UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to _________________
Commission File No.: 333-137210
ZEVOTEK, INC.
(Exact name of registrant as specified in its charter)
| Delaware | | 05-0630427 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
900 Southeast Ocean Blvd
Suite 130D
Stuart, FL 34994
(Address of principal executive offices)
Issuer’s telephone number: (772) 600-2676
Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
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 filter ¨ | | Accelerated filter ¨ |
Non-accelerated filter ¨ | (Do not check if a smaller reporting company) | 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
As of November 15, 2010, there were 244,558,267 shares of our common stock outstanding.
Transitional Small Business Disclosure Format: Yes ¨ No x
Quarterly Report on Form 10-Q for the
Quarterly Period Ended September 30, 2010
Table of Contents
| | | Page | |
| PART I. FINANCIAL INFORMATION | | | | |
| Item 1. Financial Statements | | | 3 | |
| Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and June 30, 2010 | | | 3 | |
| Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2010 and 2009 (unaudited): | | | 4 | |
| Condensed Consolidated Statement of Changes in Deficiency in Stockholders’ Equity for Period June 30, 2009 to September 30, 2010 (unaudited): | | | 5 | |
| Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2010 and 2009 (unaudited): | | | 6 | |
| Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2010: | | | 7 | |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | 17 | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | | | 21 | |
| Item 4 Controls and Procedures | | | 21 | |
| | | | | |
| PART II. OTHER INFORMATION | | | | |
| Item 1. Legal Proceedings | | | 21 | |
| Item 1A Risk Factor | | | 22 | |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | | 22 | |
| Item 3. Defaults upon Senior Securities | | | 22 | |
| Item 4. Removed and Reserved | | | 22 | |
| Item 5. Other Information | | | 22 | |
| Item 6. Exhibits | | | 22 | |
| | | | | |
| CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 | | | | |
| CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 | | | | |
PART 1: FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
ZEVOTEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | September 30, | | | June 30, | |
| | | 2010 | | | 2010 | |
| | | (unaudited) | | | | |
| ASSETS | | | | | | |
| | | | | | | |
| Current assets: | | | | | | |
| Cash | | $ | — | | | $ | 132,517 | |
| Accounts receivable | | | 7,037 | | | | 6,269 | |
| Inventory | | | 95,106 | | | | 98,247 | |
| Prepayments and other current assets | | | 32,203 | | | | 17,993 | |
| Total current assets | | | 134,346 | | | | 255,026 | |
| | | | | | | | | |
| Other assets: | | | | | | | | |
| Security deposit | | | 5,000 | | | | 5,000 | |
| Licensing agreement | | | 40,000 | | | | 40,000 | |
| Total assets | | $ | 179,346 | | | $ | 300,026 | |
| | | | | | | | | |
| LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 671,758 | | | $ | 705,855 | |
| Advances payable | | | 701,958 | | | | 820,389 | |
| Convertible notes payable and demand notes (net of debt discount of $42,336 and $53,692 as of September 30, 2010 and June 30, 2010, respectively) | | | 196,914 | | | | 182,557 | |
| Customer deposits | | | 24,351 | | | | 24,351 | |
| Total current liabilities | | | 1,594,981 | | | | 1,733,152 | |
| | | | | | | | | |
| Long term portion of convertible notes payable (net of debt discount of $177,952 and $22,916 as of September 30, 2010 and June 30, 2010, respectively) | | | 14,478 | | | | 21,084 | |
| | | | | | | | | |
| Deficiency in stockholders' equity: | | | | | | | | |
| Series A Preferred stock, $0.00001 par value; 10,000,000 shares authorized; 50,000 shares issued and outstanding as of September 30, 2010 and June 30, 2010. | | | 1 | | | | 1 | |
| Series B Preferred stock, $0.00001 par value; 1,000,000 shares authorized; 1,000,000 shares issued and outstanding as of September 30, 2010 and June 30, 2010 | | | 10 | | | | 10 | |
| Common stock, $0.00001 par value, 5,000,000,000 shares authorized; 207,647,478 and 173,594,998 shares issued and outstanding as of September 30, 2010 and June 30, 2010, respectively | | | 2,076 | | | | 1,736 | |
| Common stock to be issued | | | — | | | | 30,000 | |
| Treasury stock, 2,000 shares as of September 30, 2010 and June 30, 2010 | | | — | | | | — | |
| Additional paid in capital | | | 4,452,858 | | | | 3,999,068 | |
| Accumulated deficit | | | (5,885,058 | ) | | | (5,485,025 | ) |
| Total deficiency in stockholders' equity | | | (1,430,113 | ) | | | (1,454,210 | ) |
| Total liabilities and deficiency in stockholders' equity | | $ | 179,346 | | | $ | 300,026 | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
ZEVOTEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | Three Months Ended September 30, | |
| | | 2010 | | | 2009 | |
| REVENUES: | | | | | | |
| Sales | | $ | 5,340 | | | $ | — | |
| | | | | | | | | |
| Cost of sales | | | 3,141 | | | | — | |
| | | | | | | | | |
| Gross profit | | | 2,199 | | | | — | |
| | | | | | | | | |
| OPERATING EXPENSES: | | | | | | | | |
| Selling | | | 137,704 | | | | 17,000 | |
| General and administrative | | | 188,973 | | | | 184,785 | |
| Total operating expense | | | 326,677 | | | | 201,785 | |
| | | | | | | | | |
| Loss from operations | | | (324,478 | ) | | | (201,785 | ) |
| | | | | | | | | |
| OTHER (EXPENSE): | | | | | | | | |
| Interest, net | | | (26,805 | ) | | | (13,745 | ) |
| Amortization of beneficial conversion feature | | | (48,750 | ) | | | (78,731 | ) |
| | | | | | | | | |
| Total other expense | | | (75,555 | ) | | | (92,476 | ) |
| Net loss before provision for income taxes | | | (400,033 | ) | | | (294,261 | ) |
| | | | | | | | | |
| Income taxes | | | — | | | | — | |
| | | | | | | | | |
| NET LOSS | | $ | (400,033 | ) | | $ | (294,261 | ) |
| | | | | | | | | |
| Net loss per common share, basic and fully diluted | | $ | (0.00 | ) | | $ | (0.02 | ) |
| | | | | | | | | |
| Weighted average number of common shares outstanding, basic and fully diluted | | | 191,866,755 | | | | 16,509,044 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
ZEVOTEK, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the Period from June 30, 2009 to September 30, 2010
(UNAUDITED)
| | | Preferred stock | | | | | | | | | Common | | | | | | | | | Additional | | | | | | | |
| | | Series A | | | Series B | | | Common stock | | | Stock To | | | Treasury stock | | | Paid in | | | Accumulated | | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Be Issued | | | Shares | | | Amount | | | Capital | | | Deficit | | | Total | |
