UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________________ to ______________
Commission file number: 0-27565
Abazias, Inc.
(Exact name of registrant as specified in its charter)
Delaware | | 0-23532 | | 65-0636277 |
(State or other jurisdiction | | (Commission | | (IRS Employer |
of incorporation) | | File No.) | | Identification No.) |
5214 SW 91st Terrace Suite A
Gainesville, FL 32608
(Address of principal executive offices) (Zip Code)
352-264-9940
(Registrant's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | | Smaller Reporting Company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
Applicable only to corporate issuers:
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock, $.001 par value 3,178,057 shares outstanding as of August 12, 2008.
Transitional Small Business Disclosure Format: Yes o No x
PART I.
Item 1. FINANCIAL INFORMATION
ABAZIAS, INC.
BALANCE SHEETS
(unaudited)
| | June 30, | | | December 31, | |
| | 2008 | | | 2007 | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash | | $ | 84,013 | | | $ | 337,773 | |
Accounts receivable | | | 224,977 | | | | 400,281 | |
Inventory | | | 331,129 | | | | 245,570 | |
Total current assets | | | 640,119 | | | | 983,624 | |
| | | | | | | | |
Property & equipment, net of accumulated | | | | | | | | |
depreciation of $5,287 and $5,287 respectively | | | 2,209 | | | | 2,209 | |
Website, net of accumulated amortization | | | | | | | | |
of $31,000,583 and $22,167 respectively | | | 4,331 | | | | 13,164 | |
Total Assets | | $ | 646,659 | | | $ | 998,997 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | | | | | | | |
| | | | | | | | |
Current Liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 704,518 | | | $ | 739,266 | |
Stock payable | | | - | | | | 50,000 | |
Loans from stockholders | | | 62,031 | | | | 208,031 | |
Total Current Liabilities | | | 766,549 | | | | 997,297 | |
Commitments and Contingencies | | | - | | | | - | |
| | | | | | | | |
Stockholders’ Equity (Deficit): | | | | | | | | |
Preferred stock, $.001 par value, 1,000,000 | | | | | | | | |
authorized, no shares issued and outstanding | | | - | | | | - | |
Common stock, $.001 par value, 150,000,000 shares | | | | | | | | |
authorized, 3,165,522 and 3,102,998 | | | | | | | | |
issued and outstanding respectively | | | 3,166 | | | | 3,103 | |
Additional paid-in capital | | | 5,837,649 | | | | 5,729,931 | |
Accumulated deficit | | | (5,960,705 | ) | | | (5,731,334 | ) |
Total Stockholders’ Equity (Deficit) | | | (119,890 | ) | | | 1,700 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | $ | 646,659 | | | $ | 998,997 | |
See accompanying notes to unaudited financial statements.
ABAZIAS, INC.
STATEMENTS OF OPERATIONS
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)
| | Three months | | | Six months | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | |
Sales | | $ | 1,848,130 | | | $ | 1,697,683 | | | | 3,640,832 | | | $ | 3,342,367 | |
Cost of sales | | | 1,587,238 | | | | 1,346,001 | | | | 3,139,118 | | | | 2,895,391 | |
Gross profit | | | 260,892 | | | | 351,682 | | | | 501,714 | | | | 446,976 | |
| | | | | | | | | | | | | | | | |
General and administrative | | | 331,306 | | | | 402,143 | | | | 728,404 | | | | 1,803,499 | |
Operating loss | | | (70,414 | ) | | | (50,461 | ) | | | (226,690 | ) | | | (1,356,523 | ) |
| | | | | | | | | | | | | | | | |
Interest expense | | | (1,237 | ) | | | (754 | ) | | | (2,681 | ) | | | (1,945 | ) |
Net Loss | | $ | (71,651 | ) | | $ | (51,215 | ) | | | (229,371 | ) | | | (1,358,468 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic and diluted loss per share | | $ | (0.02 | ) | | $ | (0.01 | ) | | | (0.07 | ) | | | (0.50 | ) |
| | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | 3,165,522 | | | | 2,915,838 | | | | 3,141,251 | | | | 2,722,606 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
See accompanying notes to unaudited financial statements.
