SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| (Mark One) | | |
ý | | ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2012 |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File Number: 0-52524
VANITY EVENTS HOLDING, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) | | 43-2114545 (I.R.S. Employer Identification No.) |
1111 Kane Concourse, Suite 304, Bay Harbor Islands, FL 33154
(Address of principal executive offices) (Zip Code)
(786) 763-3830
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
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Securities registered pursuant to section 12(g) of the Act:
Title of class: Common Stock, par value $0.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") 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 ý 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer o (Do not check if a smaller reporting company) | | Smaller reporting company ý |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates was $1,777,499.40 computed by reference to the closing price of the Company’s common stock as quoted on the Over-the-Counter Bulletin Board on March 28, 2013. For purposes of the above statement only, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
As of March 29, 2013 the registrant had 3,685,526 shares of common stock, par value $0.001 per share outstanding.
VANITY EVENTS HOLDING, INC.
FORM 10-K
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| F-1 |
This Report on Form 10-K for Vanity Events Holding, Inc. may contain forward-looking statements. Such forward-looking statements are characterized by future or conditional verbs such as "may," "will," "expect," "intend," "anticipate," believe," "estimate" and "continue" or similar words. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. Such statements are only predictions and our actual results may differ materially from those anticipated in these forward-looking statements. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Factors that may cause such differences include, but are not limited to, those discussed under Item 1A. Risk Factors and elsewhere in this Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission, including the uncertainties associated with product development, the risks associated with dependence upon key personnel and the need for additional financing. We do not assume any obligation to update forward-looking statements as circumstances change.
Unless otherwise stated or the context requires otherwise, references in this Annual Report on Form 10-K to “Vanity Events Holding, Inc.”, the “Company”, “Vanity”, “we”, “us”, or “our” refer to Vanity Events Holding, Inc. and its subsidiaries.
Corporate History
Vanity Events Holding, Inc. was incorporated in the State of Delaware on November 22, 2006 under the name Map V Acquisition, Inc.
On April 2, 2008, the Company entered into a Share Exchange Agreement with Vanity Holding Group, Inc. (“Vanity Group”) and Vanity Group’s then shareholders whereby we agreed to acquire all of the issued and outstanding shares of the common stock of Vanity Group. As consideration for the acquisition of the shares of Vanity Group, the Company has agreed to issue an aggregate of 21,392,109 pre-reverse split shares of its common stock) to the shareholders of Vanity Group. Upon consummation of the acquisition, Vanity Group became a wholly-owned subsidiary of the Company. Subsequent to the completion of the reverse merger acquisition, the Company filed a Certificate of Amendment with the Delaware Secretary of State changing its name from “Map V Acquisition, Inc.” to “Vanity Events Holding, Inc.” in 2008.
On December 31, 2010, the Company entered into a share exchange agreement (“Exchange Agreement”) by and among the Company, Shogun Energy, Inc., a South Dakota corporation (“Shogun”), Shawn Knapp, the principal shareholder of Shogun (the “Principal Shareholder”) and the other shareholders of Shogun (the “Shogun Shareholders” and collectively with the Principal Shareholder, the “Shareholders”). Pursuant to the terms of the Exchange Agreement, the Shareholders exchanged an aggregate of 100% of the issued and outstanding shares of capital stock of Shogun in exchange for 500,000 shares of the Company’s Series A Preferred stock (the “Exchange”). Each share of Series A Preferred stock is entitled to 1,604 pre-reverse split votes per share and is be convertible into 1,604 pre-reverse split shares of the Company’s common stock. Upon filing an amendment to the Company’s certificate of incorporation to increase the number of shares of authorized common stock so that there were an adequate amount of shares of authorized common stock for issuance upon conversion of the series A preferred stock (the “Amendment”), the shares of series A preferred stock be automatically converted into an aggregate of 802,000,000 pre-reverse split shares of the Company’s common stock. The closing of the transaction took place on December 31, 2010. Upon the closing of the Exchange, the Company shifted its operations to focus on the business of Shogun.
On June 30, 2011 the Company, Shogun, Mr. Knapp, Roxanne Knapp (“Mrs. Knapp”) and the Shareholders entered into a rescission agreement (the “Rescission Agreement”) pursuant to which, upon closing (the “Closing Date”), the Exchange Agreement was rescinded, any and all obligations of any party arising from such Exchange Agreement, were, in all respects, deemed to be null and void and of no further force and effect (the “Rescission”). Furthermore, upon closing, no party to the Exchange Agreement shall have any further obligations of any nature whatsoever with respect to the other parties pursuant to or arising from the Exchange Agreement. On July 26, 2011, a majority of the voting capital stock of the Company took action in lieu of a special meeting of stockholders authorizing the Company to enter into the Rescission Agreement. The closing of the transactions contemplated by the Rescission Agreement took place on September 20, 2011. The rescission has been accounted for as a spin-off of Shogun by Vanity.
On September 30, 2011, the Board of Directors and a majority of the voting capital stock of the Company took action by written consent authorizing the Company to amend its Certificate of Incorporation, as amended, to (1) effect a reverse stock split of the Company’s issued and outstanding shares of common stock, par value $.001 per share (the "Common Stock") at the ratio of 300-for-1 (the “Reverse Stock Split”), and (2) increase the number of authorized shares of Common Stock of the Company from 350,000,000 shares to 500,000,000 shares (the “Authorized Capital Change” and collectively with the Reverse Stock Split, the “Corporate Actions”). The Authorized Capital Change became effective on November 18, 2011. The reverse stock split became effective on February 10, 2012. Unless otherwise stated, all share and per share amounts in these financial statements have been retroactively restated to reflect the effects of the reverse stock split.
Overview
The Company is a holding company. The primary focus of the company is the development of e-commerce sites in the collaborative consumption market place wherein consumers share access to goods. Management is also active in reviewing potential acquisitions that they believe will enhance the value of the company. Utilizing their licensed trademark of America’s Cleaning Company™, Vanity established a cleaning company offering residential and commercial cleaning services. This company intended to expand its reach through national franchising. In addition, the Company also sought out, licenses, develops, promotes, and brings to market various innovative consumer and commercial products.
Beginning in the second quarter of 2011, management actively engaged in evolving the existing business model of the Company from a sourcing and distribution company to a licensing and marketing company. Management believed that this new business model would allow the Company to have the ability to capture revenue without many of the associated costs that come along with the production of its products.
On May 24, 2011, the Company entered into a non-exclusive license agreement (the “Sorbco Non-Exclusive License Agreement”) with Plant Sorb LLC (“Sorbco”) pursuant to which the Company has the non-exclusive right and license to (i) market, sell, distribute and otherwise deal in commerce with certain Sorbco products in the United States through any media and (ii) use Sorbco’s trademark. The Sorbco Non-Exclusive License Agreement had an initial term commencing on the date of the Sorbco Non-Exclusive License Agreement and ending on May 31, 2011, and continues on a month-to-month basis thereafter unless terminated by either party on not less than thirty (30) days’ notice prior to the end of the initial term or any month-to-month extension. On July 13, 2011, the Company entered into an exclusive license and distribution agreement (the “Sorbco Exclusive License Agreement” and together with the Sorbco Non-Exclusive License Agreement the “Sorbco Agreement”) with Sorbco pursuant to which the Company has the exclusive right and license to (i) market, sell, distribute and otherwise deal in commerce with the Sorbco products in the United States through any media and (ii) use Sorbco’s trademark. The Sorbco Exclusive License Agreement had an initial term ending on July 13, 2012, and shall continue on successive one-year terms thereafter unless terminated by either party for cause. For purposes of the Sorbco Exclusive License Agreement, “cause” is defined as the Company not exceeding a threshold of five hundred thousand dollars ($500,000.00) of retail revenues through sales of Sorbco products during the initial term of the Sorbco Exclusive License Agreement. On July 12, 2012 the Company and Sorbco agreed to extend and amend the Sorbco Agreement to grant the Company the non-exclusive right and license to (i) market, sell, distribute and otherwise deal in commerce with the Sorbco products in the United States through any media and (ii) use Sorbco’s trademark. On September 21, 2012 the Company and Sorbco agreed to terminate the agreement.
On September 20, 2011, the Company and Shogun, concurrent with the closing of the rescission agreement with Shogun, entered into a non-exclusive sales distributor agreement, pursuant to which Shogun granted Vanity a non-exclusive right to distribute or sell Shogun’s products in the United States for a period of 12 months from the date of the Agreement.
The Company proceeded to leverage this business model going forward by creating a short form direct response TV spot for the Sorbco products as well as establishing an online ecommerce presence with www.buyplantsorbnow.com , as well as media tested driving traffic to its stand-alone web property in an effort to generate sales for the Sorbco products and Shogun products at www.thereisaaproductforthat.com . The Company’s goal in using the direct response TV spot was if the media tests were successful, the Company would roll-out additional direct TV spots and leverage retail distributors to drive the Company’s products thru mainstream retail channels as well as traditional direct response outlets. At the end of 2011, after evaluating the media tests, management determined that it would not be profitable or beneficial for the Company to pursue this business model for the Sorbco products past the initial testing phase.
Beginning in 2012, management decided to evolve its business strategy from a licensing and marketing company to an e-commerce transactional business where the Company’s management felt it had the relevant core competency and experience to successfully build value for the Company’s shareholders.
On February 29, 2012, the Company entered into a domain name assignment agreement with Greg Pippo, the Company’s former chief financial officer ( “Pippo”), pursuant to which Pippo assigned all of his rights, title and interest and goodwill in or associated with the domain names www.buyborroworsell.com and www.buyborroworsell.net (the “Domain Names”), together with any unregistered or registered trademarks, service marks, copyrights or other intellectual property or property rights based on or in any way related to the Domain Names. In consideration for the assignment of the Domain Names, the Company agreed to pay Pippo$2,500 for the fees and expenses related to the Domain Names incurred by Pippo to date.
On April 4, 2012, the Company entered into an asset purchase agreement (the “Aegis Agreement”) with Aegis Worldwide, LLC, an entity controlled by Greg Pippo, the Company’s former chief financial officer, pursuant to which Aegis agreed to sell, transfer, convey, and deliver to the Company, all of Aegis’s right, title and interest and goodwill in or associated with certain domain names (the “Aegis Domain Names”) along with any information or materials proprietary to Aegis that relate to the business or affairs associated with the Aegis Domain Names which is of a confidential nature, including, but not limited to, trade secrets, information or materials relating to existing or proposed products (in all and various stages of development), “know-how”, marketing techniques and materials, marketing and development plans and pricing policies (the “Assets”). In consideration for the purchase of the Assets, the Company agreed issue Aegis 1,000,000 shares of Company’s common stock. On October 12, 2012 the Company received notice of Aegis Worldwide LLC’s intention to return to treasury the 1,000,000 shares of common stock issued in connection with the April 4 2012 Asset Purchase Agreement. The Company accepted the return of the shares without conditions.
Simultaneously with the execution of the Aegis Agreement, on April 4, 2012, the parties entered into an option agreement, pursuant to which Aegis shall have the option to purchase the Assets and all enhancements to the Assets from the Company in consideration for (i) an amount in cash equal to the net proceeds used by the Company for the enhancement of the Assets on or after April 4, 2012 and (ii) the cancellation of the shares issued to Aegis. The option is exercisable beginning on the twelve month anniversary of the Closing Date and terminating on the 24 month anniversary of the Closing Date.
Online Marketplace
At this time the company is focusing on the development of e-commerce sites in the collaborative consumption marketplace. In these challenging economic times, we believe that consumers need access to many different types of goods leveraging the economies that come with shared consumption, along with a convenient and user friendly way to sell or monetize the goods that they currently own.
Our web properties will house several stand-alone sites specifically addressing areas management has identified as attractive in the world of collaborative consumption. What that in turn means is that the consumer will not own the goods unless they are purchased outright, instead they will enjoy the use of them through the access that their membership fees allow. The Company plans to offer strong mobile applications to support these sites, as well as leveraging both social and traditional media to build consumer awareness.
Management plans on developing an engaging community experience filled with user feedback and industry specific content that will further enhance the attractiveness of each stand-alone site. At this time these sites are in the planning and development stages. It is currently planned that the first site to be launched will be watchlender.com. This site will offer the consumer a range of luxury watches for rent or for purchase. Using this experience it is planned to launch additional sites utilizing the website domains that the Company has purchased including, ToysLender.com , SneakerLender.com , FineArtLender.com , Shoelender.com , ElectronicsLender.com and CoutureLender.com . Management plans to utilize existing relationships with various suppliers to source product to be offered on the sites. The company is working closely with outsourced third party developers to launch the first of these web and mobile platforms.
The categories of products that the Company initially plans to offer through its web properties include toys, electronics, footwear, watches and other desirable fashion accessories. Through these properties, we intend to offer “flexible access to the products you need on the terms you want”. The end result is intended to make consumers revisit the idea of collaborative consumption and commerce over a wide array of categories. Management also plans to make it possible for consumers to sell goods to the Company that they already own.
We plan on collecting and analyzing data we collect from our future customers, including purchase patterns, and preferences to identify their needs and demands. The analysis of this data guides our selection of new product categories. In this way, we can improve our customers’ shopping experience and satisfaction, generate online traffic, convert traffic into orders, and quickly increase sales for newly introduced products.
Product Sourcing and Pricing
Product Sourcing
It is the Company’s plan to allow consumers to access products through E-Commerce sites, ranging from luxury watches to fine art to fashion clothing, Management anticipates that the Company’s first offering will be luxury watches. Consumers will be able to rent, buy, or sell to the Company a wide range of certified luxury watches. We plan on offering the consumer the ability to rent watches either on a short term basis or for longer periods of time.
Pricing
We intend to price our products and services competitively and to provide a superior customer service experience. The Company plans on developing a product management team that fully understands the watch aficionado requirements, the cost and resale value of watches and trends in the industry.
Marketing and Promotion
We seek to strengthen our web properties and build strong customer loyalty through our marketing and promotional efforts. We believe that the most efficient marketing method is to provide a superior customer service t experience. this will drive word-of-mouth and positive social media coverage and generates repeat customer visits. We intend to build customer loyalty by delivering personalized services through innovative technologies, in an environment of trust and quality offerings.
Intellectual Property
We regard our domain names, patents, trademarks, copyrights, trade dress, trade secrets, proprietary technologies and similar intellectual property as critical to our success, and we rely on patent, trademark and copyright law, trade-secret protection, and confidentiality and/or license agreements with our employees, customers, partners, and others to protect our proprietary rights.
We currently have not submitted any applications for any trademarks or patents. We have applied for, or have been assigned by third parties, the domain names set forth below which we may use to develop our business.
www.buyborroworsell.com; www.buyborroworsell.net
www.sneakerlender.com; www.sneakerlender.net
www.toyslender.com; www.toyslender.net
www.electronicslender.com; www.electronicslender.net
www.couturelender.com ; www.couturelender.net
www.shoelender.com ; www.shoelender.net
www.watchlender.com ; www.watchlender.net
www.baglender.com; www.baglender.net
www.bridallender.com; www.bridallender.net
www.bridalpartylender.com; www.bridalpartylender.net.
www.weddingdresslender.com; www.weddingdresslender.net
www.weddinggownlender.com; www.weddinggownlender.net
www.fineartlender.com; www.fineartlender.net
www.furniturelender.com; www.furniturelender.net
www.handbaglender.com; www.handbaglender.net
www.sneakerlender.com; www.sneakerlender.net
www.suitlender.com; www.suitlender.net
Companies in the Internet, technology, and media industries own large numbers of patents, copyrights, and trademarks and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition, the possibility of intellectual property claims against us grows. Vanity has been, and from time to time we expect to continue to be, subject to claims of alleged infringement of copyrights, trademarks and other intellectual property rights of third parties. These claims and any resultant litigation, should it occur, could subject us to significant liability for damages. Our technologies may not be able to withstand any third-party claims or rights against their use. In addition, even if we prevail, litigation could be time-consuming and expensive to defend and could result in the diversion of our time and attention. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims, unless we are able to enter into license agreements with the third parties making these claims.
Competitors
We operate in the Internet products, services and content market, which is highly competitive and characterized by rapid change, converging technologies, and increasing competition from companies offering communication, information and entertainment services integrated into other products and media properties. We primarily compete with companies to attract users to our website and advertisers to our marketing services.
Our prospective competition includes amongst others, Rent the Runway, Inc., Rent-A-Center, Inc., Bag, Borrow or Steal, Inc., Aaron’s, and Gilt Groupe, Inc.
Many of our competitors have longer operating histories, more extensive management experience, and employee base with more extensive experience, better geographic coverage, larger consumer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. We expect competition to further intensify in the future. If our competitors are more successful than we are in developing compelling products or attracting and retaining users, our competitive position and financial results could be adversely affected.
Governmental Regulations
We are subject to a number of domestic laws and regulations that affect corporations using the Internet as their business platform. The interpretation of laws and regulations pertaining to the privacy of users, freedom of expression, content, advertising and intellectual property rights in the United States may at times be unclear or unsettled. Additionally, rules and regulations in these areas are being debated and considered for adoption in other countries, and we face risks from proposed legislation that may be adopted in the future.
In the U.S., laws governing the liability of Internet companies offering online services for the activity of website users and/or other third parties, are currently being tested by a number of claims. Cases include actions for libel, slander, invasion of privacy and other tort claims, unlawful activity, trademark and copyright infringement, as well as other theories based on the nature and content of the materials searched, the ads posted, or the content generated by users. Any court ruling that will impose liability on providers of online services for activities of their users and other third parties could harm our business.
Nevertheless, to resolve some of the current legal uncertainty, we expect the courts to interpret these laws and regulations and such rulings may be applicable to our activities. Such rulings could generally dampen the growth in use of the Internet and could potentially expose us to substantial liability, including significant expenses necessary to comply with applicable laws and regulations. Several U.S. federal laws that could have an impact on our business include, among others:
| · | The Digital Millennium Copyright Act (“DMCA”), intended to reduce the liability of online service providers for listing or linking to third party Web properties that include materials that infringe copyrights of others. The DMCA is intended to limit, but does not necessarily eliminate, our liability for listing, linking, or hosting third-party content that includes materials that infringe copyrights. |
| · | Portions of the Communications Decency Act, intended to provide statutory protections to online service providers who distribute third party content. |
| · | The CAN-SPAM Act is intended to regulate spam and create criminal penalties for unmarked sexually-oriented material and emails containing fraudulent headers. |
A range of other laws and new interpretations of existing laws could have an impact on our business. For example, in the area of data protection, many states have passed laws requiring notification to users when there is a security breach for personal data. The costs of compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any failure on our part to comply with these laws may subject us to significant liabilities.
We intend to post our privacy policy and practices concerning the use and disclosure of user data. Any failure by us to comply with our posted privacy policy, U.S. Federal Trade Commission requirements or other domestic or international privacy-related laws and regulations could result in proceedings by governmental or regulatory bodies, that could potentially harm our business, results of operations and financial condition. In this regard, there are a large number of legislative proposals before the European Union, as well as before the United States Congress and various state legislative bodies, regarding privacy issues related to our business. It is not possible to predict whether or when such legislation may be adopted, and certain proposals, if adopted, could harm our business operations. For example, decreases in usage of Answers.com could be caused by, among other provisions, the required use of disclaimers or other requirements before users can utilize our services.
In addition, because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, including laws relating to labor arrangements, taxes, media and content, among others, even where we have no local entity, employees, or infrastructure. We might unintentionally violate such laws, such laws may be modified or interpreted to our detriment, and new laws may be enacted in the future. Any such developments could harm our business, operating results and financial condition.
We may be subject to legal liability for specific types of online services we provide. We direct users to a wide variety of services that enable individuals to exchange information conduct business and engage in various online activities on an international basis. The law relating to the liability of providers of these online services for activities of their users is currently unsettled both within the United States and abroad. Claims may be threatened against us for aiding and abetting defamation, negligence, copyright or trademark infringement, or other theories based on the nature and content of information to which we provide links or that may be posted online.
Research and Development
During the fiscal years ended December 31, 2012 and 2011, the Company did not have any research and development costs. The Company may incur research and development costs during the fiscal year ended December 31, 2012 as the Company plans to gather its intelligence in real time as its web properties our built out and tested since it will rely heavily on both user feedback, and testing to determine the optimal financial model and price points for the goods and services it plans to offer.
