Mr. Bohnett has a bachelor degree in Industrial Technology from California Polytechnic in San Luis Obispo, California.
CHRIS CRUTTENDEN has served as our director since May 9, 2007. Mr. Cruttenden has worked for such notable advertising agencies as BBDO and DGWB. His branding and marketing talents have been put to use on many accounts such as Qualcomm, FileNET and Budweiser. Mr. Cruttenden has won several national awards for advertising excellence. In addition to his advertising and marketing talents, Mr. Cruttenden has an extensive working knowledge of the corporate finance industry as co-founder and director of marketing for E*OFFERING. Currently he is the President and co-founder of NetChemistry, Inc., an Internet solution and software provider for the Health and Financial Services industries whose systems have handled billions of dollars in transactions. Mr. Cruttenden holds a bachelor’s degree from California Polytechnic in San Luis Obispo, California, and attended the Portfolio Center of Advertising in Atlanta, Georgia.
BOARD OF DIRECTORS
We currently have five members of our Board of Directors, who are elected to annual terms and until their successors are elected and qualified. Executive officers are appointed by the Board of Directors on an annual basis and serve until their successors have been duly elected and qualified. There are no family relationships among any of our directors, officers or key employees.
AUDIT COMMITTEE
We do not have a separate Audit Committee. Our full Board of Directors performs the functions usually designated to an Audit Committee. Messrs. Crane, Bohnett and Cruttenden, directors, are “independent” under the definition established by NASDAQ, and Mr. Crane qualifies as an "audit committee financial expert" as defined in Item 407(d)(5) of Regulation S-B.
The following table sets forth certain information concerning the beneficial ownership of our outstanding classes of stock as of June 6, 2007, by each person known by us to (i) own beneficially more than 5% of each class, (ii) by each of our Directors and Executive Officers and (iii) by all Directors and Executive Officers as a group. Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock except to the extent that authority is shared by spouses under applicable law.
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percentage (a) | |||||
Michael Hill (b) 30 S. La Patera Ln., Suite 8 Goleta, CA 93117 | 8,694,607 | 16.6% | |||||
David Foucar (c) 30 S. La Patera Ln., Suite 8 Goleta, CA 93117 | 240,346 | * | |||||
Charlie Gugliuzza (d) 30 S. La Patera Ln., Suite 8 Goleta, CA 93117 | 4,508,374 | 8.6% | |||||
James Crane 21 Pleasant Street, Suite 201 Newburyport, MA 01950 | -0- | * | |||||
Dominic Bohnett (e) 125 E. De La Guerra Street, Suite 201 Santa Barbara, CA 93101 | 269,300 | * | |||||
Chris Cruttenden 4600 Campus Drive, Suite 101 Newport Beach, CA 92660 | -0- | * | |||||
JLF Asset Management, LLC (f) 2775 Via de la Valle, Suite 204 Del Mar, CA 92014 | 3,037,500 | 6.1% | |||||
Jeffrey L. Feinberg (g) c/o JLF Asset Management, LLC 2775 Via de la Valle, Suite 204 Del Mar, CA 92014 | 3,037,500 | 6.1% | |||||
Barrett Evans (h) 301 East Ocean Blvd. Long Beach, CA 90802 | 10,291,250 | 20.5% | |||||
Michael A. Novielli (i) 100 Mill Plain Rd., 3rd Floor Danbury, CT 06811 | 7,057,750 | 13.4% | |||||
Douglas Leighton (j) 50 Commonwealth Ave. Boston, MA 02116 | 7,057,750 | 13.4% | |||||
Dutchess Advisors, LLC (k) 50 Commonwealth Ave. Boston, MA 02116 | 3,600,000 | 7.3% | |||||
eFund Capital Partners, LLC (l) 301 East Ocean Blvd. Long Beach, CA 90802 | 3,710,457 | 7.4% | |||||
eFund Small Cap Fund (m) 301 East Ocean Blvd. Long Beach, CA 90802 | 3,300,000 | 6.6% | |||||
All Directors and current Executive Officers as a group | 13,712,627 | 24.9% | |||||
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* Less than 1%
a) Percentage calculations are based on 49,539,256 shares issued and outstanding as of June 6, 2007.
b) Mr. Hill owns 5,971,500 shares of common stock, 1,445,010 shares of common stock that are issuable within 60 days upon conversion of 7 shares of Series D Convertible Preferred Stock, 1,238,580 shares of common stock that are issuable within 60 days upon the exercise of 6 Series D Convertible Preferred Stock warrants and the subsequent conversion within 60 days of Series D Convertible Preferred Stock and 39,517 shares of common stock that are issuable within 60 days upon the exercise of options. The Series D warrants have an exercise price of $0.01 and expire on January 1, 2010. Each share of Series D Convertible Preferred Stock converts into 0.4167% of the total number of shares issued and outstanding on the date of conversion.
c) Mr. Foucar owns 159,146 shares of common stock outright and 81,200 shares of common stock that are issuable within 60 days upon the exercise of options.
d) Mr. Gugliuzza owns 1,785,267 shares of common stock outright, 1,445,010 shares of common stock that are issuable within 60 days upon conversion of 7 shares of Series D Convertible Preferred Stock, 1,238,580 shares of common stock that are issuable within 60 days upon the exercise of 6 Series D Convertible Preferred Stock warrants and the subsequent conversion of Series D Convertible Preferred Stock and 39,517 shares of common stock that are issuable within 60 days upon the exercise of options. The Series D warrants have an exercise price of $0.01 and expire on January 1, 2010. Each share of Series D Convertible Preferred Stock converts into 0.4167% of the total number of shares issued and outstanding on the date of conversion.
e) Mr. Bohnett owns 269,300 shares of common stock outright.
f) JLF Asset Management’s beneficial ownership is comprised of 1,339,100 shares of common stock through JLF Partners I, L.P. 94,900 shares of common stock through JLF Partners II, L.P. and 1,603,500 shares of common stock through JLF Offshore Fund, Ltd. JLF Asset Management’s beneficial ownership was reported on a Schedule 13G filed on February 20, 2007.
g) Mr. Feinberg’s beneficial ownership is comprised of 1,339,100 shares of common stock through JLF Partners I, LP, 94,900 shares of common stock through JLF Partners II, LP and 1,603,500 shares of common stock through JLF Offshore Fund, Ltd. Mr. Feinberg’s beneficial ownership was reported on a Schedule 13G filed on February 20, 2007.
h) Mr. Evans’s beneficial ownership is comprised of 10,000 shares of common stock, 6,531,250 shares of common stock through eFund Capital Partners, LLC and 3,000,000 shares of common stock through eFund Small Cap Fund, LP. Mr. Evans owns 225,000 shares of common stock through eFund Capital Partners, LLC, that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.42 per share and an expiration date of April 2, 2009. Mr. Evans owns 225,000 shares of common stock through eFund Capital Partners, LLC, that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.42 and an expiration date of May 5, 2009. Mr. Evans owns 150,000 shares of common stock through eFund Small Cap Fund, LP, that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.03 per share and an expiration date of August 18, 2009. Mr. Evans owns 150,000 shares of common stock through eFund Small Cap Fund, LP, that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.25 and an expiration date of September 25, 2009.
i) Mr. Novielli’s beneficial ownership is comprised of 128,000 shares of common stock through Dutchess Private Equities Fund, LP, 179,750 shares of common stock through Dutchess Private Equities Fund II, L.P., 3,600,000 shares of common stock through Dutchess Advisors, LLC. Mr. Novielli owns 540,000 shares of common stock through Dutchess Private Equities Fund, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.25 and an expiration date of September 25, 2008. Mr. Novielli owns 720,000 shares of common stock through Dutchess Private Equities Fund, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.25 and an expiration date of December 18, 2008. Mr. Novielli owns 225,000 shares of common stock through Dutchess Private Equities Fund II, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.42 and an expiration date of April 1, 2008. Mr. Novielli owns 225,000 shares of common stock through Dutchess Private Equities Fund II, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.42 and an expiration date of May 5, 2008. Mr. Novielli owns 450,000 shares of common stock through Dutchess Private Equities Fund II, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.17 and an expiration date of July 7, 2008. Mr. Novielli owns 360,000 shares of common stock through Dutchess Private Equities Fund II, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.03 and an expiration date of August 18, 2008. Mr. Novielli owns 150,000 shares of common stock through Dutchess Private Equities Fund II, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.53 and an expiration date of October 25, 2008. Mr. Novielli owns 480,000 shares of common stock through Dutchess Private Equities Fund II, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.25 and an expiration date of November 11, 2008.
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j) Mr. Leighton’s beneficial ownership is comprised of 128,000 shares of common stock through Dutchess Private Equities Fund, LP, 179,750 shares of common stock through Dutchess Private Equities Fund II, LP and 3,600,000 shares of common stock through Dutchess Advisors, LLC. Mr. Leighton owns 540,000 shares of common stock through Dutchess Private Equities Fund, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.25 and an expiration date of September 25, 2008. Mr. Leighton owns 720,000 shares of common stock through Dutchess Private Equities Fund, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.25 and an expiration date of December 18, 2008. Mr. Leighton owns 225,000 shares of common stock through Dutchess Private Equities Fund II, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.42 and an expiration date of April 1, 2008. Mr. Leighton owns 225,000 shares of common stock through Dutchess Private Equities Fund II, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.42 and an expiration date of May 5, 2008. Mr. Leighton owns 450,000 shares of common stock through Dutchess Private Equities Fund II, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.17 and an expiration date of July 7, 2008. Mr. Leighton owns 360,000 shares of common stock through Dutchess Private Equities Fund II, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.03 and an expiration date of August 18, 2008. Mr. Leighton owns 150,000 shares of common stock through Dutchess Private Equities Fund II, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.53 and an expiration date of October 25, 2008. Mr. Leighton owns 480,000 shares of common stock through Dutchess Private Equities Fund II, LP that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.25 and an expiration date of November 11, 2008.
k) Dutchess Advisors, LLC owns 3,600,000 shares of common stock. Michael Novielli and Douglas Leighton have shared voting and dispositive power over the shares held by Dutchess Advisors, LLC.
l) eFund Capital Partners, LLC owns 3,260,457 shares of common stock. eFund Capital Partners owns 225,000 shares of common stock that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.42 per share and an expiration date of April 2, 2009. eFund Capital Partners owns 225,000 shares of common stock that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.42 and an expiration date of May 5, 2009. Barrett Evans has voting and dispositive power over the shares held by eFund Capital Partners, LLC.
m) eFund Small Cap Fund, LP owns 3,000,000 shares of common stock. eFund Small Cap Fund, LP owns 150,000 shares of common stock that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.03 per share and an expiration date of August 18, 2008. eFund Small Cap Fund, L.P. owns 150,000 shares of common stock that are issuable within 60 days upon the exercise of warrants with an exercise price of $1.25 and an expiration date of September 25, 2008. Barrett Evans has voting and dispositive power over the shares held by eFund Small Cap Fund, LP.
COMMON STOCK. Our Restated Articles of Incorporation, as amended, authorize us to issue 300,000,000 shares of common stock, par value $0.001 per share.
VOTING RIGHTS. Each share of our common stock entitles the holder thereof to one vote, either in person or by proxy, at meetings of stockholders. Our Board of Directors is elected annually at each annual meeting of the stockholders.
DIVIDEND POLICY. All shares of common stock are entitled to participate in dividends when, as and if declared by our Board of Directors out of the funds legally available therefore.
MISCELLANEOUS RIGHTS AND PROVISIONS. Holders of common stock have no preemptive or other subscriptions rights, conversions rights, and redemption or sinking fund provisions. In the event of the liquidation or dissolution, whether voluntary or involuntary each share of common stock is entitled to share in any assets available for distribution to holders of the equity after satisfaction of all liabilities and distributions to preferred shareholders.
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No expert or counsel within the meaning of those terms under Item 509 of Regulation S-B will receive a direct or indirect interest in the small business issuer or was a promoter, underwriter, voting trustee, director, officer, or employee of CommercePlanet, Inc. nor does any such expert have any contingent based agreement with us or any other interest in or connection to us.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons in accordance with the provisions contained in our Restated Articles of Incorporation, as amended, and By-laws, Utah law or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, this indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and we will follow the court's determination.
HISTORY
We incorporated in the State of Utah on March 1, 1994 as Utah Clay Technology, Inc. From our formation until January 15, 2004, our business plan included:
| - | locating kaolin deposits in Utah; | |
| - | obtaining the legal rights to these deposits; |
| - | conducting exploratory operations; | |
| - | testing the extracted minerals in the laboratory; and |
| - | selling samples of the processed form of our kaolin to a commercial company for market evaluation. |
Although we did obtain certain legal rights to properties possibly containing kaolin, due to a lack of capital, we never commenced mining operations. As a result, we had no revenues since our inception.
On January 15, 2004, we abandoned the business plan for Utah Clay Technologies. On the same date, pursuant to an Agreement and Plan of Reorganization with NeWave, Inc., a Utah corporation, Utah Clay Technologies, Inc. changed its name to NeWave, Inc. and OnlineSupplier.com became our wholly-owned subsidiary. We own and operate an online membership club that offers a comprehensive line of products and services at wholesale prices through our membership program. As a result of this change in our focus and direction, the entire former management team and Board of Directors resigned and we employed a new management team and appointed a new Board of Directors.
On January 30, 2004, we changed our name to NeWave, Inc. We acquired our operating subsidiary, Onlinesupplier.com on January 15, 2004. In April, 2004, we organized Discount Online Warehouse as a wholly-owned subsidiary to offer heavily discounted products purchased in bulk to consumers. We organized our subsidiary, Auction Liquidator, Inc., in September 2004 and it began to generate immaterial revenues in October 2004.
During 2005, we decided to cease operations at Auction Liquidator, Inc. and Discount Online Warehouse in order to focus our efforts and resources on Onlinesupplier.com. Discontinued operations did not have a material effect on the financial statements.
On June 1, 2006, we acquired all of the assets, both fixed and intangible, of Onesource Imaging, a California corporation. We acquired the assets in exchange for our assumption of certain liabilities. On June 20, 2006, we established three wholly-owned subsidiaries, OS Imaging, Inc., Legacy Media, Inc., and Consumer Loyalty Group, Inc. Effective June 22, 2006, we changed our name from NeWave, Inc. to Commerce Planet, Inc. On October 3, 2006, we acquired the assets of Interaccurate, Inc. including software, intellectual properties and a web hosting facility. On October 11, 2006, our subsidiary, Consumer Loyalty Group, executed an agreement with Datascension, Inc. to establish a Costa Rican call center. The call center began operations on November 27, 2006.
eCOMMERCE INDUSTRY BACKGROUND
We participate in the online retail industry by offering a myriad of consumer products at discount prices through our online memberships. Additionally, we provide tools to facilitate the resale of these products in this space. Business partners purchase online advertising as well as supporting tools, technologies and services to succeed in the online retail and related spaces. Our success is driven by trends in the online retail industry, the online advertising industry, and our ability to capture market share in these industries and provide supporting technologies and products.
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Online shopping continues to be a large and rapidly growing channel for consumers and merchants to buy and sell goods and services. According to the U.S. Census Bureau 2007 Statistical Abstract, U.S. online retail sales will grow to $329 billion in 2010. Reaching this number requires a compound average growth rate, or CAGR, of 13% between 2006 and 2010 with growth rates in consumer electronics slightly higher at 14%. Similar research provided by Forrester Research, Inc. indicates that the total number of U.S. online shopping households will reach 55 million in 2010.
While price-driven consumers dominated the landscape of online retail for years, Forrester sees a more lucrative value proposition for online retail in making life easier for time-starved consumers. Forrester reported that nearly 40% of Web shoppers say they are pressed for time, and more than 70% find shopping online easier than through other channels. We believe that the key forces driving the growth of online shopping will continue to be convenience, selection and savings. The internet offers around-the-clock access to millions of products and thousands of stores, unlike in-store shopping. It contains shopping information from a wide variety of sources, including merchant websites, manufacturer websites and other online content providers. Consumers utilize this convenience, selection and information to save time and money.
Online advertising spending is projected to have strong growth over the next several years as well. According to Jupiter Research, online ad spending was $15.7 billion in 2006 and will grow to $25.9 billion by 2011 resulting in a compound annual growth rate of 11%. Their research indicates that search, will dominate online ad spending for the next five years growing from about 41% of spending in 2006 to 43% of spending in 2011. Display advertising contributed 37% of total online ad spending and will decline to about 35% in 2011, while classified advertising spending contributed 22% of the total and will hold that level through 2011.
We believe that individuals and businesses desire an integrated package that is inexpensive, comprehensive and easily navigable. We believe current electronic commerce applications in the market do not generally include complete functionality such as webstore generation, merchant processing capabilities, customer management, online training modules, domain name registration and an array of wholesale products. Accordingly, we believe there will continue to be a large demand for a complete electronic commerce product for individuals and businesses and that demand is not being fully met. Additionally, as the online retail sales industry continues to show strong growth and online advertising spending grows, demand for our marketing services, supporting technology and product offerings has increased.
OUR WEBSITE, PRODUCTS AND SERVICES
We are a progressive Internet-based direct marketing company and provider of product fulfillment solutions headquartered in Goleta, CA. We bring value to consumers by designing and implementing membership programs that offer the services and discounts needed to stay competitive in today's online marketplace. As a consumer-driven organization, we offer a program that can fit the needs of today's multi-faceted customer. From payment solutions to product distribution, we give our customers access to every major area of e-commerce and provide a one-stop portal into the world of internet-driven business solutions.
Our membership-based website Onlinesupplier.com, provides our customers access to an array of products and services designed to create or enhance their shopping experience and to promote our customer’s own ecommerce solution. Our services and capabilities include:
| - | Automated Webstore Generation and Customization; | |
| - | Merchant Processing Capabilities; |
| - | Domain Name Registration; | |
| - | Online Training Modules (includes online auction training); and |
| - | Web hosting. |
As of December 31, 2005, we stored approximately 450 unique products in our warehouse for distribution to our customers. As of February 28, 2006, we curtailed operations at our warehouse and decided to focus exclusively on providing products to our members by drop shipping the products from third party suppliers when they are ordered. We provide access to over 30,000 products from our third party suppliers. Our website wholesales products in many categories, including:
| - | Consumer Electronics; | |
| - | Audio/Video Equipment; |
| - | Software; | |
| - | Home/Small Office Electronic Equipment; |
| - | Automobile Accessories; | |
| - | Travel Accessories; and |
| - | Networking Equipment. |
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We generate revenues by:
| - | Charging our members a monthly fee for the tools and services needed to create and run a successful internet auction business. | |
| - | Offering our customers access to coaching services provided through a third party arrangement with 20-20 Advisors for a monthly fee. We began to offer this service in February 2005. |
| - | Offering our customers access to discounted value-added services such as: prescription drug plans, roadside assistance, tax and legal services, real estate listing services, and discounted entertainment packages for a monthly fee. These services are currently offered to our customers through third party arrangements with suppliers such as My Computer Club, Inc., West, Inc. and InQ. | |
| - | Product sales via our website. |
| - | Providing our customer information to third parties who compensate us with a fee for each customer's contact information acquired, or by sharing the revenues generated from contacting our customer. Revenues generated by the sale of our customer information have been related to offers made to customers in a wide variety of industries. Revenues generated from sharing arrangements have primarily been related to the sale of extended business coaching products and services. | |
| - | Providing businesses with graphic design and printing services, data merge, mailing and finishing. |
| - | Offering clients fulfillment services including: assembly, pick and pack, mailing, warehousing and inventory management services. | |
| - | Design and implementation of cutting-edge technology for secure electronic payment modules, advanced content search tools and secure data hosting. |
STRATEGIC RELATIONSHIPS AND ALLIANCES
Our wholly-owned subsidiary, Consumer Loyalty Group, Inc., executed an agreement on October 11, 2006 with Datascension, Inc., an unrelated party, that enables Consumer Loyalty Group to operate a state-of-the-art call center in Costa Rica. The call center became operational on November 27, 2006, and is utilized to support Consumer Loyalty Group customer service and sales efforts at dramatically lowered costs in comparison to their U.S. based counterparts. An additional benefit to the cost savings is the highly developed and well-educated Costa Rican labor pool that Consumer Loyalty Group has access to in support of their campaigns. The combination of cost savings and elevated labor resources allows Consumer Loyalty Group to launch higher end sales and support initiatives that we anticipate will generate increased revenue and profits.
CUSTOMERS
As of December 31, 2006, we had approximately 120,000 current members for our core membership product, Onlinesupplier.com, and we have serviced about 600,000 paid members since our inception. Additionally, many of these customers participated in one or more add-on membership programs resulting in approximately another 25,000 memberships for these products current as of December 31, 2006. Customers for these products consist primarily of individuals desiring assistance with organizing their own internet-based business.
We also sell products and services to businesses that require lead generation and/or customer acquisition services, graphic design, printing, fulfillment or secure data hosting. We provided products and/or services to about 50 business clients in these areas.
No single customer comprised more than 10% of revenues during 2006.
SALES AND MARKETING
We primarily identify, sell and market to our membership customers through the internet. We generate traffic to our website using click through campaigns, online search engines, and opt-in e-mail marketing to offer customers the opportunity to become members. At December 31, 2006, we also employed 8 telephone representatives and used third-party partners to sell add-on products to existing customers. In addition, we employed 50 customer service representatives and use the subcontract services of our Costa Rican call center to address any issues that may arise while a customer is utilizing a product or service.
We market our lead generation and customer acquisition services, graphic design, printing, fulfillment, and secure data hosting through our respective subsidiary websites. In addition, we advertise and market in industry magazines, news publications, online search engines, and network marketing.
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We primarily market our products throughout the United States.
SUPPLIERS
Although we continue to increase our direct purchasing from manufacturers, we source a significant amount of inventory from relatively few vendors. However, no vendor accounts for 10% or more of our inventory purchases. We do not have long-term contracts or arrangements with most of our vendors to guarantee the availability of merchandise, particular payment terms, or the extension of credit limits. If our current vendors were to stop selling merchandise to us on acceptable terms, we may not be able to acquire merchandise from other suppliers in a timely and efficient manner and on acceptable terms.
COMPETITION
The environment for our products and services is intensely competitive. Our current and potential competitors include:
| - | physical-world retailers, catalog retailers, publishers, distributors and manufacturers of the same products that we sell, many of which possess significant brand awareness, sales volume, and customer bases, and some of which sell products or services through the internet, mail order, or direct marketing, such as: Wal-Mart Stores, Target Corporation, Kmart Corporation, Costco Wholesale Corporation, Sam's Club, BJ's Wholesale Club, Inc., and Best Buy, Inc.; | |
| - | other online eCommerce sites such as: Amazon, Sam's Club Online, Wal-Mart.com USA, LLC; |
| - | a number of indirect competitors, including media companies, Web portals, and Web search engines that are involved in online commerce, either directly or in collaboration with other retailers, such as Yahoo!, AOL and Google; and | |
| - | companies that provide eCommerce services, including website developers and third-party fulfillment and customer-service providers, such as Yahoo!, Go-Daddy, MSN, Network Solutions, Register.com, and Buydomains. |
We believe that the principal competitive factors in our market segments include selection, price, availability, convenience, information, discovery, brand recognition, personalized services, accessibility, customer service, reliability, speed of fulfillment, ease of use, and ability to adapt to changing conditions, as well as our customers' overall trust in the entire experience in transactions with us or facilitated by us on behalf of third-party sellers. For services we offer to businesses and individual sellers, additional competitive factors include the quality of our services and tools, and the speed of performance for our services. As the market segments in which we operate continue to grow, other companies may also enter into business combinations or alliances that strengthen their competitive positions.
Our overall market is intensely competitive, and there are a number of other competitors that are much larger than us and have significantly greater resources at their disposal. We believe that our product offerings are competitive with others in the marketplace; however, we do not have a dominant market share.
INTELLECTUAL PROPERTY
We have received trademarks for Onlinesupplier.com (date of use: August 18, 2003), Tomorrow's Innovations, Today (date of use: August 18, 2003), Auction Liquidator (date of use: September 1, 2004), and Stop, Drop, n' Cash (date of use: September 1, 2004). We have also filed a trademark for MyOnlineChat., (date of use: February 14, 2007) which is still pending registration. We regard our trademarks, copyrights, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as important to our success, and we rely on trademark and copyright law, trade-secret protection, and confidentiality and/or license agreements with our employees, customers, partners, and others to protect our proprietary rights. We have licensed in the past, and expect that we may license in the future, certain proprietary rights, technologies or copyrighted materials, from third parties and we rely on those third parties to defend their proprietary rights, copyrights and technologies.
We also may not be able to acquire or maintain appropriate domain names in all countries in which we intend to do business. Furthermore, regulations governing domain names may not protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights.
Policing unauthorized use of our proprietary rights is inherently difficult, and we may not be able to determine the existence or extent of any unauthorized use. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, we cannot be certain that the steps we take to protect our intellectual property will adequately protect our rights or that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights.
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TECHNOLOGY
Using a combination of our own technologies and commercially available, licensed technologies, we have implemented numerous features that simplify and improve the customer shopping experience, enable third parties to generate customized eCommerce solutions on our platform, and facilitate our fulfillment and customer service operations. Our current strategy is to focus our development efforts on creating and enhancing the specialized, proprietary software that is unique to our business, and to license or acquire commercially-developed technology for other applications where available and appropriate.
OPERATIONS
We sublease approximately 20,000 square feet of office space in Goleta and Santa Barbara, California, consisting of three separate locations. These locations house our production, sales, customer services and administrative activities.
Our wholly-owned subsidiary, Consumer Loyalty Group, Inc., executed a cost plus agreement with Datascension, Inc. that enables Consumer Loyalty Group to operate a state-of-the-art call center in Costa Rica. The call center is utilized to support Consumer Loyalty Group customer service and sales efforts at dramatically lowered costs in comparison to their U.S.-based counterparts. An additional benefit to the cost savings is the highly developed and well educated Costa Rican labor pool that Consumer Loyalty Group has access to in support of their campaigns. The combination of cost savings and elevated labor resources allows Consumer Loyalty Group to launch higher end sales and support initiatives that generate increased revenue and profits.
We have no significant need for warehouse space since we decided to focus exclusively on providing products to our members by drop shipping the products from third party suppliers when they are ordered. Accordingly, we curtailed our warehouse operations as of February 28, 2006. The change enables us to provide a wider selection of products while eliminating the need to invest in inventory or incur carrying costs. We provide access to over 30,000 products from our third party suppliers. When we receive an order from our customer, we place a purchase order on our supplier to drop ship the products ordered to the end customer.