ABAZIAS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Six Months Ended June 30, 2008
(Unaudited)
| | | | | | | | Additional | | | | | | | |
| | Common Stock | | | | | | Paid-in | | | Retained | | | | |
| | Shares | | | Amount | | | Capital | | | Deficit | | | Totals | |
Balances, | | | | | | | | | | | | | | | | | | | | |
December 31, 2007 | | | 3,102,998 | | | $ | 3,103 | | | $ | 5,729,931 | | | $ | (5,731,334 | ) | | $ | 1,700 | |
| | | | | | | | | | | | | | | | | | | | |
Shares issued for | | | | | | | | | | | | | | | | | | | | |
services | | | 3,000 | | | | 3 | | | | 5,097 | | | | - | | | | 5,100 | |
| | | | | | | | | | | | | | | | | | | | |
Shares issued for | | | | | | | | | | | | | | | | | | | | |
cash and stock payable | | | 59,524 | | | | 60 | | | | 99,940 | | | | - | | | | 100,000 | |
| | | | �� | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Imputed interest | | | - | | | | - | | | | 2,681 | | | | - | | | | 2,681 | |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | (229,371 | ) | | | (229,371 | ) |
June 30, 2008 | | | 3,165,522 | | | $ | 3,166 | | | $ | 5,837,649 | | | $ | (5,960,705 | ) | | $ | (119,890 | ) |
See accompanying notes to unaudited financial statements.
ABAZIAS, INC
STATEMENTS OF CASH FLOW
Six Months Ended June 30, 2008 and 2007
(Unaudited)
| | 2008 | | | 2007 | |
Cash Flows From Operating Activities | | | | | | | | |
Net loss | | $ | (229,371) | | | $ | (1,358,468 | ) |
Adjustments to reconcile net loss to net cash | | | | | | | | |
used in operating activities: | | | | | | | | |
Common stock issued for services | | | 5,100 | | | | 141,725 | |
Options issued for services | | | - | | | | 1,002,344 | |
Imputed interest on stockholder loan | | | 2,681 | | | | 1,945 | |
Depreciation and amortization | | | 8,833 | | | | 9,240 | |
Changes in: | | | | | | | | |
Accounts receivable | | | 175,304 | | | | 116,694 | |
Inventory | | | (85,559) | | | | 29,213 | |
Accounts payable and accrued expenses | | | (34,748) | | | | (390,566) | |
Bank overdraft | | | - | | | | 49,969 | |
Deferred revenues | | | - | | | | (19,549) | |
Net Cash Used In Operating Activities | | | (157,760) | | | | (417,453) | |
| | | | | | | | |
Cash Flows From Investing Activities | | | | | | | | |
Purchase of assets | | | - | | | | (770) | |
Net Cash Used In Investing Activities | | | - | | | | (770) | |
| | | | | | | | |
Cash Flows From Financing Activities | | | | | | | | |
Proceeds from subscription receivable | | | - | | | | 25,000 | |
Payment on loans from stockholders | | | (146,000 | ) | | | (64,131 | ) |
Common stock issued for cash | | | 50,000 | | | | - | |
Net Cash Used In Financing Activities | | | (96,000 | ) | | | (39,131 | ) |
| | | | | | | | |
| | | | | | | | |
Net change in cash | | | (253,760 | ) | | | (457,354 | ) |
Cash at beginning of period | | | 337,773 | | | | 457,354 | |
Cash at end of period | | $ | 84,013 | | | $ | - | |
| | | | | | | | |
Supplementary Disclosures: | | | | | | | | |
Income tax paid | | $ | - | | | $ | - | |
Interest paid | | | - | | | | - | |
| | | | | | | | |
Non-cash operating and financing activities: | | | | | | | | |
Common stock issued as payment on stock payable | | $ | 50,000 | | | $ | 300,000 | |
| | | | | | | | |
| | | | | | | | |
See accompanying notes to unaudited financial statements.