Employees
As of March 29, 2013, Vanity employed a total of 1 full-time employee, comprised of its chief executive officer.
You should carefully consider the following risk factors and the other information included in this annual report on Form 10-K, as well as the information included in other reports and filings made with the SEC, before investing in our common stock. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. The trading price of our common stock could decline due to any of these risks, and you may lose part or all of your investment.
Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
Our financial statements as of December 31, 2012 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm issued a report that was included in this annual report which included an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern ultimately is dependent on our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates of our future performance.
We have a limited operating history which makes it difficult to evaluate our business on the basis of historical operations. As a consequence, it is difficult, if not impossible, to forecast our future results based upon our historical data. Reliance on our historical results may not be representative of the results we will achieve. Because of the uncertainties related to our lack of historical operations, we may be hindered in our ability to anticipate and timely adapt to increases or decreases in sales, product costs or expenses. If we make poor budgetary decisions as a result of unreliable historical data, we could be less profitable or incur losses, which may result in a decline in our stock price.
Our results of operations have not been consistent, and we may not be able to maintain profitability.
Our business plan is speculative and unproven. There is no assurance that we will be successful in executing our business plan or that even if we successfully implement our business plan, that we will sustain profitability now or in the future. If we incur significant operating losses, our stock price may decline, perhaps significantly.
We expect that we will need to raise additional funds, and these funds may not be available when we need them.
We believe that we will need to raise additional monies in order to fund our growth strategy and implement our business plan. Specifically, we expect that we will need to raise additional funds in order to pursue rapid expansion, develop new or enhanced services and products, and acquire complementary businesses or assets. Additionally, we may need funds to respond to unanticipated events that require us to make additional investments in our business. There can be no assurance that additional financing will be available when needed, on favorable terms, or at all. If these funds are not available when we need them, then we may need to change our business strategy and reduce our rate of growth.
Our business depends heavily on the market recognition and reputation of our brand, and any harm to our brand or failure to maintain and enhance our brand recognition may materially and adversely affect our business, financial condition and results of operations.
We believe that the market recognition and reputation of our web properties is key to the success of our business. Maintaining and enhancing the recognition and reputation of our brand are critical to our success and ability to compete. Many factors, some of which are beyond our control, are important to maintaining and enhancing our brand and may negatively impact our brand and reputation if not properly managed, such as:
| | • | | our ability to maintain a convenient and reliable user experience as consumer preferences evolve and as we expand into new product categories and new business lines; |
| | • | | our ability to increase brand awareness among existing and potential customers through various means of marketing and promotional activities; |
| | • | | the efficiency, reliability and service quality of our courier service providers; |
| | • | | our ability to effectively control the product and service quality of third-party merchants and to monitor service performance of third parties as we continue to develop our marketplace program; and |
| | • | | any negative media publicity about e-commerce or security or product quality problems of other e-commerce websites. |
If we are unable to maintain our reputation, further enhance our brand recognition and increase positive awareness of our website, our results of operations may be materially and adversely affected.
Our success depends on our ability to identify and respond to constantly changing consumer preferences.
The e-commerce and retail industries are subject to changing consumer preferences. Consequently, we must stay abreast of emerging lifestyle and consumer trends and anticipate trends that will appeal to existing and potential customers. If our customers cannot find their desired products on our website, they may stop purchasing products on our website, stop visiting our website or visit less often.
If we do not anticipate, identify and respond effectively to consumer preferences or changes in consumer trends at an early stage, we may not be able to generate the desired level of sales. Such circumstances could materially and adversely affect our business, financial condition and results of operations.
We face significant competition from industry-specific Web properties that could adversely impact our competitive position.
We face significant competition from a wide variety of Web properties. Many of our competitors have longer operating histories, more extensive management experience, an employee base with more extensive experience, better geographic coverage, larger consumer bases, greater brand recognition and significantly greater financial, marketing and other resource than we do. We expect competition to intensify in the future. If our competitors are more successful than we are in developing compelling products or attracting and retaining more users, then our competitive position and financial results could be adversely affected.
Our operating results may fluctuate, which makes comparing our operating results on a period-to-period basis difficult and could cause our results to fall short of expectations.
Our operating results may fluctuate as a result of a number of factors, many outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our quarterly, year-to-date and annual expenses as a percentage of our revenues may differ significantly from our historical or projected rates. Our operating results in future quarters may fall below expectations.
If we fail to maintain and enhance awareness of our website, our business and financial results could be adversely affected.
We believe that maintaining and enhancing awareness of our website is critical to achieving widespread acceptance of our services and to the success of our business. We also believe that the importance of brand recognition will increase due to the relatively low barriers to entry in our market. Maintaining and enhancing our website may require us to spend increasing amounts of money on, and devote greater resources to, advertising, marketing and other brand-building efforts, and these investments may not be successful. Further, even if these efforts are successful, they may not be cost-effective. If we are unable to continuously maintain and enhance our website, our traffic may decrease and we may fail to attract advertisers, which could in turn result in lost revenues and adversely affect our business and financial results.
If our intellectual property and technologies are not adequately protected to prevent use or misappropriation by our competitors, the value of our brand and other intangible assets may be diminished, and our business may be materially and adversely affected.
Our future success and competitive position depends in part on our ability to protect our proprietary technologies and intellectual property. We have generally not sought trademark, copyright or patent protection to protect our proprietary technology and intellectual property. Instead, we have relied on a combination of trade secret laws and confidentiality arrangements to protect our proprietary technologies and intellectual property.
The steps we have taken or will take may not be adequate to protect our technologies and intellectual property. In addition, others may develop or patent similar or superior technologies, products or services, and our intellectual property may be challenged, invalidated or circumvented by others. Furthermore, the intellectual property laws of other countries in which we operate or may operate in the future may not protect our products and intellectual property rights to the same extent as the laws of the United States. The legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in the video game industry are uncertain and still evolving, both in the United States and in other countries. In addition, third parties may knowingly or unknowingly infringe our intellectual property rights, and litigation may be necessary to protect and enforce our intellectual property rights. Any such litigation could be very costly, have an uncertain outcome and could divert management attention and resources. As a result of any dispute where we are alleged to have infringed or violated a third party’s intellectual property rights, we may have to develop non-infringing technology, pay damages, enter into royalty or licensing agreements, cease providing certain products or services, adjust our merchandizing or marketing and advertising activities or take other actions to resolve the claims. If the protection of our technologies and intellectual property is inadequate to prevent use or misappropriation by third parties, the value of our brand and other intangible assets may be diminished and competitors may be able to more effectively mimic our products and methods of operation. Any of these events may have a material adverse effect on our business, financial condition and results of operations.
We also expect that the more successful we are, the more likely it will become that competitors will try to develop services that are similar to ours, which may infringe on our proprietary rights. It may also become more likely that competitors will claim that our products infringe on their proprietary rights. If we are unable to protect our proprietary rights or if third parties independently develop or gain access to our or similar technologies, our business, revenue, reputation and competitive position could be harmed.
If we are unable to protect our domain names, our reputation and brand could be adversely affected.
We currently own registrations for various domain names relating to our brand, including www.buyborroworsell.com; www.buyborroworsell.net; www.sneakerlender.com; www.sneakerlender.net; www.toyslender.com; www.toyslender.net; www.electronicslender.com; www.electronics.net; www.couturelender.com; www.couturelender.net; www.shoelender.com; www.shoelender.net ; and www.watchlender.com ; www.watchlender.net . Failure to protect our domain names could adversely affect our reputation and brand and make it more difficult for users to find our website and our service. Domain names similar to ours have been registered in the United States and elsewhere. The acquisition and maintenance of domain names generally are regulated by various agencies and their designees. However, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights varies from jurisdiction to jurisdiction and is unclear in some jurisdictions. The regulation of domain names in the United States may change in the near future. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names. We may be unable, without significant cost or at all, to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our domain names.
We may not adequately prevent disclosure of trade secrets and other proprietary information.
A substantial amount of our tools and technologies are protected by trade secret laws. In order to protect our proprietary technologies and processes, we rely in part on security measures. These measures may not effectively prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. We could potentially lose future trade secret protection if any unauthorized disclosure of such information occurs. In addition, others may independently discover our trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Laws regarding trade secret rights in certain markets in which we operate may afford little or no protection to our trade secrets. The loss of trade secret protection could make it easier for third parties to compete with our products by copying functionality. In addition, any changes in, or unexpected interpretations of trade secret and other intellectual property laws may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our business, revenue, reputation and competitive position.
If we are unable to maintain and expand our computer and communications systems, then interruptions and failures in our services could result, making our services less attractive to consumers and subjecting us to lost revenue from the loss of users and advertisers.
Our ability to provide high quality user experience depends on the efficient and uninterrupted operation of our computer and communications systems. Our Internet servers must accommodate spikes in demand for our Web pages in addition to potential significant growth in traffic. Delays and interruptions could frustrate users and reduce traffic on our Web properties, adversely affecting our operations and growth prospects. Furthermore, our systems may be vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our systems, which could adversely affect our operations.
The proper functioning of our website is essential to our business and any failure to maintain the satisfactory performance, security and integrity of our website will materially and adversely affect our business, reputation, financial condition and results of operations.
The satisfactory performance, reliability and availability of our website, our transaction-processing systems and our network infrastructure are critical to our success and our ability to attract and retain customers and maintain adequate customer service levels.
Our revenues will depend on the number of visitors who shop on our website and the volume of orders we fulfill. Any system interruptions caused by telecommunications failures, computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our website or reduced order fulfillment performance would reduce the volume of products sold and the attractiveness of product offerings at our website. Our servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of data or the inability to accept and fulfill customer orders. We may also experience interruptions caused by reasons beyond our control. There can be no assurance that such unexpected interruptions will not happen again, and future occurrences could damage our reputation and result in a material decrease in our revenues. Any inability to add additional software and hardware or to develop and upgrade our existing technology, or network infrastructure to accommodate increased traffic on our website may cause unanticipated system disruptions, slower response time, degradation in levels of customer service and impaired quality and speed of order fulfillment, which would have a material adverse effect on our business, reputation, financial condition and results of operations.
If we fail to successfully adopt new technologies or adapt our web properties and systems to customer requirements or emerging industry standards, our business, prospects and financial results may be materially and adversely affected.
To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our website. The internet and the online retail industry are characterized by rapid technological evolution, changes in user requirements and preferences, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices that could render our existing proprietary technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business, enhance our existing services, develop new services and technologies that address the increasingly sophisticated and varied needs of our existing and prospective customers, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of website and other proprietary technology entails significant technical and business risks. There can be no assurance that we will be able to use new technologies effectively or adapt our website, proprietary technologies and transaction-processing systems to customer requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or customer requirements, whether for technical, legal, financial or other reasons, our business, prospects, financial condition and results of operations would be materially and adversely affected.
Failure to protect confidential information of our customers and our network against security breaches could damage our reputation and brand and substantially harm our business and results of operations.
A significant challenge to online commerce and communications is the secure transmission of confidential information over public networks. We intend for all product orders and payments for products we offer to be made through our web properties. In addition, some online payments for our products may be settled through third-party online payment services. In such transactions, maintaining complete security for the transmission of confidential information on our website, such as customers’ credit card numbers and expiration dates, personal information and billing addresses, is essential to maintain consumer confidence.
We have limited influence over the security measures of third-party online payment service providers. In addition, we hold certain private information about our customers, such as their names, addresses, phone numbers, browsing and purchasing records. We may not be able to prevent third parties, such as hackers or criminal organizations, from stealing information provided by our customers to us through our website. In addition, our third-party merchants and delivery service providers may violate their confidentiality obligations and disclose information about our customers. Any compromise of our security or third-party service providers’ security could have a material adverse effect on our reputation, business, prospects, financial condition and results of operations.
Additional capital and other resources may be required to protect against security breaches or to alleviate problems caused by such breaches. The methods used by hackers and others engaged in online criminal activity are increasingly sophisticated and constantly evolving. Even if we are successful in adapting to and preventing new security breaches, any perception by the public that online commerce and transactions, or the privacy of user information, are becoming increasingly unsafe or vulnerable to attack could inhibit the growth of e-commerce and other online services generally, which in turn may reduce the number of orders we receive.
We may incur liability for counterfeit products, products sold at our websites or content provided on our website that infringe on third-party intellectual property rights.
Although we intend to adopt measures to verify the authenticity of products sold on our web properties and minimize potential infringement of third-party intellectual property rights in the course of sourcing and selling products, we may not always be successful. In the event that counterfeit or infringing products are sold on our website, we could face claims that we should be held liable for selling counterfeit products or infringing on others’ intellectual property rights.
We have in the past received intellectual property infringement claims, none of which have had a material adverse effect on our business or financial condition. Irrespective of the validity of such claims, we could incur significant costs and efforts in either defending against or settling such claims. If there is a successful claim against us, we might be required to pay substantial damages or refrain from further sale of the relevant products. Moreover, regardless of whether we successfully defend against such claims, our reputation could be severely damaged. Any of these events could have a material adverse effect on our business, results of operations or financial condition.
If we are unable to attract, train and retain qualified personnel, our business may be materially and adversely affected.
Our future success depends, to a significant extent, on our ability to attract, train and retain qualified personnel, particularly management, technical and marketing personnel with expertise in the e-commerce industry. Since our industry is characterized by high demand and intense competition for talent, there can be no assurance that we will be able to attract or retain qualified staff or other highly skilled employees that we will need to achieve our strategic objectives. As we are still a relatively young company, our ability to train and integrate new employees into our operations may not meet the growing demands of our business. If we are unable to attract, train and retain qualified personnel, our business may be materially and adversely affected.
We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks, service marks, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to our success, and we intend to rely on trademark law, trade secret protection and confidentiality and license agreements with our employees, suppliers, partners and others to protect our proprietary rights. Our trademarks and service marks may be invalidated, circumvented, or challenged. Trade secrets are difficult to protect, and our trade secrets may be leaked or otherwise become known or be independently discovered by competitors. Confidentiality agreements may be breached, and we may not have adequate remedies for any breach. Policing any unauthorized use of our intellectual property is difficult and costly and the steps we have taken may be inadequate to prevent the misappropriation of our technologies.
We will incur significant costs on a variety of marketing efforts designed to increase sales of our products and some marketing campaigns and methods may turn out to be ineffective.
We will rely on a variety of different marketing efforts tailored to our targeted customers to increase sales of our products. Our marketing activities, which often may involve significant costs, may not be well received by customers and may not result in the levels of product sales that we anticipate. Marketing approaches and tools requires us to enhance our marketing approaches and experiment with new marketing methods to keep pace with industry developments and customer preferences. Failure to refine our existing marketing approaches or to introduce new effective marketing approaches in a cost-effective manner could negatively impact our profitability.
Future strategic alliances or acquisitions may have a material and adverse effect on our business, reputation and results of operations.
We may in the future enter into strategic alliances with various third parties. Strategic alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the counter-party, and an increase in expenses incurred in establishing new strategic alliances, any of which may materially and adversely affect our business. We may have little ability to control or monitor their actions. To the extent strategic third parties suffer negative publicity or harm to their reputation from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with such third parties.
We actively review potential acquisition candidates. We evaluate candidates based on, their ability to move us along in t our strategic direction, the addition of a core competency and value. Future acquisitions and the subsequent integration of new assets and businesses into our own would require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations. Acquired assets or businesses may not generate the financial results we expect.
In addition, acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and consummating acquisitions may be significant.
We must effectively manage the growth of our operations, or our company will suffer.
Our ability to successfully implement our business plan requires an effective planning and management process. If funding is available, we intend to increase the scope of our operations and acquire complimentary businesses. Implementing our business plan will require significant additional funding and resources. If we grow our operations, we will need to hire additional employees and make significant capital investments. If we grow our operations, it will place a significant strain on our existing management and resources. If we grow, we will need to improve our financial and managerial controls and reporting systems and procedures, and we will need to expand, train and manage our workforce. Any failure to manage any of the foregoing areas efficiently and effectively would cause our business to suffer.
Our sales and profitability may be affected by changes in economic, business or industry conditions.
If the economic climate in the U.S. or abroad deteriorates, customers or potential customers could reduce or delay their technology investments. Reduced or delayed technology investments could decrease our sales and profitability. In this environment, our customers may experience financial difficulty, cease operations and fail to budget or reduce budgets for the purchase of our products and professional services. This may lead to longer sales cycles, delays in purchase decisions, payment and collection, and can also result in downward price pressures, causing our sales and profitability to decline. In addition, general economic uncertainty and general declines in capital spending in the information technology sector make it difficult to predict changes in the purchasing requirements of our customers and the markets we serve. There are many other factors which could affect our business, including:
| · | the introduction and market acceptance of new technologies, products and services; |
| · | new competitors and new forms of competition; |
| · | the size and timing of customer orders; |
| · | the size and timing of capital expenditures by our customers; |
| · | adverse changes in the credit quality of our customers and suppliers; |
| · | changes in the pricing policies of, or the introduction of, new products and services by us or our competitors; |
| · | changes in the terms of our contracts with our customers or suppliers; |
| · | the availability of products from our suppliers; and |
| · | variations in product costs and the mix of products sold. |
These trends and factors could adversely affect our business, profitability and financial condition and diminish our ability to achieve our strategic objectives.
We face competition from numerous sources and there is existing competition in all of these categories from both online retailers as well as brick and mortar retailers.
We will compete primarily with well-established companies, many of which we believe have greater resources than us. We believe that barriers to entry are not significant and start-up costs are relatively low, so our competition may increase in the future. New competitors may be able to launch new businesses similar to ours, and current competitors may replicate our business model, at a relatively low cost. If competitors with significantly greater resources than ours decide to replicate our business model, they may be able to quickly gain recognition and acceptance of their business methods and products through marketing and promotion. We may not have the resources to compete effectively with current or future competitors. If we are unable to effectively compete, we will lose sales to our competitors and our revenues will decline.
We are heavily dependent on our Chief Executive Officer, and a loss of our CEO could cause our stock price to suffer.
If we lose Philip Ellett, our Chief Executive Officer, we may not be able to find an appropriate replacement on a timely basis, and our business could be adversely affected. Our existing operations and continued future development depend to a significant extent upon the performance and active participation of our Chief Executive Officer. We cannot guarantee that we will be successful in retaining the services of Mr. Ellett. If we were to lose him, we may not be able to find an appropriate replacement on a timely basis and our financial condition and results of operations could be materially adversely affected.
In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for these employees is intense, and we may not be successful in attracting and retaining qualified personnel. We could also experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options they are to receive in connection with their employment. Accounting principles generally accepted in the United States relating to the expensing of stock options may discourage us from granting the size or type of stock option awards that job candidates may require to join our company. If we fail to attract new personnel, or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.
Litigation and litigation results could negatively impact our future financial condition and results of operations.
In the ordinary course of our business, the Company is, from time to time, subject to various litigation and legal proceedings. Currently, the Company is not subject to any litigation or legal proceedings. In the future, the costs or results of such legal proceedings, individually or in the aggregate, could have a negative impact on the Company’s operations or financial condition.
Risks Relating to Our Current Financing Arrangements :
There Are a Large Number of Shares Underlying Our Secured Convertible Debentures, and Warrants That May be Available for Future Sale and the Sale of These Shares May Depress the Market Price of Our Common Stock.
As of March 29, 2013, we had 3,685,526 shares of common stock issued and outstanding, convertible debentures outstanding with variable conversion prices that may be converted into an estimated 3,624,478 shares of common stock at current market prices and convertible debentures outstanding with fixed conversion prices that may be converted into an estimated 100,000,000 shares of common stock at current market prices. In addition, the number of shares of common stock issuable upon conversion of the outstanding convertible notes may increase if the market price of our stock declines. All of the shares, including all of the shares issuable upon conversion of the debentures and upon exercise of our warrants, may be sold without restriction. The sale of these shares may adversely affect the market price of our common stock.
The Continuously Adjustable Conversion Price Feature of Our Convertible Debentures Could Require Us to Issue a Substantially Greater Number of Shares, Which Will Cause Dilution to Our Existing Stockholders.