| BALANCE, June 30, 2009 | | | 50,000 | | | $ | 1 | | | | 1,000,000 | | | $ | 10 | | | | 8,804,619 | | | $ | 88 | | | $ | 30 | | | | 2,000 | | | $ | — | | | $ | 2,728,469 | | | $ | (4,146,023 | ) | | $ | (1,417,425 | ) |
| Common stock issued for services rendered | | | — | | | | — | | | | — | | | | — | | | | 6,670,600 | | | | 66 | | | | — | | | | — | | | | — | | | | 276,230 | | | | — | | | | 276,296 | |
| Common stock issued for accrued expenses | | | — | | | | — | | | | — | | | | — | | | | 1,500,000 | | | | 15 | | | | — | | | | — | | | | — | | | | 489,734 | | | | — | | | | 489,749 | |
| Conversion of debt and accrued interest for common stock | | | — | | | | — | | | | — | | | | — | | | | 155,698,350 | | | | 1,557 | | | | (30 | ) | | | — | | | | — | | | | 309,569 | | | | — | | | | 311,096 | |
| Common stock issued for officer’s compensation | | | — | | | | — | | | | — | | | | — | | | | 350,000 | | | | 4 | | | | — | | | | — | | | | — | | | | 10,496 | | | | — | | | | 10,500 | |
| Fair value of Beneficial conversion feature | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 44,000 | | | | — | | | | 44,000 | |
| Common stock to be issued to former officer for accrued compensation | | | — | | | | — | | | | — | | | | — | | | | 571,429 | | | | 6 | | | | 30,000 | | | | — | | | | — | | | | 140,570 | | | | — | | | | 170,576 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,339,002 | ) | | | (1,339,002 | ) |
| BALANCE, June 30, 2010 | | | 50,000 | | | $ | 1 | | | | 1,000,000 | | | $ | 10 | | | | 173,594,998 | | | $ | 1,736 | | | $ | 30,000 | | | | 2,000 | | | $ | — | | | $ | 3999,068 | | | $ | (5,485,025 | ) | | $ | (1,454,210 | ) |
| Common stock issued for services rendered and prepayments | | | — | | | | — | | | | — | | | | — | | | | 5,117,956 | | | | 51 | | | | — | | | | — | | | | — | | | | 79,149 | | | | — | | | | 79,200 | |
| Common stock issued for accounts payable | | | — | | | | — | | | | — | | | | — | | | | 4,428,572 | | | | 44 | | | | — | | | | — | | | | — | | | | 79,956 | | | | — | | | | 80,000 | |
| Conversion of debt for common stock | | | — | | | | — | | | | — | | | | — | | | | 20,500,000 | | | | 205 | | | | — | | | | — | | | | — | | | | 40,795 | | | | — | | | | 41,000 | |
| Common stock issued to officer and board members | | | — | | | | — | | | | — | | | | — | | | | 2,250,000 | | | | 22 | | | | — | | | | — | | | | — | | | | 31,478 | | | | — | | | | 31,500 | |
| Fair value of Beneficial conversion feature | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 192,430 | | | | — | | | | 192,430 | |
| Common stock issued to former officer for accrued compensation | | | — | | | | — | | | | — | | | | — | | | | 1,755,952 | | | | 18 | | | | (30,000 | ) | | | — | | | | — | | | | 29,982 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (400,033 | ) | | | (400,033 | ) |
| BALANCE, September 30, 2010 | | | 50,000 | | | $ | 1 | | | | 1,000,000 | | | $ | 10 | | | | 207,647,478 | | | $ | 2,076 | | | $ | — | | | | 2,000 | | | $ | — | | | $ | 4,452,858 | | | $ | (5,882,058 | ) | | $ | (1,430,113 | ) |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
ZEVOTEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2010 and 2009
(UNAUDITED)
| | | 2010 | | | 2009 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net loss | | $ | (400,033 | ) | | $ | (294,261 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Common stock issued for services rendered | | | 54,630 | | | | 116,093 | |
| Common stock issued to board members as remuneration | | | 31,500 | | | | — | |
| Amortization of beneficial conversion feature | | | 48,750 | | | | 78,731 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (768 | ) | | | — | |
| Inventory | | | 3,141 | | | | — | |
| Prepayments and other current assets | | | 10,360 | | | | 17,000 | |
| Accounts payable and accrued expenses | | | 45,903 | | | | 19,676 | |
| Net cash used in operating activities | | | (206,517 | ) | | | (62,761 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | — | | | | — | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Proceeds from advances payable | | | 74,000 | | | | 62,827 | |
| Net cash provided by financing activities | | | 74,000 | | | | 62,827 | |
| | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (132,517) | | | | 66 | |
| Cash and cash equivalents, beginning of period | | | 132,517 | | | | — | |
| | | | | | | | | |
| Cash and cash equivalents, end of period | | $ | — | | | $ | 66 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW: | | | | | | | | |
| Interest paid | | $ | — | | | $ | — | |
| Taxes paid | | $ | — | | | $ | — | |
| NON CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | |
| Common stock issued for prepayment of services | | $ | 24,570 | | | $ | — | |
| Common stock issued for settlement of accrued liabilities | | $ | 110,000 | | | $ | — | |
| Exchange of convertible debenture for advances payable | | $ | 192,430 | | | $ | 44,000 | |
| Debt and accrued interest converted for shares of common stock | | $ | 41,000 | | | $ | 41,730 | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
ZEVOTEK, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.
Business and Basis of Presentation
ZEVOTEK, INC. (“Company” or “Registrant”) was organized on December 19, 2005 under the state laws of Delaware with an original name of “The Diet Coffee Company.” On June 25, 2008, the Company changed its name to Zevotek, Inc.
The Company plans to market and sell a range of innovative personal and home care items. The Company’s wholly owned subsidiary is Ionic Bulb.com, Inc., a Delaware corporation formed on August 21, 2007, which markets and sells the Zevotek Ionic Bulb. Zevotek has a license to sell the Ionic Bulb, a patented air purifier that silently emits negative ions using a microchip placed inside a 10,000-hour energy saving compact fluorescent light bulb (CFL). One Ionic Bulb is an eco-easy maintenance-free inexpensive alternative that cleans the air in a 100 square foot area. Outfitting lamps and ceiling lights with the Ionic Bulb rids a living room, kitchen, bedroom, children’s playroom, workout area and office space of unpleasant odors and indoor air pollutants that you breathe. The Company sells the Ionic Bulb through TV infomercials and the Internet and plans to market Ionic Bulbs through catalogs and major U.S. retail and specialty stores. The Company’s 1 minute and 2 minute Ionic Bulb TV ads are designed to air on national cable channels, local broadcast channels and TV superstations. Zevotek directly sells the Ionic Bulb to consumers through newionicbulb.com and amazon.com.