Some of the products we sell may expose us to product liability claims relating to personal injury, death, or property damage caused by these products, and may require us to take actions such as product recalls. Certain businesses and individuals also sell products using our eCommerce platform that may increase our exposure to product liability claims, such as if these sellers do not have sufficient resources to protect themselves from these claims. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In addition, some of our vendor agreements with our suppliers and third party sellers do not indemnify us from product liability.
EMPLOYEES
As of December 31, 2006, we employ 96 employees, including customer service representatives, telephone sales representatives, production personnel, and administrative and management personnel. We have never experienced work stoppages, and we are not a party to any collective bargaining agreement. We anticipate that our business will continue to grow and that we will be required to hire additional employees to service our customer demand.
In addition to our direct employees, we have access to labor resources through our cost plus agreement with Datascension. The Costa Rican call center operated under this agreement employs 61 employees including sales agents, customer service representatives, and supervisory personnel.
REGULATORY RESTRICTIONS ON OUR BUSINESS
We are subject to general business regulations and laws, as well as regulations and laws specifically governing the internet, telecommunication sales and eCommerce. These existing and future laws and regulations may impede the growth of the internet or other online services. These regulations and laws may cover taxation, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential internet access, and the characteristics and quality of products and services.
It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel, and personal privacy apply to the internet, eCommerce and our Company. Unfavorable resolution of these issues may harm our business. Specifically, our inbound telephone center is regulated by the Federal Trade Commission and Federal Communication Commission. Under the Federal Trade Commission's Telemarketing Sales Rule and the Federal Communication Commission's Telephone Consumer Protection Act, we are subject to the Do Not Call Registry, limited in the use of pre-acquired account information, required to get certain authorizations and consents with regard to billing, required to make certain disclosure statements, prohibited from making misrepresentations, limited to when we may call consumers, required to transmit Caller ID information, restricted in the trafficking of data, required to keep certain records, prohibited from abandoning certain outbound calls, and are subject to fines for unlawful activity. Furthermore, some of our merchant, advertising and marketing efforts are regulated by the same organizations and statutes, such as the CAN-SPAM Act limiting the transmission of unsolicited commercial electronic mail via the internet, California Online Privacy Protection Act of 2003 requiring owners of commercial websites or online services to post a privacy policy, the Fair and Accurate Credit Transaction Act of 2003 ensuring that everyone is treated fairly when applying for credit and protecting consumers against identity theft, California Financial Information Privacy Act prohibiting the sharing of nonpublic personal information of a consumer with nonaffiliated third parties without the explicit prior consent of the consumer, California Civil Code Section 1798.82 requiring businesses to notify customers if an unauthorized person may have obtained access to their personal information and California Civil Code Section 1798.83 requiring disclosure of sharing for marketing purposes.
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While we believe that we maintain all requisite licenses and permits and are in compliance with all applicable federal, state, local and foreign regulations, we may not be able to maintain all requisite licenses and permits. The failure to satisfy those and other regulatory requirements could have a material adverse effect on our business' financial condition and results of operations.
INTRODUCTION
The following is a discussion of our financial condition and results of operations. To the extent that our analysis contains statements that are not of a historical nature, these statements are forward-looking statements, which involve risks and uncertainties. The following should be read in conjunction with our Financial Statements and the related Notes included elsewhere in this prospectus.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and uncertainties. We generally use words such as "believe," "may," "could," "will," "intend," "expect," "anticipate," "plan," and similar expressions to identify forward-looking statements, including statements regarding our expansion plans. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in our "Risk Factor" section and elsewhere in this report. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and our future results, levels of activity, performance or achievements may not meet these expectations. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.
OVERVIEW
Commerce Planet is a publicly traded media company which trades on the Over-the-Counter Bulletin Board of the National Quotation Service under the ticker symbol "CPNE.OB." We offer media products, lead generation services and marketing tools to our client partners. We offer a turnkey media solution through our network of wholly-owned subsidiaries, Consumer Loyalty Group, Inc., Legacy Media, Inc., OS Imaging, Inc., and Interaccurate, Inc.
Each subsidiary specializes in a specific niche of the media industry. Their combined services are designed to address all the needs of their client partners including: membership loyalty offers, consumer marketing data management, affiliate list management, printing and fulfillment services and Web/Data hosting and software development.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout this section where such policies affect our reported and expected financial results. Our preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Our accounting policies that are the most important to the portrayal of our financial condition and results, and which require the highest degree of management judgment relate to revenue recognition, the provision for uncollectible accounts receivable, property and equipment, advertising and issuance of shares for service.
We estimate the likelihood of customer payment based principally on a customer's credit history and our general credit experience. To the extent our estimates differ materially from actual results, the timing and amount of revenues recognized or bad debt expense recorded may be materially misstated during a reporting period.
Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, e.g. computers (5 years), software (3 years), office equipment and furniture (3-7 years).
Leasehold improvements are amortized over the remaining lease term at the date of installation. Expenditures for maintenance and repairs are charged to expense as incurred.
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We expense the media costs of advertising the first time the advertising takes place, except for direct-response advertising that is contracted with our advertising partners on a cost per customer acquired basis, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of on line advertising that includes unique reference codes and URL tracking that are used for purchasing our products and services. The capitalized costs of the advertising are amortized over the three-month period following the receipt of a trial order for our products and services.
At March 31, 2007 and March 31, 2006, capitalized direct-response advertising costs of $2,387,623 and $890,806, respectively, were included in "Prepaid Expenses" in the accompanying Balance Sheets. Advertising expense was $3,466,046 for the three months ended March 31, 2007 and $1,106,616 for the same period in 2006. At December 31, 2006, and December 31, 2005, capitalized direct-response advertising costs of $1,962,466 and $159,182, respectively, were included in "Prepaid Expenses" in the accompanying Balance Sheets. Advertising expense was $6,055,104 in 2006. Advertising expense was $3,098,204 in 2005.
We account for the issuance of equity instruments to acquire goods and services based on the fair value of the goods and services or the fair value of the equity instrument at the time of issuance, whichever is more reliably measurable.
We recognize revenue in accordance with the provisions of the SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. Our revenues earned from membership setup fees and monthly charges are recorded when the credit card transaction is processed and the Company has received confirmation that the credit card processing has been successful. Current terms on membership agreements stipulate that the customer pays a nonrefundable fee ranging from $1.95 to $9.95 to setup an account. The customer then has a fourteen day period to review our offerings. If the customer does not cancel the service within the fourteen day window, a charge of $29.95 to $59.95 is billed to the customer's credit card on a monthly basis. The membership terms are agreed to under a negative option and we will continue to bill the customer on a monthly basis until they cancel their account. Bulletin No. 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for the disclosure of revenue recognition policies. Our revenue recognition policy for sale of products is in compliance with Bulletin No. 104. Revenue from the sale of products is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed and collectibility is reasonably assured. Generally, we extend credit to our customers and do not require collateral. We perform ongoing credit evaluations of our customers and historic credit losses have been within management's expectations.
PERIOD ENDED MARCH 31, 2007, AS COMPARED TO PERIOD ENDED MARCH 31, 2006
Revenues
We generated net revenues of $13,235,726 for the three months ended March 31, 2007, as compared to $3,932,343 for the three months ended March 31, 2006. The increase year-over-year resulted in growth of 236.6%.
Three Months Ended March 31 | ||||||||||
2007 | 2006 | % Change | ||||||||
Revenue | ||||||||||
Membership Revenue | $ | 11,520,386 | $ | 3,307,623 | 248.3 | % | ||||
Upsell Revenue | 984,357 | 210,521 | 367.6 | % | ||||||
Lead Revenue | 649,492 | 388,827 | 67.0 | % | ||||||
Fulfillment/Other Revenue | 81,491 | 25,372 | 221.2 | % | ||||||
Total Revenue | 13,235,726 | 3,932,343 | 236.6 | % | ||||||
Membership revenues contributed 87.0% to total revenues for the period ending March 31, 2007 as compared to 84.1% for the same period in 2006 while increasing by 248.3%. Increased memberships year-over-year was the primary contributor to the growth in membership revenues driven by record sign-ups in the fourth quarter of 2006.
Upsell revenues contributed 7.4% to total revenues for the three months ending March 31, 2007 as compared to 5.4% for the same period in 2006 while increasing by 367.6%. We provide access to business partners’ product offerings though our website for which they pay fees. Our growth in memberships over the prior periods and increased website traffic drove higher revenues derived from our partners’ offerings.
Lead revenues contributed 4.9% to total revenues for the period ending March 31, 2007 as compared to 9.9% for the same period in 2006 while increasing by 67.0%. Our increasing membership base and website traffic increases the quantity of leads available resulting in higher revenues.
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Printing, fulfillment and other revenues contributed 0.6% to total revenues for the period ending March 31, 2007 as compared to 0.7% for the same period in 2006 while increasing by 221.2%. The increases in revenue in this category were driven by the addition of printing and fulfillment services through the acquisition of One Source Imaging.
Costs Of Goods Sold
We incurred costs of sales of $2,556,490 for the three months ended March 31, 2007, as compared to $687,575 for the same period in 2006. Costs of goods sold increased by 271.8% and increased to 19.3% from 17.5% of revenues for the same period last year. The overall increase is primarily due to the increased number memberships generating an increased volume of transaction related costs. Additionally, the rates for transaction related fees as well as higher return and charge back rates resulted in increase in the percentage of costs of good sold proportional to revenue.
Operating Expenses
We incurred costs of $6,574,028 for the three months ended March 31, 2007 as compared to $2,710,181 for the same period in 2006. While operating expenses increased by 142.6% over the prior year period these expenses were spread over much higher revenue resulting in a reduction in operating expenses as a percentage of revenue to 49.7% from 68.9%.
Three Months Ended March 31 | ||||||||||
2007 | 2006 | % Change | ||||||||
Expense | ||||||||||
Salaries | $ | 1,616,629 | $ | 533,213 | 203.2 | % | ||||
Stock Compensation | 238,022 | 185,000 | 28.7 | % | ||||||
Advertising | 3,466,046 | 1,106,616 | 211.4 | % | ||||||
Other Expenses | 1,273,331 | 885,352 | 43.8 | % | ||||||
Total Operating Expense | $ | 6,574,028 | $ | 2,710,181 | 142.6 | % | ||||
Expenses for salaries increase by 203.2% during the three months ended March 31, 2007 as compared to the same period in 2005. Salary and related expenses increased as we increased the depth of our management team, and our administrative staff. At the same time, expenses decreased to 12.2% of revenue from 13.6% in the same period last year as result of more efficient operations and the use of our Costa Rica call center operated by Datascension.
Expenses for stock compensation increased by 28.7% for the three months ended March 31, 2007 as compared to the same period in 2006 while falling to 1.8% of revenue verses 4.7% in 2006 for the same period. The increase in this non cash expense is due to the issue of stock to management staff as well as the implementation of our stock option plan for salaried staff.
Advertising expense increased by 211.4% from the year earlier period. The higher gross costs of advertising were lower as a percentage of revenue at 26.0% compared to 28.1% for the same period last year.
Other expenses grew 43.8% as compared to the same period last year. We increased our expenses for outside services including legal and professional fees to support our business growth, as well as travel, facilities, depreciation expense, and we increased our provision for doubtful accounts related to an old customer balance. While gross spending increased, other expenses fell to 9.6% of revenue compared to 22.5% for the same period last year.
Other Income And Expense
Other income and expense for the three months ended March 31, 2007 provided net other income of $16,499 compared to a net expense of $340,207 for the same period in 2006. The elimination of our convertible debt during 2006 resulted in the reduction in interest expense and our cumulating cash balances are provided interest income.
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Three Months Ended March 31 | |||||||
2007 | 2006 | ||||||
Other (Income)/Expense | |||||||
Other Income | $ | (2,142 | ) | $ | - | ||
Interest Income | (16,621 | ) | - | ||||
Interest Expense | 1,461 | 340,207 | |||||
Other Expense | 803 | - | |||||
| $ | (16,499 | ) | $ | 340,207 | |||
Income Before Income Taxes
We had income before income taxes of $4,121,708 for the three months ended March 31, 2007, compared to $194,380 for the same period last year. Non-cash charges to income comprised $530,766 and $598,590 for the three months ended March, 2007 and 2006, are summarized as follows:
Three Months Ended March 31 | |||||||
2007 | 2006 | ||||||
Stock issued for services | $ | $ | $104,668 | ||||
Depreciation and amortization | 78,755 | 44,733 | |||||
Allowance for doubtful accounts | 213989 | 12,500 | |||||
Stock Compensation | 238,022 | 185,000 | |||||
Amortization of debt interest | 214,278 | ||||||
Debt conversion feature expense | 37,411 | ||||||
| $ | 530,766 | $ | 598,590 | ||||
Income Taxes and Net Income
We recognized income tax expense of $447,972 for the three months ended March 31, 2007 resulting in net income of $3,673,736 compared to net income of $194,380 for the same period last year. No income tax expense was booked in 2006 due to the application of our net operating loss carryforwards. Our tax expense is a combination of our estimated tax liability and the recognition of deferred tax assets and liabilities as described in Note 2 in the financial statement section. Unlike prior periods, because of our improved operating results, we expect to have a continuing income tax obligation.
Basic And Diluted Loss Per Share
Our basic income per share for the three months ended March 31, 2007 was $0.08 as compared to $0.0 for the same period in 2006. Basic net earnings (loss) per common share is computed by dividing net earnings (loss) applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings per common share was $0.07 compared to $0.0 per common share for the same period in 2006 and is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock warrants and conversion of convertible debt. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
Material Trends and Uncertainties
Our membership revenues are generated by charging our members a monthly fee for the tools and services needed to create and run a successful Internet auction business. Members sign-up for our services at our website after having been directed to our website by internet advertising campaigns for which we pay a fee for each sign-up. As we closed the year in 2006 and began 2007 we generated record volumes of sign-ups from orders generated through our affiliate networks which partially contributed to membership revenues during the three months ended March 31, 2007. We also experienced a large amount of poor quality sign-ups and a higher than normal level of potential online fraud in conjunction with the record sign-ups resulting in increases in both our return rate and our chargeback rate.
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In response, we have reduced our advertising related to these programs as we implement preventative measures and analyze the results of these measures. We expect that our gross transactions will decline but that our return rates and chargeback percentages will return to normal levels, and that the conversion rate from sign-up to billable membership will improve as a result of our actions. It is not clear how much the second quarter’s performance will be impacted by these changes, but revenues generated from this source will likely be reduced at least temporarily.
The higher chargeback volume as a percentage of gross transaction volume is viewed as a potential credit risk by our merchant processing banks. An unfavorable credit risk assessment may result in increased transactional fees and penalties, and higher reserve requirements. We depend on our banking relationships to provide payment processing to all our customers. If chargeback volumes continue at a high rate as compared to gross transaction volume, our merchant processing banks may determine that we are too high a credit risk and decline to continue to provide payment processing services which would impact our ability to bill and collect payment from our membership customers. In addition, processing rates may increase in relation to the increased risk assessed by our processing banks.
We are aggressively pursuing opportunities to increase traffic at our websites and partner websites to offset these risks and grow long term revenues from memberships as well as, upsell, and lead generation revenues. We expect that increasing our website traffic from sources other than our current affiliate network will improve the volume and quality of sign-ups, and reduce both our return rate and chargeback rate.
Liquidity And Capital Resources
As of March 31, 2007, our Total Current Assets were $16,067,696 and our Total Current Liabilities were $6,703,214. Our Stockholders' Equity at March 31, 2007 was $10,966,785.
During 2006, all of our promissory notes and convertible debt were repaid. During the fourth quarter of 2006 we financed an insurance policy which had a balance of $40,300 which constituted our entire debt at March 31, 2007.
As a result of the higher number of chargebacks as a percentage of billing transactions during the three months ending March 31, 2007 described above, we have been required to increase our merchant card reserves at our merchant processors bank. We deposited $1,000, 000 by wire transfer into our reserve account on May 3, 2007. These funds will be unrestricted and returned if chargeback percentages return to normal levels. We anticipate that the preventative measures we have implemented will cause our chargebacks to return to their previous levels. Merchant reserves are classified on our balance sheet as other receivables.
Because of the favorable results from operations and our expectations that our success will continue we will be required to make tax payments during the quarter ending June 30, 2007. These tax obligations will continue in conjunction with our ongoing profitability in contrast with the prior cumulative loss that resulted in immaterial tax obligations.
We believe that cash generated from operations will be sufficient to fund operations and capital requirements as presently planned over the next twelve months. We anticipate putting a line of credit in place and/or raise funds through the sale of securities to assist with short term cash needs should we identify acquisition opportunities.
Seasonality
Historically, our business has not been susceptible to significant seasonal factors and we anticipate it will not be in the future.
Commitments
Minimum future rental payments under non-cancelable operating leases as of March 31, 2007, for each of the next five years and in the aggregate are as follows:
2007 | $ | 214,355 | ||
2008 | $ | 293,229 | ||
2009 | $ | 120,976 | ||
Total | $ | 628,560 |
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We entered a two year cost plus agreement on October 11, 2006, with Datascension, Inc., an unrelated party, that enables Consumer Loyalty Group to operate a state of the art call center. The call center became operational on November 27, 2006 and is utilized to support Consumer Loyalty Group customer service and sales efforts at dramatically lowered costs in comparison to their U.S. based counterparts.
YEAR ENDED DECEMBER 31, 2006, AS COMPARED TO YEAR ENDED DECEMBER 31, 2005
Segment Results
During 2006, we structured the company into several distinct business entities. Each entity is separately incorporated and a wholly- owned subsidiary of Commerce Planet. Each subsidiary, Consumer Loyalty Group, Inc., Legacy Media, Inc., OS Imaging, Inc., and Interaccurate, Inc., specializes in a specific niche of the media industry. Their combined services are designed to address all the needs of their client partners including: membership loyalty offers; consumer marketing data management; affiliate list management; printing and fulfillment services; and Web/Data hosting and software development. We provide management and administrative services, as well as accounting, finance, and information technology support to the subsidiary companies.
The structure enables the subsidiaries to support each other as well as continue to develop third party revenues and profits. The subsidiary companies have operated since the third quarter of 2006 and generated combined segment revenues of $34,800,283 with the single operating company existing in the first half of the year included.
Commerce Planet | Consumer Loyalty Group | Legacy Media | OS Imaging | Inter- accurate | Combined Segments | ||||||||||||||
| Revenue | $ | 13,161,238 | $ | 14,645,907 | $ | 5,317,437 | $ | 1,480,226 | $ | 195,475 | $ | 34,800,283 | |||||||
| Cost of Goods Sold | 1,669,915 | 1,900,520 | 3,769,298 | 1,145,744 | 45,600 | 8,531,077 | |||||||||||||
| Gross Profit | 11,491,323 | 12,745,387 | 1,548,139 | 334,482 | 149,875 | $ | 26,269,206 | ||||||||||||
| Operating Expense | 8,085,069 | 6,204,679 | 1,095,848 | 644,938 | 238,293 | 16,268,827 | |||||||||||||
| Other (Income) Expense | 1,233,363 | 2,459 | 18,471 | 4,981 | 1,259,274 | ||||||||||||||
| Income/(Loss) Before Income Taxes | 2,172,891 | 6,538,249 | 433,820 | (315,437 | ) | (88,418 | ) | 8,741,105 | |||||||||||
Consolidating adjustments
Favorable/(Unfavorable) | Revenue | COGS | Expenses/ Other | Net Income | |||||||||
| Combined | $ | 34,800,283 | (8,531,077 | ) | (17,528,101 | ) | $ | 8,741,105 | |||||
| Intersegment Adjustments | $ | (7,312,149 | ) | $ | 4,155,316 | $ | 3,156,833 | $ | - | ||||
| Consolidated | $ | 27,488,134 | $ | (4,375,761 | ) | $ | (14,371,268 | ) | $ | 8,741,105 | |||
Revenues
We generated net revenues of $27,488,134 for the year ended December 31, 2006, as compared to $7,340,399 for the year ended December 31, 2005. The increase year-over-year resulted in growth of 274.5%.
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Year Ended December 31 | ||||||||||
2006 | 2005 | % Change | ||||||||
| Revenue | ||||||||||
| Membership Revenue | $ | 22,410,394 | $ | 5,493,609 | 307.9 | % | ||||
| Upsell Revenue | 2,598,936 | 415,592 | 525.4 | % | ||||||
| Lead Revenue | 1,211,526 | 991,058 | 22.2 | % | ||||||
| Fulfillment/Other Revenue | 1,267,278 | 440,140 | 187.9 | % | ||||||
| Total Revenue | 27,488,134 | 7,340,399 | 274.5 | % | ||||||
Membership revenues contributed 81.5% to total revenues while increasing by 307.9% over 2005. At the end of 2006, we had approximately 120,000 current members for our core membership product, Onlinesupplier, versus about 30,000 current members at the end of 2005. The increase in membership year-over-year was the primary contributor to the growth in revenues for membership generating approximately 85.0% of the total growth. New product offerings and price increases introduced late in the year contributed approximately 7.0% and 8.0%, respectively, to the total growth in membership revenues.
During the last quarter of 2005, we changed our advertising to direct the majority of our potential customers to our web site to purchase our products and services rather than directing customers to contact us via phone at our call center. This strategy was very successful and resulted in higher new member activations in the fourth quarter of 2005 than any other previous quarter. Our success with this changed strategy has continued into 2006 and combined with robust growth in the online retail sales industry drove significant growth in memberships.
Upsell revenues contributed 9.5% to total revenues while increasing by 525.4% over 2005. We provide access to business partners’ product offerings though our website for which they pay fees. The growth in memberships in 2006 increased revenues for existing offers dramatically and spurred the addition of new affers as well.
Lead revenues contributed 4.4% of revenues while increasing by 22.2% over 2005. Our increasing membership base and website traffic increases the quantity of leads available resulting in higher revenues.
Printing, fulfillment and other revenues contributed 4.6% to total revenue while increasing by 187.9% over 2005. The increases in revenue in this category were driven by the addition of printing and fulfillment services through the acquisition of One Source Imaging.
Costs Of Goods Sold
We incurred costs of sales of $4,375,361 for the year ended December 31, 2006, as compared to $1,744,866 for the year ended December 31, 2005. Costs of sales increased by 150.7% over 2005 which was a much lower rate than the growth of revenues. On a percentage basis, cost of goods sold decreased from 23.7% to 15.9% of revenues. The overall mix of membership revenues to total revenues is improved at 81.5% in 2006 compared to 74.8% in 2005. Additionally, our increase in membership volume has provided economies of scale related to our webstore costs driving costs per unit down while our fulfillment costs have improved on a per unit basis with the acquisition of One Source Imaging. These improvements are slightly offset by an increase in transactional fees for merchant card transactions.
Operating Expenses
We incurred costs of $13,915,202 for the year ended December 31, 2006 as compared to $10,230,994 for the year ended December 31, 2005. While operating expenses increased by 36.0% over the prior year these expenses were spread over much higher revenue resulting in a reduction in operating expenses as a percentage of revenue to 50.6% in 2006 from 139.3% in 2005.
Year Ended December 31 | ||||||||||
2006 | 2005 | % Change | ||||||||
| Expense | ||||||||||
| Salaries | $ | 3,120,927 | $ | 3,179,427 | -1.8 | % | ||||
| Stock Compensation | 619,363 | 305,687 | 102.6 | % | ||||||
| Advertising | 6,055,104 | 3,098,204 | 95.4 | % | ||||||
| Other Expenses | 4,119,808 | 3,647,676 | 12.9 | % | ||||||
| Total Operating Expense | $ | 13,915,202 | $ | 10,230,994 | 36.0 | % | ||||
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Expenses for salaries fell slightly by 1.8% during the year ended December 31, 2006 as compared to the prior year. During 2006, we increased the depth of our management team, and our administrative staff. We entered an agreement with Datascension to operate a call center in Costa Rica which enables us to perform customer service activities more efficiently. Additionally, in conjunction with our move to direct customers to our web site we reduced our sales force.
Expenses for stock compensation increased by 102.6% during 2006 as compared to the prior year. The increase in this non cash expense is due to the issue of stock to management staff as well as the implementation of our stock option plan for salaried staff.
Advertising expense increased by 95.4% from the year earlier period. In conjunction with our move to direct customers to our web site our internet and e-mail advertising expenses increased resulting in higher gross costs of advertising but a lower cost as a percentage of revenue at 22.0% compared to 42.2% last year.
Other expenses grew 12.9% as compared to the prior year period. We increased our expenses for outside services including legal and professional fees to support our business growth, as well as travel, facilities, and depreciation expense. These increases were slightly offset by a reduction in investor relation expenses.
Other Income And Expense
Other income and expense totaled $456,066 compared to $1,630,464 from the prior year period. Included in these costs were $1,373,668 in interest expense compared to $1,630,464 last year. Interest expense includes expenses related to beneficial conversion and the amortization of the discounts on notes issued. During the year we retired all of our debt allowing us to recover $837,191 of the beneficial conversion expense taken in 2004 and 2005 which was included in other income. Additionally, we received $80,411 in interest and other income further offsetting the interest expense for the year.
Net Income
We had net income of $8,741,105 for the year ended December 31, 2006 compared to a net loss of $6,265,924 for the year ended December 31, 2005. Non-cash charges to income comprised $1,267,652 and $2,836,132 for the years ended December 31, 2006 and 2005, are summarized as follows:
Year Ended December 31 | |||||||
2006 | 2005 | ||||||
| Stock issued for services | $ | 128,103 | $ | 563,647 | |||
| Depreciation and amortization | 208,938 | 173,609 | |||||
| Allowance for doubtful accounts | 96,675 | 50,000 | |||||
| Issuance of warrants | 619,363 | 341,238 | |||||
| Amortization of debt interest | 1,014,353 | 630,865 | |||||
| Debt conversion feature expense | (837,191 | ) | 754,238 | ||||
| Debt inducement expense | 37,411 | 322,535 | |||||
| $ | 1,267,652 | $ | 2,836,132 | ||||
Basic And Diluted Loss Per Share
Our basic income per share for the year ended December 31, 2006 was $0.20 as compared to ($0.17) for the year ended December 31, 2005. Basic net earnings (loss) per common share is computed by dividing net earnings (loss) applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings per common share was $0.18 and is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock warrants and conversion of convertible debt. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. At December 31, 2005, the total amount of outstanding convertible debentures was $4,203,698 which might be converted into 35,030,817 shares of our common stock, based on the closing price of our common shares on December 31, 2005. At December 31, 2005, there were 4,148,750 warrants outstanding that were eligible for conversion into shares of our common stock. All convertible debentures have been retired as of December 31, 2006 and we had 9,996,722 warrants outstanding that were eligible for conversion into shares of our common stock.