Our obligation to issue shares upon conversion of certain of our convertible debentures is essentially limitless. The following is an example of the amount of shares of our common stock that are issuable, upon conversion of our convertible debentures that contain a conversion price with a discount to market price (excluding accrued interest), based on market prices 25%, 50% and 75% below the market price, as of March 29, 2013 of $1.90.
| | | | | Number | % of |
| % Below | Price Per | With Discount | With Discount | of Shares | Outstanding |
| Market | Share | at 80% | at 90% | Issuable | Stock |
| | | | | | |
| 25% | $1.42 | $0.28 | $0.14 | 4,805,105 | 57% |
| 50% | $0.95 | $0.19 | $0.10 | 7,248,957 | 66% |
| 75% | $0.48 | $0.10 | $0.05 | 14,342,949 | 80% |
| | | | | | |
As illustrated, the number of shares of common stock issuable upon conversion of our convertible debentures will increase if the market price of our stock declines, which will cause dilution to our existing stockholders.
The Continuously Adjustable Conversion Price feature of our Convertible Debentures May Encourage Investors to Make Short Sales in Our Common Stock, Which Could Have a Depressive Effect on the Price of Our Common Stock.
Certain of our convertible debentures are convertible into shares of our common stock at either a 50% discount, 80% discount or a 90% discount to the trading price of the common stock prior to the conversion. The significant downward pressure on the price of the common stock as the selling stockholder converts and sells material amounts of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common stock. The selling stockholder could sell common stock into the market in anticipation of covering the short sale by converting their securities, which could cause the further downward pressure on the stock price. In addition, not only the sale of shares issued upon conversion or exercise of debentures and warrants, but also the mere perception that these sales could occur, may adversely affect the market price of the common stock.
The Issuance of Shares Upon Conversion of the Convertible Debentures and Exercise of Outstanding Warrants May Cause Immediate and Substantial Dilution to Our Existing Stockholders.
The issuance of shares upon conversion of the convertible debentures and exercise of warrants may result in substantial dilution to the interests of other stockholders since the selling stockholders may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholders may not convert their secured convertible notes and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholders from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the selling stockholders could sell more than this limit while never holding more than this limit. There is no upper limit on the number of shares that may be issued which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock, including investors in this offering.
If We Are Required for any Reason to Repay Our Outstanding Convertible Debentures, We Would Be Required to Deplete Our Working Capital, If Available, Or Raise Additional Funds. Our Failure to Repay the Convertible Debentures, If Required, Could Result in Legal Action Against Us, Which Could Require the Sale of Substantial Assets.
Between May 2010 and December 2012, we have entered into securities purchase agreements for the sale of an aggregate of $1,026,500 principal amount of convertible debentures ($990,284 outstanding balance at March 29, 2013. The secured convertible notes are due and payable, with interest, one to two years from the date of issuance, unless sooner converted into shares of our common stock. In addition, any event of default such as our failure to repay the principal or interest when due, our failure to issue shares of common stock upon conversion by the holder, breach of any covenant, representation or warranty in the respective securities purchase agreement or related convertible debenture, the assignment or appointment of a receiver to control a substantial part of our property or business, the filing of a money judgment, writ or similar process against our company in excess of $100,000, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against our company and the delisting of our common stock could require the early repayment of the convertible debentures, including a default interest rate of 18% on the outstanding principal balance of the notes if the default is not cured with the specified grace period. We anticipate that the full amount of the convertible debentures will be converted into shares of our common stock, in accordance with the terms of the convertible debentures. If we are required to repay the convertible debentures, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the debentures when required, the debenture holders could commence legal action against us to recover the amounts due. Any such action would require us to curtail or cease operations.
We are Currently in Default under the June 2010, July 2010, November 2010, April 2011, May 2011, June 2011, October 2011, November 2011and March 2012 Convertible Debentures and the Investors could, if they were to successfully enforce their rights under the Convertible Debentures through a lawsuit, levy on our assets and have them sold to satisfy our obligations on the Convertible Debentures.
Pursuant to the terms of the convertible debentures issued in June 2010, July 2010, November 2010, April 2011, May 2011, June 2011, October 2011, November 2011 and March 2012, each of the debentures has matured and an event of default has occurred under each of the respective debentures. We currently owed the investors $618,784 in face amount of convertible debentures, plus interest and default payments. Holders of these convertible debentures could, if they choose to sue on these convertible debentures, and if they were to successfully obtain a judgment on the Company, could levy on our assets and have those assets sold to satisfy the amounts we owe them.
RISKS RELATING TO OUR COMMON STOCK
We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock would depend on earnings, financial condition and other business and economic factors affecting it at such time as the Board of Directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if its stock price appreciates.
There is a limited market for our common stock which may make it more difficult to dispose of your stock.
Our common stock is currently quoted on the Over the Counter Bulletin Board under the symbol "VAEV". There is a limited trading market for our common stock. Accordingly, there can be no assurance as to the liquidity of any markets that may develop for our common stock, the ability of holders of our common stock to sell our common stock, or the prices at which holders may be able to sell our common stock.
A sale of a substantial number of shares of the Company's common stock may cause the price of its common stock to decline.
If the Company’s stockholders sell substantial amounts of the Company’s common stock in the public market, the market price of its common stock could fall. These sales also may make it more difficult for the Company to sell equity or equity-related securities in the future at a time and price that the Company deems reasonable or appropriate.
If we fail to remain current in our SEC reporting requirements, we could be removed from the OTC Bulletin Board which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Companies trading on the Over-the-Counter Bulletin Board (the “OTC Bulletin Board”), such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current in our reporting requirements, we could be removed from the OTC Bulletin
Board. As a result, the market liquidity for our securities could be severely and adversely affected by limiting the ability of broker-dealers to
sell our securities and the ability of stockholders to sell their securities in the secondary market. There can be no assurance that in the future we will always be current in our SEC reporting requirements.
Our common stock is subject to the "Penny Stock" rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The SEC has adopted Rule 3a51-1 which establishes the definition of a "penny stock", for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:
| · | that a broker or dealer approve a person's account for transactions in penny stocks; and |
| · | that the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
| · | obtain financial information and investment experience objectives of the person; and |
| · | make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:
| · | sets forth the basis on which the broker or dealer made the suitability determination; and |
| · | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Because certain of our stockholders control a significant amount of our common stock, they may have effective control over actions requiring stockholder approval.
Our directors, executive officers and principal stockholders (5%) and their affiliates will beneficially own approximately 74% of the outstanding shares of common stock upon the filing of the Amendment. Accordingly, our executive officers, directors, principal stockholders and certain of their affiliates will have substantial influence on the ability to control the Company and the outcome of issues submitted to our stockholders.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results and stockholders could lose confidence in our financial reporting.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. Failure to achieve and maintain an effective internal control environment, regardless of whether we are required to maintain such controls, could also cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price. Although we are not aware of anything that would impact our ability to maintain effective internal controls, we have not obtained an independent audit of our internal controls as such is not required, and, as a result, we are not aware of any deficiencies which would result from such an audit. Further, at such time as we are required to comply with the internal controls requirements of Sarbanes Oxley, we may incur significant expenses in having our internal controls audited and in implementing any changes which are required.
Not Applicable.
Our corporate offices are located at 1111 Kane Concourse, Suite 304, Bay Harbor Islands, FL 33154. We share approximately 150 square feet of space leased by a third party for $535 per month. We believe that our existing facilities are suitable and adequate to meet our current business requirements.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
Not applicable.
Our common stock is currently quoted on the Over-The-Counter Bulletin Board under the symbol “VAEV”. The closing price of our common stock on the OTC Bulletin Board on April 28, 2013 was $1.90 per share. The prices, as presented below, represent the highest and lowest intra-day prices for our common stock as quoted on the OTC Bulletin Board which take into account the 1 for 300 reverse stock split which was effected on February 10, 2012. Such over-the-counter market quotations may reflect inter-dealer prices, without markup, markdown or commissions and may not necessarily represent actual transactions
| | | 2012 |
| | | High | | | Low |
| First quarter | | $ | 2.60 | | | $ | 0.015 |
| Second quarter | | $ | 2.60 | | | $ | 1.21 |
| Third quarter | | $ | 1.95 | | | $ | 1.01 |
| Fourth quarter | | $ | 1.66 | | | $ | 0.95 |
| | | 2011 | |
| | | High | | | Low | |
| First quarter | | $ | 10.5105 | | | $ | 0.4505 | |
| Second quarter | | $ | 1.5015 | | | $ | 0.3303 | |
| Third quarter | | $ | 5.7057 | | | $ | 0.3303 | |
| Fourth quarter | | $ | 0.8709 | | | $ | 0.1201 | |
On March 29, 2013 we had approximately 68 registered shareholders of record of the 3,685,526 shares of our common stock.
Dividends
Any cash dividends on its common stock. Currently, the Company intends to retain future earnings, if any, to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table shows information with respect to each equity compensation plan under which the Company’s common stock is authorized for issuance as of the fiscal year ended December 31, 2012.
EQUITY COMPENSATION PLAN INFORMATION
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | |
| | | (a) | | | (b) | | | (c) | |
| Equity compensation plans approved by security holders | | | -0- | | | | -0- | | | | -0- | |
| | | | | | | | | | | | | |
| Equity compensation plans not approved by security holders | | | -0- | | | | -0- | | | | -0- | |
| | | | | | | | | | | | | |
| Total | | | -0- | | | | -0- | | | | -0- | |
Not Applicable.
This discussion contains forward-looking statements based upon our current expectations and involves risks and uncertainties. To the extent that the information presented in this report discusses financial projections, information or expectations about our business plans, results of operations, products or markets, or otherwise makes statements about future events, such statements are forward-looking. Such forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “might,” “would,” “intends,” “anticipates,” “believes,” “estimates,” “projects,” “forecasts,” “expects,” “plans,” and “proposes.” Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. These include, among others, the cautionary statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report. These cautionary statements identify important factors that could cause actual results to differ materially from those described in the forward-looking statements. When considering forward-looking statements in this report, you should keep in mind the cautionary statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section below, and other sections of this report.
All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, unless required by law. It is important to note that our actual results could differ materially from those included in such forward-looking statements.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and related notes.
Overview
The Company is a holding company. The primary focus of the company is the development of e-commerce sites in the collaborative consumption market place. Management is also active in reviewing potential acquisitions that they believe will enhance the value of the company. Utilizing their licensed trademark of America’s Cleaning Company™, Vanity established a cleaning company offering residential and commercial cleaning services. This company intended to expand its reach through national franchising. In addition, the Company also sought out, licenses, develops, promotes, and brings to market various innovative consumer and commercial products. Upon the closing of transactions contemplated by the Exchange Agreement, the Company shifted its operations beginning in 2011 to focus on the business of Shogun Energy, Inc.
Shogun’s goal is to produce a premium line of energy drinks that are unique and appealing to all demographics, which adds to the allure of its product and the value of its brand. Shogun does not directly manufacture the Shogun Energy® drink, but instead outsources the manufacturing process to third party bottlers and contract packers.
After careful review of the Company’s business model during the first half of 2011, the Company determined that the capital requirements and time to market for the products and services of Shogun were greater than had been previously expected. As such, on June 30, 2011, the Company and Shogun entered into the Rescission Agreement, which relieved the Company of further capital investment in the Shogun business and allowed the Company to streamline its business operations and operate under a more efficient business model on a going forward basis. The assets, liabilities and operations of Shogun were spun-off on September 20, 2011 pursuant to the Rescission Agreement.
Beginning in the second quarter of 2011, management actively engaged in evolving the existing business model of the Company from a sourcing and distribution company to a licensing and marketing company. Management believed that this new business model would allow the Company to have the ability to capture revenue without many of the associated costs that come along with the production of its products.
On May 24, 2011, the Company entered into a non-exclusive license agreement (the “Sorbco Non-Exclusive License Agreement”) with Plant Sorb LLC (“Sorbco”) pursuant to which the Company has the non-exclusive right and license to (i) market, sell, distribute and otherwise deal in commerce with certain Sorbco products in the United States through any media and (ii) use Sorbco’s trademark. The Sorbco Non-Exclusive License Agreement had an initial term commencing on the date of the Sorbco Non-Exclusive License Agreement and ending on May 31, 2011, and continues on a month-to-month basis thereafter unless terminated by either party on not less than thirty (30) days’ notice prior to the end of the initial term or any month-to-month extension. On July 13, 2011, the Company entered into an exclusive license and distribution agreement (the “Sorbco Exclusive License Agreement” and together with the Sorbco Non-Exclusive License Agreement the “Sorbco Agreement”) with Sorbco pursuant to which the Company has the exclusive right and license to (i) market, sell, distribute and otherwise deal in commerce with the Sorbco products in the United States through any media and (ii) use Sorbco’s trademark. The Sorbco Exclusive License Agreement had an initial term ending on July 13, 2012, and shall continue on successive one-year terms thereafter unless terminated by either party for cause.
For purposes of the Sorbco Exclusive License Agreement, “cause” is defined as the Company not exceeding a threshold of five hundred thousand dollars ($500,000.00) of retail revenues through sales of Sorbco products during the initial term of the Sorbco Exclusive License Agreement. On July 12, 2012 the Company and Sorbco agreed to extend and amend the Sorbco Agreement to grant the Company the non-exclusive right and license to (i) market, sell, distribute and otherwise deal in commerce with the Sorbco products in the United States through any media and (ii) use Sorbco’s trademark. On September 21, 2012 the Company and Sorbco agreed to terminate the agreement.
On September 20, 2011, the Company and Shogun entered into a non-exclusive sales distributor agreement, pursuant to which Shogun granted Vanity a non-exclusive right to distribute or sell Shogun’s products in the United States for a period of 12 months from the date of the Agreement.
The Company proceeded to leverage this business model going forward by creating a short form direct response TV spot for the Sorbco products as well as establishing an online ecommerce presence with www.buyplantsorbnow.com , as well as media tested driving traffic to its stand-alone web property in an effort to generate sales for the Sorbco products and Shogun products at www.thereisaaproductforthat.com . The Company’s goal in using the direct response TV spot was if the media tests were successful, the Company would roll-out additional direct TV spots and leverage retail distributors to drive the Company’s products thru mainstream retail channels as well as traditional direct response outlets. At the end of 2011, after evaluating the media tests, management determined that it would not be profitable or beneficial for the Company to pursue this business model for the Sorbco products past the initial testing phase.
Beginning in 2012, management decided to evolve its business strategy from a licensing and marketing company to an e-commerce transactional business where the Company’s management felt it had the relevant core competency and experience to successfully build value for the Company’s shareholders.
On February 29, 2012, the Company entered into a domain name assignment agreement with Greg Pippo, the Company’s former chief financial officer ( “Pippo”), pursuant to which Pippo assigned all of his rights, title and interest and goodwill in or associated with the domain names www.buyborroworsell.com and www.buyborroworsell.net (the “Domain Names”), together with any unregistered or registered trademarks, service marks, copyrights or other intellectual property or property rights based on or in any way related to the Domain Names. In consideration for the assignment of the Domain Names, the Company agreed to pay Pippo$2,500 for the fees and expenses related to the Domain Names incurred by Pippo to date.
On April 4, 2012, the Company entered into an asset purchase agreement (the “Aegis Agreement”) with Aegis Worldwide, LLC, an entity controlled by Greg Pippo, the Company’s former chief financial officer (the “Aegis”), pursuant to which Aegis agreed to sell, transfer, convey, and deliver to the Company, all of Aegis’s right, title and interest and goodwill in or associated with certain domain names (the “Aegis Domain Names”) along with any information or materials proprietary to Aegis that relate to the business or affairs associated with the Aegis Domain Names which is of a confidential nature, including, but not limited to, trade secrets, information or materials relating to existing or proposed products (in all and various stages of development), “know-how”, marketing techniques and materials, marketing and development plans and pricing policies (the “Assets”). In consideration for the purchase of the Assets, the Company agreed issue Aegis 1,000,000 shares of Company’s common stock. On October 12, 2012 the Company received notice of Aegis Worldwide LLC’s intention to return to treasury the 1,000,000 shares of common stock issued in connection with the April 4 2012 Asset Purchase Agreement. The Company accepted the return of the shares without conditions.
Simultaneously with the execution of the Aegis Agreement, on April 4, 2012, the parties entered into an option agreement, pursuant to which Aegis shall have the option to purchase the Assets and all enhancements to the Assets from the Company in consideration for (i) an amount in cash equal to the net proceeds used by the Company for the enhancement of the Assets on or after April 4, 2012 and (ii) the cancellation of the shares issued to Aegis. The option is exercisable beginning on the twelve month anniversary of the Closing Date and terminating on the 24 month anniversary of the Closing Date.
At this time the company is focusing on the development of e-commerce sites in the collaborative consumption marketplace. In these challenging economic times, we believe that consumers need access to many different types of goods leveraging the economies that come with shared consumption, along with a convenient and user friendly way to sell or monetize the goods that they currently own.
Our web properties will house several stand-alone sites specifically addressing areas management has identified as attractive in the world of collaborative consumption. What that in turn means is that the consumer will not own the goods unless they are purchased outright, instead they will enjoy the use of them through the access that their membership fees allow. The Company plans to offer strong mobile applications to support these sites, as well as leveraging both social and traditional media to build consumer awareness.
Management plans on developing an engaging community experience filled with user feedback and industry specific content that will further enhance the attractiveness of each stand-alone site. At this time these sites are in the planning and development stages. It is currently planned that the first site to be launched will be watchlender.com. This site will offer the consumer a range of luxury watches for rent or for purchase.
Using this experience it is planned to launch additional sites utilizing the website domains that the Company has purchased including, ToysLender.com , SneakerLender.com , FineArtLender.com , Shoelender.com , ElectronicsLender.com and CoutureLender.com.
Management plans to utilize existing relationships with various suppliers to source product to be offered on the sites. The company is working closely with outsourced third party developers to launch the first of these web and mobile platforms.
Recent Developments
On October 12, 2012 the Company received notice of Aegis Worldwide LLC’s intention to return to treasury the 1,000,000 shares of common stock issued in connection with the April 4 2012 Asset Purchase Agreement. The Company accepted the return of the shares without conditions.
On November 7, 2012 the Company entered into an employment agreement with Phil Ellett under which Mr. Ellett will be issued 2,000,000 shares of common stock. The shares shall be issued with a substantial right of forfeiture as follows: The Employee cannot transfer the shares and must return all shares to the Employer if he terminates employment within two years from date of issuance.
Critical Accounting Policies
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:
Use of Estimates - These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Going Concern - The financial statements have been prepared on a going concern basis, and do not reflect any adjustments related to the uncertainty surrounding our recurring losses or accumulated deficit
Revenue Recognition - We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605 “Revenue Recognition”. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred and title has transferred or services have been rendered, the price is fixed and determinable and collectability is reasonably assured. Revenue is not recognized on product sales transacted on a test or pilot basis. Instead, receipts from these types of transactions offset marketing expenses.
Fair Value of Financial Instruments - Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value. The fair value of the Company’s derivative instruments is determined using option pricing models.
Results of Operations
Year ended December 31, 2012 as compared to the Year ended December 31, 2011
The results of operations for the corresponding 2012 and 2011 periods include Shogun’s operations through September 20, 2011, the date of closing on the Rescission. All of the revenue reported in 2011 resulted from Shogun’s operations. Comparisons between the comparable periods are not necessarily indicative of our future operations.
Net sales were $424 for the year ended December 31, 2012 compared to net sales of $95,039 for the comparable 2011 period, a decrease of $94,615, or 99.55%. Gross profit was $424 and $52,585 for the 2012 and 2011 periods, respectively. The principal reason for the decrease in sales in 2012 is directly related to the spin-off of the Shogun operations in September of 2011. Our revenues subsequent to the spin-off have been minimal as we implement our current business plan.
Operating expense:
Selling expense was $106,198 for the year ended December 31, 2011, with no comparable expense in the current 2012 period. The reason for the decrease in 2012 is directly related to spin-off of the Shogun operations in September of 2011.
General and administrative expense for the year ended December 31, 2012 was $1,123,141, as compared to $742,230 for the year ended December 31, 2011, an increase of $380,911, or 51%. The principal reasons for the increase in expense in 2012 are increases in stock-based consulting fees of $570,000 and stock –based compensation of approximately $241,000 partially offset by a decrease in professional fees of approximately $200,000 and distributor costs of approximately $31,000. Other expense decreases aggregating approximately $167,000 are directly related to spin-off of the Shogun operations in September of 2011. Current general and administrative expense consists primarily of payroll, professional fees and consulting fees.