General
The accompanying unaudited condensed consolidated financial statements of Zevotek, Inc. have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission and instructions to Form 10Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The consolidated balance sheet of the Company, as of June 30, 2010, was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly the financial position of the Company and the results of the Company’s operations and cash flows for the periods presented. All of these adjustments are of normal recurring nature. All intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the year ended June 30, 2010.
The company has adopted the fiscal year end of June 30.
Reverse Stock Split
Effective June 26, 2008, the Company authorized for its common stock a 50:1 reverse stock split. Also, par value for the Preferred Stock and Common stock was changed to $.00001 per share. All preferred and common stock and related information have been retroactively restated.
On September 24, 2010, the Company filed a certificate of amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware in order to effectuate a reverse split on a 1 to 20 basis (the “Reverse Split”). On October 6, 2010, Financial Industry Regulatory Authority (“FINRA”) approved the Reverse Split and each holder of common stock received 1 share of the Company’s common stock for each 20 shares of the Company’s common stock they owned. The Company did not issue fractional shares in connection with the foregoing stock split. Fractional shares were rounded up to the nearest whole share. All per share numbers reflected in this quarterly report on Form 10-Q are reflective of the Reverse Split.
Revenue Recognition
For revenue from product sales, the Company recognizes revenue in accordance with Accounting Standards Codification 605, “Revenue Recognition SEC Staff Accounting Bulletin Topic 13” (“ASC 605”). ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
ASC 605 incorporates Accounting Standards Codification 605-25, “Revenue Recognition Multiple Element Arrangements”. ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.
Consideration Paid to Customers
The Company offers our customers certain incentives in the form of cooperative advertising arrangements, product markdown allowances, trade discounts, cash discounts, and slotting fees. Markdown allowances, trade discounts, cooperative advertising program participation and cash discounts are all recorded as reductions of net sales. No customer incentives are included in sales for the three months ended September 30, 2010 and 2009.
Use of Estimates
The preparation of the financial statement in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Foreign Currency Translation
The Company translates the foreign currency assets and liabilities at current exchange rates, and related revenue and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a separate component in stockholders' equity. Foreign currency translation gains and losses are included in the statement of operations.
Cash and Cash Equivalents
For the purpose of the accompanying unaudited condensed consolidated financial statements, all highly liquid investments with a maturity of three months or less are considered to be cash equivalents.
Inventories / Cost of Goods Sold
The Company has adopted a policy to record inventory at the lower of cost or market determined by the first-in-first-out method. The elements of cost that comprise inventory and cost of goods sold are FOB shipping point costs, freight and destination charges, customs and importation fees and taxes, customer broker fees (if any) and other related costs. Warehousing costs are charged to cost of goods in the period the costs are incurred. The Company provides inventory allowances based on estimates of obsolete inventories.
Inventories consist of finished products available for sale to distributors and customers. At September 30, 2010 and June 30, 2010, finished goods inventory was $95,106 and $98,247, respectively.
Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts to reduce amounts to their estimated realizable value, including reserves for customer and other receivable allowances and incentives. In estimating the provision for doubtful accounts, the company considers a number of factors including age of the accounts receivable, trends and ratios involving the age of the accounts receivable and the customer mix of each aging categories. As of September 30, 2010 and June 30, 2010, the allowance for doubtful accounts was $0.
Property and Equipment
Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment would be recorded at cost and depreciated using the straight-line method over their estimated useful lives.
Impairment of long lived assets
The Company has adopted Accounting Standards Codification 360 "Property, Plant and Equipment" (“ASC 360”). The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undercounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
Advertising
The Company charges the costs of advertising to expenses as incurred. The Company charged $86,680 and $17,000 to operations for the three months ended September 30, 2010 and 2009, respectively.
Comprehensive Income (Loss)
The Company adopted Accounting Standards Codification subtopic 220-10, “Comprehensive Income” (“ASC 220-10”). ASC 220-10 establishes standards for the reporting and displaying of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owners sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. ASC 220-10 requires other comprehensive income (loss) to include foreign currency translation adjustments and unrealized gains and losses on available for sale securities. The Company does not have any items of comprehensive income in the periods presented, that are not already presented in the statement of operations.
Income Taxes
The Company has adopted Accounting Standards Codification 740, “Income Taxes” (“ASC 740”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant, except basis difference related to certain debts.
Effective January 1, 2007 the Company adopted an amendment to the requirements of ASC 740. The amended standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
ASC 740-10-25-5 “Income Taxes—Overall—Recognition—Basis Recognition Threshold”, (“Tax Position Topic”) provides guidance to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold, i.e. “more-likely-than-not”, that the income tax positions must achieve before being recognized in the financial statements. In addition, the Tax Position Topic requires expanded annual disclosures, including a roll forward of the beginning and ending aggregate unrecognized tax benefits as well as specific detail related to tax uncertainties for which it is reasonably possible the amount of unrecognized tax benefit will significantly increase or decrease within twelve months.
As a result of implementing ASC 740, there has been no adjustment to the Company’s financial statements and the adoption of ASC 740 did not have a material effect on the Company’s unaudited condensed consolidated financial statements for the three months ended September 30, 2010.
Research and Development
The Company accounts for research and development costs in accordance with the Financial Accounting Standards Board's Accounting Standards Codification 730 "Research and Development" (“ASC 730”). Under ASC 730, all research and development costs must be charged to expense as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company had no expenditures on research and product development for three months ended September 30, 2010 and 2009.
Stock Based Compensation
Effective January 1, 2006, the Company adopted the requirements of ASC 505 “Equity” and ASC 718-10 “Stock Compensation”, under the modified prospective transition method. The standards require the measurement of compensation cost at the grant date, based upon the estimated fair value of the award, and requires amortization of the related expense over the employee’s requisite service period.
Under ASC 718-10, stock based compensation cost will be recognized over the period during which an employee is required to provide service in exchange for the award. ASC 718-10 also requires an entity to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adoption of ASC 718-10 (the “APIC pool”). The Company has evaluated its APIC pool and has determined that it was immaterial as of January 1, 2006. ASC 718-10 also amends ASC 230 “Cash Flows”, to require that excess tax benefits that had been reflected as operating cash flows be reflected as financing cash flows.
The Company made no employee stock-based compensation grants before June 30, 2008 and during the years ended June 30, 2010 and 2009 and during the three months ended September 30, 2010; therefore it has no unrecognized stock compensation related liabilities or expense unvested or vested.
Loss per Share
The Company has adopted Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”) specifying the computation, presentation and disclosure requirements of earnings per share information. Basic loss per share has been calculated based upon the weighted average number of common shares outstanding. Stock options and warrants would have been excluded as common stock equivalents in the diluted loss per share because there effect is anti-dilutive on the computation.
Potentially dilutive shares of common stock realizable from the conversion of our convertible debentures of 4,139,729,900 and 5,022,012,998 shares, respectively at September 30, 2010 and 2009, are excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive.
Concentration of Credit Risk
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit.