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Liquidity And Capital Resources
As of December 31, 2006, our Total Current Assets were $9,475,493 and our Total Current Liabilities were $3,546,413. Our Stockholders' Equity at December 31, 2006 was $7,254,026.
During 2006, all of our promissory notes and convertible debt were repaid as more fully described in the financing section below. At December 31, 2006, we financed an insurance policy with a balance of $69,681 which constituted our entire debt at year end.
Seasonality
Our business is not susceptible to significant seasonal factors.
Financings
On January 5, 2004, we issued convertible debentures of $250,000 to Dutchess Private Equities Fund LP. The debentures convert on January 15, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 6% cumulative interest, payable in cash or stock at our option, at the time of conversion. At December 31, 2006 the debenture was completely repaid.
On January 19, 2004, we issued convertible debentures of $305,000 to eFund Capital Partners, LLC. The debentures convert on January 19, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 6% cumulative interest, payable in cash or stock at our option, at the time of conversion. At December 31, 2006, the debenture was completely repaid.
On January 25, 2004, we issued convertible debentures of $50,000 to Dutchess Private Equities Fund LP. The debentures convert on January 25, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 6% cumulative interest, payable in cash or stock at our option, at the time of conversion. At December 31, 2006, the debenture was completely repaid.
On January 25, 2004, we issued convertible debentures of $50,000 to eFund Capital Partners, LLC. The debentures convert on January 25, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 6% cumulative interest, payable in cash or stock at our option, at the time of conversion. At December 31, 2006, the debenture was completely repaid.
On March 3, 2004, we issued convertible debentures of $28,000 to Preston Capital Partners, LLC. The debentures convert on March 3, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 6% cumulative interest, payable in cash or stock at our option, at the time of conversion. At December 31, 2006, the debenture was completely repaid.
On April 1, 2004, we issued convertible debentures of $90,000 to Dutchess Private Equities Fund, II. The debentures convert on April 1, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. The debenture was issued at a discount of $15,000. On July 9, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 225,000 of our common shares at an exercise price at $1.42 per share. At December 31, 2006, the debenture was completely repaid.
On April 1, 2004, we issued convertible debentures of $90,000 to eFund Capital Partners, LLC. The debentures convert on April 1, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. The debenture was issued at a discount of $15,000. On April 1, 2004, we issued a warrant to eFund Capital Partners, LLC, to purchase 225,000 of our common shares at an exercise price at $1.42 per share. At December 31, 2006, the debenture was completely repaid.
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On May 5, 2004, we issued convertible debentures of $90,000 to Dutchess Private Equities Fund, II. The debentures convert on May 5, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. The debenture was issued at a discount of $15,000. On July 9, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 225,000 of our common shares at an exercise price at $1.42 per share. At December 31, 2006, the debenture was completely repaid.
On May 5, 2004, we issued convertible debentures of $90,000 to eFund Capital Partners, LLC. The debentures convert on May 5, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. The debenture was issued at a discount of $15,000. On May 5, we issued a warrant to eFund Capital Partners, LLC, to purchase 225,000 of our common shares at an exercise price at $1.42 per share. At December 31, 2006, the debenture was completely repaid.
On July 9, 2004, we issued convertible debentures of $180,000 to Dutchess Private Equities Fund, II. The debentures convert on July 9, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. The debenture was issued at a discount of $30,000. On July 9, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 450,000 of our common shares at an exercise price at $1.17 per share. At December 31, 2006, the debenture was completely repaid.
On August 15, 2004, we issued convertible debentures of $144,000 to Dutchess Private Equities Fund, II. The debentures convert on August 15, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $24,000. On August 18, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 360,000 of our common shares at an exercise price at $1.03 per share. At December 31, 2006, the debenture was completely repaid.
On August 15, 2004, we issued convertible debentures of $60,000 to eFund Small Cap Fund, LP. The debentures convert on August 15, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $10,000. On August 18, 2004, we issued a warrant to eFund Capital Partners, to purchase 150,000 of our common shares at an exercise price at $1.03 per share. At December 31, 2006, the debenture was completely repaid.
On September 25, 2004, we issued convertible debentures of $222,000 to Dutchess Private Equities Fund. The debentures convert on September 25, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $37,000. On September 25, 2004, we issued a warrant to Dutchess Private Equities Fund, to purchase 540,000 of our common shares at an exercise price at $1.25 per share. At December 31, 2006, the debenture was completely repaid.
On September 25, 2004, we issued convertible debentures of $60,000 to eFund Small Cap Fund, LP. The debentures convert on September 24, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $10,000. On September 25, 2004, we issued a warrant to eFund Capital Partners, to purchase 150,000 of our common shares at an exercise price at $1.25 per share. At December 31, 2006, the debenture was completely repaid.
On October 25, 2004, we issued convertible debentures of $60,000 to Dutchess Private Equities Fund, II, LP. The debentures convert on October 25, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $10,000. On October 25, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 150,000 of our common shares at an exercise price at $1.53 per share. At December 31, 2006, the debenture was completely repaid.
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On November 11, 2004, we issued convertible debentures of $162,000 to Dutchess Private Equities Fund, II, LP. The debentures convert on November 11, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $27,000. On November 11, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 480,000 of our common shares at an exercise price at $1.25 per share. At December 31, 2006, the debenture was completely repaid.
On December 28, 2004, we issued convertible debentures of $240,000 to Dutchess Private Equities Fund, II, LP. The debentures convert on December 28, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $40,000. On December 28, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 720,000 of our common shares at an exercise price at $1.25 per share. At December 31, 2006, the debenture was completely repaid.
On February 11, 2005, we issued a Note to Dutchess Private Equities Fund, II, in the amount of $360,000, at a discount of $60,000. The Note had a 0% interest rate and was repaid during 2005.
On April 18, 2005, we issued a Note to Dutchess Private Equities Fund, II, in the amount of $132,000, at a discount of $22.000. The Note had a 0% interest rate and was repaid on during 2005.
On April 18, 2005, we issued a Note to eFund Capital Partners, in the amount of $132,000, at a discount of $22,000. The Note had a 0% interest rate and was repaid during 2005.
On May 20, 2005, we issued a Note to Dutchess Private Equities Fund, II, in the amount of $402,750, at a discount of $52,750. The Note had a 0% interest rate and $112,500 was repaid prior to December 18, 2005. The remaining amount was exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006, the Note was completely repaid.
On June 2, 2005, we issued a Note to Dutchess Private Equities Fund, II, in the amount of 540,000, at a discount of $80,000. The Note had a 0% interest rate and was exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006, the Note was completely repaid.
On July 22, 2005, we issued a Note to Dutchess Private Equities Fund, II, in the amount of $258,000, at a discount of $33,000. The Note had a 0% interest rate and was exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006 the Note was completely repaid.
On August 4, 2005, we issued a Note to Dutchess Private Equities Fund, II, in the amount of $162,000, at a discount of $17,000. The Note had a 0% interest rate and was exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006, the Note was completely repaid.
On August 17, 2005, we issued a Note to Dutchess Private Equities Fund, II, in the amount of $247,200, at a discount of $41,200. The Note had a 0% interest rate and was exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006, the Note was completely repaid.
On August 18, 2005, we issued Notes to eFund, in the amount of $221,000, at a total discount of $37,000. The notes had a 0% interest rate and $18,211 was repaid prior to December 18, 2005. The remaining outstanding amount was exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006, the Notes were completely repaid.
On August 18, 2005, we issued a Note to a Barrett Evans in the amount of $84,000, at a total discount of $14,000. The notes had a 0% interest rate and were exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006, the Note was completely repaid. At the time the Note was issued, Mr. Evans was on our Board of Directors.
On September 16, 2005, we issued a Note to Dutchess Private Equities Fund, L.P., in the amount of $192,000, at a discount of $32,000. The Note has a 0% interest rate and $162,752 was repaid during 2005, and the remaining $29,248 was outstanding at December 31, 2005. This amount was due and payable on March 15, 2006, and was repaid on March 1, 2006. At December 31, 2006, the Note was completely repaid.
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On September 30, 2005, we issued a Note to Dutchess Private Equities Fund, LP, in the amount of $276,000, at a discount of $46,000. The Note has a 0% interest rate and is due and payable on March 30, 2006. At December 31, 2006, the Note was completely repaid.
On October 11, 2005, we issued a Note to Dutchess Private Equities Fund, LP, in the amount of $30,000, at a discount of $5,000. The Note has a 0% interest rate and is due and payable on April 11, 2006. At December 31, 2006, the Note was completely repaid.
Effective November 1, 2005, we agreed to issue a convertible debenture to eFund Capital Partners, in the amount of $180,000, at a discount of $176,200. The debenture has a 10% interest rate and is due and payable November 1, 2009. The debentures are convertible into shares of our common stock at a price equal to the lesser of; (i) seventy-five percent of the average of the closing bid price of the stock for the five days prior to conversion or (ii) the average of the closing bid price of the stock on the five days immediately preceding the date of the of debenture agreement. At December 31, 2006, the debenture was completely repaid.
Effective December 18, 2005, we entered into a Convertible Debenture Exchange Agreement with Dutchess Private Equities Fund, LP and eFund Capital Partners, LLC, majority shareholders, to exchange the unpaid balance of promissory notes issued in 2005 worth $1,784,239 into 10%, 4-year term, Convertible Debentures. The debentures are convertible at the lesser of (i) 75% of the average of the lowest closing bid price during fifteen immediately preceding the conversion date or (ii) 100% of the average of the closing bid price of the stock for the twenty days immediately preceding the closing date of the debenture agreement. At December 31, 2006, the debenture was completely repaid.
The following table sets forth the dollar amount of each payment made in connection each of the above-described transactions we made with eFund, any affiliate of, or any person with whom eFund has a contractual relationship regarding the transaction. We did not make any payments that were for liquidated damages, paid to finders or placement agents.
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Name of eFund entity or affiliate with whom financing instrument was entered into | Date of issunance | Face value | Cash the Company received from the financing instrument | Amount paid by the Company to eFund | Interest Paid (discount amount on face of the note, if any) | Date of payment | Shares issued as payment | Amount ($) of each payment (1) | Date warrant issued, if any | Value of warrant, if any (6) | Amount of interest payments, if any (9) ($) | Percentage calculated by dividing the total potential profit eFund could have gotten by the funds we received | |||||||||||||||||||||||||
| eFund Capital Partners, LLC | 1/19/2004 | $ | 305,000 | $ | 305,000 | $ | 36,600 | 1/13/2006 | 100,000 | $ | 12,000 | ||||||||||||||||||||||||||
| eFund Capital Partners, LLC | 1/19/2004 | 1/19/2006 | 150,000 | $ | 18,000 | ||||||||||||||||||||||||||||||||
| eFund Capital Partners, LLC | 1/19/2004 | 2/3/2006 | 32,000 | $ | 5,528 | ||||||||||||||||||||||||||||||||
| eFund Capital Partners, LLC | 1/19/2004 | 3/31/2006 | $ | 48,500 | |||||||||||||||||||||||||||||||||
| eFund Capital Partners, LLC | 1/19/2004 | 4/13/2006 | 619,118 | $ | 79,433 | ||||||||||||||||||||||||||||||||
| eFund Capital Partners, LLC | 1/19/2004 | 6/30/2006 | $ | 141,539 | |||||||||||||||||||||||||||||||||
Subtotal for 1/19/2004 instrument | $ | 305,000 | $ | 305,000 | $ | 341,600 | $ | 36,600 | $ | 305,000 | |||||||||||||||||||||||||||
| eFund Capital Partners, LLC | 1/25/2004 | $ | 50,000 | $ | 50,000 | $ | 6,000 | 2/2/2006 | $ | 10,433 | |||||||||||||||||||||||||||
| eFund Capital Partners, LLC | 1/25/2004 | 3/7/2006 | 68,000 | $ | 39,567 | ||||||||||||||||||||||||||||||||
Subtotal for 1/25/2004 instrument | $ | 50,000 | $ | 50,000 | $ | 56,000 | $ | 6,000 | $ | 50,000 | 100.00 | % | |||||||||||||||||||||||||
| eFund Capital Partners, LLC | 4/2/2004 | $ | 90,000 | $ | 75,000 | 3/7/2006 | 330,000 | $ | 23,000 | 4/2/2004 | 0(7 | ) | |||||||||||||||||||||||||
| eFund Capital Partners, LLC | 4/2/2004 | $ | 15,000 | 6/30/2006 | 170,000 | $ | 67,000 | ||||||||||||||||||||||||||||||
Subtotal for 4/2/2004 instrument | $ | 90,000 | $ | 75,000 | $ | 90,000 | $ | 15,000 | $ | 90,000 | 120.00 | % | |||||||||||||||||||||||||
| eFund Capital Partners, LLC | 5/5/2004 | $ | 90,000 | $ | 75,000 | $ | 15,000 | 6/8/2006 | $ | 90,000 | 5/5/2004 | 0(8 | ) | ||||||||||||||||||||||||
Subtotal for 5/5/2004 instrument | $ | 90,000 | $ | 75,000 | $ | 90,000 | $ | 15,000 | $ | 90,000 | 120.00 | % | |||||||||||||||||||||||||
| eFund Capital Partners, LP | 8/15/2004 | $ | 60,000 | $ | 50,000 | $ | 10,000 | 3/31/2006 | 439,794 | $ | 60,000 | 8/18/2004(4 | ) | 3,000 | |||||||||||||||||||||||
Subtotal for 8/15/2004 instrument | $ | 60,000 | $ | 50,000 | $ | 60,000 | $ | 10,000 | $ | 60,000 | 120.00 | % | |||||||||||||||||||||||||
| eFund Capital Partners, LP | 9/25/2004 | $ | 60,000 | $ | 50,000 | $ | 10,000 | 4/13/2006 | 467,654 | $ | 60,000 | 9/25/2004(5 | ) | $ | 4,950 | ||||||||||||||||||||||
Subtotal for 9/25/2004 instrument | $ | 60,000 | $ | 50,000 | $ | 64,950 (10 | ) | $ | 10,000 | $ | 60,000 | $ | 4,950 | 129.90 | % | ||||||||||||||||||||||
| eFund Capital Partners, LLC | 4/18/2005 | $ | 132,000 | $ | 110,000 | $ | 22,000 | 6/30/2005 | $ | 13,812 | |||||||||||||||||||||||||||
| eFund Capital Partners, LLC | 4/18/2005 | 9/30/2005 | $ | 118,188 | |||||||||||||||||||||||||||||||||
Subtotal for 4/18/2005 instrument | $ | 132,000 | $ | 110,000 | $ | 132,000 | $ | 22,000 | $ | 132,000 | 120.00 | % | |||||||||||||||||||||||||
| eFund Capital Partners, LLC | 8/18/2005 | $ | 48,000 | $ | 40,000 | $ | 8,000 | 9/30/2005 | $ | 5,000 | |||||||||||||||||||||||||||
| eFund Capital Partners, LLC | 8/18/2005 | 12/31/2005 | $ | 13,211 | |||||||||||||||||||||||||||||||||
| eFund Capital Partners, LLC | 8/18/2005 | 12/31/2005 | $ | 29,789 | (2 | ) | |||||||||||||||||||||||||||||||
| eFund Capital Partners, LLC | 8/18/2005 | $ | 125,000 | $ | 104,000 | $ | 21,000 | 12/31/2005 | $ | 125,000 | (2 | ) | |||||||||||||||||||||||||
| eFund Capital Partners, LLC | 8/18/2005 | $ | 48,000 | $ | 40,000 | $ | 8,000 | 12/31/2005 | $ | 48,000 | (2 | ) | |||||||||||||||||||||||||
Subtotal for 8/18/2005 instruments | $ | 221,000 | $ | 184,000 | $ | 221,000 | $ | 37,000(3 | ) | $ | 221,000 | 120.11 | % | ||||||||||||||||||||||||
| Barrett Evans | 8/18/2005 | $ | 84,000 | $ | 70,000 | $ | 14,000 | 12/31/2005 | $ | 84,000 | (2 | ) | |||||||||||||||||||||||||
Subtotal for 8/18/2005 instrument | $ | 84,000 | $ | 70,000 | $ | 84,000 | $ | 14,000 | $ | 84,000 | 120.00 | % | |||||||||||||||||||||||||
| eFund Capital Partners, LLC | 11/1/2005 | $ | 180,000 | $ | 176,200 | $ | 3,800 | 3/31/2006 | $ | 132,400 | |||||||||||||||||||||||||||
| eFund Capital Partners, LLC | 11/1/2005 | 6/30/2006 | $ | 47,600 | |||||||||||||||||||||||||||||||||
Subtotal for 11/1/2005 instrument | $ | 180,000 | $ | 176,200 | $ | 180,000 | $ | 3,800 | $ | 180,000 | 102.16 | % | |||||||||||||||||||||||||
| eFund Capital Partners, LLC | 12/18/2005 | $ | 286,789 | None. | 9/302006 | $ | 286,789 | ||||||||||||||||||||||||||||||
Subtotal for 12/18/2005 instrument | $ | 286,789 | N/A | $ | - | $ | 286,789 | ||||||||||||||||||||||||||||||
TOTAL OF ALL EFUND | |||||||||||||||||||||||||||||||||||||
AND AFFILIATE INSTRUMENTS: | $ | 1,558,789 | $ | 1,606,339 | $ | 169,400 | $ | 1,558,789 | |||||||||||||||||||||||||||||
| (1) Payments made in common stock have been given a value based on a contractual formula in the instrument to which the payments relate, generally a percentage of market price. The aggregate of all payments total the face value of the instrument including interest in the form of discounts. | |||||||||||||||||||||||||||||||||||||
(2) New note issued on December 18, 2005 in the amount $286,789 restructered existing notes issued on August 18, 2005 with face values of $48,000, $125,000, $48,000, and $84,000. The note balances of $29,789, $125,000, $48,000, and $84,000 totaling $286,789 constituted the face value of the new note. The restructure of existing debt issued with the new note included interest in the form of discounts of $8,000, $21,000, $8,000, and $14,000 respectively. | |||||||||||||||||||||||||||||||||||||
| (3) The total discout amount for all Notes issued on August 18, 2005 is $37,000. | |||||||||||||||||||||||||||||||||||||
(4) On August 18, 2004, we issued a warrant to eFund Capital Partners, to purchase 150,000 of our common shares at an exercise price of $1.03 per share. The closing price of our stock on August 18, 2004 was $1.05 per share. | |||||||||||||||||||||||||||||||||||||
(5) On September 25, 2004, we issued a warrant to eFund Capital Partners, to purchase 150,000 of our common shares at an exercise price of $1.25 per share. The closing price of our stock on September 25, 2004 was $1.283 per share. | |||||||||||||||||||||||||||||||||||||
(6) Caluculated by subtracting the total exercise price on the date of the issuance of the warrants from the combied market price of the total number of shares underlying the warrants on that date. | |||||||||||||||||||||||||||||||||||||
(7) On April 2, 2004, we issued a warrant to eFund Capital Partners, to purchase 225,000 of our common shares at an exercise price of $1.53. The market price of our stock on April 2, 2004 was $1.38. | |||||||||||||||||||||||||||||||||||||
(8) On May 5, 2004, we issued a warrant to eFund Capital Partners, to purchase 225,000 of our common shares at an exercise price of $1.53. The market price of our stock on May 5, 2004 was $1.47. | |||||||||||||||||||||||||||||||||||||
| (9) Unless indicated in this column, interest amounts are included in the face value of the instrument and listed in the column titled "Interest Paid." | |||||||||||||||||||||||||||||||||||||
| (10) Includes interest payment of $4,950. | |||||||||||||||||||||||||||||||||||||
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Commitments
Minimum future rental payments under non-cancelable operating leases as of December 31, 2005 for each of the next five years and in the aggregate are as follows:
| 2007 | $ | 285,807 | ||
| 2008 | $ | 293,229 | ||
| 2009 | $ | 120,976 | ||
| TOTAL | $ | 700,012 |
We entered a two year cost plus agreement on October 11, 2006, with Datascension, Inc. that enables our subsidiary, Consumer Loyalty Group, to operate a state of the art call center. The call center became operational on November 27, 2006 and is utilized to support Consumer Loyalty Group customer service and sales efforts at dramatically lowered costs in comparison to their U.S. based counterparts. An additional benefit to the cost savings is the highly developed and well educated Costa Rican labor pool that Consumer Loyalty Group has access to in support of their campaigns. The combination of cost savings and elevated labor resources allows Consumer Loyalty Group to launch higher end sales and support initiatives that generate increased revenue and profits.
The address of our principal executive office is 30 S. LaPatera Lane, Suite 8, Goleta, CA 93117.
We sublease approximately 20,000 square feet of office space in Goleta and Santa Barbara, California consisting of three separate locations. These locations house our production, sales, customer services and administrative activities. The combined base rent for these locations is $24,470 per month plus expenses, estimated at $0.22 per square foot, plus a pro rata share of utilities payable monthly in advance on the first day of each calendar month of the term of the sublease. The subleases expire in April and November of 2009.
We operate, through a cost plus agreement, a Costa Rican call center which currently houses 61 sales agents, customer service representatives, and supervisory personnel. We do not own or lease this property but have a two-year obligation to reimburse lease related costs and own all furniture and equipment housed within the location.
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In February 2006, we terminated our lease for 10,500 square feet of warehouse and office space in Signal Hill, California. This space was no longer required to support our growth because we ceased operations of our subsidiaries, Auction Liquidator, Inc. and Discount OnlineWarehouse.
We believe our existing leased facilities are adequate for our current requirements. We evaluate our facility requirements as business needs change. Should additional space be required to support growth we would be able to acquire property as needed through lease or purchase since no shortages of available properties exist.
On February 11, 2005, we issued a Note to Dutchess Private Equities Fund, II, in the amount of $360,000, at a discount of $60,000. The Note has a 0% interest rate. During the year ended December 31, 2005, this Note was repaid, and the balance at December 31, 2005 was zero. We issued 37,500 shares to the Holder as an inducement to provide financing. The shares were valued at $40,219. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on our Board of Directors. At December 31, 2006 the Note was completely repaid.
In February 2005, we entered into a software agreement with Discount Solutions, Inc. to purchase certain software license rights to software that is used to provide web based stores to our customers. We agreed to purchase a perpetual license for use of the software of $52,500, and to compensate Discount Solutions $24,000 monthly for the full service hosting and maintenance of our customers' web stores. Our Chief Executive Officer is a majority owner of Discount Solutions. This agreement automatically renews monthly unless notice is provided be either party. We intend to renegotiate and extend the terms of this agreement.
On April 18, 2005, we issued a $132,000 non-interest bearing Convertible Promissory Note, due August 18, 2005 at a discount of $44,000, to eFund Capital Partners, LLC and Dutchess Private Equities Fund, II, LP. The Notes have a 0% interest rate. During the year ended December 31, 2005, this Note was repaid, and the balance at December 31, 2005 was zero. We issued 13,750 shares to eFund Capital Partners and Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $31,968. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on our Board of Directors. At December 31, 2006, the Note was completely repaid.
On May 20, 2005, we issued a $402,750 non-interest bearing Convertible Promissory Note, due December 20, 2005 at a discount of $52,750, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, $112,500 of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 40,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $46,500. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on our Board of Directors. At December 31, 2006, the Note was completely repaid.
On June 2, 2005, we issued a $540,000 non-interest bearing Convertible Promissory Note, due December 20, 2005 at a discount of $80,000, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 54,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $50,700. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on our Board of Directors. At December 31, 2006, the Note was completely repaid.
On July 22, 2005, we issued a $258,000 non-interest bearing Convertible Promissory Note, due December 22, 2005 at a discount of $33,000, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 10,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $8,925. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on our Board of Directors. At December 31, 2006, the Note was completely repaid.
We awarded seven hundred and fifty thousand warrants to our Chief Financial Officer upon his hiring during July 2005. Five hundred thousand of the warrants vest one year after his date of hire, and two hundred fifty thousand vest two years after his date of hire. Five hundred thousand of the warrants are priced at $1.12 per share, and two hundred fifty thousand are priced at $0.10 per share. The warrants have been cancelled.
On August 4, 2005, we issued a $162,000 non-interest bearing Convertible Promissory Note, due January 4, 2006 at a discount of $17,000, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 25,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $15,937. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on our Board of Directors. At December 31, 2006, the Note was completely repaid.
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On August 17, 2005, we issued a $247,200 non-interest bearing Convertible Promissory Note, due January 17, 2006 at a discount of $40,200, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 37,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $24,975. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on our Board of Directors. At December 31, 2006, the Note was completely repaid.
On August 18 2005, we issued a $221,000 non-interest bearing Convertible Promissory Note, due December 18, 2005 at a discount of $37,000, to eFund Capital Partners. The Note has a 0% interest rate. During the year ended December 31, 2005, $18,211 of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 30,000 shares to eFund Capital Partners as an inducement to provide financing. The shares were valued at $19,125. At the time the Note was issued, Barrett Evans, the Managing Member of eFund Capital Partners, was on our Board of Directors. At December 31, 2006, the Note was completely repaid.
On August 18 2005, we issued a $84,000 non-interest bearing Convertible Promissory Note, due December 18, 2005 at a discount of $14,000, to Barrett Evans. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 10,000 shares to Barrett Evans as an inducement to provide financing. At the time the Note was issued, Barrett Evans was on our Board of Directors. The shares were valued at $6,375. At December 31, 2006, the Note was completely repaid.
On September 16, 2005, we issued a $192,000 non-interest bearing Convertible Promissory Note, due March 15, 2006 at a discount of $32,000, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, $162,752 of this Note was repaid, and the balance at December 31, 2005 was $29,248. We issued 50,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $31,500. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on our Board of Directors. At December 31, 2006, the Note was completely repaid.
On September 30, 2005, we issued a $276,000 non-interest bearing Convertible Promissory Note, due March 30, 2006 at a discount of $46,000, to Dutchess Private Equities Fund, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance at December 31, 2005 was $276,000. We issued 70,000 shares to Dutchess Private Equities Fund, LP as an inducement to provide financing. The shares were valued at $42,000. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on our Board of Directors. At December 31, 2006, the Note was completely repaid.