Other income (expense):
We had expense from the change in the fair value of our derivative liabilities of $4,123,599 during the year ended December 31, 2012 as compared to income of $4,861,802 in the comparable 2011 period. The change in the fair value of our derivative liabilities resulted primarily from the changes in our stock price and the volatility of our common stock during the reported periods. Refer to Note 4 to the financial statements for further discussion of our derivative liabilities.
We reported gain from the conversion of debt of $15,887 during the year ended December 31, 2012 as compared to gain of $6,811in the 2011 period. The gain on debt conversion resulted from the issuance of common shares to pay off debt, based on the fair value of the shares issued as compared to the carrying value of the related debt. The closing price on the date of conversion is used to compute the actual fair market value of our common stock in determining the amount of the gain or loss.
We reported interest expense of $10,801,553 during the year ended December 31, 2011 as compared with interest expense of $3,742,065 in the comparable 2011 period. Interest expense during the 2012 period consists primarily of the expense associated with the price resets of certain of our derivative instruments aggregating $6,276,372 and derivative liabilities issued during the period whose fair values exceeded the proceeds of the debt aggregating $4,134,745. The balance of the expense for the 2012 period relates to the amortization of debt discount and interest accrued on the debt. Interest expense for the 2011 period consists primarily of the expense associated with the price resets of certain of our derivative instruments aggregating $369,127 and derivative liabilities issued during the period whose fair values exceeded the proceeds of the debt aggregating $3,001,899. The balance of the expense for the 2011 period relates to the amortization of debt discount and interest accrued on the debt.
Net income (loss):
We reported net loss of $16,031,982 during the year ended December 31, 2012 and income of $330,705 during the year ended December 31, 2011, resulting from the components described above.
Liquidity and Capital Resources
As of December 31, 2012 we had a working capital deficit of $16,631,224. During the year ended December 31, 2012 we raised $450,000 in cash proceeds from the sale of convertible debentures (see below).
Operating Activities - For the year ended December 31, 2012, net cash used in operating activities was $325,344, primarily attributable to a loss of $412,100 (after adjusting for non-cash items), partially offset by an increase in accounts payable of $86,756. Net cash used in operating activities for the year ended December 31, 2011 was $443,207, primarily attributable to a loss of $849,111 (after adjusting for non-cash items), partially offset by an increase in accounts payable of $379,438.
Investing Activities - For the year ended December 31, 2012, net cash used in investing activities was $55,400 related to the build-out of intangible assets. For the year ended December 31, 2011, net cash used in investing activities was $1,166, related to the purchases of furniture and equipment.
Financing Activities - For the years ended December 31, 2012 and 2011, net cash provided by financing activities was $450,000 and $460,403, respectively. Net proceeds from loans obtained through bank, related parties and others were $450,000 and $422,875 during 2012 and 2011, respectively. During 2011 we repaid a bank overdraft of $4,273 and made other repayments of debt aggregating $33,199. Also during 2011 we received proceeds of $75,000 from the sale of preferred stock.
Our continuation as a going concern for a period longer than the current fiscal year is dependent upon our ability to obtain necessary additional funds to continue operations and expansion of our business, to determine the existence, discovery and successful exploitation of potential revenue sources that will be financed primarily through available working capital, the sales of securities and convertible debt, issuance of notes payable other debt or a combination thereof, depending upon the transaction size, market conditions and other factors.
On March 21, 2012, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Greystone Capital Partners LLC , an accredited investor (the “Investor”), providing for the sale by the Company to the Investor of a 8% convertible debenture in the principal amount of up to $100,000 (the “Debenture”). The Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears interest a rate of 8% per annum, payable semi-annually and on the Maturity Date. The Investor may convert, at any time, the outstanding principal and accrued interest on the Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price per share equal to the lesser of (i) a ninety percent (90%) discount of the average of the closing bid price of the Common Stock during the five (5) trading days immediately preceding the date of conversion as quoted by Bloomberg, LP or (ii) the average of the closing bid price per share during the five (5) trading days prior to the date of any such conversion (the “Conversion Price”).
With the exception of the shares that the Company is obligated to issue to previous investors, for as long as the Debenture is outstanding, the Conversion Price of the Debenture shall be subject to adjustment for issuances of Common Stock or securities convertible into common stock or exercisable for shares of Common Stock at a purchase price of less than the then-effective Conversion Price, on any unconverted amounts, such that the then applicable Conversion Price shall be adjusted using full-ratchet anti-dilution on such new issuances subject, to customary carve outs, including restricted shares granted to officers, and directors and consultants.
On September 21, 2012 Greystone Capital Partners assigned the March 21, 2012 note to Adam Wasserman.
On May 30, 2012, the Company entered into a Securities Purchase Agreement with Flyback LLC ("Flyback") providing for the sale by the Company to Flyback of a 8% convertible debenture in the principal amount of up to $150,000 (the “May Debenture”). The May Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears an interest rate of 8% per annum, payable semi-annually and on the Maturity Date. Flyback may convert, at any time, the outstanding principal and accrued interest on the May Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price per share equal to the lesser of (i) a ninety percent (90%) discount of the average of the closing bid price of the Common Stock during the five (5) trading days immediately preceding the date of conversion as quoted by Bloomberg, LP or (ii) the average of the closing bid price per share during the five (5) trading days prior to the date of any such conversion (the “Conversion Price”).
With the exception of the shares that the Company is obligated to issue to previous investors, for as long as the May Debenture is outstanding, the Conversion Price of the May Debenture shall be subject to adjustment for issuances of Common Stock or securities convertible into common stock or exercisable for shares of Common Stock at a purchase price of less than the then-effective Conversion Price, on any unconverted amounts, such that the then applicable Conversion Price shall be adjusted using full-ratchet anti-dilution on such new issuances subject, to customary carve outs, including restricted shares granted to officers, and directors and consultants.
On September 18, 2012, the Company entered into an Exchange Agreement with IBC Funds, LLC (“IBC”), pursuant to which the Company and IBC agreed to exchange two promissory notes held by IBC in the aggregate principal amount of $21,500 (collectively, the “Notes”) for an 8% convertible debenture in the aggregate principal amount of $21,500 (the “September Debenture”). The September Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears interest a rate of 8% per annum, payable semi-annually and on the Maturity Date. IBC may convert, at any time, the outstanding principal and accrued interest on the September Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price per share equal to a ninety percent (90%) discount of the average of the closing bid price of the Common Stock during the five (5) trading days immediately preceding the date of conversion as quoted by Bloomberg, LP provided, however, that in no event shall the conversion price be an amount that is lower than $0.001.
With the exception of the shares that the Company is obligated to issue to previous investors, for as long as the September Debenture is outstanding, the Conversion Price of the September Debenture shall be subject to adjustment for issuances of Common Stock or securities convertible into common stock or exercisable for shares of Common Stock at a purchase price of less than the then-effective Conversion Price, on any unconverted amounts, such that the then applicable Conversion Price shall be adjusted using full-ratchet anti-dilution on such new issuances, subject to customary carve outs, including restricted shares granted to officers, and directors and consultants.
On October 26, 2012, Company entered into a Securities Purchase Agreement (the “Oct 2012 Purchase Agreement”) with Monroe Milstein , an accredited investor (the “October 2012 Investor”), providing for the sale by the Company to the October 2012 Investor of a 10% convertible debenture in the principal amount of $200,000 (the “October 2012 Debenture”). The October 2012 Debenture matures on the second anniversary of the date of issuance (the “October 2012 Maturity Date”) and bears interest a rate of 10% per annum, payable semi-annually and on the October 2012 Maturity Date. The October 2012 Investor may convert, at any time, the outstanding principal and accrued interest on the October 2012 Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price that is a fifty percent (50%) discount of the lowest closing price of the Common Stock during the ten (10) trading days immediately preceding the date of conversion as quoted by Bloomberg, LP or such other quotation service as mutually agreed to by the parties.
With the exception of the shares that the Company is obligated to issue to previous investors, for as long as the October Debenture is outstanding, the Conversion Price of the September Debenture shall be subject to adjustment for issuances of Common Stock or securities convertible into common stock or exercisable for shares of Common Stock at a purchase price of less than the then-effective Conversion Price, on any unconverted amounts, such that the then applicable Conversion Price shall be adjusted using full-ratchet anti-dilution on such new issuances, subject to customary carve outs, including restricted shares granted to officers, and directors and consultants.
We presently do not have any other available credit, bank financing or other external sources of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding.
We will still need additional capital in order to continue operations until we are able to achieve positive operating cash flow. Additional capital is 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 a downturn in the equity and debt markets could 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. Furthermore, 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.
Off-Balance Sheet Arrangements
We have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
Not Applicable
The full text of our audited consolidated financial statements as of December 31, 2012 and 2011, begins on page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On July 14, 2011, the board of directors of the Company dismissed RBSM LLP (“RBSM”) as the independent auditors for the Company and its subsidiaries.
RBSM’s report on the Company's financial statements for the fiscal years ended December 31, 2010 and 2009 contained an explanatory paragraph indicating that there was substantial doubt as to the Company’s ability to continue as a going concern. Other than such statement, no report of RBSM on the financial statements of the Company for either of the past two years and through July 14, 2011 contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company’s two most recent fiscal years and through July 14, 2011: (i) there have been no disagreements with RBSM on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of RBSM, would have caused it to make reference to the subject matter of the disagreement in connection with its reports and (ii) RBSM did not advise the Company of any of the events requiring reporting under Item 304(a)(1) of Regulation S-K.
The Company provided to RBSM the disclosure contained herein and requested RBSM to furnish a letter addressed to the Commission stating whether it agrees with the statements made by the Company herein and, if not, stating the respects in which it does not agree. A copy of such letter is attached hereto as Exhibit 16.1 and incorporated herein by reference.
On July 14, 2011, the board of directors of the Company ratified and approved the Company's engagement of Kabani & Company, Inc. (“Kabani”) as independent auditors for the Company and its subsidiaries.
During the years ended December 31, 2011 and 2010 and through July 14, 2011, neither the Company nor anyone on its behalf consulted Kabani regarding (i) the application of accounting principles to a specific completed or contemplated transaction, (ii) the type of audit opinion that might be rendered on the Company's financial statements, or (iii) any matter that was the subject of a disagreement or event identified in response to Item 304(a)(1) of Regulation S-K (there being none).
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our interim chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure. During the quarter ended December 31, 2011 we carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the 1934 Act. Based on this evaluation, because of the Company’s limited resources and limited number of employees, management concluded that our disclosure controls and procedures were ineffective as of December 31, 2012.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of the financial statements of the Company in accordance with U.S. generally accepted accounting principles, or GAAP. Because of its inherent limitations, 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 because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
With the participation of our Chief Executive Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2012 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our evaluation and the material weaknesses described below, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2012 based on the COSO framework criteria. Management has identified control deficiencies regarding the lack of segregation of duties and the need for a stronger internal control environment. Management of the Company believes that these material weaknesses are due to the small size of the Company’s accounting staff. The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation.
To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of external legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.
These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our consolidated financial statements may not be prevented or detected on a timely basis. Accordingly, we have determined that these control deficiencies as described above together constitute a material weakness.
In light of this material weakness, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the year ended December 31, 2012 included in this Annual Report on Form 10-K were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weaknesses, our consolidated financial statements for the year ended December 31, 2012 are fairly stated, in all material respects, in accordance with US GAAP.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm.
Limitations on Effectiveness of Controls and Procedures
Our management, including our interim chief executive officer and chief financial officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Controls
During the fiscal quarter ended December 31, 2012, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
None.
The names, ages and positions of our directors and executive officers as of March 29, 2013, are as follows:
| Name | | Age | | Position |
| Philip Ellett | | 58 | | Chief Executive Officer, Principal Executive Officer and Director |
| Scott Weiselberg | | 41 | | Director |
| Michael Brodsky | | 41 | | Director |
All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Officers are elected annually by the board of directors and serve at the discretion of the board.
The principal occupations for the past five years (and, in some instances, for prior years) of each of our directors and executive officers are as follows:
Philip Ellett – Chairman of the Board of Directors and Chief Executive Officer. Mr. Ellett has been chairman, chief executive officer and chief financial officer of the Company since October 9, 2012. Since December 2010 Mr. Ellett has been an independent consultant providing executive management services to a number of domestic and international companies. From November 2009 until November 2010, Mr. Ellett was chief executive officer of Blackhawk Healthcare, a hospital management company. From December 2006 through February 2009, Mr. Ellett was chief executive officer and director of Innovative Software Technologies, Inc. (INIV), a software services company. From 2002 to 2004, Mr. Ellett served as president and CEO of Realvue, Inc. (f/k/a/ Soft Mountain), a software developer. From 2001 to 2002, he served as Senior Vice President of Sales at Motive Computing, a software developer. From 2000 to 2001, Mr. Ellett was an investor and served as President and CEO of Netier, Inc. a manufacturer of thin client computers, which was subsequently sold to Wyse, Inc. From 1996 to 2000, Mr. Ellett held various positions with Ingram Micro, Inc., a computer products distributor, serving as President of Europe for three years and President of the Americas for the final year of his tenure. Mr. Ellett received his Higher National Certificate in Electrical and Electronic Engineering in 1977 from Slough College of Technology in England. Mr. Ellet served as a director of Biofina Group from September 2010 thru August 2011. Mr. Ellett served as a director of Diatect International Corporation (DTCT) from April 2008 thru November 2009.
Scott Weiselberg – Director. Mr. Weiselberg has been director of the Company since February 15, 2012. Mr. Weiselberg has been a shareholder of the Kopelowitz Ostrow Firm, P.A., a law firm based in Fort Lauderdale, Florida since 2007 and a partner since March 2003. Mr. Weiselberg is a member of the Florida Bar, United States District Court for the Southern District of Florida, the Broward County Bar Association, American Bar Association, and serves as a member on several Florida Bar committees including, but not limited to, the Florida Bar's Grievance Committee in Broward County. Mr. Weiselberg received his Bachelor of Science and Business Administration from the University of Georgia in 1992 and Juris Doctorate from Nova Southeastern University in 1997. The Company believes Mr. Weiselberg’s legal background gives him the qualifications and skill to serve as a director.
Michael Brodsky – Director. Mr. Brodsky has been director of the Company since February 27, 2012. Mr. Brodsky has served as president of Thalia Woods Management, Inc., a company that makes direct investments in public and private companies, since June 2009. From April 2004 to June 2009, Mr. Brodsky served as president and chief executive officer of Venture Investment Group, a company that makes direct investments in public and private companies. From February 2007 to May 2008, Mr. Brodsky served as manager in charge of worldwide logistics at Resnick Supermarket Equipment Corp. The Company believes Mr. Brodsky’s experience as an investor in public and private companies gives him the qualifications and skill to serve as a director.
Family Relationships
The former Chief Financial Officer is the brother in law of the former Chief Executive Officer. Except for the relationship described in the previous sentence, there are no family relationships among our directors and executive officers.
The Board believes that each of our directors is highly qualified to serve as a member of the Board. Each of the directors has contributed to the mix of skills, core competencies and qualifications of the Board. When evaluating candidates for election to the Board, the Nominating Committee seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective, good judgment, leadership skills. Our directors are highly educated and have diverse backgrounds and talents and extensive track records of success in what we believe are highly relevant positions. Some of our directors have served in our operating entities and benefit from an intimate knowledge of our operations and corporate philosophy.
Legal Proceedings
To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:
| | · | Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time. |
| | · | Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses. |
| | · | Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities. |
| | · | Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated. |
| | · | Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Committees of the Board
Our business, property and affairs are managed by or under the direction of the board of directors. Members of the board are kept informed of our business through discussion with the chief executive and financial officers and other officers, by reviewing materials provided to them and by participating at meetings of the board and its committees.
Audit Committee
The Board of Directors acts as the audit committee. The Company does not have a qualified financial expert at this time because it has not been able to hire a qualified candidate. Further, the Company believes that it has inadequate financial resources at this time to hire such an expert. The Company intends to continue to search for a qualified individual for hire.
Nominating Committee
We have not adopted any procedures by which security holders may recommend nominees to our Board of Directors.
Code of Ethics
We have not adopted a formal Code of Ethics applicable to all Board members, executive officers and employees.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than 10 percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. During the fiscal year ended December 31, 2012, the fallowing officer, directors and 10% stockholders were late in their filings: Philip Ellett was 83 days late in the filing of his Form 3.
Summary Compensation Table
The table below sets forth, for the fiscal years ended December 31, 2012 and 2011, the compensation earned by each person acting as our Chief Executive Officer and our next two most highly compensated executive officers whose total annual compensation exceeded $100,000 in 2012 (together, the “Named Executive Officers”).
| Name and principal | | | Salary | | | Bonus | | | Option awards | | | Non-equity incentive plan compensation | | | Change in pension value and non qualified deferred compensation | | | All Other Compensation | | | Total | |
| position | Year | | ($) | | | ($) | | | ($) | | | ($) | | | ($) | | | ($) | | | ($) | |
Philip Ellett Chief Executive Officer (1) | 2012 | | | 14,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 14,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Lloyd Lapidus | 2012 | | | 54,680 | | | | - | | | | - | | | | | | | | - | | | | - | | | | 54,680 | |
| Former Interim Chief Executive Officer (2) | 2011 | | $ | 61,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 61,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shawn Knapp | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Former Chief Executive Officer (3) | 2011 | | | 15,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 15,000 | |
| 1) Mr. Ellett was appointed CEO, CFO and Chairman of the Company on October 9, 2012. |
(2) Mr. Lapidus was appointed interim CEO of the Company on April 6, 2011 and resigned as CEO on October 4, 2012. |
| (3) Mr. Knapp was appointed CEO of the Company on December 31, 2010 and resigned on April 6, 2011. |
Outstanding Equity Awards at Fiscal Year-End
On November 7, 2012 the Company entered into an employment agreement with Philip Ellett under which Mr. Ellett will be issued 2,000,000 shares of common stock. The shares shall be issued with a substantial right of forfeiture as follows: The Employee cannot transfer the shares and must return all shares to the Employer if he terminates employment within two years from date of issuance. Other than the above there were no outstanding unexercised options, unvested stock, and/or equity incentive plan awards issued to our named executive officers as of December 31, 2012.
Employment Agreements
On November 7, 2012 the Company entered into an employment agreement (the “Ellett Agreement”) with Philip Ellett to serve as Chief Executive Officer (CEO), Chief Financial Officer (CFO), Principal Executive Officer, Principal Financial Officer and Secretary. The Agreement has an initial term of month to month. The base salary under the Agreement is a monthly gross salary of $7,000. In addition Mr. Ellett will be issued 2,000,000 shares of common stock. The shares shall be issued with a substantial right of forfeiture as follows: The Employee cannot transfer the shares and must return all shares to the Employer if he terminates employment within two years from date of issuance. Mr. Ellett is entitled to participate in any and all benefit plans, from time to time, in effect for senior management, along with vacation, sick and holiday pay in accordance with the Company’s policies established and in effect from time to time.
On July 15, 2011, the Company entered into an employment agreement (the “Pippo Agreement”) with Gregory Pippo to serve as Chief Financial Officer (CFO). The Agreement has an initial term of one year. The base salary under the Agreement is a monthly net salary of $2,500. The Company agreed to pay all associated income taxes applicable to Mr. Pippo in connection with his employment. Mr. Pippo is entitled to participate in any and all benefit plans, from time to time, in effect for senior management, along with vacation, sick and holiday pay in accordance with the Company’s policies established and in effect from time to time.
On October 12, 2011, the Company and Gregory Pippo, entered into an addendum to his employment agreement, dated July 15, 2011 pursuant to which Mr. Pippo’s monthly net salary has been changed to $4,000 per month with the same payment of all associated income taxes applicable to Mr. Pippo’s wages as set forth in the Pippo Agreement. Mr. Pippo resigned as CFO on September 14, 2012.
DIRECTOR COMPENSATION
The following table sets forth summary information concerning the total compensation paid to our non-employee directors in 2012 for services to our company.
Name | | Fees Earned or Paid in Cash ($) | | | Stock Awards ($) | | | Option Awards ($) | | | Non-Equity Incentive Plan Compensation ($) | | | Change in Pension Value and Nonqualified Deferred Compensation Earnings | | | All Other Compensation ($) | | | Total ($) | |
| Scott Weiselberg | | $ | -- | | | $ | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | $ | -- | |
| Michael Brodsky | | $ | -- | | | $ | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | $ | -- | |
The following table sets forth information regarding the beneficial ownership of our common stock as of March 29, 2013 and as adjusted to reflect the sale of our common stock offered by this prospectus, by (a) each person who is known by us to beneficially own 5% or more of our common stock, (b) each of our directors and executive officers, and (c) all of our directors and executive officers as a group.