ABAZIAS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
The accompanying unaudited interim financial statements of Abazias, Inc., have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Abazias’ latest Annual Report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year, 2007, as reported in Form 10-KSB, have been omitted.
NOTE 2 - - LOANS FROM STOCKHOLDERS
The majority stockholder has advanced money to Abazias on an as-needed basis during the period ended June 30, 2008 and will continue to advance money to support Abazias' working capital and cash flow needs for the year ending December 31, 2008. The advances are due upon demand, bear no interest and have no collateral. Imputed interest expenses of $2,681 and $1,945 using an interest rate of 8% was recorded as a contribution to capital for the six month period ended June 30, 2008 and 2007, respectively. The balance as of June 30, 2008 was $62,031.
NOTE 3 - - EQUITY
On January 24, 2008, 3,000 common shares were issued to a consultant for services with a fair value of $5,100.
On March 13th, 2008, Abazias issued 29,762 common shares for a $50,000 stock payable.
On March 13th, 2008, Abazias issued 29,762 common shares for $50,000 cash.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
Some of the statements contained in this Form 10-Q that are not historical facts are "forward-looking statements" which can be identified by the use of terminology such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 10-Q, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:
· | Our ability to maintain, attract and integrate internal management, technical information and management information systems; |
· | Our ability to generate customer demand for our services; |
· | The intensity of competition; and |
· | General economic conditions. |
All written and oral forward-looking statements made in connection with this Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
Overview
We are an online retailer of high quality loose diamonds and fine jewelry settings for our diamonds. Our web site at www.abazias.com showcases over 100,000 diamonds almost all of which are independently certified and around 600 styles of fine jewelry, including rings, wedding bands, earrings, necklaces, and bracelets.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2008 and 2007
| | Three months | | | Six months | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | |
Sales | | $ | 1,848,130 | | | $ | 1,697,683 | | | | 3,640,832 | | | $ | 3,342,367 | |
Cost of sales | | | 1,587,238 | | | | 1,346,001 | | | | 3,139,118 | | | | 2,895,391 | |
Gross profit | | | 260,892 | | | | 351,682 | | | | 501,714 | | | | 446,976 | |
| | | | | | | | | | | | | | | | |
General and administrative | | | 331,306 | | | | 402,143 | | | | 728,404 | | | | 1,803,499 | |
Operating loss | | | (70,414 | ) | | | (50,461 | ) | | | (226,690 | ) | | | (1,356,523 | ) |
| | | | | | | | | | | | | | | | |
Interest expense | | | (1,237 | ) | | | (754 | ) | | | (2,681 | ) | | | (1,945 | ) |
Net Loss | | $ | (71,651 | ) | | $ | (51,215 | ) | | | (229,371 | ) | | | (1,358,468 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic and diluted loss per share | | $ | (0.02 | ) | | $ | (0.01 | ) | | | (0.07 | ) | | | (0.50 | ) |
| | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | 3,165,522 | | | | 2,915,838 | | | | 3,141,251 | | | | 2,722,606 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2008 and 2007
Our sales for the three months ended June 30, 2008 vs. three months ended June 30, 2007 increased 9% to $1,848,130 from $1,697,683 primarily due to an increase in online marketing campaigns, especially with respect to increasing our visibility on search engine rankings. This is a result of our extensive internal search engine optimization campaign and pay per performance search engine efforts. Additionally, an increased expenditure and its corresponding exposure in certain jewelry and general retail internet portals, like pricegrabber.com and pricescope.com, assisted in this increase in revenue.
Our cost of sales for the three months ended June 30, 2008 vs. three months ended June 30, 2007 increased 18% from $1,587,237 from $1,346,001 primarily due to an increase in sales.