On October 11, 2005, we issued a $30,000 non-interest bearing Convertible Promissory Note, due April 11, 2006 at a discount of $5,000, to Dutchess Private Equities Fund, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance December 31, 2005 was $30,000. We issued 8,000 shares to Dutchess Private Equities Fund, LP as an inducement to provide financing. The shares were valued at $5,000. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on our Board of Directors. At December 31, 2006, the Note was completely repaid.
Effective November 1, 2005, we agreed to issue a convertible debenture to eFund Capital Partners, in the amount of $180,000, at a discount of $176,200. The debenture has a 10% interest rate and is due and payable November 1, 2009. The debentures are convertible into shares of our common stock at a price equal to the lesser of; (i) seventy-five percent of the average of the closing bid price of the stock for the five days prior to conversion or (ii) the average of the closing bid price of the stock on the five days immediately preceding the date of the of debenture agreement. At the time the Note was issued, Barrett Evans, the Managing Member of eFund Capital Partners, was on our Board of Directors. At December 31, 2006, the debenture was completely repaid.
Effective December 15, 2005, we entered into a Convertible Debenture Exchange Agreement with Dutchess Private Equities Fund, II, LP and eFund Capital Partners to exchange the unpaid balance of promissory notes issued in 2005 worth $1,784,239 into 10%, 4-year term, Convertible Debentures. The debentures are convertible at the lesser of (i) seventy-five percent of the average of the lowest closing bid price during fifteen immediately preceding the conversion date or (ii) 100% of the average of the closing bid price of the stock for the twenty days immediately preceding the closing date of the debenture agreement. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on our Board of Directors. At December 31, 2006, the debenture was completely repaid.
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On October 3, 2006 we acquired the assets of Interaccurate, Inc. including software, intellectual properties, and a web hosting facility. Total consideration of $235,000 consisting of $176,239 in cash 42,266 shares of common stock. Our executives Michael Hill, Charlie Gugliuzza, and Ethan Brooks were parties to the transaction.
Bid and ask quotations for our common shares are routinely submitted by registered broker dealers who are members of the National Association of Securities Dealers on the NASD Over-the-Counter Electronic Bulletin Board. These quotations reflect inner-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The high and low bid information for our shares for each quarter for the last two years, so far as information is reported, through the quarter ended December 31, 2006, as reported by the Bloomberg Financial Network, are as follows:
| High | Low | |||||||
| 2005 FISCAL YEAR * | ||||||||
| First Quarter | $ | 1.93 | $ | 1.29 | ||||
| Second Quarter | $ | 1.78 | $ | 1.35 | ||||
| Third Quarter | $ | 1.27 | $ | 0.75 | ||||
| Fourth Quarter | $ | 0.90 | $ | 0.16 | ||||
| 2006 FISCAL YEAR | ||||||||
| First Quarter | $ | 0.40 | $ | 0.16 | ||||
| Second Quarter | $ | 0.61 | $ | 0.21 | ||||
| Third Quarter | $ | 1.44 | $ | 0.43 | ||||
| Fourth Quarter | $ | 1.80 | $ | 0.97 | ||||
| * Price adjusted for 1:3 split on February 18, 2005 |
SHAREHOLDERS
As of December 31, 2006, there were approximately 132 holders of record of our common stock.
DIVIDEND POLICY
We have never declared a cash dividend on our common stock and our Board of Directors does not anticipate that we will pay cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will depend upon our financial condition, operating results, capital requirements, restrictions contained in our agreements and other factors which our Board of Directors deems relevant.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes securities authorized for issuance under equity compensation plans:
Equity Compensation Plan Information | ||||||
| Plan Category | Number of shares of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||
| (a) | (b) | (c ) | ||||
Equity compensation plans approved by security holders | 0 | 0 | 0 | |||
Equity compensation plans not approved by security holders | 7,733,634 | $ 0.10 | 1,225,639 | |||
| Total | 7,733,634 | $ 0.10 | 1,225,639 | |||
38
PURCHASES OF EQUITY SECURITIES BY THE SMALL BUSINESS ISSUER AND AFFILIATED PURCHASERS
The table below details our repurchases of common stock under the stock buyback program we announced on November 28, 2006. The table shows the number of shares purchased as of December 31, 2006. The program is in effect through December 31, 2007. Under the program we may buy back up to $2,000,000 of our common stock.
SMALL BUSINESS ISSUER'S PURCHASES OF EQUITY SECURITIES | |||||||||||||
| Period | (a) Total Numbers of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |||||||||
| October 1, 2006 through October 31, 2006 | 0 | 0 | 0 | 0 | |||||||||
| November 1, 2006 through November 30, 2006 | 0 | 0 | 0 | 0 | |||||||||
| December 1, 2006 through December 31, 2006 | 226,500 | $ | 1.50 | 226,500 | $ | 1,660,726 | |||||||
| Total | 226,500 | $ | 1.50 | 226,500 | $ | 1,660,726 | |||||||
The following table presents a summary of the compensation paid to our Chief Executive Officer, our Chief Financial Officer and our President, during the fiscal year ended December 31, 2006. Except as listed below, there are no bonuses, other annual compensation, restricted stock awards or stock options/SARs or any other compensation paid to the named executive officers.
Summary Compensation Table
Name and Principal | Year Ended December | Base Salary | Bonus | Stock Awards | Option Awards | Non-equity plan compensation | Non- qualified Deferred compensation Earnings | All Other Compensation | Dollar Value of total compensation for the covered fiscal year | |||||||||||||||||||
| Position | 31, | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||||||
Michael Hill | 2006 | 305,408 | 224,458 | 0 | 480,422 (1)(2 | ) | 0 | 0 | 24,600 (4 | ) | 1,034,888 | |||||||||||||||||
| Chief Executive Officer, Director | 2005 | 164,308 | 124,116 | 0 | 0 | 0 | 0 | 0 | 288,424 | |||||||||||||||||||
Charlie Gugliuzza | 2006 | 109,038 | 224,446 | 0 | 480,422 (1)(2 | ) | 0 | 0 | 25,241 (4 | ) | 839,147 | |||||||||||||||||
| President, Director | ||||||||||||||||||||||||||||
David Foucar | 2006 | 69,000 | 17,316 | 0 | 210,015(1)(3 | ) | 0 | 0 | 17,500 (4 | ) | 313,831 | |||||||||||||||||
| Chief Financial Officer, Director | ||||||||||||||||||||||||||||
(1) The members of our Board of Directors received a Series D Preferred Stock Purchase Warrant for 1 share of our Series D Convertible Preferred Stock as compensation for serving as director.
(2) Mr. Hill and Mr. Gugliuzza received 12 shares of our Series D Preferred Stock as compensation for serving as Chief Executive Officer and President, respectively.
(3) Mr. Foucar received a one time stock option grant of 0.25% of the total number of shares outstanding as of June 13, 2006. The options vest over 24 months on a pro-rata basis.
(4) Includes $15,000 paid to each of our directors for expenses they incurred in performing their duties for the Board.
39
EXECUTIVE COMPENSATION NARRATIVE
On September 7, 2006, we entered into an employment agreement with our Chief Executive Officer, Michael Hill, whereby he receives an annual salary of $350,000. In addition, Mr. Hill will receive an annual bonus equal to 5% of our adjusted net profits. In the third quarter of 2006, Mr. Hill received 12 shares of our Series D Preferred Stock as compensation for serving as our Chief Executive Officer.
On September 7, 2006, our Board of Directors appointed Charlie Gugliuzza as our President. On September 1, 2006, we also entered into an employment agreement with Mr. Gugliuzza whereby he receives an annual salary of $350,000. In addition, Mr. Gugliuzza will receive an annual bonus equal to 5% of our adjusted net profits. In the third quarter of 2006, Mr. Gugliuzza received 12 shares of our Series D Preferred Stock as compensation for serving as our President.
On June 13, 2006, our Board of Directors appointed David Foucar as Chief Financial Officer. Under Mr. Foucar’s employment agreement he receives an annual salary of $130,000. In addition, he is eligible to receive an annual bonus of up to 20% of his annual salary. Mr. Foucar also received a one time stock option grant of 0.25% of the total number of shares outstanding as of June 13, 2006. The options vest over 24 months on a pro-rata basis.
Outstanding Equity Awards at Fiscal Year-End Table
| Option awards | Stock awards | |||||||||||||||||||||||||||
Name | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) unexercisable | Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) | Option exercise price ($) | Option expiration date | Number of shares or units of stock that have not vested (#) | Market value of shares or units of stock that have not vested ($) | Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) | |||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||||||
| Michael Hill | 1,179,846 | 0 | 0 | 0 | Jan. 1, 2010 | 0 | 0 | 0 | 0 | |||||||||||||||||||
| Charlie Gugliuzza | 1,179,846 | 0 | 0 | 0 | Jan. 1, 2010 | 0 | 0 | 0 | 0 | |||||||||||||||||||
| David Foucar | 31,270 | 81,734 | 0 | 0 | Jun. 13, 2010 | 0 | 0 | 0 | 0 | |||||||||||||||||||
DIRECTOR COMPENSATION
The following table presents a summary of the compensation paid to the members of our Board of Directors during the fiscal year ended December 31, 2006. Except as listed below, no other compensation was paid to our Directors.
Director Compensation Table
| Name | Fees Earned or Paid in Cash | Stock Awards | Option Awards | Non-equity plan compensation | Non- qualified Deferred compensation Earnings | All Other Compensation | Total | |||||||||||||||
$ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| (a) | (b) | (c) | (d) | (g) | (h) | (i) | (j) | |||||||||||||||
| Michael Hill | 15,000 | 187,566 | 0 | 0 | 0 | 0 | 202,566 | |||||||||||||||
| Charlie Gugliuzza | 15,000 | 187,566 | 0 | 0 | 0 | 0 | 202,566 | |||||||||||||||
| David Foucar | 15,000 | 187,566 | 0 | 0 | 0 | 0 | 202,566 | |||||||||||||||
DIRECTOR COMPENSATION AGREEMENT
Starting in 2006, our Directors receive $3,000 for each month of service. In addition, our Directors received one share of Series D Convertible Preferred Stock as compensation during the third quarter of 2006.
40
JASPERS + HALL, PC
CERTIFIED PUBLIC ACCOUNTANTS
9175 E. KENYON AVENUE, SUITE 100
DENVER, CO 80237
303-796-0099
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Commerce Planet, Inc.
Goleta, California
We have reviewed the accompanying consolidated balance sheet of Commerce Planet, Inc. as of March 31, 2007, and the related consolidated statement of operations, stockholders' equity and cash flows for the three-month period then ended. These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). The review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States.
Jaspers + Hall, PC
Denver, CO
May 11, 2007
F-1
COMMERCE PLANET, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2007 AND DECEMBER 31, 2006
Unaudited
March 31 | December 31 | ||||||
ASSETS | 2007 | 2006 | |||||
Current Assets | |||||||
Cash | $ | 5,415,874 | $ | 3,659,316 | |||
Accounts Receivable, net of allowances | 2,061,925 | 1,567,526 | |||||
Other Receivables | 3,537,368 | 1,901,470 | |||||
Deferred Tax Asset | 2,219,183 | - | |||||
Prepaid Expenses | 2,833,346 | 2,347,181 | |||||
Total Current Assets | 16,067,696 | 9,475,493 | |||||
Fixed Assets | |||||||
Equipment | 915,506 | 792,564 | |||||
Furniture & Fixtures | 117,321 | 101,091 | |||||
Computers & Software | 696,215 | 789,628 | |||||
Leasehold Improvements | 121,168 | 121,168 | |||||
Total Fixed Assets | 1,850,210 | 1,804,451 | |||||
Accumulated Depreciation | (575,273 | ) | (498,659 | ) | |||
Net Fixed Assets | 1,274,937 | 1,305,792 | |||||
Other Assets | |||||||
Deposits | 22,856 | 19,154 | |||||
Long Term Investment | 100,000 | ||||||
Other Assets | 4,664 | - | |||||
Total Other Assets | 127,520 | 19,154 | |||||
TOTAL ASSETS | $ | 17,470,153 | $ | 10,800,439 | |||
LIABILITIES & EQUITY | |||||||
Liabilities | |||||||
Current Liabilities | |||||||
Accounts Payable and Accrued Expenses | $ | 2,654,505 | $ | 2,459,372 | |||
Note Payable | 40,300 | 69,681 | |||||
Deferred Revenue | 1,343,852 | 1,017,360 | |||||
Income Tax Payable | 2,174,593 | - | |||||
Deferred Tax Liability | 489,964 | - | |||||
Total Current Liabilities | 6,703,214 | 3,546,413 | |||||
Total Long Term Liabilities | - | - | |||||
Total Liabilities | 6,703,214 | 3,546,413 | |||||
Equity | |||||||
Series D Preferred stock, 100 authorized | |||||||
shares at $0.001 par value, 15 shares issued | |||||||
and 14 shares outstanding at March 31, 2007 | |||||||
Common stock, 100,000,000 shares authorized | |||||||
shares at $0.001 par value, 49,879,252 shares issued and | |||||||
outstanding at March 31, 2007, and 47,193,839 shares | |||||||
issued and outstanding at December 31, 2006 | 49,879 | 47,420 | |||||
Additional Paid in Capital | 9,164,040 | 9,327,597 | |||||
Deferred Compensation | - | - | |||||
Shares to be issued | 48 | - | |||||
Shares to be returned | - | (227 | ) | ||||
Stock subscription receivable | - | - | |||||
Retained Earnings/(Accumulated deficit) | 1,552,972 | (2,120,764 | ) | ||||
Total Equity | 10,766,939 | 7,254,026 | |||||
TOTAL LIABILITIES & EQUITY | $ | 17,470,153 | $ | 10,800,439 | |||
See Accountant’s Review Report
F-2
COMMERCE PLANET, INC.
CONSOLIDATED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
Unaudited
Three Months Ended March 31 | |||||||
Revenue | 2007 | 2006 | |||||
Membership Revenue | $ | 11,520,366 | $ | 3,307,623 | |||
Upsell Revenue | 984,357 | 210,521 | |||||
Lead Revenue | 649,492 | 388,827 | |||||
Fulfillment/Other Revenue | 81,491 | 25,372 | |||||
Total Revenue | 13,235,726 | 3,932,343 | |||||
Cost of Goods Sold | 2,556,490 | 687,575 | |||||
Gross Profit | 10,679,236 | 3,244,768 | |||||
Expense | |||||||
Salaries and Personnel Related | 1,616,629 | 533,213 | |||||
Stock Compensation | 238,022 | 185,000 | |||||
Advertising | 3,466,046 | 1,106,616 | |||||
Other Expenses | 1,273,331 | 885,352 | |||||
Total Operating Expense | 6,574,028 | 2,710,181 | |||||
Net Ordinary Income | 4,105,209 | 534,587 | |||||
Other (Income)/Expense | (16,499 | ) | 340,207 | ||||
Income/(Loss) before Income taxes | 4,121,708 | 194,380 | |||||
Provision for Income Taxes | 447,972 | - | |||||
Net Income/(Loss) | $ | 3,673,736 | $ | 194,380 | |||
Basic Net Income/(Loss) Per Common Share | $ | 0.08 | $ | 0.00 | |||
Diluted Net Income/(Loss) Per Common Share | $ | 0.07 | $ | 0.00 | |||
Basic Weighted Average | |||||||
Number of Common Shares | 48,618,228 | 39,445,891 | |||||
Diluted Weighted Average | |||||||
Number of Common Shares | 56,349,450 | 43,474,641 | |||||
See Accountant’s Review Report
F-3
COMMERCE PLANET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
Unaudited
Three Months Ended March 31 | |||||||
2007 | 2006 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net Income/(Loss) | 3,673,736 | 194,380 | |||||
Adjustment to reconcile net loss to net cash | |||||||
(used in) operating activities: | |||||||
Stock issued for services | 104,668 | ||||||
Depreciation and amortization | 78,755 | 44,733 | |||||
Allowance for doubtful accounts | 213,989 | 12,500 | |||||
Stock Compensation | 238,022 | 185,000 | |||||
Amortization of debt interest | - | 214,278 | |||||
Debt conversion feature expense | - | 37,411 | |||||
CHANGES IN OPERATING ASSETS/LIABILITIES | |||||||
Accounts receivable | (604,774 | ) | (170,779 | ) | |||
Other receivables | (1,680,093 | ) | |||||
Other assets | (534,754 | ) | (912,627 | ) | |||
Deferred revenue | 326,492 | 582,983 | |||||
Deferred tax asset | (2,219,183 | ) | |||||
Accounts payable and accruals | 160,321 | 396,783 | |||||
Income tax payable | 2,174,593 | ||||||
Deferred tax liability | 489,964 | - | |||||
NET CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES | 2,316,068 | 689,285 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Purchase of Fixed Assets | (45,699 | ) | (11,425 | ) | |||
Long term investments | (100,000 | ) | |||||
Acquired Assets | 14,415 | - | |||||
NET CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES | (131,284 | ) | (11,425 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Proceeds from line of credit | - | 68,000 | |||||
Payments on Notes payable | (29,380 | ) | (335,248 | ) | |||
Payment on long-term debt | - | (166,000 | ) | ||||
Payment to reacquire stock | (483,606 | ) | - | ||||
Issuance of Common Stock | 84,760 | 191,900 | |||||
NET CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES | (428,226 | ) | (241,348 | ) | |||
NET INCREASE (DECREASE) IN CASH | 1,756,558 | 436,512 | |||||
CASH AT BEGINNING OF PERIOD | 3,659,316 | 253,856 | |||||
CASH AT END OF PERIOD | 5,415,874 | 690,368 | |||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: | |||||||
Cash paid for interest | 1,461 | 52,880 | |||||
Cash paid for taxes | 3,470 | 800 | |||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS | |||||||
Stock issued for services | - | 104,668 | |||||
Stock Compensation | 238,022 | 185,000 | |||||
| 238,022 | 104,668 | ||||||
See Accountant’s Review Report
F-4
Commerce Planet
Consolidated Condensed Statement of Stockholders' Equity
Preferred Stock | Common Stock | ||||||||||||||||||
Shares Issued | Par 0.001 | Shares Issued | Par 0.001 | Additional Paid in Capital | Shares to be Issued | ||||||||||||||
BALANCE, December 31, 2005 | 39,094,633 | $ | 39,096 | $ | 8,230,224 | $ | 1,843 | ||||||||||||
Beneficial Conversion | (799,780 | ) | |||||||||||||||||
Exercise of Warrants | 587,210 | 587 | 151,416 | ||||||||||||||||
Conversion of convertible debentures | 7,348,488 | 7,348 | 1,314,490 | ||||||||||||||||
Shares returned to Company | (1,805,371 | ) | (1,805 | ) | - | ||||||||||||||
Shares repurchased | (226,500 | ) | (339,055 | ) | |||||||||||||||
Shares issued | 15 | 78,750 | 78 | 36,280 | |||||||||||||||
Purchase Interaccurate | 42,266 | 42 | 58,709 | ||||||||||||||||
Issuance of stock for services | 300,000 | 300 | 55,950 | ||||||||||||||||
Employee stock, options, and warrants | 619,363 | ||||||||||||||||||
Payment for stock subscription agreements | (1,843 | ) | |||||||||||||||||
Stock Subscription agreements | 1,774,363 | 1,774 | |||||||||||||||||
Net Income | |||||||||||||||||||
BALANCE, December 31, 2006 | 15 | - | 47,193,839 | 47,420 | 9,327,597 | - | |||||||||||||
Exercise of Warrants | 50000 | 50 | 59,662 | 48 | |||||||||||||||
Shares returned to Company | (227 | ) | |||||||||||||||||
Shares repurchased | (294,500 | ) | (294 | ) | (483,311 | ) | |||||||||||||
Employee stock, options, and warrants | 2929913 | 2,930 | 260,091 | ||||||||||||||||
Net Income | |||||||||||||||||||
BALANCE, March 31, 2007 | 15 | - | 49,879,252 | $ | 49,879 | $ | 9,164,039 | $ | 48 | ||||||||||
See Accountant’s Review Report
F-5
Commerce Planet
Consolidated Condensed Statement of Stockholders' Equity
Shares to be returned | Deferred Compensation | Stock Sub Receivable | Accumulated Deficit | Total S/E | ||||||||||||
BALANCE, December 31, 2005 | $ | -1,805 | $ | (71,853 | ) | $ | (189,900 | ) | $ | (10,861,869 | ) | $ | (2,854,264 | ) | ||
Beneficial Conversion | (799,780 | ) | ||||||||||||||
Exercise of Warrants | 152,003 | |||||||||||||||
Conversion of convertible debentures | 1,321,838 | |||||||||||||||
Shares returned to Company | 1,805 | - | ||||||||||||||
Shares repurchased | (227 | ) | (339,282 | ) | ||||||||||||
Shares issued | 36,358 | |||||||||||||||
Purchase Interaccurate | 58,751 | |||||||||||||||
Issuance of stock for services | 71,853 | 128,103 | ||||||||||||||
Employee stock, options, and warrants | 619,363 | |||||||||||||||
Payment for stock subscription agreements | 189,900 | 188,057 | ||||||||||||||
Stock Subscription agreements | 1,774 | |||||||||||||||
Net Income | 8,741,105 | 8,741,105 | ||||||||||||||
BALANCE, December 31, 2006 | (227 | ) | - | - | (2,120,764 | ) | 7,254,026 | |||||||||
Exercise of Warrants | 59,760 | |||||||||||||||
Shares returned to Company | 227 | - | ||||||||||||||
Shares repurchased | (483,605 | ) | ||||||||||||||
Employee stock, options, and warrants | 263,002 | |||||||||||||||
Net Income | 3,673,736 | 3,873,582 | ||||||||||||||
BALANCE, March 31, 2007 | $ | - | $ | - | $ | - | $ | 1,552,972 | $ | 10766938 |
See Accountant’s Review Report
F-6
COMMERCE PLANET, INC.
Notes to Financial Statements
March 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Utah Clay Technology, Inc. (the "Company"), a Utah corporation, was incorporated on March 1, 1994. On December 24, 2003, the Company entered into an Agreement and Plan of Reorganization with NeWave, Inc. a Nevada corporation, pursuant to which the Company agreed that NeWave, Inc. would become the wholly-owned subsidiary subject to the parties to the Agreement meeting certain conditions. The parties to the Agreement satisfied the required conditions to close on January 15, 2004, including transfer of all funds. On January 15, 2004, all outstanding shares of Utah Clay Technology, Inc. common stock were acquired by NeWave, Inc. The purchase price consisted of $150,000 and the assumption of $165,000 in convertible debt for 576,968 shares of NeWave, Inc. dba Onlinesupplier.com's common stock. Although from a legal perspective, NeWave, Inc. acquired NeWave dba Onlinesupplier.com, the transaction is viewed as a recapitalization of NeWave dba Onlinesupplier.com accompanied by an issuance of stock by NeWave dba Onlinesupplier.com for the net assets of NeWave, Inc. This is because NeWave, Inc. did not have operations immediately prior to the transaction, and following the reorganization, NeWave dba Onlinesupplier.com was the operating company. Effective February 11, 2004 the Company changed its name from Utah Clay Technology, Inc. to NeWave, Inc.
On June 1, 2006, the Company acquired all of the assets, both fixed and intangible, of Onesource Imaging, a California corporation. The assets were acquired in exchange for our assumption of certain liabilities totaling $52,747. On June 20, 2006, the Company established three wholly-owned subsidiaries, OS Imaging, Inc., Legacy Media, Inc., and Consumer Loyalty Group, Inc. to support its growth and develop new customer relationships. Effective June 22, 2006, the Company changed its name from NeWave, Inc. to Commerce Planet, Inc. On October 3, 2006, the Company acquired the assets of Interaccurate, Inc. including software, intellectual properties, and a web hosting facility for $176,239 in cash and 42,266 shares of common stock. On October 11, 2006 the Company’s subsidiary, Consumer Loyalty Group, executed an agreement with Datascension, Inc., an unrelated party, to establish a Costa Rican call center. The call center began operations on November 27, 2006.
Commerce Planet, through its wholly-owned subsidiaries, offers a comprehensive line of products and services at wholesale prices through its online club memberships as well as online tools and technology to create, manage, and maintain effective website solutions for eCommerce. Additionally, the Company provides businesses with lead generation and order acquisition services, graphic design, printing and fulfillment, as well as secure co-location and data hosting services.
Basis Of Accounting
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles.
Reclassification Of Cost Of Sales And Operating Expenses
In the accompanying condensed statement of operations, all of the Company's operating expenses have been classified as cost of sales, salary expense, stock compensation, advertising expense, and other operating expense. This basis of presentation is different than in prior reports, and all prior period amounts have been changed to comply with the current period classification.
Consolidation of Financial Statements
The accompanying financial statements present results for Commerce Planet, Inc. and its wholly owned subsidiaries, Consumer Loyalty Group, Inc., Legacy Media, Inc., O S Imaging, Inc., and Intaccurate, Inc. on a consolidated basis. All inter-company sales and costs, and receivables and payables have been eliminated in the resulting financial statements.
Cash And Cash Equivalents
The Company considers all highly liquid debt instruments, purchased with an original maturity of three months or less, to be cash equivalents.
F-7
Use Of Estimates
The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company defers revenue based on its estimate of the timing of payments within a month, estimates the benefit period of memberships to defer direct-response advertising, identifies services prior to receipt of invoice for accrual purposes, and estimates the useful life of assets to calculate depreciation. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally three to seven years.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between the financial statements and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income (loss).
Basic And Diluted Net Loss Per Share
Basic net earnings (loss) per common share is computed by dividing net earnings (loss) applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock warrants and conversion of convertible shares of preferred stock . In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. At March 31, 2006, there were 4,028,750 warrants outstanding that were eligible for conversion into shares of the Company’s common stock. At March 31, 2007, the Company had 10,136,068 warrants and convertible preferred stock outstanding that were eligible for conversion into shares of the Company’s common stock.
Stock Based Compensation
The Company has adopted the use of Statement of financial accounting standards No. 123R , “Share-Based Payment”, (SFAS No. 123R) This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost is recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. This Statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance and eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. For public entities that file as small business issuers, implementation of these rules was required as of the beginning of the first interim or annual reporting period that begins after December 15, 2005.