Reclassifications
Certain reclassifications have been made in prior year's financial statements to conform to classifications used in the current year.
Recent Accounting Pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the results of its operations.
NOTE B - GOING CONCERN MATTERS
The accompanying unaudited condensed consolidated statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying unaudited condensed consolidated financial statements for the three months ended September 30, 2010, the Company incurred net losses of $400,033. At September 30, 2010, the Company had a working capital deficit of $1,460,635 and accumulated losses of $5,885,058. The Company is in default of principal and accrued interest on certain convertible notes payable. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.
The Company is actively pursuing additional convertible debt financing through discussions with its current lenders. The Company cannot predict whether the additional financing will be in the form of equity or debt, or be in another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, the Company may be unable to implement its current plans for expansion, repay its debt obligations as they become due, or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial conditions and result of operations.
The Company's existence is dependent upon management's ability to develop profitable operations. Management anticipates the Company may attain profitable status and improve its liquidity through the continued developing, marketing and selling of its services and additional equity investment in the Company. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
NOTE C – LICENSING AGREEMENT AND DISTRIBUTION AGREEMENT
On February 24, 2009, the Company entered into an Exclusive License and Sales Agreement whereby the Company has worldwide exclusive rights to manufacture, market use, sell, distribute and advertise a patented ionic bulb.
In exchange for the exclusive license, the Company issued 2,500,000 shares of its common stock. The license was valued at the market price of the underlying security.
NOTE D- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are as follows:
| | | September 30, 2010 | | | June 30, 2010 | |
| Accounts payable | | $ | 67,679 | | | $ | 101,379 | |
| Accrued professional fees | | | 77,600 | | | | 95,000 | |
| Accrued payroll and payroll taxes | | | 156,817 | | | | 156,817 | |
| Old disputed accounts payable | | | 136,405 | | | | 136,405 | |
| Accrued interest | | | 103,003 | | | | 76,291 | |
| Other accrued liabilities | | | 130,254 | | | | 139,963 | |
| Total | | $ | 671,758 | | | $ | 705,855 | |
NOTE E – ADVANCES PAYABLE
As of September 30, 2010 and June 30, 2010, the Company owed $701,958 and $820,389, respectively, to a note holder for cash advanced to the Company for operating purposes. The advances accrue interest at 10% per annum and are repayable on demand.
NOTE F - - CONVERTIBLE NOTES PAYABLE AND DEMAND NOTES
| | | September 30, 2010 | | | June 30, 2010 | |
| Notes Payable: | | | | | | |
| Convertible term note (a) | | $ | 3,423 | | | $ | 3,423 | |
| Convertible term note (b) | | | 1,923 | | | | 1,923 | |
| Convertible term note (c) | | | 50,000 | | | | 50,000 | |
| Convertible term note (d) | | | 40,800 | | | | 55,800 | |
| Convertible term note (e) | | | 87,972 | | | | 113,972 | |
| Convertible term note (f) | | | 11,132 | | | | 11,132 | |
| Convertible term note (g) | | | 44,000 | | | | 44,000 | |
| Convertible term note (h) | | | 192,430 | | | | — | |
| | | | 431,680 | | | | 280,250 | |
| Less: discount on debt | | | (220,288 | ) | | | (76,608 | ) |
| | | | 211,392 | | | | 203,642 | |
| Less: current portion | | | (196,914 | ) | | | (182,558 | ) |
| Long term debt | | $ | 14,478 | | | $ | 21,084 | |
| | a) | On May 14, 2008, the Company entered into a convertible term note bearing interest at 10% per annum with a maturity date of May 14, 2010. At any time at the option of the note holder, principal and interest payments may be paid in common stock at a conversion price of $0.0001 per share (see below). The Company is in default of payment of principal and interest on the note and the Company is in discussions with the note holders about amending the conversion terms to cure the default. |
| | b) | On May 27, 2008, the Company entered into a convertible term note bearing interest at 10% per annum with a maturity date of May 27, 2010. At any time at the option of the note holder, principal and interest payments may be paid in common stock at a conversion price of $0.0001 per share (see below). The Company is in default of payment of principal and interest on the note and the Company is in discussions with the note holder about amending the conversion terms to cure the default. |
| | c) | On January 1, 2008, the Company entered into a convertible term note for the principal amount of $50,000 bearing interest at 7% per annum with a maturity date of June 30, 2008. This note is convertible into common stock at 90% of the common stock closing price at June 30, 2008, or approximately 18,500 shares of common stock. The Company is in default of payment of principal and interest on the note and the Company is in discussions with the note holder about amending the conversion terms to cure the default. |
| | d) | On January 8, 2009, the Company entered into a convertible term note bearing interest at 10% per annum with a maturity date of January 8, 2011. At any time at the option of the note holder, principal and interest payments may be paid in common stock at a conversion price of $0.0001 per share (see below). |
| | e) | On March 9, 2009, the Company entered into a convertible term note bearing interest at 10% per annum with a maturity date of March 9, 2011. At any time at the option of the note holder, principal and interest payments may be paid in common stock at a conversion price of $0.0001 per share (see below). |
| | f) | Of the convertible term notes entered into on May 14, 2008, certain notes having a principal amount of $11,132 as of September 30, 2010 and 2009 were not amended with respect to their conversion price and, at any time at the option of the note holder, principal and interest payments may be paid in common stock at a conversion price of $0.001 per share (see below). The Company is in default of payment of principal and interest on the note and the Company is in discussions with the note holder about amending the conversion terms to cure the default. |
| | g) | On July 28, 2009, the Company entered into a convertible term note bearing interest at 10% per annum with a maturity date of July 28, 2011. At any time at the option of the note holder, principal and interest payments may be paid in common stock at a conversion price of $0.0001 per share (see below). |
| | h) | On August 6, 2010, the Company converted $192,430 of advances payable into a convertible term note bearing interest at 10% per annum with a maturity date of August 6, 2012. At any time at the option of the note holder, principal and interest payments may be paid in common stock at a conversion price of $0.0001 per share (see below). |
In accordance with Accounting Standards Codification 470-20-65, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (“ASC 470-20-65”), the Company recognized an imbedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital. The Company recognized and measured an aggregate of $314,049 of the proceeds, which was equal to the intrinsic value of the imbedded beneficial conversion feature at the time, to additional paid in capital and a discount against the Notes issued during the year ended June 30, 2008. The debt discount attributed to the beneficial conversion feature was originally amortized over the Notes maturity period (two years) as interest expense, adjusted for conversion of debt to common stock. In January 2009 through March 2009, the Company restructured certain Notes to a conversion rate of $0.0001 per share with a two year term and accordingly fully amortized the remaining debt discount of $206,160. In accordance with ASC 470-20-65, Accounting for Convertible Securities with Beneficial Conversion Features, the Company recognized an imbedded beneficial conversion feature present in the notes. The Company recognized and measured an aggregate of $457,849 of the proceeds, which is equal to the intrinsic value of the imbedded amended beneficial conversion feature, to additional paid in capital and a discount against the Notes issued during the year ended June 30, 2009. The remaining debt discount attributed to the original beneficial conversion feature was expensed at the time the Notes were amended and the $457,849 assigned to the amended beneficial conversion feature is being amortized over the Notes maturity period.