Our general and administrative expenses for the three months ended June 30, 2008 vs. three months ended June 30, 2007 decreased 18% to $331,306 from $402,143 primarily due to a significant reduction in underperforming paid advertising spend.
.
Our interest expense for the three months ended June 30, 2008 vs. three months ended June 30, 2007 increased to $1,237. This was a result of an increase in average outstanding principal liability owed to our major stockholder Oscar Rodriguez during this period.
Our net loss for the three months ended June 30, 2008 vs. three months ended June 30, 2007 increased 40% to $71,651 from $51,215 due primarily to a disproportionally low cost of goods for the quarter ending June 30th 2007 in which some of that quarters cost were in the previous and following quarters.
Six Months Ended June 30, 2008 and 2007
Our sales for the six months ended June 30, 2008 vs. six months ended June 30, 2007 increased 9% to $3,640,832 from
$3,342,367 primarily due to an increase in online marketing campaigns, especially with respect to increasing our visibility on search engine rankings. This is a result of our extensive internal search engine optimization campaign and pay per performance search engine efforts. Additionally, an increased expenditure and its corresponding exposure in certain jewelry and general retail internet portals, like pricegrabber.com and pricescope.com, assisted in this increase in revenue.
Our cost of sales for the six months ended June 30, 2008 vs. six months ended June 30, 2007 increased 8% to $3,139,118 from $2,895,391 primarily due to an increase in sales
Our general and administrative expenses for the six months June 30, 2008 vs. six months ended June 30, 2007 decreased 60% to $728,404 from $1,803,499. For the period ended June 30, 2007 the company had expense of $1,114,069 relating to stock issued to key employees and consultants. This expense was not present for the six months ended June 30, 2008. For the first 4 months of 2008 the company did have increased spending on internet related advertising including search engine optimization, pay per click advertising, and portal advertising cost. Which have been significantly reduced in the following quarter ending June 30th 2008. Additionally, payroll has increased due to new hires in preparation of future growth.
Liquidity and Capital Resources
At June 30, 2008 we had current assets of:
Cash | | $ | 84,013 | |
Accounts receivable | | | 224,977 | |
Inventory | | | 331,129 | |
Total current assets | | | 640,119 | |
At June 30, 2008 we had current liabilities of:
Accounts payable | | $ | 704,518 | |
Loans from stockholders | | | 62,031 | |
Total Current Liabilities | | | 766,549 | |
We expect that our average cash revenues to increase over the next twelve months based on recent historical trends. We also expect expenses to increase over the same period. We anticipate that this will result in an increase in gross profit as well as a decrease in advertising spend should compensate for the current negative cash flow position, primarily because a significant portion of our expenses are fixed. While this may not always compensate for negative cash flow on a quarter by quarter basis due to the timing or certain large payables (ie. diamond vendors), over a larger period of time we expect this to be the case. We intend to raise additional funds from an offering of our stock in the future. Except for preliminary discussions, we have not taken any steps to effect this offering and we have no agreement, commitment or understanding for this financing. The offering may not occur, or if it occurs, may not generate the required funding. We may also consider securing debt financing.
On August 4, 2008, a letter concerning a possible acquisition by OmniReliant Holdings, Inc. (“Omni”) of approximately 100% of the outstanding capital stock (“Shares”) of a newly formed subsidiary (“Abazias Sub”) from Abazias, Inc. (“Abazias”) (the “Transaction”) was executed by the parties.
The agreement contains certain provisions which are merely a non-binding expression of intent and other provisions which constitute a binding agreement.