During the three months ended March 31, 2007, the Company granted 437,102 options to purchase common stock under its employee stock option plan. The equivalent common share conversion for existing warrants to purchase convertible preferred shares and convertible preferred shares issued increased by 441,648 share equivalents based on conversion at 0.4167% of outstanding shares on the day of conversion. Additionally, 2,370,767 common shares were issued to the President of the Company to meet the requirements of his employment contract. The common shares issued to the President of the Company divest over twenty four months beginning on January 1, 2007, according to the terms of his contract, and must be returned or purchased should he terminate his employment during the divesting period. The strike prices on these issues range from $0.0 to $1.78 and each issue was accounted for in accordance with the provisions of SFAS No. 123R.
Fair Value Of Financial Instruments
Statement of financial accounting standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are considered a reasonable estimate of fair value.
Comprehensive Income
Statement of financial accounting standards No. 130, "Reporting Comprehensive Income", (SFAS No. 130), establishes standards for reporting and displaying comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity, except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company adopted this standard in 1998 and the implementation of this standard did not have a material impact on its financial statements.
F-8
Accounts Receivable
The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payments terms when making estimates of the uncollectibility of the Company's trade accounts receivable balances. If the Company determines that the financial conditions of any of its customers deteriorated, whether due to customer specific or general economic issues, an increase in the allowance will be made. Accounts receivable are written off when all collection attempts have failed.
Inventory
The Company does not carry product inventories. Wholesale goods purchased for individual resale are drop shipped by third party suppliers. Marketing materials and other supplies which are kept on hand are generally expensed as purchased.
Revenue Recognition
The Company has eight revenue streams:
- Charging its members a monthly fee for the tools and services needed to create and run a successful Internet auction business.
- Offering its customers access to coaching services provided through a third party arrangement with 20-20 Advisors for a monthly fee. The Company began to offer this service in February 2005.
- Offering its customers access to discounted value-added services such as: prescription drug plans, roadside assistance, tax and legal services, real estate listing services, and discounted entertainment packages for a monthly fee. These services are currently offered to its customers through third party arrangements with suppliers such as My Computer Club, Inc., West, Inc. and InQ.
- Product sales via its website.
- Providing its customer information to third parties who compensate the Company with a fee for each customer’s contact information acquired, or by sharing the revenues generated from contacting the Company’s customer. Revenues generated by the sale of the Company’s customer information have been related to offers made to customers in a wide variety of industries. Revenues generated from sharing arrangements have primarily been related to the sale of extended business coaching products and services.
- Providing businesses with graphic design and printing services, data merge, mailing and finishing.
- Offering clients fulfillment services including: assembly, pick and pack, mailing, and warehousing and inventory management services.
- Design and implementation of cutting-edge technology for secure electronic payment modules, advanced content search tools, and secure data hosting.
The Company does not provide multiple deliverables to its customers as described in EITF 00-21. Instead, the Company generally uses one revenue stream to develop potential revenues from another source, not from the same source. As such, the Company does not anticipate that the adoption of EITF 00-21 has a material effect on the financial statements.
The Company's revenues earned from membership setup fees and monthly charges are recorded when the credit card transaction is processed and the Company has received confirmation that the credit card processing has been successful. The Company does not recognize the revenues earned related to membership fees charged to credit cards until the collection of the revenue is assured. This is due to the uncertainty surrounding the credit card transactions. Current terms of the onlinesupplier.com membership agreement stipulate that the customer pays a nonrefundable fee between $1.85 and $9.95 to set up an account. The customer then has a fourteen day period to review the Company's offerings. If the customer does not cancel the service within the fourteen day window, a charge of between $29.95 and $59.95 is billed to the customer's credit card on a monthly basis. The membership terms are agreed to under a negative option and the Company will continue to bill the customer on a monthly basis until they cancel their account.
F-9
The Company initiates the sale of products for its affiliates during the process of selling the Company's own products, normally when an individual accesses our internet home page or calls the Company's sales or customer service department. The Company's internal system maintains records of each sale of an affiliate's product. The affiliate completes the sales process by fulfilling the particular product. Payments are forwarded to the Company, plus or minus two percent of actual billings, when the affiliate has completed the fulfillment of their product and has approved the cross selling revenue due to the Company. On a historical basis, the Company’s affiliates have generally approved all sales initiated by the Company. The Company recognizes cross selling revenues once it has reconciled its internal records of cross selling sales with the affiliate's records. The Company has several contracts with affiliates. The terms of each contract are varied but in most cases, a minimum/flat amount of revenue is earned per sale based on a certain volume being reached.
The Company generates leads for Applied Merchant as potential customers of the Company contact the Company's customer service department. The Company can not reasonably determine the actual incremental cost incurred in the process of generating each telephone call from a potential customer. Therefore costs are expensed as incurred.
The Company recognizes income when the products are received by the customer. The Company applies the provisions of SEC Staff Accounting Bulletin ("SAB") No.104, "Revenue Recognition in Financial Statements" which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for the disclosure of revenue recognition policies. The Company's revenue recognition policy for sale of products is in compliance with SAB No. 104. Revenue from the sale of products is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed and collectibility is reasonably assured. Generally, the Company extends credit to its customers and does not require collateral. The Company performs ongoing credit evaluations of its customers and historic credit losses have been within management's expectations. The Company accounts for sales returns related to product sales on an individual basis, as they occur. Sales returns related to product sales have not been significant in the past.
Advertising Costs
The Company expenses the media costs of advertising the first time the advertising takes place, except for direct-response advertising that is contracted with its advertising partners on a cost per customer acquired basis, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of on line advertising that include reference codes that are used for purchasing the Company’s products and services. The capitalized costs of the advertising are amortized over the three-month period following the receipt of a trial order for the Company’s products and services. At March 31, 2007, and March 31, 2006, capitalized direct-response advertising costs of $2,387,623 and $890,806, respectively, were included in "Prepaid Expenses" in the accompanying Balance Sheets. Advertising expense was $3,466,046 for the three months ended March 31, 2007 and $1,106,616 for the same period in 2006.
Discontinued Operations
During 2005, the Company determined to cease operations at Auction Liquidator, Inc. and Discount Online Warehouse in order to focus its efforts and resources on Onlinesupplier.com. Discontinued operations did not have a material effect on the Company’s financial statements for the period ended March 31, 2007.
NOTE 2 - FEDERAL INCOME TAXES
The Financial Accounting Standards Board (“FASB”) has issued Statement of Financial Accounting Standards Number 109 ("SFAS 109"). "Accounting for Income Taxes", which requires a change from the deferred method to the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.
Mar 31, 2007 | ||||
Deferred tax assets | ||||
Net operating loss carryforwards | $ | 1,393,643 | ||
Depreciation | 825,541 | |||
Total deferred tax assets | 2,219,184 | |||
Deferred tax liabilities | ||||
Stock based compensation | $ | 479,133 | ||
Meals | 10,831 | |||
Total deferred tax liabilities | 489,964 | |||
Net deferred tax | $ | 1,729,220 | ||
F-10
At March 31, 2007, the Company had net deferred tax of $1,729,220 for federal income tax purposes. Of this total $1,393,643 are net operating loss carryforwards which, if not utilized to offset taxable income, will begin to expire in 2025.
NOTE 3 - ACCOUNTS RECEIVABLE
As of March 31, 2007, accounts receivable consists of the following:
Mar 31, 2007 | ||||
Accounts Receivable | ||||
Impact Legal | $ | 313,963 | ||
Merchant Cards | 1,147,323 | |||
Other Trade | 925,735 | |||
Allowance for Doubtful Accounts | (325,096 | ) | ||
Total | $ | 2,061,925 | ||
Merchant cards include multiple merchant card membership and sign-up transactions ranging from $1.00 to $59.95 that were billed but not settled at the end of the period. Other Trade are business partner receivables for upsell and lead sale revenues, excluding Impact Legal, none of which are material.
NOTE 4 - OTHER RECEIVABLES
As of March 31, 2007, other receivables consists of the following:
Mar 31, 2007 | ||||
Other Receivables | ||||
Merchant Card Reserve | $ | 3,758,480 | ||
Return Provision | (264,319 | ) | ||
Other | 43,207 | |||
Total | $ | 3,537,368 | ||
NOTE 5 - PREPAID EXPENSES
As of March 31, 2007, prepaid expenses consists of the following:
Mar 31, 2007 | ||||
Prepaid Expenses | ||||
Deferred Advertising | $ | 2,387,623 | ||
Insurance | 161,890 | |||
Advertising | 95,473 | |||
Other | 188,360 | |||
Total | $ | 2,833,346 | ||
F-11
NOTE 6 - ACCOUNTS PAYABLE & ACCRUED EXPENSES
As of March 31, 2007, accounts payable and accrued expenses consists of the following:
Mar 31, 2007 | ||||
Accounts Payable and Accrued Expenses | $ | 2,077,368 | ||
Accrued Payroll and Payroll Taxes | $ | 577,137 | ||
Accrued Interest | - | |||
Total | $ | 2,654,505 | ||
NOTE 7 - NOTES PAYABLE
The Company established a Note Payable for the financing of its Directors and Officers Liability Insurance on November 1, 2006. At March 31, 2007 the Notes Payable balance was $40,300 which represents the Company’s entire debt. The total premiums for the policy are $120,088 and $88,875 which were financed after a down payment of $31,212. The balance was financed for 9 months at an annual interest rate of 9.75%.
NOTE 7 - CAPITAL STOCK
Preferred Stock
On August 3, 2006, the Company authorized 100 shares of preferred series “D” stock at par value of $0.001. Shares of preferred stock convert at 0.4167% of outstanding shares of common stock on the day of conversion. As of March 31, 2006, 14 preferred shares were outstanding as follows:
| Michael Hill | 7 shares |
| Charlie Gugliuzza | 7 Shares |
Common Stock
In January 2004, the Company increased the number of authorized shares of common stock to 300,000,000. The Company effectuated a 3 for 1 forward stock split on February 18, 2005. All shares have been stated to retroactively affect this reverse stock split.
During the three month period ended March 31, 2007, the following shares of common stock were issued / repurchased by the Company:
Name | Transaction Type | Date | Issued / (Repurchased) | |||||||
Outstanding at 12/31/06 | 47,193,839 | |||||||||
| Commerce Planet | Shares Repurchased | 01/02/07 | (2,000 | ) | ||||||
| Commerce Planet | Shares Repurchased | 01/03/07 | (15,000 | ) | ||||||
| Affiliate | Warrant Exercise | 01/09/07 | 50,000 | |||||||
| Affiliate | Stock Award | 02/16/07 | 2,370,767 | |||||||
| Affiliate | Conversion of preferred stock | 02/16/07 | 209,146 | |||||||
| Affiliate | Warrant Exercise | 02/16/07 | 100,000 | |||||||
| Affiliate | Warrant Exercise | 02/16/07 | 250,000 | |||||||
| Commerce Planet | Shares Repurchased | 03/09/07 | (30,500 | ) | ||||||
| Commerce Planet | Shares Repurchased | 03/12/07 | (20,000 | ) | ||||||
| Commerce Planet | Shares Repurchased | 03/14/07 | (22,000 | ) | ||||||
| Commerce Planet | Shares Repurchased | 03/19/07 | (54,500 | ) | ||||||
| Commerce Planet | Shares Repurchased | 03/20/07 | (52,500 | ) | ||||||
| Commerce Planet | Shares Repurchased | 03/21/07 | (11,000 | ) | ||||||
| Commerce Planet | Shares Repurchased | 03/27/07 | (12,000 | ) | ||||||
| Commerce Planet | Shares Repurchased | 03/28/07 | (33,000 | ) | ||||||
| Commerce Planet | Shares Repurchased | 03/29/07 | (18,500 | ) | ||||||
| Commerce Planet | Shares Repurchased | 03/30/07 | (23,500 | ) | ||||||
Oustanding at 03/31/07 | 49,879,252 | |||||||||
F-12
During the three month period ended March 31, 2007, the Board of Directors approved the issuance of warrants to purchase an aggregate of 878,750 shares of the Company's common stock. Such warrants are exercisable at prices ranging from $0.01 to $2.15 per share, vest over periods up to 24 months, and expire at various times through March 2012. During the three month period ended March 31, 2007, 609,146 warrants and preferred shares were exercised or converted. The average remaining contractual life of all outstanding warrants and convertible stock is 3.5 years.
A summary of warrant activity for the three month period ending March 31, 2007, including preferred share equivalents, is as follows:
Weighted Average | Weighted Average | ||||||||||||
Issued | Price | Exercisable | Price | ||||||||||
Outstanding, December 31, 2006 | 11,633,634 | $ | 0.49 | 9,996,722 | $ | 0.47 | |||||||
Granted | 878,750 | $ | 1.59 | 742,492 | 1.11 | ||||||||
Exercised | (609,146 | ) | 0.08 | (609,146 | ) | 0.08 | |||||||
Outstanding, March 31, 2007 | 11,903,238 | $ | 0.59 | 10,136,068 | $ | 0.54 | |||||||
NOTE 8 - OTHER INCOME AND EXPENSE
For the three month period ending March 31, 2007, other income and expenses consists of the following:
March 31, 2007 | ||||
Other Income/Expense | ||||
Other Income | (2,142 | ) | ||
Interest Income | (16,621 | ) | ||
Interest Expense | 1,461 | |||
Other Expense | 803 | |||
Other (Income)/Expense | (16,499 | ) | ||
NOTE 9 - LONG TERM INVESTMENTS
During the three month period ending March 31, 2007, the Company made an equity investment in the amount of $100,000 to purchase 1,424,501 shares of Series C Convertible Preferred Stock issued by Content Directions, Inc., D.B.A.Linkstorm. The purchased shares represent 2.4% of the total shares issued and outstanding.
NOTE 10 - COMMITMENTS & CONTINGENCIES
Commitments
F-13
Minimum future rental payments under non-cancelable operating leases as of March 31, 2007, for each of the next five years and in the aggregate are as follows:
2007 | $ | 214,355 | ||
2008 | $ | 293,229 | ||
2009 | $ | 120,976 | ||
Total | $ | 628,560 |
The Company entered a two year cost plus agreement on October 11, 2006, with Datascension, Inc., an unrelated party, that enables Consumer Loyalty Group to operate a state of the art call center. The call center became operational on November 27, 2006 and is utilized to support Consumer Loyalty Group customer service and sales efforts at dramatically lowered costs in comparison to their U.S. based counterparts.
The Company’s bank deposits at Bank of America, First Republic Bank, and First Regional Bank all exceed the federally insured limit of $100,000.
JASPERS + HALL, PC
CERTIFIED PUBLIC ACCOUNTANTS
9175 Kenyon Avenue, Suite 100
Denver, CO 80237
303-796-0099
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Commerce Planet, Inc.
We have audited the accompanying consolidated balance sheet of Commerce Planet, Inc. as of December 31, 2006, and the related consolidated income statements, and the consolidated statements of cash flows and changes in stockholders' equity (deficit) for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Commerce Planet, Inc. at December 31, 2006, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
/s/ Jaspers + Hall, PC
Jaspers + Hall PC
February 28, 2007
F-14
CONSOLIDATED BALANCE SHEETS | |||||||
AS OF DECEMBER 31, 2006 AND DECEMBER 31, 2005 | |||||||
Year Ended December 31 | |||||||
2006 | 2005 | ||||||
ASSETS | |||||||
| Current Assets | |||||||
| Cash | $ | 3,659,316 | $ | 253,856 | |||
| Accounts Receivable, net of allowances | 1,567,526 | 251,419 | |||||
| Other Receivables | 1,901,470 | 76,906 | |||||
| Prepaid Expenses | 2,347,181 | 278,343 | |||||
| Inventory | - | 2,590 | |||||
| Total Current Assets | 9,475,493 | 863,114 | |||||
| Fixed Assets | |||||||
| Equipment | 792,564 | 578,493 | |||||
| Furniture & Fixtures | 101,091 | 75,627 | |||||
| Computers & Software | 789,628 | 240,677 | |||||
| Leasehold Improvements | 121,168 | 103,124 | |||||
| Total Fixed Assets | 1,804,451 | 997,921 | |||||
| Accumulated Depreciation | (498,659 | ) | (292,311 | ) | |||
| Net Fixed Assets | 1,305,792 | 705,610 | |||||
| Other Assets | |||||||
| Deposits | 19,154 | 16,392 | |||||
| Total Other Assets | 19,154 | 16,392 | |||||
TOTAL ASSETS | $ | 10,800,439 | $ | 1,622,116 | |||
LIABILITIES & EQUITY | |||||||
| Liabilities | |||||||
| Current Liabilities | |||||||
| Accounts Payable and Accrued Expenses | $ | 2,459,372 | $ | 723,364 | |||
| Notes Payable | 69,681 | 295,998 | |||||
| Deferred Revenue | 1,017,360 | 336,001 | |||||
| Total Current Liabilities | 3,546,413 | 1,355,363 | |||||
| Long Term Liabilities | |||||||
| Bank Loans | - | - | |||||
| Convertible Debentures | - | 3,084,017 | |||||
| Total Long Term Liabilities | - | 3,084,017 | |||||
| Total Liabilities | 3,546,413 | 4,476,380 | |||||
| Equity | |||||||
Preferred stock, 100 shares authorized shares at $.001 par value, 15 shares issued and outstanding at December 31, 2006 | |||||||
Common stock, 100,000,000 shares authorized shares at $0.001 par value, 47,193,839 shares issued and outstanding at December 31, 2006, 39,094,633 shares issued and outstanding at December 31, 2005 | 47,420 | 39,096 | |||||
| Additional Paid in Capital | 9,327,597 | 8,230,224 | |||||
| Deferred Compensation | - | (71,853 | ) | ||||
| Shares to be issued | - | 1,843 | |||||
| Shares to be returned | (227 | ) | (1,805 | ) | |||
| Deferred Compensation | - | - | |||||
| Stock subscription receivable | - | (189,900 | ) | ||||
| Accumulated deficit | (2,120,764 | ) | (10,861,869 | ) | |||
| Total Equity | 7,254,026 | (2,854,264 | ) | ||||
TOTAL LIABILITIES & EQUITY | $ | 10,800,439 | $ | 1,622,116 | |||
See accompanying notes to financial statements
F-15
CONSOLIDATED INCOME STATEMENT | |||||||
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 | |||||||
Year Ended December 31 | |||||||
2006 | 2005 | ||||||
| Revenue | |||||||
| Membership Revenue | $ | 22,410,394 | $ | 5,493,609 | |||
| Upsell Revenue | 2,598,936 | 415,592 | |||||
| Lead Revenue | 1,211,526 | 991,058 | |||||
| Fulfillment/Other Revenue | 1,267,278 | 440,140 | |||||
| Total Revenue | 27,488,134 | 7,340,399 | |||||
| Cost of Goods Sold | 4,375,761 | 1,744,865 | |||||
| Gross Profit | 23,112,373 | 5,595,534 | |||||
| Expense | |||||||
| Salaries | 3,120,927 | 3,179,427 | |||||
| Stock Compensation | 619,363 | 305,687 | |||||
| Advertising | 6,055,104 | 3,098,204 | |||||
| Other Expenses | 4,119,808 | 3,647,676 | |||||
| Total Operating Expense | 13,915,202 | 10,230,994 | |||||
| Net Ordinary Income | 9,197,171 | (4,635,460 | ) | ||||
| Other Income/Expense | 456,066 | 1,630,464 | |||||
| Income/(Loss) before Income taxes | $ | 8,741,105 | $ | (6,265,924 | ) | ||
| Provision for Income Taxes | - | - | |||||
| Net Income/(Loss) | 8,741,105 | (6,265,924 | ) | ||||
| Basic Net Income/(Loss) Per Common Share | $ | 0.20 | $ | (0.17 | ) | ||
| Diluted Net Income/(Loss) Per Common Share | $ | 0.17 | $ | (0.17 | ) | ||
| Basic Weighted Average | |||||||
| Number of Common Shares | 44,211,254 | 36,644,281 | |||||
| Diluted Weighted Average | |||||||
| Number of Common Shares | 50,688,288 | 36,644,281 | |||||
See accompanying notes to financial statements
F-16
CONSOLIDATED STATEMENT OF CASH FLOWS | |||||||
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 | |||||||
Year Ended December 31 | |||||||
2006 | 2005 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
| Net Income/(Loss) | 8,741,105 | (6,265,924 | ) | ||||
| Adjustment to reconcile net loss to net cash | |||||||
| (used in) operating activities: | |||||||
| Stock issued for services | 128,103 | 563,647 | |||||
| Write-off of Inventory | 2,590 | ||||||
| Depreciation and amortization | 206,348 | 173,609 | |||||
| Allowance for Doubtful Accounts | 96,675 | 50,000 | |||||
| Stock Compensation | 619,363 | 341,238 | |||||
| Amortization of debt interest | 1,014,353 | 630,865 | |||||
| Debt conversion feature expense | (837,191 | ) | 754,238 | ||||
| Debt inducement expense | 37,411 | 322,535 | |||||
CHANGES IN OPERATING ASSETS/LIABILITIES | |||||||
| Accounts receivable | (1,317,127 | ) | (5,125 | ) | |||
| Other receivables | (1,853,219 | ) | 724,865 | ||||
| Inventory | 37,206 | ||||||
| Other assets | (1,948,750 | ) | (388,587 | ) | |||
| Deposits | (2,763 | ) | 49,848 | ||||
| Deferred Revenue | 681,360 | 265,438 | |||||
| Accounts payable and accruals | 1,770,254 | 268,373 | |||||
NET CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES | 7,338,512 | (2,477,774 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
| Purchase of Fixed Assets | (563,586 | ) | (456,399 | ) | |||
| Acquired Assets | (159,446 | ) | |||||
NET CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES | (723,032 | ) | (456,399 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
| Payment for acquisition of Utah Clay Technology | - | ||||||
| Proceeds from line of credit | 68,000 | - | |||||
| Payments on Notes payable | (292,655 | ) | (115,356 | ) | |||
| Payment on line of credit | (68,000 | ) | - | ||||
| Proceeds from notes payable - related parties | 2,786,800 | ||||||
| Conversions and refinancings on notes payable - related parties | (1,099,004 | ) | |||||
| Proceeds from notes payable & debentures | |||||||
| Payment on long-term debt | (2,901,595 | ) | |||||
| Payment to reacquire stock | (339,282 | ) | |||||
| Payments on bank borrowings | (54,748 | ) | |||||
| Issuance of Common Stock | 378,260 | 1,405,228 | |||||
NET CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES | (3,210,020 | ) | 2,977,668 | ||||
NET INCREASE (DECREASE) IN CASH | 3,405,460 | 43,495 | |||||
CASH AT BEGINNING OF PERIOD | 253,856 | 210,361 | |||||
CASH AT END OF PERIOD | 3,659,316 | 253,856 | |||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: | |||||||
| Cash paid for interest | 1,318,076 | 92,636 | |||||
| Cash paid for taxes | 800 | 800 | |||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS | |||||||
| Stock issued for services | 128,103 | 563,647 | |||||
| Stock Compensation | 619,363 | 341,238 | |||||
| 747,466 | 904,885 | ||||||
See accompanying notes to financial statements
F-17
Commerce Planet | |||||||||||||||||||
Consolidated Condensed Statement of Stockholders' Equity (Deficit) - Common Stock | |||||||||||||||||||
For the years ended December 31, 2006 and 2005 | |||||||||||||||||||
Preferred Stock | Common Stock | Additional | |||||||||||||||||
Shares | Par | Shares | Par | Paid in | Shares to | ||||||||||||||
Issued | .001 | Issued | .001 | Capital | be Issued | ||||||||||||||
BALANCE, December 31, 2004 | $ | 33,885,117 | $ | 33,891 | $ | 4,844,384 | $ | 1,473 | |||||||||||
| Issuance of stock for equity line | 1,550,000 | 1,544 | (1,165 | ) | |||||||||||||||
| Issuance of stock for inducement | 808,500 | 810 | 322,135 | (410 | ) | ||||||||||||||
| Issuance of stock for cash | 264,000 | 264 | (264 | ) | |||||||||||||||
| Beneficial Conversion | 754,238 | ||||||||||||||||||
| Exercise of Puts | 1,348,696 | ||||||||||||||||||
| Conversion on convertible debentures | 66,516 | 67 | 56,472 | ||||||||||||||||
| Stock Issued for Services | 1,100,000 | 1,100 | 436,000 | (750 | ) | ||||||||||||||
| Re-issuance of stock as registered | 1,420,500 | 1,420 | |||||||||||||||||
| Issuance of stock warrants | 341,238 | ||||||||||||||||||
| Reduction in stock subscription receivable, pre merger | (59,880 | ) | |||||||||||||||||
| Issuance of Stock Subscription Agreements | 188,106 | 1,794 | |||||||||||||||||
| Net Loss for Period | |||||||||||||||||||
BALANCE, December 31, 2005 | - | - | 39,094,633 | 39,096 | 8,230,224 | 1,843 | |||||||||||||
| Beneficial Conversion | (799,780 | ) | |||||||||||||||||
| Exercise of Warrants | 587,210 | 587 | 151,416 | ||||||||||||||||
| Conversion of convertible debentures | 7,348,488 | 7,348 | 1,314,490 | ||||||||||||||||
| Shares returned to Company | (1,805,371 | ) | (1,805 | ) | - | ||||||||||||||
| Shares repurchased | (226,500 | ) | (339,055 | ) | |||||||||||||||
| Shares issued | 15 | 78,750 | 78 | 36,280 | |||||||||||||||
| Purchase Interaccurate | 42,266 | 42 | 58,709 | ||||||||||||||||
| Issuance of stock for services | 300,000 | 300 | 55,950 | ||||||||||||||||
| Employee stock, options, and warrants | 619,363 | ||||||||||||||||||
| Payment for stock subscription agreements | (1,843 | ) | |||||||||||||||||
| Stock Subscription agreements | 1,774,363 | 1,774 | |||||||||||||||||
| Net Income | |||||||||||||||||||
BALANCE, December 31, 2006 | 15 | - | $ | 47,193,839 | $ | 47,420 | $ | 9,327,597 | $ | - | |||||||||
See accompanying notes to financial statements
F-18
Consolidated Condensed Statement of Stockholders' Equity (Deficit) - Common Stock | ||||||||||||||||
For the years ended December 31, 2006 and 2005 | ||||||||||||||||
Shares to be returned | Deferred Compensation | Stock Sub Receivable | Accumulated Deficit | Total S/E | ||||||||||||
BALANCE, December 31, 2004 | $ | - | $ | (199,150 | ) | $ | (59,880 | ) | $ | (4,595,945 | ) | $ | 24,773 | |||
| Issuance of stock for equity line | (385 | ) | (6 | ) | ||||||||||||
| Issuance of stock for inducement | 322,535 | |||||||||||||||
| Issuance of stock for cash | - | |||||||||||||||
| Beneficial Conversion | 754,238 | |||||||||||||||
| Exercise of Puts | 1,348,696 | |||||||||||||||
| Conversion on convertible debentures | 56,539 | |||||||||||||||
| Stock Issued for Services | 127,297 | 563,647 | ||||||||||||||
| Re-issuance of stock as registered | (1,420 | ) | - | |||||||||||||
| Issuance of stock warrants | 341,238 | |||||||||||||||
| Reduction in stock subscription receivable, pre merger | 59,880 | - | ||||||||||||||
| Issuance of Stock Subscription Agreements | (189,900 | ) | - | |||||||||||||
| Net Loss for Period | (6,265,924 | ) | (6,265,924 | ) | ||||||||||||
BALANCE, December 31, 2005 | (1,805 | ) | (71,853 | ) | (189,900 | ) | (10,861,869 | ) | (2,854,264 | ) | ||||||
| Beneficial Conversion | (799,780 | ) | ||||||||||||||
| Exercise of Warrants | 152,003 | |||||||||||||||
| Conversion of convertible debentures | 1,321,838 | |||||||||||||||
| Shares returned to Company | 1,805 | - | ||||||||||||||
| Shares repurchased | (227 | ) | (339,282 | ) | ||||||||||||
| Shares issued | 36,358 | |||||||||||||||
| Purchase Interaccurate | 58,751 | |||||||||||||||
| Issuance of stock for services | 71,853 | 128,103 | ||||||||||||||
| Employee stock, options, and warrants | 619,363 | |||||||||||||||
| Payment for stock subscription agreements | 189,900 | 188,057 | ||||||||||||||
| Stock Subscription agreements | 1,774 | |||||||||||||||
| Net Income | 8,741,105 | 8,741,105 | ||||||||||||||
BALANCE, December 31, 2006 | $ | (227 | ) | $ | - | $ | - | $ | (2,120,764 | ) | $ | 7,254,026 | ||||
See accompanying notes to financial statements
F-19
Notes to Financial Statements
December 31, 2006
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Utah Clay Technology, Inc. (the "Company"), a Utah corporation, was incorporated on March 1, 1994. On December 24, 2003, the Company entered into an Agreement and Plan of Reorganization with NeWave, Inc. a Nevada corporation, pursuant to which the Company agreed that NeWave, Inc. would become the wholly-owned subsidiary subject to the parties to the Agreement meeting certain conditions. The parties to the Agreement satisfied the required conditions to close on January 15, 2004, including transfer of all funds. On January 15, 2004, all outstanding shares of Utah Clay Technology, Inc. common stock were acquired by NeWave, Inc. The purchase price consisted of $150,000 and the assumption of $165,000 in convertible debt for 576,968 shares of NeWave, Inc. dba Onlinesupplier.com's common stock. Although from a legal perspective, NeWave, Inc. acquired NeWave dba Onlinesupplier.com, the transaction is viewed as a recapitalization of NeWave dba Onlinesupplier.com accompanied by an issuance of stock by NeWave dba Onlinesupplier.com for the net assets of NeWave, Inc. This is because NeWave, Inc. did not have operations immediately prior to the transaction, and following the reorganization, NeWave dba Onlinesupplier.com was the operating company. Effective February 11, 2004 the Company changed its name from Utah Clay Technology, Inc. to NeWave, Inc.