On July 28, 2009, the Company issued a $44,000 convertible note having the same terms as the amended outstanding convertible notes. The Company recognized and measured an aggregate of $44,000 of the proceeds, which is equal to the intrinsic value of the imbedded amended beneficial conversion feature, to additional paid in capital and a discount against the note issued, with the discount being amortized over the note’s two-year term.
On August 6, 2010, the Company converted $192,430 of advances payable into a convertible note. The Company recognized and measured an aggregate of $192,430 of the advances payable, which is equal to the intrinsic value of the imbedded amended beneficial conversion feature, to additional paid in capital and a discount against the note issued, with the discount being amortized over the note’s two-year term.
During the three months ended September 30, 2010 and 2009, amortization related to the beneficial conversion feature on the convertible notes was $48,750 and $78,731, respectively.
In November and December 2009 and April 2010, two note holders submitted conversion notices to the Company seeking to convert note principal and interest on the notes they hold into 182,000,000 shares of Company common stock. The Company has not honored these conversion notices. As discussed in Note I, on or about May 2010, one of the note holders commenced an action in the United States District Court, District of Connecticut.
NOTE G – STOCKHOLDERS EQUITY
Preferred Stock
The Company has authorized 10,000,000 shares of Preferred Stock of which 50,000 shares have been designated as Series A Preferred Stock, par value $0.00001, and 1,000,000 shares have been designated as Series B Preferred Stock, par value $0.00001 within the limitations and restrictions stated in the Certificate of Incorporation of the Company.
The Company issued 50,000 shares of Series A Preferred Stock; Each share of the Series A Preferred Stock is entitled to 10,000 votes on all matters submitted to the stockholders of the Company. The holders of the Series A Preferred Stock are not granted any preference upon the liquidation, dissolution or winding up of the business of the Company. The Series A Preferred Stock is not Convertible into Common Stock.
The Company designated and issued 1,000,000 shares of Series B Preferred Stock. On May 14, 2008, the Company and an unrelated third party entered into an exchange agreement under which the third party note holder exchanged a $21,026 promissory note for 1,000,000 shares of Series B Preferred Stock. Each share of Series B Preferred Stock is entitled to 5,000 votes on all matters submitted to the stockholders of the Company.
Common Stock
The Company effectuated a 1 for 50 reverse stock split on June 26, 2008. All common stock and related information has been retroactively restated. In addition, contemporaneously with the stock split the Company increased its authorized Common stock, par value $0.00001 to 1,000,000,000 shares. Prior to this date, the authorized shares were 200,000,000 shares. On October 14, 2009, the Company authorized capital was increased to 5,000,000,000.
On September 24, 2010, the Company filed a certificate of amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware in order to effectuate a reverse split on a 1 to 20 basis (the “Reverse Split”). On October 6, 2010, Financial Industry Regulatory Authority (“FINRA”) approved the Reverse Split and each holder of common stock received 1 share of the Company’s common stock for each 20 shares of the Company’s common stock they owned. The Company did not issue fractional shares in connection with the foregoing stock split. Fractional shares were rounded up to the nearest whole share. All per share numbers reflected in this quarterly report on Form 10-Q are reflective of the Reverse Split. At September 30, 2010 and June 30, 2010, common shares issued and outstanding were 207,647,478 and 173,594,998, respectively.
On September 11, 2007, the Company adopted its 2007 Stock Incentive Plan (the “2007 Plan”). The Company is permitted to issue up to 21,450,000 shares of common stock under the Plan in the form of stock options, restricted stock awards, and stock awards to employees, non-employee directors, and outside consultants. As of September 30, 2010, there were 1,072,500 shares issued under this 2007 Plan.
On December 13, 2007, the Company adopted its 2007 Stock Incentive Plan No. 2. (the “2007 Plan #2”). The Company is permitted to issue up to 21,994,000 shares of common stock under the Plan in the form of stock options, restricted stock awards, and stock awards to employees, non-employee directors, and outside consultants. As of September 30, 2010, there were 1,099,700 shares issued under this 2007 Plan #2.
On February 21, 2008 the Company adopted its 2008 Stock Incentive Plan. The Company is permitted to issue up to 33,000,000 shares of common stock under the Plan in the form of stock options, restricted stock awards, and stock awards to employees, non-employee directors, and outside consultants. As of September 30, 2010, there were 1,617,047 shares issued under this 2008 Plan.
On February 21, 2008 the Company adopted its 2008 California Stock Incentive Plan. The Company is permitted to issue up to 33,000,000 shares of common stock under the Plan in the form of stock options, restricted stock awards, and stock awards to employees, non-employee directors, and outside consultants. As of September 30, 2010, there were 1,646,260 shares issued under this 2008 Plan.
On September 15, 2009 the Company adopted its 2009 Stock Incentive Plan. The Company is permitted to issue up to 136,715,000 shares of common stock under the Plan in the form of stock options, restricted stock awards, and stock awards to employees, non-employee directors, and outside consultants. As of September 30, 2010, there were 4,470,000 shares issued under this 2009 Plan.
On September 15, 2009 the Company adopted its 2009 California Stock Incentive Plan. The Company is permitted to issue up to 136,715,000 shares of common stock under the Plan in the form of stock options, restricted stock awards, and stock awards to employees, non-employee directors, and outside consultants. As of September 30, 2010, there were 5,260,552 shares issued under this 2009 Plan.
On August 17, 2010, the Company adopted its 2010 Equity Incentive Plan (“2010 Plan”). The Company is permitted to issue up to 17,500,000 shares of common stock under the Plan in the form of stock options, restricted stock awards, and stock awards to directors, officers, consultants, advisors and employees of the Company. As of September 30, 2010, there were 10,589,286 shares issued under this 2010 Plan.
During the three months ended September 30, 2010, the Company issued 9,546,528 shares of common stock, valued at $159,200 for services, accrued expenses and prepayments.
During the three months ended September 30, 2010, the Company converted debt and accrued interest of $41,000 into 20,500,000 shares of common stock.
During the three months ended September 30, 2010, the Company issued 2,250,000 shares of its common stock, valued at $31,500, to its Chief Executive Officer and two of its directors as compensation.
During the three months ended September 30, 2010, the Company issued 1,755,952 shares valued at $30,000 to a former officer to satisfy the remaining claim included in the accrued payroll totaling $170,576 as discussed in Note I.
Treasury Stock
As of September 30, 2010 and June 30, 2010, the Company had 2,000 shares of common stock held in treasury, which carried at $0 based on a $0.00001 par value.