Non-Binding Expression of Intent
ACQUISITION PRICE:
Omni shall acquire the Shares in exchange for 13,000,000 shares of a zero coupon convertible preferred stock, or similar agreed to security exchange, to be designated (“Preferred Stock”). If Omni’s common stock is below $1.20 per share at closing, Omni will issue additional shares in order to make up such deficiency. The Preferred Stock or other mutually agreeable security is convertible into 13,000,000 shares of common stock of Omni. In addition, Omni agrees to enter into an employment agreement with Oscar Rodriguez, Jesus Diaz and a key consultant (“Employment Agreements”). As consideration for such Employment Agreements and non-compete agreement Omni will pay $500,000. In addition, and not as a condition to the Transaction, Omni will uses its best efforts to provide additional funding of at least $500,000, within 6 months post closing of the Transaction to the Abazias Sub.
DUE DILIGENCE:
To consummate the Transaction, Omni will need to: (a) complete due diligence by legal counsel and auditor on the timeframe set forth herein, (b) negotiate and execute binding definitive documents with Abazias, including lock-ups (c) obtain board, regulatory and third-party approvals as required, and (d) enter into 2 year employment and non-compete agreements with Oscar Rodriguez and Jesus Diaz, such agreements shall also provide for a bonus in the event the Abazias Sub sells in excess of $15MM in cash within 2 years from closing. The bonus will be every dollar over 15MM in cash up to 17MM and 15% of the cash in excess of 17MM.
CONDITIONS TO THE TRANSACTION:
Abazias, will file with the Securities and Exchange Commission (“SEC”) and subsequent to clearance by the SEC: (i) mail to their shareholders a Proxy Statement setting forth the Transaction and soliciting, with the affirmative unanimous recommendation of such company’s Board of Directors, the affirmative vote of such number of their shareholders representing such number of their shares as is required by the laws of their respective domiciles, and (ii) hold properly noticed special meetings of their shareholders for the purpose of approving the Transaction, and at such meeting receive the affirmative vote of their shareholders representing such number of their shares as is required by the laws of their respective domiciles. Closing of the Transaction will occur ten days following the receipt by Abazias, of the affirmative vote of their shareholders representing such number of their shares as is required by the laws of their respective domiciles. At closing each party will deliver such ordinary and customary closing documents (including but not limited to third party consents, regulatory approvals, etc.) as is required to close the Transaction.
The parties each agree to negotiate in good faith and, if the parties reach a definitive agreement, and use all reasonable efforts to close the Transaction prior to February 1, 2009.
Binding Agreements
CONVERTIBLE NOTE:
A convertible secured promissory note in the principal amount of $500,000 shall be issued to Omni on the principal terms and conditions provided for herein (“Note”), within 10 days of signing this agreement. The Note shall provide for per annum interest of 10%, interest payable quarterly, with principal and all unpaid interest thereon due on or before December 31, 2009. The Note shall be convertible into common stock of Abazias at the closing bid price at the time of conversion with a floor of $.50 per share or be convertible into 25% of the shares of Abazias on a fully-diluted basis post closing of the Transaction. In the event the acquisition and share exchange is effected, such note will be cancelled, and applied towards the minimum total deal value referenced above.
EXCLUSIVITY PERIOD:
During the period from the August 4, 2008 until the date which is the earlier of: (a) ninety days following the date of acceptance of this letter by Abazias and any extension thereof, or (b) the determination by Omni that it does not intend to proceed on the basis outlined in the letter (the “Exclusivity Period”), neither Abazias nor any person acting with Abazias authorization, approval or consent, express or implied, shall take any action, directly or indirectly: (i) to initiate or solicit any Alternate Transaction, or (ii) except as required in the furtherance of the fiduciary duties of the board of directors of Abazias Sub, (a) engage in discussions or negotiations with any entity or person other than Omni and its representatives concerning any Alternate Transaction (as defined in the letter), or (b) otherwise take any action outside of the ordinary course of business which would prejudice the ability of Omni to complete the Transaction described herein.