Name of Beneficial Owner (1) | | Common Stock Beneficially Owned | | | Percentage of Common Stock (2) | |
| Philip Ellett | | | 2,000,000 | | | | 54.27% | |
| Scott Weiselberg | | | 0 | | | | * | |
| Michael Brodsky (3) | | | 250,000 | | | | 6.78% | |
| All Executive Officers and Directors as a group (3 people) | | | 2,250,000 | | | | 61.05% | |
| 5% Shareholders | | | | | | | | |
Thalia Woods Management, Inc. (3) 560 People Plaza #325-F Newark, Delaware 19702 | | | 250,000 | | | | 6.78% | |
| | | | | | | | | |
Cortell Communications, Inc. 1 Wellington Drive Stamford, CT 06903 | | | 250,000 | | | | 6.78% | |
| | | | | | | | | |
Sadore Consulting Group, LLC 1965 South Ocean Drive Bay North Apt 5S Hallandale Beach, FL 33309 | | | 250,000 | | | | 6.78% | |
(*) - Less than 1%.
| (1) | Except as otherwise set forth herein, the address of each beneficial owner is c/o Vanity Events Holding, Inc., 1111 Kane Concourse, Suite 304, Bay Harbor Islands, FL 33154. |
| (2) | Applicable percentage ownership is based on 3,685,526 shares of common stock outstanding as of March 29, 2013, together with securities exercisable or convertible into shares of common stock within 60 days of March 29, 2013, for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of March 29, 2013, are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. |
| (3) | Each share of Series B Preferred Stock held by Thalia Woods Management, Inc. is entitled to 1,000 votes per share which voting right shall be non-dilutive for a period of one year from the date of issuance and is convertible at any time into shares of the Company’s common stock at a conversion price equal to $0.30 per share or an aggregate of 250,000 shares of the Company’s common stock. Michael Brodsky has sole voting and dispositive power over the shares held by Thalia Woods Management, Inc. |
Domain Name Assignment Agreement
On February 29, 2012, the Company entered into a domain name assignment agreement with Greg Pippo, the Company’s former chief financial officer (the “Assignor”), pursuant to which the Assignor assigned all of his rights, title and interest and goodwill in or associated with the domain names www.buyborroworsell.com and www.buyborroworsell.net (the “Domain Names”), together with any unregistered or registered trademarks, service marks, copyrights or other intellectual property or property rights based on or in any way related to the Domain Names. In consideration for the assignment of the Domain Names, the Corporation agreed to pay the Assignor $2,500 for the fees and expenses related to the Domain Names incurred by the Assignor to date.
Asset Purchase Agreement with Aegis Worldwide, LLC
On April 4, 2012 (the “Closing Date”), the Company entered into an asset purchase agreement (the “Aegis Agreement”) with Aegis Worldwide, LLC, an entity controlled by Greg Pippo, the Company’s former chief financial officer (the “Seller”), pursuant to which the Seller agreed to sell, transfer, convey, and deliver to the Company, all of Seller’s right, title and interest and goodwill in or associated with certain domain names (the “Aegis Domain Names”) along with any information or materials proprietary to the Seller that relate to the business or affairs associated with the Aegis Domain Names which is of a confidential nature, including, but not limited to, trade secrets, information or materials relating to existing or proposed products (in all and various stages of development), “know-how”, marketing techniques and materials, marketing and development plans and pricing policies (the “Assets”)). In consideration for the purchase of the Assets, the Company agreed issue Seller 1,000,000 shares of Company’s common stock. On October 12, 2012 the Company received notice of Aegis Worldwide LLC’s intention to return to treasury the 1,000,000 shares of common stock issued in connection with the April 4 2012 Asset Purchase Agreement. The Company accepted the return of the shares without conditions.
Simultaneously with the execution of the Aegis Agreement, on April 4, 2012, the parties entered into an option agreement, pursuant to which Seller shall have the option to purchase the Assets and all enhancements to the Assets from the Company in consideration for (i) an amount in cash equal to the net proceeds used by the Company for the enhancement of the Assets on or after the Closing Date and (ii) the cancellation of the Shares, beginning on Closing Date and terminating on the 24 month anniversary of the Closing Date.
Director Independence
Two of our directors, Scott Weiselberg and Michael Brodsky, are independent directors, using the Nasdaq definition of independence.
The aggregate fees billed to us by Kabani & Company, Inc. and RBSM LLP, our principal accountants for professional services rendered during the years ended December 31, 2012 and 2011, respectively, in connection with their respective audits of our December 31, 2012 and 2011 consolidated financial statements and reviews of our interim consolidated financial statements included in our quarterly reports on Form 10-Q and other professional services as audit fees, audit-related fees, tax fees and all other fees are set forth in the table below:
Fee Category | | Year ended December 31, 2012 | | | Year ended December 31, 2011 | |
| | | | | | | |
| Audit fees (1) | | $ | 57,000 | | | $ | 165,575 | |
| Audit-related fees (2) | | $ | - | | | $ | - | |
| Tax fees (3) | | $ | - | | | $ | - | |
| All other fees (4) | | $ | - | | | $ | - | |
| Total fees | | $ | 57,000 | | | $ | 165,575 | |
(1) Audit fees consist of fees incurred for professional services rendered for the audits of financial statements, for reviews of our interim consolidated financial statements included in our quarterly reports on Form 10-Q and for services that are normally provided in connection with statutory or regulatory filings or engagements.
(2) Audit-related fees consist of fees billed for professional services that are reasonably related to the performance of the audit or review of our consolidated financial statements, but are not reported under “Audit fees.”
(3) Tax fees consist of fees billed for professional services relating to tax compliance, tax planning, and tax advice.
(4) All other fees consist of fees billed for all other services.
The Board of Directors selects our independent public accountant, establishes procedures for monitoring and submitting information or complaints related to accounting, internal controls or auditing matters, engages outside advisors, and makes decisions related to funding the outside auditory and non-auditory advisors.
| Exhibit Number | | Description |
| 2.1 | | Share Exchange Agreement dated April 3, 2008 by and among Map V Acquisition, Inc., Vanity Holding Group, Inc. and each of the shareholders of Vanity Holding Group, Inc. (Incorporated by reference to the Company's current report on Form 8-K, as filed with the Securities Exchange Commission on April 3, 2008.) |
| 2.2 | | Share Exchange Agreement, dated December 31, 2010, by and among Vanity Event Holdings, Inc., Shogun Energy, Inc., the principal shareholder of Shogun Energy, Inc. and the other shareholders of Shogun Energy Inc. (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 6, 2011 and incorporated herein by reference) |
| 2.3 | | Rescission of the Share Exchange Agreement, dated June 30, 2011, by and among Vanity Events Holding, Inc., Shogun Energy, Inc., Shawn Knapp, Roxanne Knapp and the other shareholders of Vanity set forth on Exhibit A thereto (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 7, 2011 and incorporated herein by reference) |
| 2.4 | | Asset Purchase Agreement, dated April 4, 2012, by and between Vanity Events Holding, Inc. and Aegis Worldwide LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 9, 2012 and incorporated herein by reference) |
| 3.1 | | Certificate of Incorporation (Incorporated by reference to the Company’s report on Form 10-SB, as filed with the Securities Exchange Commission on March 26, 2007). |
| 3.2 | | Bylaws (Incorporated by reference to the Company’s report on Form 10-SB, as filed with the Securities Exchange Commission on March 26, 2007). |
| 3.3 | | Certificate of Designation for the Company’s Series A Convertible Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 6, 2011 and incorporated herein by reference) |
| 3.4 | | Certificate of Designation for the Company’s Series B Convertible Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 19, 2011 and incorporated herein by reference) |
| 3.5 | | Certificate of Amendment to the Certificate of Incorporation, dated November 18, 2011* |
| 4.1 | | Form of Convertible Debenture, issued July 29, 2010 (Incorporated by reference to the Company's current report on Form 8-K/A, as filed with the Securities Exchange Commission on November 12, 2010.) |
| 4.2 | | Form of Convertible Debenture, issued November 9, 2010 (Incorporated by reference to the Company's current report on Form 8-K, as filed with the Securities Exchange Commission on November 16, 2010.) |
| 4.3 | | Form of Amended and Restated Convertible Debenture issued November 9, 2010. (Incorporated by reference to the Company's current report on Form 8-K, as filed with the Securities Exchange Commission on November 16, 2010.) |
| 4.4 | | Convertible Debenture dated April 6, 2011 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 13, 2011 and incorporated herein by reference) |
| 4.5 | | Warrant to purchase 30,000,000 shares of common stock, dated April 6, 2011 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 13, 2011 and incorporated herein by reference) |
| 4.6 | | Convertible Debenture dated May 10, 2011 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 13, 2011 and incorporated herein by reference) |
| 4.7 | | Warrant to purchase 16,666,667 shares of common stock of the Company, dated May 10, 2011 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 13, 2011 and incorporated herein by reference) |
| 4.8 | | Convertible Debenture dated June 13, 2011 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2011 and incorporated herein by reference) |
| 4.9 | | Warrant to purchase 33,333,333 shares of common stock of the Company, dated June 13, 2011 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2011 and incorporated herein by reference). |
| 4.10 | | Convertible Debenture dated October 6, 2011 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 13, 2011 and incorporated herein by reference). |
| 4.11 | | Warrant to purchase 50,000,000 shares of common stock of the Company, dated October 6, 2011 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on October 13, 2011 and incorporated herein by reference). |
| 4.12 | | Convertible Debenture dated November 10, 2011 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 16, 2011 and incorporated herein by reference). |
| 4.13 | | Warrant to purchase 50,000,000 shares of common stock of the Company, dated November 10, 2011 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on November 16, 2011 and incorporated herein by reference). |
| 4.14 | | Convertible Debenture dated March 21, 2012* |
| 10.1 | | Stock Purchase Agreement (Incorporated by reference to the Company's current report on Form 8-K, as filed with the Securities Exchange Commission on January 3, 2008.) |
| 10.2 | | Form of Securities Purchase Agreement dated September 1, 2009 (Incorporated by reference to the Company's current report on Form 8-K, as filed with the Securities Exchange Commission on September 2, 2009.) |
| 10.3 | | Form of Securities Purchase Agreement dated September 17, 2009 (Incorporated by reference to the Company's current report on Form 8-K, as filed with the Securities Exchange Commission on September 17, 2009.) |
| 10.4 | | Form of Securities Purchase Agreement dated November 23, 2009 (Incorporated by reference to the Company's current report on Form 8-K, as filed with the Securities Exchange Commission on December 9, 2009.) |
| 10.5 | | Securities Purchase Agreement, dated as of July 29, 2010, by and between Vanity Events Holding, Inc. and IIG Management LLC (Incorporated by reference to the Company's current report on Form 8-K, as filed with the Securities Exchange Commission on August 3, 2010.) |
| 10.6 | | Securities Purchase Agreement, dated as of November 9, 2010, by and between Vanity Events Holding, Inc. and Greystone Capital Partners LLC (Incorporated by reference to the Company's current report on Form 8-K, as filed with the Securities Exchange Commission on November 16, 2010.) |
| 10.5 | | Securities Purchase Agreement, dated as of April 6, 2011, by and between Vanity Events Holding, Inc. and IIG Management LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 13, 2011 and incorporated herein by reference) |
| 10.6 | | Securities Purchase Agreement, dated as of May 10, 2011, by and between Vanity Events Holding, Inc. and Greystone Capital Partners LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 13, 2011 and incorporated herein by reference) |
| 10.7 | | License Agreement, dated May 24, 2011, by and between Vanity Events Holding, Inc. and Planet Sorb LLC filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2011 and incorporated herein by reference). |
| 10.8 | | Securities Purchase Agreement, dated as of June 13, 2011, by and between Vanity Events Holding, Inc. and Greystone Capital Partners LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2011 and incorporated herein by reference). |
| 10.9 | | Securities Purchase Agreement, dated as of July 13, 2011, by and between Vanity Events Holding, Inc. and Thalia Woods Management, Inc. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 19, 2011 and |
| 10.10 | | License and Distribution Agreement, dated July 13, 2011, by and between Vanity Events Holding, Inc. and Plant Sorb LLC (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 19, 2011 and incorporated herein by reference).incorporated herein by reference). |
| 10.10 | | Employment Agreement, dated July 14, 2011, by and between Vanity Events Holding, Inc. and Gregory Pippo (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on July 19, 2011 and incorporated herein by reference). |
| 10.11 | | Termination Agreement, dated September 19, 2011, by and between Shawn Knapp, IIG Management LLC, Greystone Capital Partners LLC and Vanity Events Holding, Inc. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 23, 2011 and incorporated herein by reference). |
| 10.12 | | Non-Exclusive Sales Distributor Agreement, dated September 20, 2011, by and between Shogun Energy, Inc. and Vanity Events Holding, Inc. (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 23, 2011 and incorporated herein by reference). |
| 10.13 | | Consulting Agreement, dated September 20, 2011, by and between Shawn Knapp and Vanity Events Holding, Inc. (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 23, 2011 and incorporated herein by reference). |
| 10.14 | | Securities Purchase Agreement, dated as of October 6, 2011, by and between Vanity Events Holding, Inc. and Greystone Capital Partners LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 13, 2011 and incorporated herein by reference). |
| 10.15 | | Addendum to the Employment Agreement dated July 15, 2011 by and between Vanity Events Holding, Inc. and Gregory Pippo, dated October 12, 2011 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on October 13, 2011 and incorporated herein by reference). |
| 10.16 | | Securities Purchase Agreement, dated as of November 10, 2011, by and between Vanity Events Holding, Inc. and Greystone Capital Partners LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 16, 2011 and incorporated herein by reference). |
| 10.17 | | Domain Name Assignment Agreement, dated February 29, 2012, by and between Vanity Events Holding, Inc. and Greg Pippo (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 6, 2012 and incorporated herein by reference). |
| 10.18 | | Securities Purchase Agreement, dated as of March 21, 2012, by and between Vanity Events Holding, Inc. and Greystone Capital Partners LLC* |
| 10.19 | | Option Agreement, dated April 4, 2012, by and between Vanity Events Holding, Inc. and Aegis Worldwide, LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 9, 2012 and incorporated herein by reference). |
| 10.20 | | Consulting Agreement, dated March 29, 2012, by and between Vanity Events Holding, Inc. and Cortell Communications, Inc. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 9, 2012 and incorporated herein by reference). |
| 10.21 | | Securities Purchase Agreement, dated as of May 30, 2012, by and between Vanity Events Holding, Inc. and Flyback LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 6, 2012 and incorporated herein by reference). |
| 10.22 | | Consulting Agreement, dated July 19, 2012, by and between Vanity Events Holding, Inc. and Sadore Consulting LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2012 and incorporated herein by reference). |
| 10.23 | | Exchange Agreement, dated September 18, 2012, by and between Vanity Events Holding, Inc. and IBC Funds LLC (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 20, 2012 and incorporated herein by reference). |
| 10.24 | | Securities Purchase Agreement, dated as of November 13, 2012, by and between Vanity Events Holding, Inc. and Monroe Milstein (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 13, 2012 and incorporated herein by reference). |
| 10.25 | | Employment Agreement dated November 7, 2012, by and between Vanity Events Holding, Inc. and Philip Ellett (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on November 13, 2012 and incorporated herein by reference). |
| 16.1 | | Letter from RBSM LLP, dated July 18, 2011 filed as Exhibit 16.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 18, 2011 and incorporated herein by reference) |
| 21.1 | | List of Subsidiaries* |
| 31.1 | | Certificate of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.* |
| 32.1 | | Certificate of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.* |
| 32.1 | | Certificate of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.* |
| 32.2 | | Certificate of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.* |
| | | |
| EX-101.INS | | XBRL INSTANCE DOCUMENT** |
| EX-101.SCH | | XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT** |
| EX-101.CAL | | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE** |
| EX-101.DEF | | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE** |
| EX-101.LAB | | XBRL TAXONOMY EXTENSION LABELS LINKBASE** |
| EX-101.PRE | | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE** |
** The XBRL related information in Exhibit 101 shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
Filed Herewith*
Pursuant to the requirements of Section 13 or Section 15(d) 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.
| | VANITY EVENTS HOLDING, INC. | |
| | | | |
Date: April 15, 2013 | By: | /s/ Philip Ellett | |
| | | Name: Philip Ellett | |
| | | Title: Chairman, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) | |
| | | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
| | | | | |
| SIGNATURE | | TITLE | | DATE |
| | | | | |
| /s/ Philip Ellett | | | | |
| Philip Ellett | | Chairman, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer) | | April 15, 2013 |
| | | | | |
| /s/ Scott Weiselberg | | | | |
| Scott Weiselberg | | Director | | April 15, 2013 |
| | | | | |
| /s/ Michael Brodsky | | | | |
| Michael Brodsky | | Director | | April 15, 2013 |
| | | | | |
VANITY EVENTS HOLDING, INC.
INDEX TO FINANCIAL STATEMENTS
| | | | |
| | | Page | |
| Reports of Independent Registered Public Accounting Firms | | F-2 | |
| Consolidated Balance Sheets as of December 31, 2012 and 2011 | | F-3 | |
| Consolidated Statements of Operations for the years ended December 31, 2012 and 2011 | | F-3 | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011 | | F-5 | |
| Consolidated Statements of Changes in Stockholders' Deficit for the years ended December 31, 2012 and 2011 | | F-6 | |
| Notes to Consolidated Financial Statements | | F-7 to F-25 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Vanity Events Holding, Inc.
We have audited the accompanying consolidated balance sheet of Vanity Events Holding, Inc. (the “Company”) as of December 31, 2012, and and December 31, 2011, and the related statements of operations, stockholders' deficit, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We have conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vanity Events Holdings, Inc. as of December 31, 2012 and December 31, 2011, and the consolidated results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a working capital deficit of $16,631,224 as of December 31, 2012. As more fully described in Note 1 to the consolidated financial statements, the Company has incurred losses since its inception, and the Company may not have sufficient working capital or outside financing available to meet its planned operating activities over the next twelve months. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Kabani & Company, Inc.
Kabani & Company, Inc.