NOTE H - STOCK OPTIONS AND WARRANTS
During the three months ended September 30, 2010 and 2009, the Company did not issue any stock warrants or options. As of September 30, 2010, no warrants or options are outstanding.
NOTE I - COMMITMENTS AND CONTINGENCIES
Employment Agreement
On February 25, 2010, Adam Engel resigned from his positions as President, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer. In connection with Mr. Engel’s resignation, the Company entered into a letter agreement dated February 24, 2010 setting forth the terms of the mutual separation. Under the terms, Mr. Engel and the Company agreed to waive any and all continuing rights, including payroll totaling $170,576 and obligations under Mr. Engel’s employment agreement dated December 13, 2007. Mr. Engel also agreed to a 1 year non-compete/non solicitation provision as well as confidentiality and non-disparagement clauses. On May 21, 2010, the Company entered into a consulting agreement with Mr. Engel for a period of five months for $10,000 and Mr. Engel agreed that there were no claims arising from the earlier agreement as mentioned above. During the three months ended September 30, 2010, the Company issued 1,755,952 shares of its common stock to Mr. Engel valued at $30,000 to satisfy the remaining existing claim on the accrued payroll.
U.S. Federal Trade Commission Settlement
On March 26, 2007, the Company received a letter from the U.S. Federal Trade Commission (“FTC”) whereby the Company was informed that the FTC was conducting an investigation into advertising claims made for the Company’s weight loss product known as “Slim Coffee.” The purpose of the investigation was to determine whether the Company, in connection with its sales of Slim Coffee, engaged in unfair or deceptive acts or practices and false advertising. The FTC threatened to file a complaint in the United States District Court, Southern District of New York, alleging false advertising, unless the Company and the FTC could reach a satisfactory resolution to the matter. A negotiated settlement has been reached with the FTC under which the Company, its officers and directors did not admit any wrongdoing. On January 10, 2008, pursuant to a stipulated final judgment and order, the United States District Court, Southern District of New York, entered a final judgment and order against the Company in the amount of $923,910. The full amount of the judgment, and payment of any portion of it is suspended and cannot be reinstated so long as (a) the Company abides by the reporting and monitoring requirements of the judgment, (b) does not make false advertising claims in connection with any of its products in the future, and (c) its past financial disclosures to the FTC were materially accurate. The Company plans to comply with the terms of the stipulation and do not anticipate incurring a liability for the judgment, however there can be no assurance of compliance. Should the Company fail to comply with the FTC’s final judgment, this could have a material adverse effect on the Company’s business, financial condition and results of operations.
Royalty Commitment and Agreement Termination
On May 18, 2007, the Company entered into a Consulting, License and Supply Agreement with Jason Ryu, pursuant to which the Company licensed the right to market and sell a fluorescent light bulb that contains an air purifying microchip ion emitter from Mr. Ryu. In exchange for this license the Company agreed to pay Mr. Ryu a royalty of $0.20 per unit for the first 1.5 million units sold by the Company and the lesser of $0.15 per unit or 5% of manufacturing costs for all additional units. The initial term of this agreement was for two years and was to be automatically renewed for subsequent two year periods if at least 5 million units are sold by the Company during each period. Within ninety days from the date of this Agreement, the Company was required to place an order not less than 100,000 units and at least 600,000 units each quarter thereafter. Mr. Ryu sent a notice to the Company that the license agreement shall continue on a non-exclusive basis.
On February 24, 2009, the Company entered into an Exclusive License and Sales Agreement whereby the Company obtained worldwide exclusive rights to manufacture, market use, sell, distribute and advertise certain licensed products. The license is on a year to year basis with automatic renewal subject to the Company re-acquire listing on the OTC BB exchange by February 14, 2010 and files all quarterly and annual reports by due dates, inclusive of allowable extensions. In exchange for the exclusive license, the Company issued 2,500,000 shares of its common stock.
In addition, the Agreement provides for the retention of Ryu as a non-exclusive independent contractor sales representative to obtain purchase orders for the Licensed Products on the company’s behalf. In consideration for his consulting services, the Company agreed to issue Ryu 37,500 shares of Common Stock for each $100,000 in gross sales of the Licensed Product by Ryu (or any Sales Associate hired by him) on or before February 28, 2010 up to a maximum of 3,750,000 shares of Common Stock (collectively, the “Incentive Shares”). The Incentive Shares shall not vest unless Ryu (or any Sales Associate hired by him) shall have collectively procured gross sales of $5,000,000 for the Licensed Products on or before February 28, 2010 (the “Target”). If Ryu fails to achieve the Target, such Incentive Shares shall be null and void and of no further force and effect. In addition to the Incentive Shares, the Company also agreed to pay Ryu a commission at the rate 50% of all Net Profits (as defined on the Agreement) recognized by the Company on sales of the Licensed Products made by Ryu (or Sales Associates hired by Ryu) on the Company’s behalf during the period of this Agreement. The Target has concluded without any sales, incentive shares or commissions realized.
Payroll Taxes
At September 30, 2010, the Company is delinquent with filing and remitting payroll taxes of approximately $83,227 including estimated penalties and interest related to payroll taxes withheld since April 2007. The Company has recorded the delinquent payroll taxes, which are included in accrued expenses on the balance sheet. Although the Company has not entered into any formal repayment agreements with the respective tax authorities, management plans to make payment as funds become available. Penalties and interest amounts are subject to increase based on a number of factors that can cause the estimated liability to increase further. Interest and penalties were accrued in an amount estimated to cover the ultimate liability.
Sales Taxes
At September 30, 2010, the Company is delinquent with remitting sales taxes of approximately $16,000, including related estimated penalties and interest related to sales taxes withheld since 2006 in the state of New York. The Company has recorded the delinquent sales taxes, which are included in accrued expenses on the balance sheet. Although the Company has not entered into any formal repayment agreements with the respective tax authorities, management plans to make payment as funds become available. Penalties and interest amounts are subject to increase based on a number of factors that can cause the estimated liability to increase further. Interest and penalties were accrued in an amount estimated to cover the ultimate liability.
Legal
On or about May 2010, an alleged assignee (the “Assignee”) of certain convertible promissory notes, commenced an action by the filing of a summons and complaint against the Company alleging a failure to comply with its demands to convert principal and interest under the promissory notes. The Company served and filed its Answer on July 21, 2010, in which it denied the material allegations of the complaint and asserted numerous affirmative defenses. The parties are presently in the discovery stage of this action. The Company intends to vigorously defend this action. The parties have entered into a stipulation of settlement resolving this action on November 4, 2010, which calls for the entry of a final judgment against the Company, requiring it to deliver 182,000,000 shares of its common stock over time to the Assignee. The proposed final judgment has been submitted to the Court for signature, but, as of the date of the filing of this Report, has not been signed or entered.