EXPENSE REIMBURSEMENT/BREAK-UP FEE:
If, during the Exclusivity Period, or any extensions thereof, Abazias, or any of Abazias’ affiliates enters into definitive documentation with respect to, or accepts any proposal with respect to any Alternate Transaction, then Abazias, joint and severally, will pay to Omni an amount in cash equal to the lesser of: (a) the sum of: (i) the documented out-of-pocket third party expenses Omni has incurred in respect of the transactions contemplated by this letter (whether incurred before or after the date of this letter), or (ii) $50,000.
The letter of intent/agreement is filed as an exhibit to our Form 8-K filed August 5, 2008 and should be referred to in its entirety for complete information concerning this agreement.
Although this cash flow position is currently negative, management feels reasonably confident that it is in a position to maintain or increase the required level of sales, and/or reduce corresponding expenses as needed to fulfill its financial obligations from a cash flow perspective on an ongoing basis into the future, although there is no assurance we can do so. The majority stockholder had advanced money to Abazias on an as−needed basis.. At June 30, 2008 the amount of the advance was $62,031. Our recent negative cash flow has been funded by previous stock issuances to accredited investors and the majority stockholder
Certain Accounting Policies
Revenue recognition
a) Return Policy- For most of our products, we offer an unconditional 10-day return policy, under which customers desiring to return a product receive a return authorization by calling our customer service center. We have, based on historical return figures, been able to determine that returns have never had any material impact on our financial statements, and historically been less then than 5% of total sales, based on analyzing historical return rates. We therefore expect no more than 5% of sales to be returned which can only occur within 10 days after the sale is made. Returned products are treated as merchandise credits and are subject to the same inventory accountability. Revenue is recognized when the diamonds are shipped, and returns immediately debited against current sales upon any return.
b) Since our inventory is purchased at the time of sale,, we have reviewed EITF 99-19, to clarify if we might be deemed a diamond agent and have to report sales on a net basis. We clearly do not fit under the appropriate definition as an agent for several reasons. We purchase all of our diamonds under our credit facilities with our various wholesalers. This varies between many dealers and in some cases, requires us to wire funds before a diamond is shipped, to many dealers offering us credit terms of net 30 for payment. The customer that purchases a diamond or other product, does so with us solely, and is never even aware of our wholesaler relationships, and even at any time we’re aware, could not purchase from them. Consequently, regardless of whether we are paid or not for the diamond or other products we sell, we are obligated to pay our wholesaler for said product once shipped. We have purchased the diamond or product, and the responsibility of said product solely rests with us, including accepting a return from a customer, even when we in turn might not be able to return the same diamond to our wholesaler. Regardless of whether or not the company is deemed an agent, which we clearly are not, we would still fulfill all the indicators under EITF 99-19 for gross revenue reporting. We are the primary obligator in the arrangement, we maintain inventory risk in the event the product is returned, price establishment rests solely with us, we can and do modify the product frequently by mounting diamonds, as well as finishing them and other products, we can and do choose among many suppliers, all products sold are determined by us, we have physical loss risk, and additionally shoulder credit risk. Based on these reasons, we clearly are not an agent, and should report revenues on a gross basis.