Certified Public Accountants
Los Angeles, California
April 15, 2013
VANITY EVENTS HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2012 AND 2011
| | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| | | | | | | |
| Assets | | | | | | |
| | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 85,580 | | | $ | 16,324 | |
| | | | | | | | | |
| Total current assets | | | 85,580 | | | | 16,324 | |
| | | | | | | | | |
| Prepaid consulting fee | | | 406,250 | | | | - | |
| Intangible assets | | | 55,400 | | | | - | |
| | | | | | | | | |
| Total assets | | $ | 547,230 | | | $ | 16,324 | |
| | | | | | | | | |
| Liabilities and stockholders' deficit | | | | | | | | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 452,488 | | | $ | 365,501 | |
| Notes payable, net of discount of $263,613 and $133,093, respectively | | | 861,446 | | | | 563,282 | |
| Accrued payroll liabilities and sales tax liabilities | | | 296,566 | | | | 305,544 | |
| Other liabilities | | | 37,169 | | | | 37,169 | |
| Derivative liabilities | | | 15,069,135 | | | | 353,136 | |
| Total current liabilities | | | 16,716,804 | | | | 1,624,632 | |
| | | | | | | | | |
| | | | | | | | | |
| Stockholders' deficit | | | | | | | | |
| | | | | | | | | |
| Preferred stock, undesignated, authorized 49,925,000 shares, $0.001 par value, | | | | | | | | |
| no shares issued and outstanding, respectively | | | - | | | | - | |
| Preferred stock, Series B, authorized 75,000 shares, $0.001 par value, | | | | | | | | |
| 75,000 shares issued and outstanding, respectively | | | 75 | | | | 75 | |
| Common stock authorized 500,000,000 shares, $0.001 par value, | | | | | | | | |
| 2,970,864 and 269,596 shares issued and outstanding, respectively | | | 2,971 | | | | 270 | |
| Additional paid in capital | | | 1,624,767 | | | | 156,752 | |
| Accumulated deficit | | | (17,797,387 | ) | | | (1,765,405 | ) |
| Total stockholders' deficit | | | (16,169,574 | ) | | | (1,608,308 | ) |
| | | | | | | | | |
| Total liabilities and stockholders' deficit | | $ | 547,230 | | | $ | 16,324 | |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
VANITY EVENTS HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
| | | Years Ended December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| | | | | | | |
| Revenues | | $ | 424 | | | $ | 95,039 | |
| Cost of goods sold | | | - | | | | 42,454 | |
| | | | | | | | | |
| Gross profit | | | 424 | | | | 52,585 | |
| | | | | | | | | |
| Operating expense: | | | | | | | | |
| Selling expense | | | - | | | | 106,198 | |
| General and administrative expense | | | 1,123,141 | | | | 742,230 | |
| | | | | | | | | |
| Total operating expense | | | 1,123,141 | | | | 848,428 | |
| | | | | | | | | |
| Loss from operations | | | (1,122,717 | ) | | | (795,843 | ) |
| | | | | | | | | |
| (Loss) gain on change in fair value of derivative liability | | | (4,123,599 | ) | | | 4,861,802 | |
| Gain on conversion of debt | | | 15,887 | | | | 6,811 | |
| Interest expense | | | (10,801,553 | ) | | | (3,742,065 | ) |
| | | | | | | | | |
| Income (loss) before provision for income taxes | | | (16,031,982 | ) | | | 330,705 | |
| | | | | | | | | |
| Provision for income taxes | | | - | | | | - | |
| | | | | | | | | |
| Net income (loss) | | | (16,031,982 | ) | | | 330,705 | |
| Preferred dividend | | | (11,025 | ) | | | (41,250 | ) |
| | | | | | | | | |
| Net income (loss) attributable to common shareholders | | $ | (16,043,007 | ) | | $ | 289,455 | |
| | | | | | | | | |
| Basic income (loss) per share | | $ | (10.29 | ) | | $ | 1.21 | |
| | | | | | | | | |
| Diluted loss per share - see Note 2 | | $ | (10.29 | ) | | $ | (3.39 | ) |
| | | | | | | | | |
| Weighted average shares outstanding, | | | | | | | | |
| Basic and diluted | | | 1,558,566 | | | | 239,906 | |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
VANITY EVENTS HOLDING, INC.
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Additional | | | | | | Deficiency in | |
| | | Preferred Stock | | | Common Stock | | | Paid In | | | Accumulated | | | Stockholders' | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2010 | | | 500,000 | | | $ | 500 | | | $ | 216,633 | | | $ | 217 | | | $ | 472,850 | | | $ | (3,094,560 | ) | | $ | (2,620,993 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sale of preferred stock | | | 75,000 | | | | 75 | | | | - | | | | - | | | | 74,925 | | | | | | | | 75,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued upon conversion of debt | | | | | | | | 52,130 | | | | 52 | | | | 64,131 | | | | | | | | 64,183 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued for services | | | | | | | | | | | 833 | | | | 1 | | | | 649 | | | | | | | | 650 | |
| | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | |
Conversion feature of preferred stock, deemed dividend | | | | | | | | | | | | (41,250 | ) | | | | | | | (41,250 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | 330,705 | | | | 330,705 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Spinoff of subsidiary | | | (500,000 | ) | | | (500 | ) | | | - | | | | - | | | | (414,553 | ) | | | 998,450 | | | | 583,397 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2011 | | | 75,000 | | | | 75 | | | | 269,596 | | | | 270 | | | | 156,752 | | | | (1,765,405 | ) | | | (1,608,308 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment for reverse split | | | - | | | | - | | | | 97 | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued for consulting fees | | | - | | | | - | | | | 250,000 | | | | 250 | | | | 649,750 | | | | - | | | | 650,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued for consulting fees | | | - | | | | - | | | | 250,000 | | | | 250 | | | | 302,250 | | | | - | | | | 302,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued for settlement of accounts payable | | | - | | | | - | | | | 50,000 | | | | 50 | | | | 19,724 | | | | - | | | | 19,774 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued upon conversion of debt | | | | | | | | 151,171 | | | | 151 | | | | 268,691 | | | | - | | | | 268,842 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued pursuant to employment agreement | | | - | | | | - | | | | 2,000,000 | | | | 2,000 | | | | (2,000 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock based compensation | | | - | | | | - | | | | - | | | | - | | | | 240,625 | | | | - | | | | 240,625 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred dividend | | | - | | | | - | | | | - | | | | - | | | | (11,025 | ) | | | - | | | | (11,025 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (16,031,982 | ) | | | (16,031,982 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2012 | | | 75,000 | | | $ | 75 | | | | 2,970,864 | | | $ | 2,971 | | | $ | 1,624,767 | | | $ | (17,797,387 | ) | | $ | (16,169,574 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
VANITY EVENTS HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
| | | | | | | |
| | | Years Ended December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Cash flows from operating activities: | | | | | | |
| Net (loss) income | | $ | (16,031,982 | ) | | $ | 330,705 | |
| Adjustments to reconcile net income (loss) to net | | | | | | | | |
| cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | - | | | | 13,836 | |
| Allowance for doubtful accounts | | | - | | | | (3,966 | ) |
| Amortization of stock based prepaid fees | | | 243,750 | | | | - | |
| Stock based compensation | | | 543,125 | | | | 650 | |
| Gain on conversion of debt | | | (15,887 | ) | | | (6,811 | ) |
| Change in fair value of derivative liability | | | 4,123,599 | | | | (4,861,802 | ) |
| Amortization of debt discount | | | 10,725,295 | | | | 3,678,277 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | - | | | | (21,931 | ) |
| Inventory | | | - | | | | 38,213 | |
| Other assets | | | - | | | | 10,184 | |
| Accounts payable and other current liabilities | | | 86,756 | | | | 379,438 | |
| | | | | | | | | |
| Net cash used in operating activities | | | (325,344 | ) | | | (443,207 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Cash paid for fixed and intangible assets | | | (55,400 | ) | | | (1,166 | ) |
| | | | | | | | | |
| Net cash used in investing activities | | | (55,400 | ) | | | (1,166 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Sale of preferred stock | | | - | | | | 75,000 | |
| Bank overdraft | | | - | | | | (4,273 | ) |
| Repayments of notes payable - bank | | | - | | | | (4,102 | ) |
| Proceeds from notes payable - related parties | | | - | | | | 51,375 | |
| Repayments of notes payable - related parties | | | - | | | | (14,097 | ) |
| Proceeds from notes payable - other | | | 450,000 | | | | 371,500 | |
| Repayments of notes payable - other | | | - | | | | (15,000 | ) |
| | | | | | | | | |
| Net cash provided by financing activities | | | 450,000 | | | | 460,403 | |
| | | | | | | | | |
| Net increase in cash | | | 69,256 | | | | 16,030 | |
| Cash, beginning of period | | | 16,324 | | | | 294 | |
| Cash, end of period | | $ | 85,580 | | | $ | 16,324 | |
| | | | | | | | | |
| Supplemental Schedule of Cash Flow Information: | | | | | | | | |
| Cash paid for interest | | $ | - | | | $ | 6,430 | |
| | | | | | | | | |
| Non-cash investing and financing activities: | | | | | | | | |
| Common stock issued as payment of prepaid consulting fees | | $ | 650,000 | | | $ | - | |
| Common stock issued as payment of accounts payable | | | 19,774 | | | | - | |
| Note payable issued as payment for accounts payable | | | - | | | | 84,775 | |
| Note payable converted to common stock | | | 21,316 | | | | 14,900 | |
| Derivative liability of conversion feature of debt | | | 4,584,745 | | | | 3,100,439 | |
| Derivative liability of warrants issued with debt | | | - | | | | 359,968 | |
| Increase in derivative liability resulting from modifications | | | 6,276,372 | | | | 312,460 | |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
VANITY EVENTS HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 and 2011
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
COMPANY OVERVIEW
Nature of Operations
VANITY EVENTS HOLDING, INC. (the “Company” or “Vanity” or “we” or “our”), was organized as a Delaware Corporation on August 25, 2004, and is a holding company. The primary focus of the company is the development of e-commerce sites in the collaborative consumption market place. Management is also active in reviewing potential acquisitions that they believe will enhance the value of the company. Utilizing the acquired trademark of America’s Cleaning Company™, Vanity had established a cleaning company offering a full range of residential and commercial cleaning services as its only operating business until December 2010. In September 2010, the Company was forced to suspend its cleaning services operations due to a lack of available funds. In December 2010, we entered into a share exchange agreement (“Exchange Agreement”) by and among the Company, Shogun Energy, Inc., a South Dakota corporation (“Shogun”), Shawn Knapp, the principal shareholder of Shogun (the “Principal Shareholder”) and the other shareholders of Shogun (the “Shogun Shareholders” and collectively with the Principal Shareholder, the “Shareholders”). Pursuant to the terms of the Exchange Agreement, the Shareholders exchanged an aggregate of 100% of the issued and outstanding shares of capital stock of Shogun in exchange for 500,000 shares of the Company’s series A preferred stock (the “Exchange”). Each share of series A preferred stock shall be entitled to 1,604 pre-reverse split votes per share and shall be convertible into 1,604 pre-reverse split shares of the Company’s common stock. Upon filing an amendment to the Company’s certificate of incorporation to increase the number of shares of authorized common stock so that there is an adequate amount of shares of authorized common stock for issuance upon conversion of the series A preferred stock (the “Amendment”), the shares of series A preferred stock will be automatically converted into an aggregate of 802,000,000 pre-reverse split shares of the Company’s common stock. The Exchange Agreement contains customary terms and conditions for a transaction of this type, including representations, warranties and covenants, as well as provisions describing the Exchange consideration, the process of exchanging the consideration and the effect of the Exchange. The closing of the transaction took place on December 31, 2010.
On July 26, 2011, a majority of the voting capital stock of the Company took action in lieu of a special meeting of Stockholders authorizing the Company to enter into a rescission agreement (the “Rescission Agreement”) of the share exchange agreement, dated December 31, 2010 by and among the Company, Shogun Energy, Inc., Shawn Knapp, the principal shareholder of Shogun (“Mr. Knapp”), and the other shareholders of Shogun (the “Shogun Shareholders” and collectively with Mr. Knapp, the “Shareholders”) for the purpose of rescinding the transactions contemplated by the Exchange Agreement, and upon closing (the “Closing Date”), the Exchange Agreement will be rescinded and all obligations of any party arising from such Exchange Agreement, shall, in all respects, be deemed to be null and void and of no further force and effect (the “Rescission”). Following the closing of the Rescission, no party to the Exchange Agreement shall have any further obligations of any nature whatsoever with respect to the other parties pursuant to or arising from the Exchange Agreement. The closing of the transactions contemplated by the Rescission Agreement took place on September 20, 2011. The rescission has been accounted for as a spin-off of Shogun by Vanity.
At December 31, 2012, the Company’s wholly-owned subsidiaries include Vanity Events, Inc.; America’s Cleaning Company; and Vanity Licensing, Inc.
Reverse Merger and Rescission
December 2010 Transaction
On December 31, 2010, we entered into a share exchange agreement (“Exchange Agreement”) by and among the Company, Shogun Energy, Inc., a South Dakota corporation (“Shogun”), Shawn Knapp, the principal shareholder of Shogun (the “Principal Shareholder”) and the other shareholders of Shogun (the “Shogun Shareholders” and collectively with the Principal Shareholder, the “Shareholders”). Pursuant to the terms of the Exchange Agreement, the Shareholders exchanged an aggregate of 100% of the issued and outstanding shares of capital stock of Shogun in exchange for 500,000 shares of the Company’s series A preferred stock (the “Exchange”). Each share of series A preferred stock shall be entitled to 1,604 pre-reverse split votes per share and shall be convertible into 1,604 pre-reverse split shares of the Company’s common stock. Upon filing an amendment to the Company’s certificate of incorporation to increase the number of shares of authorized common stock so that there is an adequate amount of shares of authorized common stock for issuance upon conversion of the series A preferred stock (the “Amendment”), the shares of series A preferred stock will be automatically converted into an aggregate of 802,000,000 pre-reverse split shares of the Company’s common stock. The Exchange Agreement contains customary terms and conditions for a transaction of this type, including representations, warranties and covenants, as well as provisions describing the Exchange consideration, the process of exchanging the consideration and the effect of the Exchange. The closing of the transaction took place on December 31, 2010.
The transaction has been accounted for as a reverse acquisition of Vanity by Shogun but in substance as a capital transaction, rather than a business combination since Vanity had minimal operations and assets as of the closing of the transaction. The stockholders of Shogun owned a majority of the Company’s voting power immediately following the transaction and Shogun’s management has assumed operational, management and governance control. The transaction is deemed as reverse recapitalization and the accounting is similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets should be recorded. Shogun is treated as the surviving and continuing entity. The Company did not recognize goodwill or any intangible assets in connection with this transaction. Accordingly, the Company’s historical financial statements are those of Shogun, Energy, Inc.
On July 26, 2011, a majority of the voting capital stock of the Company took action in lieu of a special meeting of Stockholders authorizing the Company to enter into a rescission agreement (the “Rescission Agreement”) of the share exchange agreement, dated December 31, 2010 by and among the Company, Shogun Energy, Inc., Shawn Knapp, the principal shareholder of Shogun (“Mr. Knapp”), and the other shareholders of Shogun (the “Shogun Shareholders” and collectively with Mr. Knapp, the “Shareholders”) for the purpose of rescinding the transactions contemplated by the Exchange Agreement, and upon closing (the “Closing Date”), the Exchange Agreement will be rescinded and all obligations of any party arising from such Exchange Agreement, shall, in all respects, be deemed to be null and void and of no further force and effect (the “Rescission”). Following the closing of the Rescission, no party to the Exchange Agreement shall have any further obligations of any nature whatsoever with respect to the other parties pursuant to or arising from the Exchange Agreement. The closing of the transactions contemplated by the Rescission Agreement took place on September 20, 2011. The rescission has been accounted for as a spin-off of Shogun by Vanity.
Shogun assets and liabilities spun off at September 20, 2011 are as follows:
| Accounts receivable | | $ | 34.931 | |
| Inventories | | | 73,982 | |
| Property and equipment, net | | | 65,893 | |
| Receivable from related party | | | 58,080 | |
| Cash overdraft, net | | | (13,141 | ) |
| Accounts payable and accrued expenses | | | (377,327 | ) |
| Accrued payroll liabilities and sales tax liabilities | | | (9,811 | ) |
| Notes payable, bank | | | (125,955 | ) |
| Notes payable, related parties | | | (290,049 | ) |
| Net liabilities spun off | | $ | (583,397 | ) |
Current Operations
Beginning in the second quarter of 2011, management actively engaged in evolving the existing business model of the Company from a sourcing and distribution company to a licensing and marketing company. Management believed that this new business model would allow the Company to have the ability to capture revenue without many of the associated costs that come along with the production of its products.
The first major area in which we moved this model forward leveraged our Sorbco Agreement (as defined below) with the launch of the Plant Sorb product. We also established an online ecommerce presence with www.thereisaproductforthat.com; in both cases, we will end up receiving our revenue for products sold sequentially ahead of when we have to pay our fulfillment partners.
Sorbco Exclusive License and Distribution Agreement
On July 13, 2011, the Company entered into an exclusive license and distribution agreement (the “Sorbco Agreement”) with Plant Sorb LLC (“Sorbco”) pursuant to which the Company will have the exclusive right and license to (i) market, sell, distribute and otherwise deal in commerce with the Sorbco products in the United States through any media and (ii) use Sorbco’s trademark. The License Agreement shall have an initial term ending on July 13, 2012, and shall continue on successive one-year terms thereafter unless terminated by either party for cause. For purposes of the Sorbco Agreement, “cause” is defined as the Company not exceeding a threshold of five hundred thousand dollars ($500,000) of retail revenues through sales of Sorbco products during the initial term of the Sorbco Agreement. On July 12, 2012 the Company and Sorbco agreed to extend and amend the Sorbco Agreement to grant the Company the non-exclusive right and license to (i) market, sell, distribute and otherwise deal in commerce with the Sorbco products in the United States through any media and (ii) use Sorbco’s trademark. On September 21, 2012 the Company and Sorbco agreed to terminate the agreement.
Shogun Distribution Agreement
On September 20, 2011, the Company and Shogun entered into a non-exclusive sales distributor agreement, pursuant to which Shogun granted Vanity a non-exclusive right to distribute or sell Shogun’s products in the United States for a period of 12 months from the date of the agreement.
The Company proceeded to leverage this business model going forward by creating a short form direct response TV spot for the Sorbco products as well as establishing an online ecommerce presence with www.buyplantsorbnow.com , as well as media tested driving traffic to its stand-alone web property in an effort to generate sales for the Sorbco products and Shogun products at www.thereisaaproductforthat.com . The Company’s goal in using the direct response TV spot was if the media tests were successful, the Company would roll-out additional direct TV spots and leverage retail distributors to drive the Company’s products thru mainstream retail channels as well as traditional direct response outlets. At the end of 2011, after evaluating the media tests, management determined that it would not be profitable or beneficial for the Company to pursue this business model for the Sorbco products past the initial testing phase.
Beginning in 2012, management decided to evolve its business strategy from a licensing and marketing company to an e-commerce transactional business where the Company’s management felt it had the relevant core competency and experience to successfully build value for the Company’s shareholders.
Pippo and Aegis Agreements
On February 29, 2012, the Company entered into a domain name assignment agreement with Greg Pippo, the Company’s former chief financial officer ( “Pippo”), pursuant to which Pippo assigned all of his rights, title and interest and goodwill in or associated with the domain names www.buyborroworsell.com and www.buyborroworsell.net (the “Domain Names”), together with any unregistered or registered trademarks, service marks, copyrights or other intellectual property or property rights based on or in any way related to the Domain Names.
On April 4, 2012, the Company entered into an asset purchase agreement (the “Aegis Agreement”) with Aegis Worldwide, LLC, an entity controlled by Pippo ( “Aegis”), pursuant to which Aegis agreed to sell, transfer, convey, and deliver to the Company, all of Aegis’s right, title and interest and goodwill in or associated with certain domain names (the “Aegis Domain Names”) along with any information or materials proprietary to Aegis that relate to the business or affairs associated with the Aegis Domain Names which is of a confidential nature, including, but not limited to, trade secrets, information or materials relating to existing or proposed products (in all and various stages of development), “know-how”, marketing techniques and materials, marketing and development plans and pricing policies (the “Assets").
Simultaneously with the execution of the Aegis Agreement, on April 4, 2012, the parties entered into an option agreement, pursuant to which Aegis shall have the option to purchase the Assets and all enhancements to the Assets from the Company in consideration for (i) an amount in cash equal to the net proceeds used by the Company for the enhancement of the Assets on or after April 4, 2012 and (ii) the cancellation of the shares issued to Aegis in connection with the Aegis Agreement. The option is exercisable beginning on the twelve month anniversary of the Closing Date and terminating on the 24 month anniversary of the Closing Date.
At this time the company is focusing on the development of e-commerce sites in the collaborative consumption marketplace. In these challenging economic times, we believe that consumers need access to many different types of goods leveraging the economies that come with shared consumption, along with a convenient and user friendly way to sell or monetize the goods that they currently own.
Our web properties will house several stand-alone sites specifically addressing areas management has identified as attractive in the world of collaborative consumption. What that in turn means is that the consumer will not own the goods unless they are purchased outright, instead they will enjoy the use of them through the access that their membership fees allow. The Company plans to offer strong mobile applications to support these sites, as well as leveraging both social and traditional media to build consumer awareness.
Management plans on developing an engaging community experience filled with user feedback and industry specific content that will further enhance the attractiveness of each stand-alone site. At this time these sites are in the planning and development stages. It is currently planned that the first site to be launched will be watchlender.com. This site will offer the consumer a range of luxury watches for rent or for purchase. Using this experience it is planned to launch additional sites utilizing the website domains that the Company has purchased including ToysLender.com, SneakerLender.com , FineArtLender.com , Shoelender.com , ElectronicsLender.com and CoutureLender.com . Management plans to utilize existing relationships with various suppliers to source product to be offered on the sites. The company is working closely with outsourced third party developers to launch the first of these web and mobile platforms.
BASIS OF PRESENTATION AND GOING CONCERN
Changes in Basis of Presentation
The 2011 financial information has been recast so that the basis of presentation is consistent with that of the 2012 financial information. This recast reflects the 1-for-300 reverse stock split of the Company’s common stock that became effective on February 10, 2012.