Leases
The Company leases office space on a month to month basis in Stuart, Florida. Rent expense for the three months ended September 30, 2010 and 2009 was $736 and $0, respectively.
NOTE J - FAIR VALUE MEASUREMENT
Fair Value Measurements under GAAP clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements are separately disclosed by level within the fair value hierarchy. It only applies to accounting pronouncements that already require or permit fair value measures, except for standards that relate to share-based payments
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
The carrying value of the Company’s cash, accounts receivable, prepayments, accounts payable, advances payable, convertible notes payable, and other current assets and liabilities approximate fair value because of their short-term maturity. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the unaudited condensed consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.
As of September 30, 2010, there were no financial assets or liabilities that were measured at fair value on a recurring basis.
NOTE K – SUBSEQUENT EVENTS
Since September 30, 2010, the Company issued an aggregate of 30,000,000 shares of common stock upon conversion of convertible promissory notes.
Since September 30, 2010, the Company issued an aggregate of 6,910,714 shares of common stock in exchange for services valued at approximately $30,000.
The Company and an assignee of its certain convertible promissory note entered into a stipulation of settlement resolving an action discussed in Note I on November 4, 2010, which calls for the entry of a final judgment against the Company, requiring it to deliver 182,000,000 shares of its common stock over time to the assignee. The proposed final judgment has been submitted to the Court for signature, but, as of the date of the filing of this Report, has not been signed or entered.
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this report. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The statements contained in this report that are not historic in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable terminology are forward-looking statements based on current expectations and assumptions. Various risks and uncertainties could cause actual results to differ materially from those expressed in forward-looking statements.
The forward-looking events discussed in this quarterly report, the documents to which we refer you and other statements made from time to time by us or our representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties and assumptions about us. For these statements, we claim the protection of the “bespeaks caution” doctrine. All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
General
The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, our unaudited condensed consolidated financial statements and related notes included elsewhere in this Report. Historical results and percentage relationships among any amounts in these financial statements are not necessarily indicative of trends in operating results for any future period. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The statements, which are not historical facts contained in this Report, including this Management’s discussion and analysis of financial condition and results of operation, and notes to our unaudited condensed consolidated financial statements, particularly those that utilize terminology such as “may” “will,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable terminology are forward-looking statements. Such statements are based on currently available operating, financial and competitive information, and are subject to various risks and uncertainties. Future events and our actual results may differ materially from the results reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, dependence on existing and future key strategic and strategic end-user customers, limited ability to establish new strategic relationships, ability to sustain and manage growth, variability of operating results, our expansion and development of new service lines, marketing and other business development initiatives, the commencement of new engagements, competition in the industry, general economic conditions, dependence on key personnel, the ability to attract, hire and retain personnel who possess the technical skills and experience necessary to meet the service requirements of our clients, the potential liability with respect to actions taken by our existing and past employees, risks associated with international sales, and other risks described herein and in our other filings with the Securities and Exchange Commission.
The safe harbor for forward-looking statements provided by Section 21E of the Securities Exchange Act of 1934 excludes issuers of “penny stock” (as defined under Rule 3a51-1 of the Securities Exchange Act of 1934). Our common stock currently falls within that definition.
All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
Company History
We were organized on December 19, 2005 under the state laws of Delaware with an original name of “The Diet Coffee Company.” On June 25, 2008, we changed our name to Zevotek, Inc.
We plan to market and sell a range of innovative personal and home care items. Our wholly owned subsidiary is Ionic Bulb.com, Inc., a Delaware corporation formed on August 21, 2007, which markets and sells the Zevotek Ionic Bulb. Zevotek has a license to sell the Ionic Bulb, a patented air purifier that silently emits negative ions using a microchip placed inside a 10,000-hour energy saving compact fluorescent light bulb (CFL). One Ionic Bulb is an eco-easy maintenance-free inexpensive alternative that cleans the air in a 100 square foot area. Outfitting lamps and ceiling lights with the Ionic Bulb rids a living room, kitchen, bedroom, children’s playroom, workout area and office space of unpleasant odors and indoor air pollutants that you breathe. We sell the Ionic Bulb through TV infomercials and the Internet and plan to market Ionic Bulbs through catalogs and major U.S. retail and specialty stores. The Company’s 1 minute and 2 minute Ionic Bulb TV ads are designed to air on national cable channels, local broadcast channels and TV superstations. We directly sell the Ionic Bulb to consumers through newionicbulb.com and amazon.com.
On September 24, 2010, we filed a certificate of amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware in order to effectuate a reverse split on a one for twenty basis (the “Reverse Split”). On October 6, 2010, FINRA approved the Reverse Split and each holder of common stock received 1 share of our common stock for each 20 shares of our common stock they owned. We did not issue fractional shares in connection with the foregoing stock split. Fractional shares were rounded up to the nearest whole share. All per share numbers reflected in this quarterly report on Form 10-Q are reflective of the Reverse Split.
Comparison of Three Months Ended September 30, 2010 To September 30, 2009
Results of Operations
Revenue
Our sales were $5,340 for the three months ended September 30, 2010 and $0 for the three months ended September 30, 2009. The increase of $5,340 or 100 % was due to the start of our sales activities. Our test marketing began in December 2009 and consisted of airing our two-minute Ionic Bulb infomercial on a variety of U.S. cable television channels at different times of the day and days of the week. The television test marketing is designed to find viewing audiences more inclined to purchase Ionic Bulbs and to educate viewers on the Ionic Bulb's performance and money saving features which can be beneficial to promote planned retail sales of Ionic Bulbs. We also introduced the Ionic Bulb to journalists at magazines, newspapers, electronic journals and blogs to gain publicity and reviews for our product. During the three months ended September 30, 2010, our television advertising consisted of airings of one-minute versions of the ad, which is designed to create consumer awareness of the Ionic Bulb that is expected to result in successful sales of Ionic Bulbs at retail outlets that we expect to carry our products. Sales for the three months ended September 30, 2010 are comprised of Ionic Bulb orders placed by individual consumers who called toll-free telephone numbers that appeared in our TV ads or who bought Ionic Bulbs from our www.newionicbulb.com website. Revenues exclude shipping and handling fees, which we include as an offset to our shipping and handling costs. Sales will increase in future periods in connection with the increased frequency of airings of our TV infomercial, other Ionic Bulb promotional activitiesand plans to establishing a retail sales channel consisting of sales of Ionic Bulbs to U.S. retailers, specialty stores, and catalog and e-commerce merchants. We have started efforts to establish our retail sales channel and expect to begin seeing additional sales results after we have further developed market awareness for our Ionic Bulb, a needed prerequisite for successful relationships with retailers.
Gross Profit
Our gross profit was $2,199 for the three months ended September 30, 2010 and $0 for the three months ended September 30, 2009. The increase of $2,199 or 100% was due to the start of our sales activities. We realized gross profit in the three months ended September 30, 2010 entirely from the sale of our Ionic Bulbs. We had no sales for the three months ended September 30, 2009, and therefore had no gross profits. We believe our gross profit will increase in connection with our expected sales in future periods.