On June 1, 2006, the Company acquired all of the assets, both fixed and intangible, of Onesource Imaging, a California corporation. The assets were acquired in exchange for our assumption of certain liabilities totaling $52,747. On June 20, 2006 the Company established three wholly- owned subsidiaries, OS Imaging, Inc., Legacy Media, Inc., and Consumer Loyalty Group, Inc. to support our growth and develop new customer relationships. Effective June 22, 2006, the Company changed its name from NeWave, Inc. to Commerce Planet, Inc. On October 3, 2006, the Company acquired the assets of Interaccurate, Inc. including software, intellectual properties, and a web hosting facility for $176,239 in cash 42,266 shares of common stock. On October 11, 2006 the Company’s subsidiary, Consumer Loyalty Group, executed an agreement with Datascension, Inc., an unrelated party, to establish a Costa Rican call center. The call center began operations on November 27, 2006.
Commerce Planet, through its wholly-owned subsidiaries, offers a comprehensive line of products and services at wholesale prices through its online club memberships as well as online tools and technology to create, manage, and maintain effective website solutions for eCommerce. Additionally, the Company provides businesses with lead generation and order acquisition services, graphic design, printing and fulfillment, as well as secure co-location and data hosting services.
Basis Of Accounting
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles.
Reclassification Of Cost Of Sales And Operating Expenses
In the accompanying condensed statement of operations, all of the Company's operating expenses have been classified as cost of sales, salary expense, stock compensation, advertising expense, and other operating expense. This basis of presentation is different than in prior reports, and all prior period amounts have been changed to comply with the current period classification.
Cash And Cash Equivalents
The Company considers all highly liquid debt instruments, purchased with an original maturity of three months or less, to be cash equivalents.
Use Of Estimates
The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company defers revenue based on its estimate of the timing of payments within a month, estimate the benefit period of memberships to defer direct-response advertising, identify services prior to receipt of invoice for accrual purposes, and estimate the useful life of assets to calculate depreciation. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, generally three to seven years.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between the financial statements and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income (loss).
F-20
Basic And Diluted Net Loss Per Share
Basic net earnings (loss) per common share is computed by dividing net earnings (loss) applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock warrants and conversion of convertible debt. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. At December 31, 2005, the total amount of outstanding convertible debentures was $4,203,698 which might be converted into 35,030,817 shares of the Company’s common stock, based on the closing price of its common shares on December 31, 2005. At December 31, 2005, there were 4,148,750 warrants outstanding that were eligible for conversion into shares of the Company’s common stock. All convertible debentures have been retired as of December 31, 2006, and the Company had 9,996,722 warrants outstanding that were eligible for conversion into shares of our common stock.
Stock Based Compensation
The Company has adopted the use of Statement of financial accounting standards No. 123R , “Share-Based Payment”, (SFAS No. 123R) This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost is recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. This Statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance and eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. For public entities that file as small business issuers, implementation of these rules was required as of the beginning of the first interim or annual reporting period that begins after December 15, 2005.
During the three months ended March 31, 2007, the Company granted 437,102 options to purchase common stock under its employee stock option plan. The equivalent common share conversion for existing warrants to purchase convertible preferred shares and convertible preferred shares issued increased by 441,648 share equivalents based on conversion at 0.4167% of outstanding shares on the day of conversion. Additionally, 2,370,767 common shares were issued to the President of the Company to meet the requirements of his employment contract. The common shares issued to the President of the Company divest over twenty four months beginning on January 1, 2007, according to the terms of his contract, and must be returned or purchased should he terminate his employment during the divesting period. The strike prices on these issues range from $0.0 to $1.78 and each issue was accounted for in accordance with the provisions of SFAS No. 123R.
Fair Value Of Financial Instruments
Statement of financial accounting standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimated of fair value.
Comprehensive Income
Statement of financial accounting standards No. 130, "Reporting Comprehensive Income", (SFAS No. 130), establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity, except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statements that is displayed with the same prominence as other financial statements. The Company adopted this standard in 1998 and the implementation of this standard did not have a material impact on its financial statements.
Accounts Receivable
The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payments terms when making estimates of the uncollectibility of the Company's trade accounts receivable balances. If the Company determines that the financial conditions of any of its customers deteriorated, whether due to customer specific or general economic issues, an increase in the allowance will be made. Accounts receivable are written off when all collection attempts have failed.
Inventory
The Company does not carry product inventories. Wholesale goods purchased for individual resale are drop shipped by third party suppliers. Marketing materials and other supplies which are kept on hand are generally expensed as purchased. The Company wrote-off minor amounts of inventory in conjunction with discontinued operations during the year ended December 31, 2006.
Revenue Recognition
The Company has eight revenue streams:
F-21
| - | Charging our members a monthly fee for the tools and services needed to create and run a successful internet auction business. | |
| - | Offering the Company’s customers access to coaching services provided through a third party arrangement with 20-20 Advisors for a monthly fee. The Company began to offer this service in February 2005. |
| - | Offering the Company’s customers access to discounted value-added services such as: prescription drug plans, roadside assistance, tax and legal services, real estate listing services, and discounted entertainment packages for a monthly fee. These services are currently offered to the Company’s customers through third party arrangements with suppliers such as My Computer Club, Inc., West, Inc. and InQ. | |
| - | Product sales via our website. |
| - | Providing the Company’s information to third parties who compensate the Company with a fee for each customer contact information acquired, or by sharing the revenues generated from contacting our customer. Revenues generated by the sale of the Company’s customer information have been related to offers made to customers in a wide variety of industries. Revenues generated from sharing arrangements have primarily been related to the sale of extended business coaching products and services. | |
| - | Providing businesses with graphic design and printing services, data merge, mailing and finishing. |
| - | Offering clients fulfillment services including: assembly; pick and pack; mailing; and warehousing and inventory management services. | |
| - | Design and implementation of cutting-edge technology for secure electronic payment modules, advanced content search tools, and secure data hosting. |
The Company does not provide multiple deliverables to its customers as described in EITF 00-21. Instead, the Company generally uses one revenue stream to develop potential revenues from another source, not from the same source. As such, the Company does not anticipate that the adoption of EITF 00-21 has a material effect on the financial statements.
The Company's revenues earned from membership setup fees and monthly charges are recorded when the credit card transaction is processed and the Company has received confirmation that the credit card processing has been successful. The Company does not recognize the revenues earned related to membership fees charged to credit cards until the collection of the revenue is assured. This is due to the uncertainty surrounding the credit card transactions. Current terms of the onlinesupplier.com membership agreement stipulate that the customer pays a nonrefundable fee between $1.85 and $9.95 fee to set up an account. The customer then has a fourteen day period to review the Company's offerings. If the customer does not cancel the service within the fourteen day window, a charge between $29.95 and $59.95 is billed to the customer's credit card on a monthly basis. The membership terms are agreed to under a negative option and we will continue to bill the customer on a monthly basis until they cancel their account. The Company initiates the sale of products for its affiliates during the process of selling the Company's own products, normally when an individual accesses our internet home page or calls the Company's sales or customer service department. The Company's internal system maintains records of each sale of an affiliate's product. The affiliate completes the sales process by fulfilling the particular product. Payments are forwarded to the Company, plus or minus two percent of actual billings, when the affiliate has completed the fulfillment of their product and has approved the cross selling revenue due to the Company. The Company notes that on a historical basis, its affiliates have generally approved all sales initiated by the Company. The Company recognizes cross selling revenues once it has reconciled its internal records of cross selling sales with the affiliate's records. The Company has several contracts with affiliates. The terms of each contract are varied but in most cases, a minimum/flat amount of revenue is earned per sale based on a certain volume being reached.
The Company generates leads for Applied Merchant as potential customers of the Company contact the Company's customer service department. The Company can not reasonably determine the actual incremental cost incurred in the process of generating each telephone call from a potential customer. Therefore costs are expensed as incurred.
The Company recognizes income when the products are received by the customer. The Company applies the provisions of SEC Staff Accounting Bulletin ("SAB") No.104, "Revenue Recognition in Financial Statements" which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for the disclosure of revenue recognition policies. The Company's revenue recognition policy for sale of products is in compliance with SAB No. 104. Revenue from the sale of products is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed and collectibility is reasonably assured. Generally, the Company extends credit to its customers and does not require collateral. The Company performs ongoing credit evaluations of its customers and historic credit losses have been within management's expectations. The Company accounts for sales returns related to product sales on an individual basis, as they occur. Sales returns related to product sales have not been significant in the past.
Advertising Costs
The Company expenses the media costs of advertising the first time the advertising takes place, except for direct-response advertising that is contracted with its advertising partners on a cost per customer acquired basis, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of on line advertising that include reference codes that are used for purchasing the Company’s products and services. The capitalized costs of the advertising are amortized over the three-month period following the receipt of a trial order for the Company’s products and services. At December 31, 2006, and December 31, 2005, capitalized direct-response advertising costs of $1,962,466 and $159,182, respectively, were included in "Prepaid Expenses" in the accompanying Balance Sheets. Advertising expense was $6,055,104 in 2006 and $3,098,204 in 2005.
F-22
Discontinued Operations
During 2005, the Company decided to cease operations at Auction Liquidator, Inc. and Discount Online Warehouse in order to focus its efforts and resources on Onlinesupplier.com. Discontinued operations did not have a material effect on the Company’s financial statements for the year ended December 31, 2006.
NOTE 2 - FEDERAL INCOME TAXES
The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards Number 109 ("SFAS 109"). "Accounting for Income Taxes", which requires a change from the deferred method to the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.
Year Ended December 31 | |||||||
2006 | 2005 | ||||||
| Deferred tax assets | |||||||
| Net operating loss carryforwards | $ | 2,920,118 | $ | 13,455,180 | |||
| Valuation allowance | (2,920,118 | ) | (13,455,180 | ) | |||
| Net deferred tax assets | $ | - | $ | - | |||
At December 31, 2006, the Company had net operating loss carryforwards of approximately $4,714,075 for federal income tax purposes. These carryforwards if not utilized to offset taxable income will begin to expire in 2025.
NOTE 3 - ACCOUNTS RECEIVABLE
As of December 31, 2006, and December 31, 2005 accounts receivable, consists of the following:
Year Ended December 31 | |||||||
2006 | 2005 | ||||||
| Accounts Receivable | |||||||
| Impact Legal | $ | 313,963 | $ | 284,482 | |||
| Cutting Edge | 343,221 | - | |||||
| Platinum Values | - | 72,256 | |||||
| Misc | 1,109,853 | 159,681 | |||||
| Allowance for Doubtful Accounts | (199,511 | ) | (265,000 | ) | |||
| Total | $ | 1,567,526 | $ | 251,419 | |||
Miscellaneous receivables consist of multiple trade receivables, none of which are material.
NOTE 4 - OTHER RECEIVABLES
As of December 31, 2006, and December 31, 2005 other receivables, consists of the following
F-23
Year Ended December 31 | |||||||
2006 | 2005 | ||||||
| Other Receivables | |||||||
| Merchant Card Reserve | $ | 2,032,824 | $ | 110,244 | |||
| Return Provision | (141,536 | ) | (37,000 | ) | |||
| Other | 10,183 | 3,662 | |||||
| Total | $ | 1,901,470 | $ | 76,906 | |||
NOTE 5 - PREPAID EXPENSES
As of December 31, 2006, and December 31, 2005 prepaid expenses, consists of the following:
2006 | 2005 | ||||||
| Prepaid Expenses | |||||||
| Deferred Advertising | $ | 1,962,466 | $ | 159,182 | |||
| Insurance | $ | 189,138 | $ | 10,969 | |||
| Other | 195,577 | 108,192 | |||||
| Total | $ | 2,347,181 | $ | 278,343 | |||
NOTE 6 - ACCOUNTS PAYABLE & ACCRUED EXPENSES
As of December 31, 2006, and December 31, 2005, accounts payable and accrued expenses, consists of the following:
2006 | 2005 | ||||||
| Accounts Payable and Accrued Expenses | |||||||
| Accounts Payable and Accrued Expenses | $ | 1,804,979 | $ | 586,133 | |||
| Accrued Payroll and Payroll Taxes | $ | 654,393 | $ | 57,335 | |||
| Accrued Interest | - | 79,896 | |||||
| Total | $ | 2,459,372 | $ | 723,364 | |||
NOTE 7 - NOTES PAYABLE - RELATED PARTIES AND OTHERS
Notes Payable
The Company established a Note Payable for the financing of its Directors and Officers Liability Insurance on November 1, 2006. At December 31, 2006, the Notes Payable balance was $69,681 which represents the company’s entire debt. The total premiums for the policy are $120,088 and $88,875 was finances after a down payment of $31,212. The balanced was financed for 9 months at an annual interest rate of 9.75%.
Notes Payable - Related Parties
At December 31, 2005, the Company had Notes Payable to two majority shareholders for $25,000 each for a total of $50,000. Each note is unsecured, due on demand, and bears interest at a rate of 6%. At December 31, 2006 the Notes Payable were completely repaid.
NOTE 8 - CONVERTIBLE DEBT
Convertible Debentures
On January 5, 2004, the Company issued $125,000 worth of 6%, 5-year Term, Convertible Debentures to a minority shareholder. At December 31, 2006 the debenture was completely repaid.
On January 5, 2004, the Company issued convertible debentures of $250,000 to Dutchess Private Equities Fund LP. The debentures convert on January 15, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 6% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. At December 31, 2006, the debenture was completely repaid.
F-24
On January 19, 2004, the Company issued convertible debentures of $305,000 to eFund Capital Partners, LLC. The debentures convert on January 19, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 6% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. At December 31, 2006, the debenture was completely repaid.
On January 25, 2004, the Company issued convertible debentures of $50,000 to Dutchess Private Equities Fund LP. The debentures convert on January 25, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 6% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. At December 31, 2006, the debenture was completely repaid.
On January 25, 2004, the Company issued convertible debentures of $50,000 to eFund Capital Partners, LLC. The debentures convert on January 25, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 6% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. At December 31, 2006, the debenture was completely repaid.
On March 3, 2004, the Company issued convertible debentures of $28,000 to Preston Capital Partners, LLC. The debentures convert on March 3, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 6% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. At December 31, 2006, the debenture was completely repaid.
On April 1, 2004, the Company issued convertible debentures of $90,000 to Dutchess Private Equities Fund, II. The debentures convert on April 1, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. The debenture was issued at a discount of $15,000. On July 9, 2004, the Company issued a warrant to Dutchess Private Equities Fund, II, to purchase 225,000 of the Company’s common shares at an exercise price at $1.42 per share. These warrants were valued at $49,612. At December 31, 2006, the debenture was completely repaid.
On April 1, 2004, the Company issued convertible debentures of $90,000 to eFund Capital Partners, LLC. The debentures convert on April 1, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. The debenture was issued at a discount of $15,000. On April 2, 2004, the Company issued a warrant to eFund Capital Partners, LLC, to purchase 225,000 of the Company’s common shares at an exercise price at $1.42 per share. These warrants were valued at $49,612. At December 31, 2006, the debenture was completely repaid.
On May 5, 2004, the Company issued convertible debentures of $90,000 to Dutchess Private Equities Fund, II. The debentures convert on May 5, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. The debenture was issued at a discount of $15,000. On July 9, 2004, the Company issued a warrant to Dutchess Private Equities Fund, II, to purchase 225,000 of the Company’s common shares at an exercise price at $1.42 per share. These warrants were valued at $65,098. At December 31, 2006, the debenture was completely repaid.
On May 5, 2004, the Company issued convertible debentures of $90,000 to eFund Capital Partners, LLC. The debentures convert on May 5, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. The debenture was issued at a discount of $15,000. On April 2, 2004, the Company issued a warrant to eFund Capital Partners, LLC, to purchase 225,000 of the Company’s common shares at an exercise price at $1.42 per share. These warrants were valued at $65,098. At December 31, 2006, the debenture was completely repaid.
F-25
On July 9, 2004, the Company issued convertible debentures of $180,000 to Dutchess Private Equities Fund, II. The debentures convert on July 9, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. The debenture was issued at a discount of $30,000. On July 9, 2004, the Company issued a warrant to Dutchess Private Equities Fund, II, to purchase 450,000 of the Company’s common shares at an exercise price at $1.17 per share. These warrants were valued at $127,126. At December 31, 2006, the debenture was completely repaid.
On August 15, 2004, the Company issued convertible debentures of $144,000 to Dutchess Private Equities Fund, II. The debentures convert on August 15, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $24,000. On August 18, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 360,000 of our common shares at an exercise price at $1.03 per share. These warrants were valued at $74,843. At December 31, 2006 the debenture was completely repaid.
On August 15, 2004, the Company issued convertible debentures of $60,000 to eFund Small Cap Fund, LP. The debentures convert on August 15, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. This debenture was issued at a discount of $10,000. On August 18, 2004, the Company issued a warrant to eFund Capital Partners, to purchase 150,000 of the Company’s common shares at an exercise price at $1.03 per share. These warrants were valued at $31,185. At December 31, 2006, the debenture was completely repaid.
On September 25, 2004, the Company issued convertible debentures of $222,000 to Dutchess Private Equities Fund. The debentures convert on September 25, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. This debenture was issued at a discount of $37,000. On September 25, 2004, the Company issued a warrant to Dutchess Private Equities Fund, to purchase 540,000 of our common shares at an exercise price at $1.25 per share. These warrants were valued at $140,130. At December 31, 2006, the debenture was completely repaid.
On September 25, 2004, the Company issued convertible debentures of $60,000 to eFund Small Cap Fund, LP. The debentures convert on September 24, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. This debenture was issued at a discount of $10,000. On September 25, 2004, the Company issued a warrant to eFund Capital Partners, to purchase 150,000 of the Company’s common shares at an exercise price at $1.25 per share. These warrants were valued at $37,873. At December 31, 2006, the debenture was completely repaid.
On October 25, 2004, the Company issued convertible debentures of $60,000 to Dutchess Private Equities Fund, II, LP. The debentures convert on October 25, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. This debenture was issued at a discount of $10,000. On October 25, 2004, the Company issued a warrant to Dutchess Private Equities Fund, II, to purchase 150,000 of the Company’s common shares at an exercise price at $1.53 per share. These warrants were valued at $37,840. At December 31, 2006, the debenture was completely repaid.
On November 11, 2004, the Company issued convertible debentures of $162,000 to Dutchess Private Equities Fund, II, LP. The debentures convert on November 11, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. This debenture was issued at a discount of $27,000. On November 11, 2004, the Company issued a warrant to Dutchess Private Equities Fund, II, to purchase 480,000 of the Company’s common shares at an exercise price at $1.25 per share. These warrants were valued at $168,254. At December 31, 2006, the debenture was completely repaid.
F-26
On December 28, 2004, the Company issued convertible debentures of $240,000 to Dutchess Private Equities Fund, II, LP. The debentures convert on December 28, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of the Company’s common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at the Company’s option, at the time of conversion. This debenture was issued at a discount of $40,000. On December 28, 2004, the Company issued a warrant to Dutchess Private Equities Fund, II, to purchase 720,000 of the Company’s common shares at an exercise price at $1.25 per share. These warrants were valued at $200,010 At December 31, 2006, the debenture was completely repaid.
The Debentures pay six percent (6%) or eight percent (8%) cumulative interest, in cash or in shares of common stock, par value $0.001 per share, of the Company, at the Company's option, at the time of each conversion. The Company shall pay interest on the unpaid principal amount of this Debenture at the time of each conversion until the principal amount hereof is paid in full or has been converted. If the interest is to be paid in cash, the Company shall make such payment within five (5) business days of the date of conversion. If the interest is to be paid in Common Stock, said Common Stock shall be delivered to the Holder, or per Holder's instructions, within five (5) business days of the date of conversion. The Debentures are subject to automatic conversion at the end of five (5) years from the date of issuance at which time all Debentures outstanding will be automatically converted based upon the formula set forth in the agreement The principal amount of the Debentures are secured by shares pledged as collateral pursuant to the terms of a Security Agreement. These Debentures are full recourse loans being made by the Holder and the Company is liable for any deficiency. At December 31, 200,6 the debenture was completely repaid.
Effective November 1, 2005, the Company entered into a Convertible Debenture agreement with a majority shareholder to issue $180,000 worth of non-interest bearing, 5-year Term, Convertible Debentures at a discount of $178,200. The debentures are convertible into shares of the Company's common stock at a price equal to the lesser of; (i) 75% of the average of the closing bid price of the stock for the five days prior to conversion or (ii) the average of the closing bid price of the stock on the five (5) days immediately preceding the date of the of debenture agreement. At December 31, 2006, the debenture was completely repaid.
Effective December 18, 2005, the Company entered into a Convertible Debenture Exchange Agreement with majority shareholders to exchange the unpaid balance of promissory notes issued in 2005 worth $1,784,239 into 10%, 4-year term, Convertible Debentures. The debentures are convertible at the lesser of (i) 75% of the average of the lowest closing bid price during fifteen (15) immediately preceding the conversion date or (ii) 100% of the average of the closing bid price of the stock for the twenty (20) days immediately preceding the closing date of the debenture agreement. At December 31, 2006, the debenture was completely repaid.
Convertible Promissory Notes
On February 11, 2005, the Company issued a Note to Dutchess Private Equities Fund, II, in the amount of $360,000, at a discount of $60,000. The Note had a 0% interest rate. At December 31, 2006, Note was completely repaid.
On April 18, 2005, the Company issued a Note to Dutchess Private Equities Fund, II, in the amount of $132,000, at a discount of $22.000. The Note had a 0% interest rate. At December 31, 2006, the Note was completely repaid.
On April 18, 2005, the Company issued a Note to eFund Capital Partners, in the amount of $132,000, at a discount of $22,000. The Note had a 0% interest rate. At December 31, 2006, the Note was completely repaid.
On May 20, 2005, the Company issued a Note to Dutchess Private Equities Fund, II, in the amount of $402,750, at a discount of $52,750. The Note had a 0% interest rate and $112,500 was repaid prior to December 18, 2005. The remaining amount was exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006, the Note was completely repaid.
On June 2, 2005, the Company issued a Note to Dutchess Private Equities Fund, II, in the amount of $540,000, at a discount of $80,000. The Note had a 0% interest rate and was exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006, the Note was completely repaid.
On July 22, 2005, the Company issued a Note to Dutchess Private Equities Fund, II, in the amount of $258,000, at a discount of $33,000. The Note had a 0% interest rate and was exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006, the Note was completely repaid.
On August 4, 2005, the Company issued a Note to Dutchess Private Equities Fund, II, in the amount of $162,000, at a discount of $17,000. The Note had a 0% interest rate and was exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006, the Note was completely repaid.
On August 17, 2005, the Company issued a Note to Dutchess Private Equities Fund, II, in the amount of $247,200, at a discount of $41,200. The Note had a 0% interest rate and was exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006, the Note was completely repaid.