We have incurred a net loss of $16,031,982 for the year ended December 31, 2012; of this loss, $4,123,599 was the result of a net, non-cash expense from the change in value of derivative instruments and $10,725,295 was the result of a non-cash expense for debt discount and financing expense related to the issuance and modification of derivative instruments. As of December 31, 2012 we have negative working capital of $16,631,224 and a stockholders’ deficit of $16,169,574. As a result, there is substantial doubt about the Company’s ability to continue as a going concern at December 31, 2012.
Management has implemented business plans as described above. Our ability to implement our current business plan and continue as a going concern ultimately is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and to achieve profitable operations.
There can be no assurances that funds will be available to the Company when needed or, if available, that such funds would be available under favorable terms. In the event that the Company is unable to generate adequate revenues to cover expenses and cannot obtain additional funds in the near future, the Company may seek protection under bankruptcy laws. To date, management has not considered this alternative, nor does management view it as a likely occurrence, since the Company is progressing with various potential sources of new capital and we anticipate a successful outcome from these activities. However, capital markets remain difficult and there can be no certainty of a successful outcome from these activities.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605 “Revenue Recognition”. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred and title has transferred or services have been rendered, the price is fixed and determinable and collectability is reasonably assured. Revenue is not recognized on product sales transacted on a test or pilot basis. Instead, receipts from these types of transactions offset marketing expenses.
CASH AND CASH EQUIVALENTS
For the purpose of the statements of cash flows, we consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
We perform a regular review of our customer activity and associated credit risks and do not require collateral from our customers. The Company had no outstanding receivables at December 31, 2012 or 2011.
LONG-LIVED ASSETS
We assess assesses the carrying value of long-lived assets in accordance with ASC 360, "Property, Plant and Equipment". We assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that could trigger an impairment review include, but are not limited to, the following: a significant underperformance to expected historical or projected future operating results, a significant change in the manner of the use of the acquired asset or the strategy for the overall business, or a significant negative industry or economic trend.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for depreciation and amortization using the straight-line method over estimated useful lives of five to ten years. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains or losses on the sale of property and equipment are reflected in the statements of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our short-term financial instruments, including cash, accounts receivable and accounts payable and accrued expenses consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value. The fair value of our notes and advances payable is based on management estimates and reasonably approximates their book value based on their current maturity.
Fair value measurements
ASC 820 “Fair Value Measurements and Disclosure” establishes a framework for measuring fair value and expands disclosure about fair value measurements.
ASC 820 defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes the following three levels of inputs that may be used:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
In accordance with ASC 820, the following table represents the Company's fair value hierarchy for its financial assets and (liabilities) measured at fair value on a recurring basis as of December 31, 2012:
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Assets | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 85,580 | | | $ | - | | | $ | - | | | $ | 85,580 | |
| Total Assets | | $ | 85,580 | | | $ | - | | | $ | - | | | $ | 85,580 | |
| Liabilities | | | | | | | | | | | | | | | | |
| Notes payable | | $ | - | | | $ | - | | | $ | 861,446 | | | $ | 861,446 | |
| Conversion and warrant derivative liabilities | | | - | | | | - | | | | 15,069,135 | | | | 15,069,135 | |
| Total Liabilities | | $ | - | | | $ | - | | | $ | 15,930,581 | | | $ | 15,930,581 | |
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (conversion and warrant derivative liabilities) for the year ended December 31, 2012.
| | | 2012 | |
| Balance at beginning of year | | $ | 353,136 | |
| Additions to derivative instruments | | | 10,861,117 | |
| Change in fair value of warrant liability | | | 4,123,599 | |
| Conversion of debentures | | | (268,717 | ) |
| Balance at end of period | | $ | 15,069,135 | |
The following is a description of the valuation methodologies used for these items:
Conversion derivative liability — these instruments consist of certain of our notes which are convertible based on a discount to the market value of our common stock. These instruments were valued using pricing models which incorporate the Company’s stock price, volatility, U.S. risk free rate, dividend rate and estimated life.
LOSS PER SHARE
We use ASC 260, “Earnings Per Share” for calculating the basic and diluted income (loss) per share. We compute basic income (loss) per share by dividing net income (loss) and net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding.
Dilutive common stock equivalents consist of shares issuable upon conversion of debt and the exercise of our stock warrants. In accordance with ASC 260-45-20, common stock equivalents derived from shares issuable through the exercise of our debt and warrants subject to derivative accounting are not considered in the calculation of the weighted average number of common shares outstanding because the adjustments in computing income available to common stockholders would result in a loss. Income of $330,705 reported for the year ended December 31, 2011 resulted solely from gains and losses attributable to our derivative instruments. Accordingly, the diluted EPS would be computed in the same manner as basic earnings per share since the inclusion of the common stock equivalents derived from shares issuable through the exercise of our debt and warrants subject to derivative accounting would be anti-dilutive.
There were 123,243,575 common share equivalents at December 31, 2012 and 138,151,458 at December 31, 2011, which have been excluded from the computation of the weighted average diluted shares.
INCOME TAXES
We utilize ASC 740 “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
The Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by the guidance. As a result of this review, the Company concluded that at this time there are no uncertain tax positions that would result in tax liability to the Company. There was no cumulative effect on retained earnings as a result of applying the provisions of this guidance.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2011, the FASB issued disclosure guidance related to the offsetting of assets and liabilities. The guidance requires an entity to disclose information about offsetting and related arrangements for recognized financial and derivative instruments to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amended guidance is effective for us on a retrospective basis commencing in the first quarter of 2014. We are currently evaluating the impact of this new guidance on our consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” ASU No. 2011-08 provides companies an option to perform a qualitative assessment to determine whether further goodwill impairment testing is necessary. If, as a result of the qualitative assessment, it is determined that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, the two-step quantitative impairment test is required. Otherwise, no further testing is required. ASU No. 2011-08 will be effective for the Company for goodwill impairment tests performed in the fiscal year ending September 30, 2013, with early adoption permitted. The adoption of this guidance is expected to have no impact on the Company’s consolidated financial condition and results of operations.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU No. 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of shareholders’ equity. All non-owner changes in shareholders’ equity instead must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Also, reclassification adjustments for items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 will be effective for the Company for the quarter ending December 31, 2012. The adoption of this guidance will have no impact on the Company’s financial condition and results of operations.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 clarifies and changes the application of various fair value measurement principles and disclosure requirements, and will be effective for the Company in the second quarter of fiscal 2012 (January 1, 2012). The adoption of this guidance will have no impact on the Company’s consolidated financial condition and results of operations.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
NOTE 3 – INTANGIBLE ASSETS
Intangible assets consist of a domain name, a website, website development costs and other intangible assets. The assets have not yet been placed into service. The Company expects that it will be assessing the estimated economic life of these assets during the year ending December 31, 2013.
NOTE 4 – CONVERTIBLE DEBENTURES, NOTES PAYABLE AND DERIVATIVE LIABILITY
The Company has identified the embedded derivatives related to its convertible notes, consisting of the conversion feature, and its warrants. Since the certain of the notes are convertible into a variable number of shares, the conversion features of those debentures are recorded as derivative liabilities. Since the warrants have a price reset feature, they are recorded as derivative liabilities. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to adjust to fair value as of each subsequent balance sheet date.
2012 Transactions
Greystone $100K Financing
On March 21, 2012, the Company entered into a Securities Purchase Agreement with Greystone Capital Partners LLC ("Greystone") providing for the sale by the Company to Greystone of a 8% convertible debenture in the principal amount of up to $100,000 (the “March Debenture”). The March Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears an interest rate of 8% per annum, payable semi-annually and on the Maturity Date. Greystone may convert, at any time, the outstanding principal and accrued interest on the March Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price per share equal to the lesser of (i) a ninety percent (90%) discount of the average of the closing bid price of the Common Stock during the five (5) trading days immediately preceding the date of conversion as quoted by Bloomberg, LP or (ii) the average of the closing bid price per share during the five (5) trading days prior to the date of any such conversion (the “Conversion Price”).
With the exception of the shares that the Company is obligated to issue to previous investors, for as long as the March Debenture is outstanding, the Conversion Price of the March Debenture shall be subject to adjustment for issuances of Common Stock or securities convertible into common stock or exercisable for shares of Common Stock at a purchase price of less than the then-effective Conversion Price, on any unconverted amounts, such that the then applicable Conversion Price shall be adjusted using full-ratchet anti-dilution on such new issuances subject, to customary carve outs, including restricted shares granted to officers, and directors and consultants.
The conversion features of the March 2012 debenture contains a variable conversion rate. As a result, we have classified the conversion feature as a derivative liability in the financial statements. At issue, we have recorded a conversion feature liability of $1,398,576. The value of the conversion feature liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.185%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 718%; and (4) an expected life of 1 year. The Company has allocated $100,000 to debt discount, to be amortized over the life of the debt, with the balance of $1,298,576 being charged to expense at issue.
On September 21, 2012 Greystone Capital Partners assigned the March 21, 2012 note to Adam Wasserman.
Flyback $150K Financing
On May 30, 2012, the Company entered into a Securities Purchase Agreement with Flyback LLC ("Flyback") providing for the sale by the Company to Flyback of a 8% convertible debenture in the principal amount of up to $150,000 (the “May Debenture”). The May Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears an interest rate of 8% per annum, payable semi-annually and on the Maturity Date. Flyback may convert, at any time, the outstanding principal and accrued interest on the May Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price per share equal to the lesser of (i) a ninety percent (90%) discount of the average of the closing bid price of the Common Stock during the five (5) trading days immediately preceding the date of conversion as quoted by Bloomberg, LP or (ii) the average of the closing bid price per share during the five (5) trading days prior to the date of any such conversion (the “Conversion Price”).
With the exception of the shares that the Company is obligated to issue to previous investors, for as long as the May Debenture is outstanding, the Conversion Price of the May Debenture shall be subject to adjustment for issuances of Common Stock or securities convertible into common stock or exercisable for shares of Common Stock at a purchase price of less than the then-effective Conversion Price, on any unconverted amounts, such that the then applicable Conversion Price shall be adjusted using full-ratchet anti-dilution on such new issuances, subject to customary carve outs, including restricted shares granted to officers, and directors and consultants.
The conversion features of the May 2012 debenture contains a variable conversion rate. As a result, we have classified the conversion feature as a derivative liability in the financial statements. At issue, we have recorded a conversion feature liability of $1,819,405. The value of the conversion feature liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.185%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 647%; and (4) an expected life of 1 year. The Company has allocated $150,000 to debt discount, to be amortized over the life of the debt, with the balance of $1,669,405 being charged to expense at issue.
IBC Funds LLC $21,500 Debenture
On September 18, 2012, the Company entered into an Exchange Agreement with IBC Funds, LLC (“IBC”), pursuant to which the Company and IBC agreed to exchange two promissory notes held by IBC in the aggregate principal amount of $21,500 (collectively, the “Notes”) for an 8% convertible debenture in the aggregate principal amount of $21,500 (the “September Debenture”). The September Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears interest a rate of 8% per annum, payable semi-annually and on the Maturity Date. IBC may convert, at any time, the outstanding principal and accrued interest on the September Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price per share equal to a ninety percent (90%) discount of the average of the closing bid price of the Common Stock during the five (5) trading days immediately preceding the date of conversion as quoted by Bloomberg, LP provided that in no event shall the Conversion Price be an amount that is lower than $0.001.
With the exception of the shares that the Company is obligated to issue to previous investors, for as long as the September Debenture is outstanding, the Conversion Price of the September Debenture shall be subject to adjustment for issuances of Common Stock or securities convertible into common stock or exercisable for shares of Common Stock at a purchase price of less than the then-effective Conversion Price, on any unconverted amounts, such that the then applicable Conversion Price shall be adjusted using full-ratchet anti-dilution on such new issuances, subject to customary carve outs, including restricted shares granted to officers, and directors and consultants.
The conversion features of the September 2012 debenture contains a variable conversion rate. As a result, we have classified the conversion feature as a derivative liability in the financial statements. At issue, we have recorded a conversion feature liability of $250,981, which has been charged to expense at issue. The value of the conversion feature liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.175%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 593%; and (4) an expected life of 1 year.
Monroe Milstein $200,000 Debenture
On October 26, 2012, Company entered into a Securities Purchase Agreement with Monroe Milstein , an accredited investor (the “October 2012 Investor”), providing for the sale by the Company to the October 2012 Investor of a 10% convertible debenture in the principal amount of $200,000 (the “October 2012 Debenture”). The October 2012 Debenture matures on the second anniversary of the date of issuance (the “October 2012 Maturity Date”) and bears interest a rate of 10% per annum, payable semi-annually and on the October 2012 Maturity Date. The October 2012 Investor may convert, at any time, the outstanding principal and accrued interest on the October 2012 Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price that is a fifty percent (50%) discount of the lowest closing price of the Common Stock during the ten (10) trading days immediately preceding the date of conversion as quoted by Bloomberg, LP or such other quotation service as mutually agreed to by the parties.
The conversion features of the October 2012 debenture contains a variable conversion rate. As a result, we have classified the conversion feature as a derivative liability in the financial statements. At issue, we have recorded a conversion feature liability of $456,655. The value of the conversion feature liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.25%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 581%; and (4) an expected life of 2 years. The Company has allocated $200,000 to debt discount, to be amortized over the life of the debt, with the balance of $256,655 being charged to expense at issue.
The warrants with price reset features have been adjusted due to the issuance of debt on March 21, 2012, May 30, 2012 and September 18, 2012. As a result, those warrants now total 4,306,932 with an exercise price of $0.101. The Company has recorded income of $1,904,997 for the year ended December 31, 2012 related to the change in fair value of the warrants through the dates of adjustment. The Company has also recorded an expense of $5,458,271 for the year ended December 31, 2012 due to the increase in the fair value of the warrants as a result of the modifications.
The conversion feature of the preferred stock has been adjusted due to the subsequent issuances of debt. As a result, the conversion price is now $0.101 per share or an aggregate of 742,574 shares of the Company’s common stock. The Company has recorded income of $212,353 for the year ended December 31, 2012, respectively, related to the change in fair value of the conversion feature of the preferred stock through the dates of adjustment. The Company has also recorded an expense of $818,101 for the year ended December 31, 2012 due to the increase in the fair value of the conversion feature as a result of the modifications.
During the year ended December 31, 2012 we recorded additions to our derivative conversion liabilities related to the conversion feature attributable to interest accrued during the period. These additions aggregated $659,128 for the year ended December 31, 2012 which has been charged to interest expense.
During the year ended December 31, 2012, $21,316 of principal was converted into 151,171 shares of common stock. The Company has recorded income of $13,330 for the year ended December 31, 2012, related to the change in fair value of the conversion feature through the dates of conversion.
At December 31, 2012, we recalculated the fair value of our embedded conversion features and warrants subject to derivative accounting and have determined that their fair value at December 31, 2012 was $15,069,135. The value of the conversion liabilities and warrant liabilities was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.14% - 0.25%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 520% - 570%; and (4) an expected life of 1 – 3.75 years. We recorded expense of $6,254,279 during the year ended December 31, 2012.
The Company is in default eight of its notes, aggregating $567,100 of unpaid principal and $101,166 of unpaid accrued interest. The Company has not repaid principal or accrued but unpaid interest that has become due and payable under the notes. The Company is currently working with the note holders on making arrangements to honor its obligations under the notes, however, there can be no assurance that any such arrangements will ever materialize or be permissible or sufficient to cover any or all of the obligations under the notes.
2011 Transactions
On April 6, 2011, the Company entered into a Securities Purchase Agreement with IIG Management LLC ("IIG"), providing for the sale by the Company to the IIG of a 10% convertible debenture in the principal amount of up to $135,000 (the “Debenture”). The Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears interest at the annual rate of 10% per year. The Company is not required to make any payments until the Maturity Date. IIG may convert, at any time, the outstanding principal and accrued interest on the Debenture into shares of the Company’s common stock at a conversion price per share equal to the lower of ten percent (10%) of the lowest closing price of the Common Stock during the ten (10) trading days immediately preceding the conversion date or ten percent of the closing price on the date of issue of the debenture. In connection with the agreement, IIG received a warrant to purchase 100,000 shares of the Company’s Common Stock (the “Warrant”). The Warrant is exercisable for a period of three years from the date of issuance at an initial exercise price of $1.35 per share, the closing price of the Company’s Common Stock as quoted on the Over-the-Counter Bulletin Board on April 5, 2011. IIG may exercise the Warrant on a cashless basis if the shares of Common Stock underlying the Warrant are not then registered pursuant to an effective registration statement after one year from the date of issuance. In the event the Investor exercises the Warrant on a cashless basis, then we will not receive any proceeds.
As an inducement for IIG to enter into the Purchase Agreement, the Company, Shawn Knapp, the Company’s then chief executive officer (“Mr. Knapp”) and IIG entered into a Pledge Agreement pursuant to which the Debenture is secured by 270,262 of Mr. Knapp’s shares of series A convertible preferred stock of the Company. In addition, on April 6, 2011, Mr. Knapp entered into a Make Good Securities Escrow Agreement with the Investor and Sichenzia Ross Friedman Ference LLP (the “Escrow Agent”) whereby Mr. Knapp has agreed to deliver to the Escrow Agent certificate(s) representing an aggregate of 129,738 shares of the Company’s series A convertible preferred stock, which shall be deliverable in the event the Company fails to achieve certain financial performance thresholds for the 12-month period ending December 31, 2011. These inducements were cancelled as a result of the closing of the transactions contemplated by the Rescission Agreement that took place on September 20, 2011 (described in Note 1).
On May 10, 2011, the Company entered into a Securities Purchase Agreement with Greystone Capital Partners LLC ("Greystone") , providing for the sale by the Company to Greystone of a 10% convertible debenture in the principal amount of up to $50,000 (the “Debenture”). The Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears interest at the annual rate of 10% per year. The Company is not required to make any payments until the Maturity Date. Greystone may convert, at any time, the outstanding principal and accrued interest on the Debenture into shares of the Company’s common stock at a conversion price per share equal to the lower of ten percent (10%) of the lowest closing price of the Common Stock during the ten (10) trading days immediately preceding the conversion date or ten percent of the closing price on the date of issue of the debenture. In connection with the agreement, Greystone received a warrant to purchase 55,556 shares of the Company’s Common Stock (the “Warrant”). The Warrant is exercisable for a period of three years from the date of issuance at an initial exercise price of $0.90 per share, the closing price of the Company’s Common Stock as quoted on the Over-the-Counter Bulletin Board on May 9, 2011. Greystone may exercise the Warrant on a cashless basis if the shares of Common Stock underlying the Warrant are not then registered pursuant to an effective registration statement after one year from the date of issuance. In the event Greystone exercises the Warrant on a cashless basis, then we will not receive any proceeds.
On June 13, 2011, the Company entered into a Securities Purchase Agreement with Greystone, providing for the sale by the Company to Greystone of a 10% convertible debenture in the principal amount of up to $50,000 (the “Debenture”). The Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears interest at the annual rate of 10% per year. The Company is not required to make any payments until the Maturity Date. Greystone may convert, at any time, the outstanding principal and accrued interest on the Debenture into shares of the Company’s common stock at a conversion price per share equal to the lower of ten percent (10%) of the lowest closing price of the Common Stock during the five (5) trading days immediately preceding the conversion date or ten percent of the closing price on the date of issue of the debenture. In connection with the agreement, Greystone received a warrant to purchase 111,111 shares of the Company’s Common Stock (the “Warrant”). The Warrant is exercisable for a period of three years from the date of issuance at an initial exercise price of $0.45 per share, the closing price of the Company’s Common Stock as quoted on the Over-the-Counter Bulletin Board on June 12, 2011. Greystone may exercise the Warrant on a cashless basis if the shares of Common Stock underlying the Warrant are not then registered pursuant to an effective registration statement after one year from the date of issuance. In the event Greystone exercises the Warrant on a cashless basis, then we will not receive any proceeds.