Trade up policy
We have a lifetime trade up policy which provides a guaranteed trade up of 80% of the price of the original diamond purchase. This provides our customers with the ability and incentive to become and remain our customers for many years to come. This affords our customers an option that many of our competitors will not extend to them. If the buyer exercised his/her trade-in right (functionally an option written by us), we would exchange a new diamond in for the original. Under normal circumstances, any trade up policy exercised would be even more profitable than a sale not including an exercised policy. This is because, on average we would make our normal markup, in addition to getting a discount that is greater than our cost on the diamond traded. It is conceivably possible, in a catastrophic event to the diamond markets which caused the value of diamonds to drop, customers would want to take advantage of this policy. Our policy is limited to the value of the diamond traded in, being close to the value when purchased. As such, we are protected from the functional price guarantee as mentioned in EITF 00-24 and FIN 45. Specifically our policy is only valid when, the diamond is at least 80% of the wholesale per carat price at time of purchase, based on published wholesale prices in the Rappaport industry publication, which is the de-facto standard for diamond pricing. To date, no customers have exercised this policy with us. After reviewing EITF 00-24 and FIN 45, we would not have any potential financial exposure to account for as a result of this policy, since our trade in value requirements based on current market conditions at the time of trade in, require the diamond to be worth 80% of the wholesale carat price, and if it does not, no trade up policy is valid.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework stated by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, due to our financial situation, we will be implementing further internal controls as we become operative so as to fully comply with the standards set by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the fiscal period ending June 30, 2008 covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This conclusion by the Company’s Chief Executive Officer and Chief Financial Officer does not relate to reporting periods after June 30, 2008.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our CEO and CFO, conducted an evaluation of the effectiveness of our internal control over financial reporting. Based on its evaluation, our management concluded that our internal controls over financial reporting were ineffective and that there is a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness relates to the monitoring and review of work performed by our Chief Financial Officer and lack of segregation of duties. In the preparation of audited financial statements, footnotes and financial data all of our financial reporting is carried out by our Chief Financial Officer, and we do not have an audit committee to monitor or review the work performed. The lack of segregation of duties results from lack of accounting staff with accounting technical expertise necessary for an effective system of internal control. In order to mitigate this material weakness to the fullest extent possible, all financial reports are reviewed by the Chief Executive Officer. All unexpected results are investigated. At any time, if it appears that any control can be implemented to continue to mitigate such weaknesses, it is immediately implemented. As soon as our finances allow, we will hire sufficient accounting staff and implement appropriate procedures for monitoring and review of work performed by our Chief Financial Officer.
This annual report does not include an attestation report of the Company s registered public accounting firm regarding internal control over financial reporting. Management s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Quartely Report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
As of June 30, 2008 the Company identified a material weakness in our internal controls over financial reporting. The material weakness relates to the monitoring and review of work performed by our Chief Financial Officer and lack of segregation of duties. In the preparation of audited financial statements, footnotes and financial data all of our financial reporting is carried out by our Chief Financial Officer, and we do not have an audit committee to monitor or review the work performed. The lack of segregation of duties results from lack of accounting staff with accounting technical expertise necessary for an effective system of internal control. In order to mitigate this material weakness to the fullest extent possible, all financial reports are reviewed by the Chief Executive Officer. All unexpected results are investigated. At any time, if it appears that any control can be implemented to continue to mitigate such weaknesses, it is immediately implemented. As soon as our finances allow, we will hire sufficient accounting staff and implement appropriate procedures for monitoring and review of work performed by our Chief Financial Officer.
No change in the Company s internal control over financial reporting occurred during the quarter ended December 31, 2007, that materially affected, or is reasonably likely to materially affect, the Company s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 13, 2008, Abazias issued 59,524 shares of common stock for $50,000 in cash to one individual and one entity.
Our shares were issued in all of the foregoing transactions in reliance upon Section 4(2) of the 1933 Act in view of the following:
● | None of these issuances involved underwriters, underwriting discounts or commissions. |
● | Restrictive legends were and will be placed on all certificates issued as described above. |
● | The distribution did not involve general solicitation or advertising. |
The distributions were made only to investors who were sophisticated enough to evaluate the risk of the investment.
In addition to representations given to us by the above-referenced investors, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided the opportunity to obtain any additional information, to the extent we possessed such information, necessary to verify the accuracy of the information to which the investors were given access.
Item 3. Default Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
(a) Exhibits:
Exhibit No. | Document Description |
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(b) Form 8-K.
Form 8-K filed August 5, 2008
SIGNATURES
In accordance with Section 12 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Abazias, Inc. | |
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Dated: August 13, 2008 | By: | /s/ Oscar Rodriguez | |
| | Oscar Rodriguez | |
| | President and Director | |
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Dated: August 13, 2008 | By: | /s/ Jesus Diaz | |
| | Jesus Diaz | |
| | Principal Financial Officer and Principal Accounting Officer | |
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