Operating Expenses
Operating expenses were $ 326,677 for the three months ended September 30, 2010, as compared to $ 201,785 for the three months ended September 30, 2009. The increase of $124,892 or 62% was primarily due to the increase in selling expenses related to the advertising and promotion activities of our Ionic Bulb product. We incurred $ 137,704 and $17,000 in selling expenses during the three months ended September 30, 2010 and 2009, respectively. Selling expenses were comprised of advertising and marketing costs in connection with a sales and marketing campaign to generate Ionic Bulb sales orders. We incurred $188,973 and $184,785 in general and administrative expenses for the three months ended September 30, 2010 and 2009, respectively.
Net Loss
Our net loss was $400,033 for the quarter ended September 30, 2010 and our net loss was $294,261 for the quarter ended September 30, 2009. The increase of $105,772 or 36% was primarily due to selling and marketing expenses incurred to increase consumer awareness of the Ionic Bulb which we believe will result in increased sales, particularly by retail outlets.
Our net loss per common share was $0 (basic and diluted) for three months ended September 30, 2010 as compared to our net loss per common share of $0.02 for the three months ended September 30, 2009.
The weighted average number of outstanding shares was 191,866,755 (basic and diluted) for three months ended September 30, 2010 as compared to 16,509,044 (basic and diluted) for the three months ended September 30, 2009.
Liquidity and Capital Resources
Overview
As of September 30, 2010, we had a working capital deficit of $1,460,635. As of June 30, 2010, we had a working capital deficit of $1,478,126. Our cash position at September 30, 2010 was $0 as compared to $132,517 at June 30, 2010. Our working capital deficit did not significantly change during the three months ended September 30, 2010.
Cash provided by financing activities totaled $74,000 for the three months ended September 30, 2010 consisting of advances from a note holder.
We expect capital expenditures to be nominal for the year ending June 30, 2011. These anticipated expenditures are for investments in property and equipment used in our business.
Financing Needs
Since our inception on December 19, 2005 to March 31, 2010, we have generated revenues of $1,395,601 and have incurred an accumulated deficit of $5,885,058. We hope to begin achieving sustainable revenues in 2011 from sales of our Ionic Bulb product. We are seeking additional products to market and sell, which we believe will allow us to make use of our existing operational structure to generate more sales and gross profits. Our ability to achieve profitability is dependent on several factors, including but not limited to, our ability to: generate liquidity from operations and satisfy our ongoing operating costs on a timely basis. We still need additional investments in order to continue operations to cash flow break even. Additional investments are being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and conditions in the U.S. stock and debt markets make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations again, attempt to further restructure financial obligations and/or seek a strategic merger, acquisition or a sale of assets.
The independent auditor's report on our June 30, 2010 financial statements states that our recurring losses raise substantial doubts about our ability to continue as a going concern.
The effect of inflation on our revenue and operating results was not significant. Our operations are located in North America and there are no seasonal aspects that would have a material effect on our financial condition or results of operations.
We do not maintain off-balance sheet arrangements nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Financial Reporting Release No. 60, recently released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The notes to the consolidated financial statements include a summary of significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. In addition, Financial Reporting Release No. 61 was recently released by the SEC requires all companies to include a discussion which addresses, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments. The following is a brief discussion of the more significant accounting policies and methods used by us.
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible and intangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported period.
On an on-going basis, we evaluate our estimates. The most significant estimates relate to our recognition of revenue, the allowance for doubtful accounts receivable and inventory valuation reserves.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Reverse Stock Split
The Company effectuated a 1 for 20 reverse stock split on September 24, 2010. All common stock and related information have been retroactively restated.
Revenue Recognition
The Company recognizes revenue from product sales based on four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgment regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product was not delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
Inventories / Cost of Goods Sold
The Company has adopted a policy to record inventory at the lower of cost or market determined by the first-in-first-out method. The elements of cost that comprise inventory and cost of goods sold are FOB shipping point costs, freight and destination charges, customs and importation fees and taxes, customer broker fees (if any) and other related costs. Warehousing costs are charged to cost of goods in the period the costs are incurred. The Company provides inventory allowances based on estimates of obsolete inventories.
Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts to reduce amounts to their estimated realizable value, including reserves for customer and other receivable allowances and incentives. In estimating the provision for doubtful accounts, the company considers a number of factors including age of the accounts receivable, trends and ratios involving the age of the accounts receivable and the customer mix of each aging categories.
Advertising
The Company charges the costs of advertising to expenses as incurred.
Off Balance Sheet Arrangements
None
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required by this item.
ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management, under the supervision and with the participation of our Chief Executive Officer/Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2010. Based upon that evaluation and the identification of the material weakness in the Company’s internal control over financial reporting, the Chief Executive Officer/Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended September 30, 2010 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
Metacomet Company, LLC v. Zevotek, Inc
Case No. 3:10CV1754 (MRK)
United States District Court, District of Connecticut
In or about May 2010, an alleged assignee (the “Assignee”) of certain convertible promissory notes, commenced an action by the filing of a summons and complaint against the Company alleging a failure to comply with its demands to convert principal and interest under the promissory notes. The Company served and filed its Answer on July 21, 2010, in which it denied the material allegations of the complaint and asserted numerous affirmative defenses. The parties are presently in the discovery stage of this action. The Company intends to vigorously defend this action. The parties have entered into a stipulation of settlement resolving this action on November 4, 2010, which calls for the entry of a final judgment against the Company, requiring it to deliver 182,000,000 shares of its common stock over time to the Assignee. The proposed final judgment has been submitted to the Court for signature, but, as of the date of the filing of this Report, has not been signed or entered.
ITEM 1A – RISK FACTORS
As a “small reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 6, 2010, the Company issued a 10% convertible note in the principal amount of $192,430 with a maturity date of August 6, 2012, to a certain investor in consideration for conversion of advances payable due to such investor in the principal amount of $192,430. At any time at the option of the holder, principal and interest payments may be paid in common stock at a conversion price of $.0001 per share.
ITEM 3 – DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4 – REMOVED AND RESERVED.
ITEM 5 – OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
Item No. | | Description |
| | | |
| 31.1 | | Certification of Robert Babkie, Chief Executive Officer and Chief Financial Officer of Zevotek, Inc. pursuant to Rule 13a-14(a) |
| 32.1 | | Certification of Robert Babkie, Chief Executive Officer and Chief Financial Officer of Zevotek, Inc. pursuant to 18 U.S.C. § 1350 adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | ZEVOTEK, INC. |
| | |
| November 15, 2010 | /s/ Robert Babkie |
| | Robert Babkie |
| | President, Chief Executive Officer and Chief Financial Officer |
| | (Principal Executive and Principal Financial and Accounting Officer) |