F-27
On August 18, 2005, the Company issued Notes to eFund, in the amount of $221,000, at a total discount of $37,000. The Notes had a 0% interest rate and $18,211 was repaid prior to December 18, 2005. The remaining outstanding amount was exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006, the Note was completely repaid.
On August 18, 2005, the Company issued a Note to a majority shareholder, in the amount of $84,000, at a total discount of $14,000. The notes had a 0% interest rate and were exchanged into a four year, convertible debenture bearing interest of 10% effective December 18, 2005. At December 31, 2006, the promissory note was completely repaid.
On September 16, 2005, the Company issued a Note to Dutchess Private Equities Fund, L.P., in the amount of $192,000, at a discount of $32,000. The Note has a 0% interest rate and $162,752 was repaid during 2005, and the remaining $29,248 was outstanding at December 31, 2005. At December 31, 2006, the Note was completely repaid.
On September 30, 2005, the Company issued a Note to Dutchess Private Equities Fund, LP, in the amount of $276,000, at a discount of $46,000. The Note has a 0% interest rate and is due and payable on March 30, 2006. At December 31, 2006, the Note was completely repaid.
On October 11, 2005, the Company issued a Note to Dutchess Private Equities Fund, LP, in the amount of $30,000, at a discount of $5,000. The Note has a 0% interest rate. At December 31, 2006, the Note was completely repaid.
Effective December 18, 2005, the Company entered into a Convertible Debenture Exchange Agreement with majority shareholders to exchange the unpaid balance of Notes issued in 2005 worth $1,784,239 into 10%, 4-year term, Convertible Debentures.
Each of the Convertible Promissory Notes shall be paid in cash or in shares of common stock, par value $0.001 per share, of the Company, at the Company's option, at the time of each conversion. The Company shall pay interest on the unpaid principal amount of this Promissory Note at the time of each conversion until the principal amount hereof is paid in full or has been converted. If the interest is to be paid in cash, the Company shall make such payment within five (5) business days of the date of conversion. If the interest is to be paid in Common Stock, said Common Stock shall be delivered to the Holder, or per Holder's instructions, within five (5) business days of the date of conversion. The Promissory Notes are subject to automatic conversion at the maturity date at which time all Promissory Notes outstanding will be automatically converted based upon the formula set forth in the agreement. At December 31, 2006 the Note was completely repaid.
NOTE 9 - CAPITAL STOCK
Preferred Stock
On August 3, 2006, the Company authorized 100 shares of preferred series “D” stock at par value of $0.001. Shares of preferred stock convert at 0.4167% of outstanding shares of common stock on the day of conversion. As of December 31, 2006, 15 preferred shares were issued as follows:
| Michael Hill | 7 shares |
| Charlie Gugliuzza | 7 Shares |
| David Foucar | 1 Share |
Common Stock
In January 2004, the Company increased the number of authorized shares of common stock to 300,000,000. The Company effectuated a 3 for 1 forward stock split on February 18, 2005. All shares have been stated to retroactively affect this reverse stock split.
During the year ended December 31, 2006, the following shares of common stock were issued by the Company:
Name | Transaction Type | Date | Issued | ||||
Oustanding at 12/31/05 | 39,094,633 | ||||||
| Minority Shareholder | Stock Rescission | 01/05/06 | (340,500) | ||||
| Preston Capital | Stock Rescission | 01/05/06 | (384,871) | ||||
| Efund Capital Partners | Conversion of convertible debentures | 01/13/06 | 100,000 | ||||
| Dutchess Equities Fund LP | Conversion of convertible debentures | 01/13/06 | 300,000 | ||||
| Minority Shareholder | Conversion of convertible debentures | 01/13/06 | 10,000 | ||||
| Minority Shareholder | Conversion of convertible debentures | 01/19/06 | 10,000 | ||||
| Efund Capital Partners | Conversion of convertible debentures | 01/19/06 | 150,000 | ||||
| Dutchess Equities Fund LP | Conversion of convertible debentures | 01/19/06 | 287,801 | ||||
| Dutchess Equities Fund LP II | Conversion of convertible debentures | 02/03/06 | 30,000 | ||||
| Efund Capital Partners | Conversion of convertible debentures | 02/03/06 | 100,000 | ||||
| Minority Shareholder | Conversion of convertible debentures | 02/03/06 | 9,000 | ||||
| Dutchess Equities Fund LP | Conversion of convertible debentures | 02/22/06 | 37,800 | ||||
| Efund Capital Partners | Conversion of convertible debentures | 03/07/06 | 500,000 | ||||
| Dutchess Equities Fund LP | Conversion of convertible debentures | 03/10/06 | 84,750 | ||||
| Minority Shareholder | Conversion of convertible debentures | 03/10/06 | 5,000 | ||||
| Dutchess Equities Fund LP | Conversion of convertible debentures | 03/16/06 | 150,000 | ||||
| Minority Shareholder | Conversion of convertible debentures | 03/16/06 | 10,000 | ||||
| Minority Shareholder | Warrant Exercise | 03/16/06 | 120,000 | ||||
| Minority Shareholder | Conversion of convertible debentures | 03/24/06 | 5,000 | ||||
| Dutchess Equities Fund LP | Conversion of convertible debentures | 03/24/06 | 83,400 | ||||
| Minority Shareholders | Subscription Agreement 12/28/05 | 04/03/06 | 1,736,363 | ||||
| Dutchess | Subscription Agreement 12/28/05 | 04/03/06 | 8,000 | ||||
| Efund | Subscription Agreement 12/28/05 | 04/03/06 | 30,000 | ||||
| EFund Capital Partners | Conversion of convertible debentures | 04/13/06 | 619,118 | ||||
| Efund Small Cap Fund | Conversion of convertible debentures | 04/13/06 | 467,654 | ||||
| Minority Shareholder | Conversion of convertible debentures | 04/25/06 | 171,500 | ||||
| Affiliate | Stock Rescission | 05/04/06 | (375,000) | ||||
| Marketbyte LLC | Stock Rescission | 05/04/06 | (375,000) | ||||
F-28
Name | Transaction Type | Date | Issued | ||||
| Luminary Ventures | Stock Rescission | 05/04/06 | (150,000) | ||||
| Minority Shareholder | Stock Rescission | 05/04/06 | (75,000) | ||||
| Pacific Shores | Stock Rescission | 05/04/06 | (75,000) | ||||
| Minority Shareholder | Stock Rescission | 05/04/06 | (30,000) | ||||
| Preston Capital Partners | Excecise Put | 05/17/06 | 287,439 | ||||
| Minority Shareholder | Conversion of convertible debentures | 05/17/06 | 449,500 | ||||
| Preston Capital Partners | Excecise Put | 05/22/06 | 105,559 | ||||
| Preston Capital Partners | Excecise Put | 05/31/06 | 74,212 | ||||
| Dutchess Private Equities II | Conversion of convertible debentures | 06/01/06 | 150,000 | ||||
| Dutchess Private Equities II | Conversion of convertible debentures | 06/02/06 | 300,000 | ||||
| Dutchess Private Equities II | Conversion of convertible debentures | 06/06/06 | 257,915 | ||||
| Dutchess Private Equities | Conversion of convertible debentures | 06/07/06 | 347,621 | ||||
| Dutchess Private Equities II | Conversion of convertible debentures | 06/07/06 | 250,000 | ||||
| EFund Capital Partners | Conversion of convertible debentures | 06/08/06 | 439,794 | ||||
| Dutchess Private Equities II | Conversion of convertible debentures | 06/13/06 | 225,000 | ||||
| Dutchess Private Equities II | Conversion of convertible debentures | 06/19/06 | 375,127 | ||||
| Dutchess Private Equities II | Conversion of convertible debentures | 07/12/06 | 241,127 | ||||
| Dutchess Private Equities II | Conversion of convertible debentures | 08/03/06 | 501,381 | ||||
| Ronald Feldman | Conversion of convertible debentures | 08/10/06 | 480,000 | ||||
| Minority Shareholder | Conversion of convertible debentures | 08/10/06 | 200,000 | ||||
| Seacoast Financial | Shares Issued for services | 09/26/06 | 300,000 | ||||
| Interaccurate acquisition | Issued for Payment | 10/31/06 | 42,266 | ||||
| Affiliate | Warrant Exercise | 11/13/06 | 30,000 | ||||
| Commerce Planet | Shares Repurchased | 12/01/06 | (34,500) | ||||
| Commerce Planet | Shares Repurchased | 12/04/06 | (15,000) | ||||
| Commerce Planet | Shares Repurchased | 12/05/06 | (34,000) | ||||
| Commerce Planet | Shares Repurchased | 12/07/06 | (15,000) | ||||
| Commerce Planet | Shares Repurchased | 12/08/06 | (20,000) | ||||
| Commerce Planet | Shares Repurchased | 12/11/06 | (13,000) | ||||
| Commerce Planet | Shares Repurchased | 12/12/06 | (7,000) | ||||
| Affiliate | Warrant Exercise | 12/15/06 | 48,750 | ||||
| Commerce Planet | Shares Repurchased | 12/19/06 | (20,000) | ||||
| Commerce Planet | Shares Repurchased | 12/20/06 | (32,500) | ||||
| Commerce Planet | Shares Repurchased | 12/28/06 | (31,000) | ||||
| Commerce Planet | Shares Repurchased | 12/29/06 | (4,500) | ||||
Oustanding at 12/31/06 | 47,193,839 | ||||||
During the years ended December 31, 2006, and December 31, 2005, the Board of Directors approved the issuance of warrants to purchase an aggregate of 3,274,327 shares of the Company's common stock. Such warrants are exercisable at prices ranging from $0.01 to $1.74 per share, vest over periods up to 24 months, and expire at various times through December 2010. 750,000 of the total warrants outstanding were cancelled and 198,750 were exercised. The average remaining contractual life of all outstanding warrants is 2.7 years.
A summary of warrant activity for 2006 and 2005, including preferred share equivalents, is as follows:
Weighted Average | |||||||||||||
Issued | Price | Exercisable | Price | ||||||||||
| Outstanding, December 31, 2004 | 4,020,000 | $ | 1.23 | 4,020,000 | $ | 1.23 | |||||||
| Granted | 878,750 | $ | 0.67 | ||||||||||
| Exercised | |||||||||||||
| Outstanding, December 31, 2005 | 4,898,750 | $ | 1.13 | 4,020,000 | $ | 1.23 | |||||||
| Granted | 7,733,634 | $ | 0.31 | 6,225,472 | $ | 0.03 | |||||||
| Cancelled | (750,000 | ) | $ | 0.67 | |||||||||
| Exercised | (715,960 | ) | $ | 0.77 | (715,960 | ) | $ | 0.77 | |||||
| Outstanding, December 31, 2004 | 11,166,424 | $ | 0.49 | 9,529,512 | $ | 0.47 | |||||||
NOTE 10 - OTHER INCOME AND EXPENSE
As of December 31, 2006, and December 31, 2005, other income and expenses, consists of the following:
2006 | 2005 | ||||||
| Other Income/Expense | |||||||
| Other Income | (30,080 | ) | - | ||||
| Beneficial Conversion Recovery | (837,191 | ) | - | ||||
| Interest Income | (50,331 | ) | - | ||||
| Interest Expense | 1,373,668 | 1,630,464 | |||||
| Other Income/Expense | 456,066 | 1,630,464 | |||||
F-29
During the years ended December 31, 2005, and 2004, we incurred beneficial conversion expenses of $754,238 and $655,516, which are included in interest expense in the consolidated financial statements. During the year ended December 31, 2006, we retired all of our debt allowing us to recover $837,191 of the beneficial conversion expense taken in 2004 and 2005, which was included in other income.
NOTE 11 - FINANCIAL ACCOUNTING DEVELOPMENTS
Recently issued Accounting Pronouncements
In February 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This statement establishes new standards of how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within the scope of this statement as a liability because the financial instrument embodies an obligation of the issuer. This statement applies to certain forms of mandatory redeemable financial instruments including certain types of preferred stock, written put options and forward contracts. SFAS 150 did not materially effect the Company’s financial statements.
In December 2003, the FASB issued FASB Interpretation No. 146, (revised December 2003) "Consolidation of Variable Interest Entities" (FIN 146) which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN No. 146R replaces FASB Interpretation No. 146, "Consolidation of Variable Interest Entities", which was issued in January 2003. Companies are required to apply FIN No. 146R to variable interests in variable interest entities ("VIEs") created after December 31, 2003. For variable interest in VIEs created before January 1, 2004, the Interpretation is applied beginning January 1, 2005. For any VIEs that must be consolidated under FIN No. 146R that were created before January 1, 2004,the assets, liabilities and non-controlling interests of the VIE initially are measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change.
If determining the carrying amounts is not practicable, fair value at the date FIN No. 146R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. The Company doe not have any interest in any VIE.
In March 2003, the FAS issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS 149 is effective for contracts entered into or modified after June 30, 2003. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 149 did not materially effect the Company’s financial statements.
In December 2004, the FASB issued SFAS No. 123(R)(revised 2004), "Share Based Payment" which amends FASB Statement No. 123 and will be effective for public companies for interim or annual periods after January 15, 2005. The new standard will require entities to expense employee stock options and other share-based payments. The new standard may be adopted in one of three ways - the modified prospective transition method, a variation of the modified prospective transition method or the modified retrospective transition method. The Company is to evaluate how it will adopt the standard and evaluate the effect that the adoption of SFAS 123(R) will have on our financial position and results of operations.
In November 2004, the FASB issued SFAS NO. 151, "Inventory Costs, an amendment of ARB No 43, Chapter 4". This statement amends the guidance in ARB No. 43, Chapter 4 Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling cost, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that, "under some circumstances, items such as idle facility expense, excessive spoilage, double freight and rehandling costs may be so abnormal as to require treatment as current period charges." SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal". In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the prospectively and are effective for inventory costs incurred during fiscal years beginning after June 5, 2005, with earlier application permitted for inventory costs incurred during fiscal years beginning after the date this Statement was issued. The adoption of SFAS No. 151 is not expected to have a material impact on the Company's financial position and results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29. The guidance in APB Opinion 29, Accounting for Non-monetary Transactions, is based on the principle that exchange of non-monetary assets should be measured based on the fair value of assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the Company's financial position and results of operations.
F-30
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. The Company will adopt FIN 47 beginning the first quarter of fiscal year 2006 and does not believe the adoption will have a material impact on its consolidated financial position or results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinions No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and a correction of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by the Company in the first quarter of 2006. The Company is currently evaluating the effect that the adoption of SFAS 154 will have on its results of operations and financial condition but does not expect it to have a material impact.
In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue 05-6, Determining the Amortization Period for Leasehold Improvements, which requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF 05-6 is effective for periods beginning after July 1, 2005. We do not expect the provisions of this consensus to have a material impact on the financial position, results of operations or cash flows.
In February 2006, the amendment to FASB Statement No 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities was issued as SFAS 155, Accounting for Certain Hybrid Financial Instruments.
This Statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. Clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.
This Statement is effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that begins after September 15, 2006.
The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of Statement 133 prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of our fiscal year, provided we have not yet issued financial statements, including financial statements for any interim period, for that fiscal year. Provisions of this Statement may be applied to instruments that we hold at the date of adoption on an instrument-by-instrument basis. The Company is currently reviewing the effects of adoption of this Statement but it is not expected to have a material impact on our financial statements.
In March 2006 the amendment to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities was issued as SFAS 156, Accounting for Servicing of Financial Assets.
This Statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations, requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable and permits and entity to choose either the amortization method or the fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. Adoption of this Statement is required as of the beginning of the first fiscal year that begins after September 15, 2006. The adoption of this statement is not expected to have a material impact on our financial statements.
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NOTE 12 - COMMITMENTS & CONTINGENCIES
Commitments
Minimum future rental payments under non-cancelable operating leases as of December 31, 2006, for each of the next five years and in the aggregate are as follows:
| 2007 | $ | 285,807 | ||
| 2008 | $ | 293,229 | ||
| 2009 | $ | 120,976 | ||
| Total | $ | 700,012 |
The Company entered a two year cost plus agreement on October 11, 2006, with Datascension, Inc., an unrelated party, that enables Consumer Loyalty Group to operate a state of the art call center. The call center became operational on November 27, 2006 and is utilized to support Consumer Loyalty Group customer service and sales efforts at dramatically lowered costs in comparison to their U.S. based counterparts.
The Company’s bank deposits at Bank of America, First Republic Bank, and First Regional Bank all exceed the federally insured limit of $100,000.
NOTE 13 - RELATED PARTY TRANSACTIONS
On February 11, 2005, the Company issued a Note to Dutchess Private Equities Fund, II, in the amount of $360,000, at a discount of $60,000. The Note has a 0% interest rate. During the year ended December 31, 2005, this Note was repaid, and the balance at December 31, 2005 was zero. We issued 37,500 shares to the Holder as an inducement to provide financing. The shares were valued at $40,219. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on the Company’s Board of Directors. At December 31, 2006 the Note was completely repaid.
In February 2005, the Company entered into a software agreement with Discount Solutions, Inc. to purchase certain software license rights to software that is used to provide web based stores to the Company’s customers. The Company agreed to purchase a perpetual license for use of the software of $52,500, and to compensate Discount Solutions $24,000 monthly for the full service hosting and maintenance of the Company’s customers' web stores. The Company’s Chief Executive Officer is a majority owner of Discount Solutions. This agreement automatically renews monthly unless notice is provided be either party. We intend to renegotiate and extend the terms of this agreement.
On April 18, 2005, the Company issued $132,000 of non-interest bearing Convertible Promissory Notes, due August 18, 2005 at a discount of $44,000, to eFund Capital Partners, LLC and Dutchess Private Equities Fund, II, LP. The Notes have a 0% interest rate. During the year ended December 31, 2005, this Note was repaid, and the balance at December 31, 2005 was zero. The Company issued 13,750 shares to eFund Capital Partners and Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $31,968. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on the Company’s Board of Directors. At the time the Note was issued, Barrett Evans, the Managing Member of eFund Capital Partners was on the Company’s Board of Directors. At December 31, 2006, the Note was completely repaid.
On May 20, 2005, the Company issued a $402,750 non-interest bearing Convertible Promissory Note, due December 20, 2005 at a discount of $52,750, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, $112,500 of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. The Company issued 40,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $46,500. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on the Company’s Board of Directors. At December 31, 2006, the Note was completely repaid.
On June 2, 2005, the Company issued a $540,000 non-interest bearing Convertible Promissory Note, due December 20, 2005 at a discount of $80,000, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005, was zero. The Company issued 54,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $50,700. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on the Company’s Board of Directors. At December 31, 2006, the Note was completely repaid.
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On July 22, 2005, the Company issued a $258,000 non-interest bearing Convertible Promissory Note, due December 22, 2005 at a discount of $33,000, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. The Company issued 10,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $8,925. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on the Company’s Board of Directors. At December 31, 2006, the Note was completely repaid.
The Company awarded 750,000 warrants to its Chief Financial Officer upon his hiring during July 2005. 500,000 of the warrants vest one year after his date of hire, and 250,000 vest two years after his date of hire. 500,000 of the warrants are priced at $1.12 per share, and 250,000 are priced at $0.10 per share. The warrants have been cancelled.
On August 4, 2005, the Company issued a $162,000 non-interest bearing Convertible Promissory Note, due January 4, 2006 at a discount of $17,000, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. The Company issued 25,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $15,937. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on the Company’s Board of Directors. At December 31, 2006, the Note was completely repaid.
On August 17, 2005, the Company issued a $247,200 non-interest bearing Convertible Promissory Note, due January 17, 2006 at a discount of $40,200, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. The Company issued 37,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $24,975. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on the Company’s Board of Directors. At December 31, 2006, the Note was completely repaid.
On August 18 2005, the Company issued a $221,000 non-interest bearing Convertible Promissory Note, due December 18, 2005 at a discount of $37,000, to eFund Capital Partners. The Note has a 0% interest rate. During the year ended December 31, 2005, $18,211 of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. The Company issued 30,000 shares to eFund Capital Partners as an inducement to provide financing. The shares were valued at $19,125. At the time the Note was issued, Barrett Evans, the Managing Member of eFund Capital Partners was on the Company’s Board of Directors. At December 31, 2006, the Note was completely repaid.
On August 18 2005, the Company issued a $84,000 non-interest bearing Convertible Promissory Note, due December 18, 2005 at a discount of $14,000, to Barrett Evans. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 10,000 shares to Barrett Evans as an inducement to provide financing. The shares were valued at $6,375. At the time the Note was issued, Barrett Evans was on the Company’s Board of Directors. At December 31, 2006, the Note was completely repaid.
On September 16, 2005, the Company issued a $192,000 non-interest bearing Convertible Promissory Note, due March 15, 2006 at a discount of $32,000, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, $162,752 of this Note was repaid, and the balance at December 31, 2005 was $29,248. The Company issued 50,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $31,500. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on the Company’s Board of Directors. At December 31, 2006, the Note was completely repaid.
On September 30, 2005, the Company issued a $276,000 non-interest bearing Convertible Promissory Note, due March 30, 2006 at a discount of $46,000, to Dutchess Private Equities Fund, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance at December 31, 2005 was $276,000. The Company issued 70,000 shares to Dutchess Private Equities Fund, LP as an inducement to provide financing. The shares were valued at $42,000. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on the Company’s Board of Directors. At December 31, 2006, the Note was completely repaid.
On October 11, 2005, the Company issued a $30,000 non-interest bearing Convertible Promissory Note, due April 11, 2006 at a discount of $5,000, to Dutchess Private Equities Fund, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance December 31, 2005 was $30,000. The Company issued 8,000 shares to Dutchess Private Equities Fund, LP as an inducement to provide financing. The shares were valued at $5,000. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on the Company’s Board of Directors. At December 31, 2006, the Note was completely repaid.
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Effective November 1, 2005, the Company agreed to issue a convertible debenture to eFund Capital Partners, in the amount of $180,000, at a discount of $176,200. The debenture has a 10% interest rate and is due and payable November 1, 2009. The debentures are convertible into shares of the Company’s common stock at a price equal to the lesser of; (i) 75% of the average of the closing bid price of the stock for the five days prior to conversion or (ii) the average of the closing bid price of the stock on the five days immediately preceding the date of the of debenture agreement. At the time the Note was issued, Barrett Evans, the Managing Member of eFund Capital Partners was on the Company’s Board of Directors. At December 31, 2006, the debenture was completely repaid.
Effective December 15, 2005, the Company entered into a Convertible Debenture Exchange Agreement with Dutchess Private Equities Fund, II, LP and eFund Capital Partners to exchange the unpaid balance of promissory notes issued in 2005 worth $1,784,239 into 10%, 4-year term, Convertible Debentures. The debentures are convertible at the lesser of (i) 75% of the average of the lowest closing bid price during fifteen immediately preceding the conversion date or (ii) 100% of the average of the closing bid price of the stock for the twenty days immediately preceding the closing date of the debenture agreement. At the time the Note was issued, Michael Novielli and Douglas Leighton, the Managing Members of Dutchess Capital Management, LLC and Theodore Smith, the Executive Vice President of Dutchess Capital Management were on the Company’s Board of Directors. At the time the Note was issued, Barrett Evans was on the Company’s Board of Directors. At December 31, 2006, the debentures were completely repaid.
The Convertible Promissory Notes shall be paid in cash or in shares of common stock, par value $0.001 per share, of the Company, at the Company's option, at the time of each conversion. The Company shall pay interest on the unpaid principal amount of this Promissory Note at the time of each conversion until the principal amount hereof is paid in full or has been converted. If the interest is to be paid in cash, the Company shall make such payment within five (5) business days of the date of conversion. If the interest is to be paid in Common Stock, said Common Stock shall be delivered to the Holder, or per Holder's instructions, within five (5) business days of the date of conversion. The Promissory Notes are subject to automatic conversion at the maturity date at which time all Promissory Notes outstanding will be automatically converted based upon the formula set forth in the agreement. At December 31, 2006 the debenture was completely repaid.
On October 3, 2006, the Company acquired the assets of Interaccurate, Inc. including software, intellectual properties, and a web hosting facility. Total consideration of $235,000 consisted of $176,239 in cash 42,266 shares of common stock. The Company’s executives Michael Hill, Charlie Gugliuzza, and Ethan Brooks were parties to the transaction.
NOTE 14 - SUBSEQUENT EVENTS
On November 27, 2006, the Board of Directors authorized the repurchase of its outstanding common stock through December 31, 2007 in the open market or in any private transaction, from time-to-time and in accordance with applicable laws, rules and regulations, subject to an aggregate purchase limit of $2,000 000.
On February 26, 2007, the Company filed Articles of Correction with the Utah Department of Commerce’s Division of Corporations which corrected an incorrect statement in the Articles of Incorporation relating to the conversion rate of the Company's Series D Convertible Preferred Stock.
On February 16, 2007, 3,037,500 shares of the Company’s common stock, par value $0.001 per share were sold to JLF Partners I, L.P., JLF Partners II, L.P. and JLF Offshore Fund, Ltd. The sale of the shares was made pursuant to a Securities Purchase Agreement, dated February 7, 2006. Shares held by Michael Hill, Charles Gugliuzza, David Foucar, Aaron Gravitz, Ethan Brooks and Miguel Angel Vazquez were sold for a purchase price of $1.90 per share, which represented a 10% discount to the average trailing 20 day closing bid price for the shares of the Common Stock.
In a separate transaction, on February 16, 2007, 1,800,000 shares of the Company’s Common Stock were sold to selected institutional investors. The sale of the shares was made pursuant to a Securities Purchase Agreement, dated February 12, 2006. Shares held by eFund Capital Partners were sold to institutional investors and were sold for a purchase price of $1.90 per share. Subsequent to this transaction, eFund will remain a major shareholder of the Company.
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We have had no changes in or disagreements with our accountants.
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration statement on Form SB-2 under the Securities Act of 1933 for the shares of common stock in the offering, of which this prospectus is a part. This prospectus does not contain all of the information in the registration statement and the exhibits and schedules that were filed with the registration statement. For further information we refer you to the registration statement and the exhibits and schedules that were filed with the registration statement.
Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules that were filed with the registration statement may be inspected without charge at the Public Reference Room maintained by the Securities and Exchange Commission at 100 F Street, N.E., Washington, DC 20549, and copies of all or any part of the registration statement may be obtained from the Securities and Exchange Commission upon payment of the prescribed fee. Information regarding the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC. The address of the site is www.sec.gov.
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Each person who is or was a director or officer shall be indemnified by us to the full extent permitted or authorized by the General Corporation Law of Utah. Under such law, to the extent that such person is successful on the merits of defense of a suit or proceeding brought against such person by reason of the fact that such person is a director or officer of CommercePlanet, Inc., such person shall be indemnified against expenses, including attorneys' fees, reasonably incurred in connection with such action. If unsuccessful in defense of a third-party civil suit or a criminal suit or if such a suit is settled, such a person shall be indemnified under such law against both (1) expenses (including attorneys' fees) and (2) judgments, fines and amounts paid in settlement if such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, our best interests, and with respect to any criminal action, had no reasonable cause to believe such person's conduct was unlawful. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various costs and expenses in connection with the sale and distribution of the common stock being registered, other than the underwriting discounts and commissions.
| Amount to be paid | ||||
| SEC Registration Fee | $ | 400 | ||
| Printing and Edgarizing expenses | $ | 3,000 | ||
| Legal fees and expenses | $ | 25,000 | ||
| Accounting fees and expenses | $ | 15,000 | ||
| Transfer agent | $ | 500 | ||
| Stock certificates | $ | 300 | ||
| Miscellaneous | $ | 1,000 | ||
| Total | $ | 45,200 |
RECENT SALES OF UNREGISTERED SECURITIES
On April 1, 2004, we issued convertible debentures of $90,000 to Dutchess Private Equities Fund, II. The debentures convert on April 1, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. The debenture was issued at a discount of $15,000. On July 9, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 225,000 of our common shares at an exercise price at $1.42 per share. At December 31, 2006, the debenture was completely repaid.
On April 1, 2004, we issued convertible debentures of $90,000 to eFund Capital Partners, LLC. The debentures convert on April 1, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. The debenture was issued at a discount of $15,000. On April 2, 2004, we issued a warrant to eFund Capital Partners, LLC, to purchase 225,000 of our common shares at an exercise price at $1.42 per share. At December 31, 2006, the debenture was completely repaid.
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On April 20, 2004, we issued 250,000 shares of our common stock to Marketbyte LLC for services amounting to $430,000. On April 20, 2004 we also issued 50,000 shares of our common stock to Mr. Robert Gleckman for service amounting to $100,000.
On May 5, 2004, we issued convertible debentures of $90,000 to Dutchess Private Equities Fund, II. The debentures convert on May 5, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. The debenture was issued at a discount of $15,000. On July 9, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 225,000 of our common shares at an exercise price at $1.42 per share. At December 31, 2006, the debenture was completely repaid.
On May 5, 2004, we issued convertible debentures of $90,000 to eFund Capital Partners, LLC. The debentures convert on May 5, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. The debenture was issued at a discount of $15,000. On May 5, 2004, we issued a warrant to eFund Capital Partners, LLC, to purchase 225,000 of our common shares at an exercise price at $1.42 per share. At December 31, 2006, the debenture was completely repaid.
During the quarter ended June 30, 2004, we issued 250,000 shares of our common stock which were to be issued in the three months ended March 31, 2004 for services amounting to $430,000, and 50,000 shares of our common stock for $100,000 of services.
On July 9, 2004, we issued convertible debentures of $180,000 to Dutchess Private Equities Fund, II. The debentures convert on July 9, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. The debenture was issued at a discount of $30,000. On July 9, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 450,000 of our common shares at an exercise price at $1.17 per share. At December 31, 2006, the debenture was completely repaid.
On August 15, 2004, we issued convertible debentures of $144,000 to Dutchess Private Equities Fund, II. The debentures convert on August 15, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $24,000. On August 18, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 360,000 of our common shares at an exercise price at $1.03 per share. At December 31, 2006, the debenture was completely repaid.
On August 15, 2004, we issued convertible debentures of $60,000 to eFund Small Cap Fund, LP. The debentures convert on August 15, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $10,000. On August 18, 2004, we issued a warrant to eFund Capital Partners, to purchase 150,000 of our common shares at an exercise price at $1.03 per share. At December 31, 2006, the debenture was completely repaid.
On September 25, 2004, we issued convertible debentures of $222,000 to Dutchess Private Equities Fund. The debentures convert on September 25, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $37,000. On September 25, 2004, we issued a warrant to Dutchess Private Equities Fund, to purchase 540,000 of our common shares at an exercise price at $1.25 per share. At December 31, 2006, the debenture was completely repaid.
On September 25, 2004, we issued convertible debentures of $60,000 to eFund Small Cap Fund, LP. The debentures convert on September 24, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $10,000. On September 25, 2004, we issued a warrant to eFund Capital Partners, to purchase 150,000 of our common shares at an exercise price at $1.25 per share. At December 31, 2006, the debenture was completely repaid.
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On September 27, 2004, we issued 50,000 shares of common stock to Pacific Shores Investment, LLC for $175,000 of business consulting services to be rendered during the next 12 months.
On October 25, 2004, we issued convertible debentures of $60,000 to Dutchess Private Equities Fund, II, L.P. The debentures convert on October 25, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $10,000. On October 25, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 150,000 of our common shares at an exercise price at $1.53 per share. At December 31, 2006, the debenture was completely repaid.
On November 11, 2004, we issued convertible debentures of $162,000 to Dutchess Private Equities Fund, II, L.P. The debentures convert on November 11, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $27,000. On November 11, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 480,000 of our common shares at an exercise price at $1.25 per share. At December 31, 2006, the debenture was completely repaid.
On December 28, 2004, we issued convertible debentures of $240,000 to Dutchess Private Equities Fund, II, L.P. The debentures convert on December 28, 2009. The holder of the debentures can convert the face value of the debenture plus accrued interest into shares of our common stock at the lesser of (i) 75% of the lowest closing bid price during the 15 full trading days prior to the conversion date or (ii) 100% of the average of the five lowest closing bid prices for the 30 trading days immediately following the first reverse split in stock price. The convertible debentures shall pay 8% cumulative interest, payable in cash or stock at our option, at the time of conversion. This debenture was issued at a discount of $40,000. On December 28, 2004, we issued a warrant to Dutchess Private Equities Fund, II, to purchase 720,000 of our common shares at an exercise price at $1.25 per share. At December 31, 2006, the debenture was completely repaid.
On April 18, 2005, we issued $132,000 of non-interest bearing Convertible Promissory Notes, due August 18, 2005 at a discount of $44,000, to eFund Capital Partners, LLC and Dutchess Private Equities Fund, II, LP. The Notes have a 0% interest rate. During the year ended December 31, 2005, this Note was repaid, and the balance at December 31, 2005 was zero. We issued 13,750 shares to eFund Capital Partners and Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $31,968. At December 31, 2006, the Note was completely repaid.
On May 20, 2005, we issued a $402,750 non-interest bearing Convertible Promissory Note, due December 20, 2005 at a discount of $52,750, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, $112,500 of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 40,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $46,500. At December 31, 2006, the Note was completely repaid.
On June 2, 2005, we issued a $540,000 non-interest bearing Convertible Promissory Note, due December 20, 2005 at a discount of $80,000, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005, was zero. We issued 54,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $50,700. At December 31, 2006, the Note was completely repaid.
On July 22, 2005, we issued a $258,000 non-interest bearing Convertible Promissory Note, due December 22, 2005 at a discount of $33,000, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 10,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $8,925. At December 31, 2006, the Note was completely repaid.
We awarded 750,000 warrants to its Chief Financial Officer upon his hiring during July 2005. 500,000 of the warrants vest one year after his date of hire, and 250,000 vest two years after his date of hire. 500,000 of the warrants are priced at $1.12 per share, and 250,000 are priced at $0.10 per share. The warrants have been cancelled.
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On August 4, 2005, we issued a $162,000 non-interest bearing Convertible Promissory Note, due January 4, 2006 at a discount of $17,000, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 25,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $15,937. At December 31, 2006, the Note was completely repaid.
On August 4, 2005, we issued 264,000 shares to investors which were contracted and accounted for as shares to be issued in 2004.
On August 17, 2005, we issued a $247,200 non-interest bearing Convertible Promissory Note, due January 17, 2006 at a discount of $40,200, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 37,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $24,975. At December 31, 2006, the Note was completely repaid.
On August 18 2005, we issued a $221,000 non-interest bearing Convertible Promissory Note, due December 18, 2005 at a discount of $37,000, to eFund Capital Partners. The Note has a 0% interest rate. During the year ended December 31, 2005, $18,211 of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 30,000 shares to eFund Capital Partners as an inducement to provide financing. The shares were valued at $19,125. At December 31, 2006, the Note was completely repaid.
On August 18 2005, we issued a $84,000 non-interest bearing Convertible Promissory Note, due December 18, 2005 at a discount of $14,000, to Barrett Evans. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance was exchanged into a Convertible Debenture effective December 18, 2005. The balance at December 31, 2005 was zero. We issued 10,000 shares to Barrett Evans as an inducement to provide financing. The shares were valued at $6,375.
On September 16, 2005, we issued a $192,000 non-interest bearing Convertible Promissory Note, due March 15, 2006 at a discount of $32,000, to Dutchess Private Equities Fund, II, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, $162,752 of this Note was repaid, and the balance at December 31, 2005 was $29,248. We issued 50,000 shares to Dutchess Private Equities Fund, II, LP as an inducement to provide financing. The shares were valued at $31,500. At December 31, 2006, the Note was completely repaid.
On August 18, 2005, we issued 72,000 shares to a majority shareholder as an inducement to provide financing to us.
On September 30, 2005, we issued a $276,000 non-interest bearing Convertible Promissory Note, due March 30, 2006 at a discount of $46,000, to Dutchess Private Equities Fund, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance at December 31, 2005 was $276,000. We issued 70,000 shares to Dutchess Private Equities Fund, LP as an inducement to provide financing. The shares were valued at $42,000. At December 31, 2006, the Note was completely repaid.
On October 11, 2005, we issued a $30,000 non-interest bearing Convertible Promissory Note, due April 11, 2006 at a discount of $5,000, to Dutchess Private Equities Fund, LP. The Note has a 0% interest rate. During the year ended December 31, 2005, none of this Note was repaid, and the balance December 31, 2005 was $30,000. We issued 8,000 shares to Dutchess Private Equities Fund, LP as an inducement to provide financing. The shares were valued at $5,000. At December 31, 2006, the Note was completely repaid.
Effective November 1, 2005, we agreed to issue a convertible debenture to eFund Capital Partners, in the amount of $180,000, at a discount of $176,200. The debenture has a 10% interest rate and is due and payable November 1, 2009. The debentures are convertible into shares of our common stock at a price equal to the lesser of; (i) seventy-five percent of the average of the closing bid price of the stock for the five days prior to conversion or (ii) the average of the closing bid price of the stock on the five days immediately preceding the date of the of debenture agreement. At December 31, 2006, the debenture was completely repaid.
Effective December 18, 2005, we entered into a Convertible Debenture Exchange Agreement with majority shareholders to exchange the unpaid balance of promissory notes issued in 2005 worth $1,784,239 into 10%, 4-year term, Convertible Debentures. The debentures are convertible at the lesser of (i) 75% of the average of the lowest closing bid price during fifteen immediately preceding the conversion date or (ii) 100% of the average of the closing bid price of the stock for the twenty days immediately preceding the closing date of the debenture agreement. At December 31, 2006, the debenture was completely repaid.
On January 6, 2006, we issued a convertible promissory note of $20,000 to an unrelated party. The promissory note matures on January 6, 2007. The Holder, at its option, has the right to receive 20% simple interest or convert the promissory note into shares of common stock. The holder of the debenture can convert the face value of the debenture into shares of our common stock at either (i) 70% of the market value of the stock on the day of conversion or (ii) 200,000 shares of our common stock, whichever results in the greater value to the Holder.
On January 9, 2006, we issued a convertible promissory note of $48,000 to an unrelated party. The promissory note matures on January 6, 2007. The Holder, at its option, has the right to receive 20% simple interest or convert the promissory note into shares of common stock. The holder of the debenture can convert the face value of the debenture into shares of our common stock at either (i) 70% of the market value of the stock on the day of conversion or (ii) 480,000 shares of our common stock, whichever results in the greater value to the Holder.
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On February 7, 2006, we entered into an agreement with Seacoast Financial LLC, whereby, in exchange for consulting services, we agreed to issue 300,000 shares of our common stock.
On June 1, 2006, we acquired all of the assets of Onesource Imaging, a California corporation. As part of the agreement, Miguel Vazquez, the co-owner of Onesource Imaging, will become the President of our printing and fulfillment division. Mr. Vazquez's annual salary will initially be $135,000. As additional compensation Mr. Vazquez will also receive 300,000 shares of our common stock which will vest in increments of 12,500 per month for a period of 2 years.
On September 5, 2006, we issued 12 warrants to purchase shares of our Series D Convertible Preferred Stock to each of 2 individuals as compensation. During the third quarter of 2006 we also issued 1 warrant to purchase a share of our Series D Convertible Preferred Stock to each of our 3 directors as compensation. The warrants have an exercise price of $0.01 and expire on January 1, 2010. Each share of Series D Convertible Preferred Stock converts into .4167% of the total number of shares of common stock outstanding on the date of conversion.
On February 13, 2007, we issued 2,370,767 shares of common stock to our President, Charles Gugliuzza, as compensation.
With respect to the sales of our common stock described above, we relied on the Section 4(2) exemption from securities registration under the federal securities laws for transactions not involving any public offering. No advertising or general solicitation was employed in offering the shares. The shares were sold to accredited investors. The shares were offered for investment purposes only and not for the purpose of resale or distribution, and the transfer thereof was appropriately restricted by us.
UNDERTAKINGS
The undersigned registrant hereby undertakes to:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act:
(ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the estimated offering price may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b)(ss.230.424(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and(2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering;
(iii) Include any additional or changed material information on the plan of distribution.
(3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned small business issuer undertakes that in a primary offering of securities of the undersigned small business issuer pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned small business issuer will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small business issuer relating to the offering required to be filed pursuant to Rule 424 (§230.424 of this chapter)
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned small business issuer or used or referred to by the undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned small business issuer or its securities provided by or on behalf of the undersigned small business issuer; and
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(iv) Any other communication that is an offer in the offering made by the undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy and as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
That for the purpose of determining any liability under the Securities Act to any purchaser:
Each prospectus filed by the undersigned small business issuer pursuant to Rule 424(b)(3)(ss.230.424(b)(3) of this chapter) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
EXHIBITS
| EXHIBIT NUMBER | DESCRIPTION | |
| 2.1 | Agreement and Plan of Reorganization between Utah Clay Technology, Inc. and NeWave, Inc., D.B.A. Online Supplier NeWave Shareholders and Dutchess Advisors, Ltd., dated December 24, 2003 (included as Exhibit 2.1 to the Form 8-K filed February 12, 2004, and incorporated herein by reference). | |
| 3.1 | Articles of Incorporation (included as Exhibit 3.(i) to the Form SB-2/A filed April 11, 2000, and incorporated herein by reference). | |
| 3.2 | Amended Articles of Incorporation (included as Exhibit 3.(i) to the Form 10-QSB filed November 14, 2001, and incorporated herein by reference). | |
| 3.3 | Articles of Amendment to Articles of Incorporation, dated January 30, 2004 (included as Exhibit 3.2 to the 10-QSB filed May 24, 2004, and incorporated herein by reference). | |
| 3.4 | By-laws (included as Exhibit 3.(ii) to the Form SB-2/A filed April 11, 2000, and incorporated herein by reference). | |
| 3.5 | Articles of Amendment to the Amended and Restated Articles of Incorporation, dated May 18, 2006 (include as Exhibit 3.1 to the Form 8K filed June 8, 2006, and incorporated herein by reference). | |
| 3.6 | Certificate of Designation of Series C Convertible Preferred Stock (included as Exhibit 4.1 to the 10-KSB filed April 14, 2004, and incorporated herein by reference). | |
| 3.7 | Certificate of Designation for Series D Convertible Preferred Stock (included as Exhibit 3.1 to the Form 8-K filed August 9, 2006, and incorporated herein by reference). | |
| 3.8 | Restated Bylaws (included as Exhibit 3.1 to the Form 8-K filed September 8, 2006, and incorporated herein by reference). | |
| 4.1 | Form Series C Convertible Preferred Stock Purchase Agreement (included as Exhibit 4.2 to the 10-KSB filed April 14, 2004, and incorporated herein by reference). |
| 4.2 | Warrant Agreement between the Company and Dutchess Private Equities Fund, II, LP, dated April 1, 2004 (included as Exhibit 4.10 to the Form SB-2 filed October 8, 2004, and incorporated herein by reference). | |
| 4.3 | Warrant Agreement between the Company and eFund Capital Partners, dated April 2, 2004 (included as Exhibit 4.11 to the Form SB-2 filed October 8, 2004, and incorporated herein by reference). | |
| 4.4 | Warrant Agreement between the Company and Dutchess Private Equities Fund, II, LP, dated May 5, 2004 (included as Exhibit 4.12 to the Form SB-2 filed October 8, 2004, and incorporated herein by reference). | |
| 4.5 | Warrant Agreement between the Company and eFund Capital Partners, dated May 5, 2004 (included as Exhibit 4.13 to the Form SB-2 filed October 8, 2004, and incorporated herein by reference). |
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| 4.6 | Warrant Agreement between the Company and Dutchess Private Equities Fund, II, LP, dated July 9, 2004 (included as Exhibit 4.14 to the Form SB-2 filed October 8, 2004, and incorporated herein by reference). | |
| 4.7 | Warrant Agreement between the Company and Dutchess Private Equities Fund, II, LP, dated August 18, 2004 (included as Exhibit 4.18 to the Form SB-2 filed October 8, 2004, and incorporated herein by reference). | |
| 4.8 | Warrant Agreement between the Company and eFund Small Cap Fund, LP, dated August 18, 2004 (included as Exhibit 4.19 to the Form SB-2 filed October 8, 2004, and incorporated herein by reference). | |
| 4.9 | Warrant Agreement between the Company and Dutchess Private Equities Fund, LP, dated September 25, 2004 (included as Exhibit 4.22 to the Form SB-2 filed October 8, 2004, and incorporated herein by reference). | |
| 4.10 | Warrant Agreement between the Company and eFund Small Cap Fund, LP, dated September 25, 2004 (included as Exhibit 4.23 to the Form SB-2 filed October 8, 2004, and incorporated herein by reference). | |
| 4.11 | Warrant Agreement between the Company and Dutchess Private Equities Fund, II, LP, dated October 25, 2004 (included as Exhibit 4.26 to the Form 10-KSB filed April 15, 2005, and incorporated herein by reference). | |
| 4.12 | Warrant Agreement between the Company and Dutchess Private Equities Fund, LP, dated November 11, 2004 (included as Exhibit 4.28 to the Form 10-KSB Filed April 15, 2005, and incorporated herein by reference). | |
| 4.13 | Warrant Agreement between the Company and Dutchess Private Equities Fund, LP, dated December 28, 2004 (included as Exhibit 4.30 to the Form 10-KSB filed April 15, 2005, and incorporated herein by reference). | |
| 4.14 | Stock Subscription Agreement between the Company and Gary D. Elliston, dated December 22, 2005, (included as Exhibit 4.51 to the Form 10-KSB dated March 21, 2006, and incorporated by reference). | |
| 4.15 | Stock Subscription Agreement between the Company and Cliff M. Holloway, dated December 22, 2005, (included as Exhibit 4.52 to the Form 10-KSB dated March 21, 2006, and incorporated by reference). | |
| 4.16 | Stock Subscription Agreement between the Company and John C. Boutwell, Jr, dated December 22, 2005, (included as Exhibit 4.53 to the Form 10-KSB dated March 21, 2006, and incorporated by reference). | |
| 4.17 | Stock Subscription Agreement between the Company and Mr. and Mrs. Jack B. Manning, dated December 22, 2005, (included as Exhibit 4.54 to the Form 10-KSB dated March 21, 2006, and incorporated by reference). | |
| 4.18 | Stock Subscription Agreement between the Company and Stephen Moore, dated December 22, 2005, (included as Exhibit 4.55 to the Form 10-KSB dated March 21, 2006, and incorporated by reference). | |
| 4.19 | Stock Subscription Agreement between the Company and Monte L. Roach, dated December 22, 2005, (included as Exhibit 4.56 to the Form 10-KSB dated March 21, 2006, and incorporated by reference). | |
| 4.20 | Convertible Promissory Notes between the Company and Ronald Feldman, dated January 9, 2006 (included as Exhibit 4.57 to the Form 10-QSB filed May 8, 2006 and incorporated herein by reference). | |
| 4.21 | Convertible Promissory Notes between the Company and Ronald Feldman, dated January 9, 2006 (included as Exhibit 4.58 to the Form 10-QSB filed May 8, 2006 and incorporated herein by reference). | |
| 4.22 | Convertible Promissory Notes between the Company and Wakelin McNeel, dated January 6, 2006 (included as Exhibit 4.57 to the Form 10-QSB filed May 8, 2006 and incorporated herein by reference). | |
| 5.1 | Opinion re: Legality of Amy Trombly, Esq. (previously filed). |
| 10.1 | 2000 Stock Option Plan (included as Exhibit 9 to the Form SB-2/A filed April 11, 2000, and incorporated herein by reference). | |
| 10.2 | Sublease between the Company and Pinnacle Sales Group, LLC, dated August 18, 2003 (included as Exhibit 10.1 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference). | |
| 10.3 | Sublease Agreement between the Company and Mammoth Moving Inc., dated July 14, 2003 (included as Exhibit 10.2 to the Form 10-KSB filed April 14, 2004, and incorporated herein by reference). |
| 10.4 | Lead Marketing Agreement between the Company and Vandalay Venture, Group, Inc. d/b/a Applied Merchant, dated June 2004 (included as Exhibit 10.13 to the Form 10-QSB filed August 23, 2004, and incorporated herein by reference). | |
| 10.5 | Standard Multi-Tenant Office Lease between the Company and La Patera Investors, dated April 9, 2004 (included as Exhibit 10.17 to the Form SB-2 filed October 8, 2004, and incorporated herein by reference). | |
| 10.6 | ASP Software Subscription Agreement between the Company and Net Chemistry, dated August 11, 2004 (included as Exhibit 10.18 to the Form SB-2 filed October 8, 2004, and incorporated herein by reference). |
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| 10.7 | Amendment to Membership Agreement between the Company and Memberworks, dated August 17, 2004 (included as Exhibit 10.21 to the Form SB-2 filed October 8, 2004, and incorporated herein by reference). | |
| 10.8 | Debt Financing Agreement between the Company and Sharon Paugh, dated January 26, 2004 (included as Exhibit 10.26 to the Form SB-2 filed December 9, 2004, and incorporated herein by reference). | |
| 10.9 | Debt Financing Agreement between the Company and Jennifer Strohl, dated March 22, 2004 (included as Exhibit 10.27 to the Form SB-2 filed December 9, 2004, and incorporated herein by reference). |
| 10.10 | Business Services Agreement between the Company and Luminary Ventures, Inc., dated March 3, 2005 (included as Exhibit 10.1 to the Form S-8 filed April 29, 2005, and incorporated herein by reference). | |
| 10.11 | Corporate Consulting Agreement between the Company and eFund Capital Partners LLC dated November 1, 2005 (included as Exhibit 10.1 to the Form 8-K filed February 17, 2006, and incorporated by reference herein). | |
| 10.12 | Corporate Consulting Agreement between the Company and Olive Tree LLC dated June 28, 2005, as amended on October 25, 2005, October 31, 2005, and January 4, 2006 (included as Exhibit 10.32 to the Form 10-KSB filed March 21 2006, and incorporated herein by reference). | |
| 10.13 | Corporate Consulting Agreement between the Company and SeaCoast Financial LLC, dated February 7, 2006 (included as Exhibit 10.33 to the Form 10-QSB filed May 8, 2006, and incorporated herein by reference). | |
| 10.14 | Asset Purchase Agreement by and among the Company and Onesource Imaging, Miquel A. Vazquez and Joanie Vazquez dated June 1, 2006 (included as Exhibit 10.1 to the Form 8-K filed June 8, 2006, and incorporated herein by reference). | |
| 10.15 | General Assignment and Bill of Sale between the Company and Onesource Imaging, Inc., dated June 1, 2006 (included as Exhibit 10.2 to the Form 8-K filed June 8, 2006, and incorporated herein by reference). | |
| 10.16 | Executive Employment Agreement between the Company and Miguel Vazquez, dated June 1, 2006 (included as Exhibit 10.3 to the Form 8-K filed June 8, 2006, and incorporated herein by reference). | |
| 10.17 | Employment Offer Letter between the Company and Dave Foucar, dated June 8, 2006 (included as Exhibit 10.1 to the Form 8-K filed June 21, 2006, and incorporated herein by reference). | |
| 10.18 | Employment Agreement between the Company and Michael Hill, dated September 7, 2006 (included as Exhibit 10.1 to the Form 8-K filed September 8, 2006, and incorporated herein by reference). | |
| 10.19 | Employment Agreement between the Company and Charlie Gugliuzza, dated September 7, 2006 (included as Exhibit 10.2 to the Form 8-K filed September 8, 2006, and incorporated herein by reference). | |
| 14.1 | Corporate Code of Conduct and Ethics (included as Exhibit 14.1 to the 10-KSB filed April 14, 2004, and incorporated herein by reference). | |
| 23.1 | Consent of Jaspers and Hall, P.C. | |
| 23.2 | Consent of Counsel (contained in Exhibit 5.1 previously filed). |
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the city of Goleta, California on June 8, 2007.
CommercePlanet, Inc. | ||
| | | |
| By: | /s/ Michael Hill | |
Michael Hill | ||
| Chief Executive Officer | ||
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In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and in the dates stated:
SIGNATURES
| /s/ Michael Hill | /s/ David Foucar | |
Michael Hill | David Foucar | |
| Chief Executive Officer and Director | Chief Financial Officer and Principal Accounting Officer |
| Date: June 8, 2007 | Date: June 8, 2007 |
| /s/ Charlie Gugliuzza | /s/ James T. Crane | |
Charlie Gugliuzza | James T. Crane | |
| President and Director | Director |
| Date: June 8, 2007 | Date: June 8, 2007 |
| /s/ Chris Cruttenden | /s/ Dominic Bohnett | |
Chris Cruttenden | Dominic Bohnett | |
| Director | Director |
| Date: June 8, 2007 | Date: June 8, 2007 |
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