On July 13, 2011, the Company entered into a Securities Purchase Agreement with an accredited investor (the “Investor”), pursuant to which the Investor purchased 75,000 shares of the Company’s series B convertible preferred stock (the “Preferred Stock”) for an aggregate purchase price of $75,000. Each share of Preferred Stock has a stated value equal to $1.00 per share and is initially convertible at any time into shares of the Company’s common stock at a conversion price equal to $0.60 per share or an aggregate of 125,000 shares of the Company’s common stock. The conversion price of the Preferred Stock is subject to full ratchet and anti-dilution adjustment for subsequent lower price issuances by the Company, as well as customary adjustments provisions for stock splits, stock dividends, recapitalizations and the like. As a result of the price protection feature, we have classified the conversion feature of the preferred stock as a derivative liability in the financial statements. At issue, we have recorded a conversion feature liability of $41,250. The corresponding charge has been recorded as a dividend to the preferred shareholder and has been charged to additional paid in capital, since there is a deficit in retained earnings. The value of the conversion feature liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 1.25%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 423%; and (4) an expected life of 5 years.
The conversion feature of the preferred stock has been adjusted due to the subsequent issuance of debt. As a result, the conversion price is now $0.30 per share or an aggregate of 250,000 shares of the Company’s common stock. The Company has recorded income related to the change in fair value of the conversion feature of the preferred stock through the date of adjustment in the amount of $18,750. The Company has also recorded an expense of $75,000 due to the increase in the fair value of the conversion feature as a result of the modification.
On October 6, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Greystone, providing for the sale by the Company to Greystone of a 10% convertible debenture in the principal amount of $50,000 (the “Debenture”). The Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears interest at the annual rate of 10%. The Company is not required to make any payments until the Maturity Date. Greystone may convert, at any time, the outstanding principal and accrued interest on the Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price per share equal to $0.001 per share (the “Conversion Price”). The Conversion Price will not be adjusted for stock splits, stock dividends, recapitalizations and the like. In connection with the Agreement, Greystone received a warrant to purchase 166,667 shares of the Company’s Common Stock (the “Warrant”). The Warrant is exercisable for a period of three years from the date of issuance at an initial exercise price of $0.60. Greystone may exercise the Warrant on a cashless basis if the shares of Common Stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event Greystone exercises the Warrant on a cashless basis, then we will not receive any proceeds. The exercise price of the Warrant is subject to full ratchet and anti-dilution adjustment for subsequent lower price issuances by the Company, as well as customary adjustments provisions for stock splits, stock dividends, recapitalizations and the like.
On November 10, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Greystone, providing for the sale by the Company to Greystone of a 10% convertible debenture in the principal amount of $50,000 (the “Debenture”). The Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears interest at the annual rate of 10%. The Company is not required to make any payments until the Maturity Date. Greystone may convert, at any time, the outstanding principal and accrued interest on the Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price per share equal to $0.001 per share (the “Conversion Price”). The Conversion Price will not be adjusted for stock splits, stock dividends, recapitalizations and the like. In connection with the Agreement, Greystone received a warrant to purchase 166,667 shares of the Company’s Common Stock (the “Warrant”). The Warrant is exercisable for a period of three years from the date of issuance at an initial exercise price of $0.60. Greystone may exercise the Warrant on a cashless basis if the shares of Common Stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event Greystone exercises the Warrant on a cashless basis, then we will not receive any proceeds. The exercise price of the Warrant is subject to full ratchet and anti-dilution adjustment for subsequent lower price issuances by the Company, as well as customary adjustments provisions for stock splits, stock dividends, recapitalizations and the like.
Since the October and November 2011 debentures are convertible at a fixed price, the conversion features have not been recorded as derivative liabilities. The Company has recorded a beneficial conversion feature of $74,990. This amount has been recorded as a debt discount at the dates of issue and will be amortized over the term of the debentures.
The conversion features of the April, May and June, 2011 debentures contain a variable conversion rate and all of the warrants issued with the 2011 debt have a price protection feature. As a result, we have classified these instruments as derivative liabilities in the financial statements. At issue, we have recorded a conversion feature liability of $2,947,635 and a warrant liability of $359,968. The value of the conversion feature liabilities and the warrant liabilities was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.20% - 0.375%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 426% - 582%; and (4) an expected life of 1 - 3 years.
Of the aggregate amount of $3,307,603, the Company has allocated $309,990 to debt discount, to be amortized over the life of the debt, with the balance of $2,997,613 being charged to expense at issue.
The warrants issued with the April, May and June 2011 debentures have been adjusted due to the subsequent issuance of debt. As a result, those warrants now total 783,333 with an exercise price of $0.30. The Company has recorded income related to the change in fair value of the warrants through the dates of adjustment in the amount of $294,127. The Company has also recorded an expense of $294,127 due to the increase in the fair value of the warrants as a result of the modifications.
At December 31, 2011, we recalculated the fair value of our embedded conversion features and warrants subject to derivative accounting and have determined that their fair value at December 31, 2011 was $353,136. The value of the conversion liabilities and warrant liabilities was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.09% - 1.25%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 417% - 478%; and (4) an expected life of 1 – 4.5 years. We recorded income of $4,861,802 during the year ending December 31, 2011.
During the year ended December 31, 2011, $14,900 of our convertible debentures subject to derivative accounting was converted into 52,130 shares of common stock. As a result of the conversion of the debt, we have recorded a gain of $6,811.
During the three months ended March 31, 2011, we executed three promissory notes in the aggregate amount of $36,500. Two of the notes, aggregating $21,500, bear interest at the rate of 10% per year and matured on June 30, 2011. These notes remained outstanding at December 31, 2011. The third note, in the amount of $15,000, has no stated interest rate and is due upon the consummation of our next financing through either debt or equity securities. The $15,000 note was repaid on April 6, 2011.
On March 9, 2011 we executed a promissory note in the amount of $84,775 as payment of outstanding legal fees. The note bears interest at 5% per year and matured on September 9, 2011. The entire principal balance remains outstanding at December 31, 2011.
On August 9, 2011, the Company entered into an omnibus waiver and modification agreement with Greystone related to the convertible note issued to Greystone in June 2010, pursuant to which, among other things, (i) Greystone agreed to extend the maturity date of the note from June 4, 2011 until September 30, 2011, (ii) the irrevocable transfer agent instructions were terminated effective immediately, (iii) the Company is no longer required to reserve a sufficient number of shares of common stock for issuance upon conversion of the convertible note, and (iv) Greystone waived any default or breach that may have resulted by way of the convertible note maturing on June 4, 2011 or a failure by the Company to reserve a sufficient number of shares under the convertible note.
On August 9, 2011, the Company entered into an omnibus waiver and modification agreement with IIG related to the convertible note issued to IIG in July 2010, pursuant to which, among other things, (i) IIG agreed to extend the maturity date of the note from July 29, 2011 until September 30, 2011, (ii) the irrevocable transfer agent instructions were terminated effective immediately, (iii) the Company is no longer required to reserve a sufficient number of shares of common stock for issuance upon conversion of the convertible note, and (iv) IIG waived any default or breach that may have resulted by way of the convertible note maturing on July 29, 2011 or a failure by the Company to reserve a sufficient number of shares under the convertible note.
On August 9, 2011, the Company entered into an omnibus waiver and modification agreement with Greystone related to the convertible note issued to Greystone in November 2010, pursuant to which, among other things, (i) the irrevocable transfer agent instructions were terminated effective immediately, (ii) the Company is no longer required to reserve a sufficient number of shares of common stock for issuance upon conversion of the convertible note, and (iii) Greystone waived any default or breach that may have resulted from a failure by the Company to reserve a sufficient number of shares under the convertible note.
On August 9, 2011, the Company entered into an omnibus waiver and modification agreement with IIG related to the convertible note and warrant issued to IIG in April 2011, pursuant to which, among other things, (i) the irrevocable transfer agent instructions were terminated effective immediately, (iii) the Company is no longer required to reserve a sufficient number of shares of common stock for issuance upon conversion of the convertible note and upon exercise of the warrant, (iv) there is no longer a buy-in penalty in the warrant if the Company doesn’t have a sufficient amount of authorized shares and (v) IIG waived any default or breach that may have resulted by a failure by the Company to reserve a sufficient number of shares under the convertible note.
On August 9, 2011, the Company entered into an omnibus waiver and modification agreement with Greystone related to the convertible note and warrant issued to Greystone in May 2011, pursuant to which, among other things, (i) the irrevocable transfer agent instructions were terminated effective immediately, (iii) the Company is no longer required to reserve a sufficient number of shares of common stock for issuance upon conversion of the convertible note and upon exercise of the warrant, (iv) there is no longer a buy-in penalty in the warrant if the Company doesn’t have a sufficient amount of authorized shares and (v) Greystone waived any default or breach that may have resulted by a failure by the Company to reserve a sufficient number of shares under the convertible note.
On August 9, 2011, the Company entered into an omnibus waiver and modification agreement with Greystone related to the convertible note and warrant issued to Greystone in June 2011, pursuant to which, among other things, (i) the irrevocable transfer agent instructions were terminated effective immediately, (iii) the Company is no longer required to reserve a sufficient number of shares of common stock for issuance upon conversion of the convertible note and upon exercise of the warrant, (iv) there is no longer a buy-in penalty in the warrant if the Company doesn’t have a sufficient amount of authorized shares and (v) Greystone waived any default or breach that may have resulted by a failure by the Company to reserve a sufficient number of shares under the convertible note.
The Company has identified the embedded derivatives related to the convertible notes, consisting of the conversion feature. Since the notes are convertible into a variable number of shares, the conversion features of the debentures are recorded as derivative liabilities. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to adjust to fair value as of each subsequent balance sheet date.
LOANS PAYABLE
On June 11th and June 22nd, 2010, Vanity received monies from an accredited investor, as a non-interest-bearing loan, without formal loan agreements and terms. The amounts received were $25,000 each, and were loaned as a favor to the Company. These advances remain outstanding at December 31, 2012.
NOTE 5 – ADVANCES RECEIVABLE – RELATED PARTIES
As of March 31, 2010, Vanity had loan receivables due from related parties / shareholders in the amount of $794,500, as a result of a note issued by Vanity which was executed in April 2010 under the direction of Vanity’s former CEO, Steven Y. Moskowitz, without proper approval of, or ratification by, the Company’s board of directors. These related parties are or were under the common ownership / control and or management of Steven Y. Moskowitz, where he was an officer and or shareholder. The balance on this loan was $617,424 as of December 31, 2012 and 2011. The Company cannot determine whether it will be able to collect any further monies on this note and has fully impaired it as of December 31, 2010. The Company is determining what options it may have in attempting to take action to collect on the note.
NOTE 6 – STOCKHOLDERS’ EQUITY
Spin-Off of Shogun
In connection with the Shogun Separation, the Company recognized a credit of $583,397 to stockholders’ equity.
Preferred Stock
The Company is authorized to issue 50,000,000 shares of preferred stock, with par value of $0.001 per share, of which 75,000 shares have been designated as Series B 10% Convertible preferred stock, with par value of $0.001 per share. There were 75,000 Series B shares issued and outstanding as of December 31, 2012 and 2011, respectively.
On July 13, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Thalia Woods Management, Inc. , an accredited investor (the “Investor”), pursuant to which the Investor purchased 75,000 shares of the Company’s series B convertible preferred stock (the “Series B Preferred Stock”) for an aggregate purchase price of $75,000. Each share of Series B Preferred Stock shall be entitled to 1,000 votes per share which voting right shall be non-dilutive for a period of one year from the date of issuance. The Series B Preferred Stock pays dividends of 10% per year, payable quarterly in arrears beginning on the one year anniversary of the date of issuance, at the Company’s option, in cash or in additional shares of the Company’s common stock.
Each share of Series B Preferred Stock has a stated value equal to $1.00 per share and is initially convertible at any time into shares of the Company’s common stock at a conversion price equal to $0.60 per share or an aggregate of 125,000 shares of the Company’s common stock. The conversion price of the Series B Preferred Stock is subject to full ratchet and anti-dilution adjustment for subsequent lower price issuances by the Company, as well as customary adjustments provisions for stock splits, stock dividends, recapitalizations and the like.
The securities were offered and sold to the Investor in a private placement transaction made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506 promulgated under Regulation D thereunder. The Investor is an accredited investor as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended.
Common Stock
The Company is authorized to issue 500,000,000 shares of common stock, with par value of $0.001 per share. As of December 31, 2012 and 2011, there were 2,970,864 and 269,596 shares of common stock issued and outstanding, respectively.
On September 30, 2011, a majority of the voting capital stock of the Company took action by written consent authorizing the Company to amend its Certificate of Incorporation, as amended, to (1) effect a reverse stock split of the Company’s issued and outstanding shares of common stock, par value $.001 per share (the "Common Stock") at the ratio of 300-for-1 (the “Reverse Stock Split”), and (2) increase the number of authorized shares of Common Stock of the Company from 350,000,000 shares to 500,000,000 shares (the “Authorized Capital Change” and collectively with the Reverse Stock Split, the “Corporate Actions”).
The Authorized Capital Change became effective on November 18, 2011. The reverse stock split became effective on February 10, 2012. Unless otherwise stated, all share and per share amounts in these financial statements have been retroactively restated to reflect the effects of the reverse stock split.
During April 2012 we issued 50,000 shares of common stock in settlement of accounts payable in the amount of $19,774.
During 2012 we issued 151,171 shares of common stock upon conversion of notes payable in the amount of $21,316. The shares had a value of $268,842 at the dates of conversion.
During the year ended December 31, 2011, $14,900 of our convertible debentures was converted into 52,130 shares of common stock. The shares had a value of $64,183 at the dates of conversion.
Cortell Communications Agreement
On March 29, 2012, the Company entered into a consultant agreement pursuant to which the consultant shall provide, among other services, public relations, advisory and consulting services to the Company commencing on March 29, 2012 and ending on March 28, 2014. As consideration for these services, the Company issued to the Consultant 250,000 shares of its common stock. The shares have been valued at $650,000 at March 31, 2012, based on the quoted market price of our common stock on March 30, 2012. We have charged $243,750 of the payment to expense during the year ended December 31, 2012, based on the 24 month term of the agreement. The remaining amount of $406,250 has been recorded as prepaid consulting fees at December 31, 2012. During the year ending December 31, 2013, the Company expects that it will be assessing the value of the services and will adjust the carrying amount of the prepayment and the related expense accordingly.
Asset Purchase Agreement with Aegis Worldwide, LLC
On April 4, 2012 (the “Closing Date”), the Company entered into an asset purchase agreement (the “Aegis Agreement”) with Aegis Worldwide, LLC, an entity controlled by Greg Pippo, the Company’s chief financial officer (the “Seller”), pursuant to which the Seller agreed to sell, transfer, convey, and deliver to the Company, all of Seller’s right, title and interest and goodwill in or associated with certain domain names (the “Domain Names”) along with any information or materials proprietary to the Seller that relate to the business or affairs associated with the Domain Names which is of a confidential nature, including, but not limited to, trade secrets, information or materials relating to existing or proposed products (in all and various stages of development), “know-how”, marketing techniques and materials, marketing and development plans and pricing policies (the “Assets”)). In consideration for the purchase of the Assets, the Company issued to the Seller 1,000,000 shares of its common stock on March 29, 2012. On October 12, 2012 the Company received notice of Aegis Worldwide LLC’s intention to return to treasury the 1,000,000 shares of common stock issued in connection with the April 4 2012 Asset Purchase Agreement. The Company accepted the return of the shares without conditions and these shares have been cancelled.
During the year ending December 31, 2013, we expect to assign a value to the assets acquired and will adjust the carrying value accordingly.
Simultaneously with the execution of the Aegis Agreement, on March 30, 2012, the parties entered into an option agreement, pursuant to which Seller shall have the option to purchase the Assets and all enhancements to the Assets from the Company in consideration for (i) an amount in cash equal to the net proceeds used by the Company for the enhancement of the Assets on or after the Closing Date and (ii) the cancellation of the Shares. The option is exercisable beginning on the twelve month anniversary of the Closing Date and terminating on the 24 month anniversary of the Closing Date.
Sadore Consulting Group LLC Agreement
On July 19, 2012, the Company entered into a consulting agreement (the “Agreement”) with Sadore Consulting Group LLC (the “Consultant”) pursuant to which the Consultant agreed to provide certain strategic advisory services to the Company for a period of 30 days in consideration for (i) $15,000 and (ii) 250,000 shares of the Company’s common stock. The shares were issued during the third quarter of 2012 and have been valued at $302,500, based on the quoted market price of our common stock on July 19, 2012. This amount has been charged to expense in full during the third quarter of 2012.
Warrants Outstanding
Transactions involving our stock warrants are summarized as follows:
| | | 2012 | | | 2011 | |
| | | | | | Weighted | | | | | | Weighted | |
| | | | | | Average | | | | | | Average | |
| | | Number | | | Exercise Price | | | Number | | | Exercise Price | |
| | | | | | | | | | | | | |
| Outstanding at beginning of the period | | | 1,116,667 | | | $ | 0.39 | | | | — | | | $ | — | |
| Granted during the period | | | — | | | | — | | | | 1,116,667 | | | | 0.39 | |
| Modifications during the period | | | 3,190,265 | | | | 0.10 | | | | | | | | | |
| Exercised during the period | | | — | | | | — | | | | — | | | | — | |
| Terminated during the period | | | — | | | | — | | | | — | | | | — | |
| Outstanding at end of the period | | | 4,306,932 | | | $ | 0.10 | | | | 1,116,667 | | | $ | 0.39 | |
| Exercisable at end of the period | | | 4,306,932 | | | $ | 0.10 | | | | 1,116,667 | | | $ | 0.39 | |
The weighted average remaining life of the options is 1.53 years.
| Range of Exercise Prices | | | Remaining Number Outstanding | | | Weighted Average Contractual Life (Years) | | | Weighted Average Exercise Price | |
| $ | $0.10 | | | | 4,306,932 | | | | 1.53 | | | $ | 0.10 | |
NOTE 7 - PROVISION FOR INCOME TAXES
The Company utilizes ASC 740 “Income Taxes”, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
At December 31, 2012, we have available for U.S federal income tax purposes a net operating loss carry forward of approximately $1,032,000 expiring through the year 2032 that may be used to offset future taxable income. The deferred tax asset related to the carry forward is approximately $366,000. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company it is more likely than not that the benefit will not be realized. The valuation allowance increased by approximately $155,000 and $211,000 for the years ending December 31, 2012 and 2011, respectively. Components of deferred tax assets as of December 31, 2012 and 2011 are presented below.
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S statutory rate to losses before income tax expense for the periods ended December 31, 2012 and 2011 as presented below. | | | 2012 | | | 2011 | |
| | | | | | | |
| Deferred tax assets: | | | | | | |
| Net operating loss carryover | | $ | 155,000 | | | $ | 211,000 | |
| Valuation allowance | | | (155,000 | ) | | | (211,000 | ) |
| | | | | | | | | |
| Net deferred tax assets | | $ | - | | | $ | - | |
| | | | | | | | | |
| Statutory federal income tax rate | | | -34 | % | | | -34 | % |
| State income taxes, net of federal taxes | | | -4 | % | | | -0 | % |
| Valuation allowance | | | 38 | % | | | 34 | % |
| | | | | | | | | |
| Effective income tax rate | | | 0 | % | | | 0 | % |
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and the tax bases of assets and liabilities at the applicable tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Due to significant changes in the Company's ownership, the future use of its existing net operating losses may be limited.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
LEASE
We currently occupy shared office space of approximately 150 square feet with a gross rent of $535 per month. The lease is in the name of a third party and is currently on a month to month basis.
Rent expense was $1,150 and $2,333 for the periods ended December 31, 2012 and 2011, respectively.
LITIGATION
From time to time, The Company and its subsidiaries may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. The Company and its subsidiaries are currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
NOTE 9 - SUBSEQUENT EVENTS
In March 2013, an investor converted a portion of his convertible note issued in April 2011, which resulted in the issuance of 147,899 shares of the Company's common stock.
In March 2013, an investor converted a portion of his convertible note issued in May 2011, which resulted in the issuance of 250,999 shares of the Company's common stock.
In March 2013, an investor converted a portion of his convertible note issued in May 2012, which resulted in the issuance of 148,134 shares of the Company's common stock.
In March 2013, an investor converted a portion of his convertible note issued in March 2012, which resulted in the issuance of 167,630 shares of the Company's common stock.
On April 12, 2013, Vanity Events Holding, Inc. (the "Company") entered into a Securities Purchase Agreement (the "Purchase Agreement") with Greystone Capital Partners, Inc., an accredited investor (the "Investor"), providing for the sale by the Company to the Investors of 8% convertible debenture in the aggregate principal amount of $52,000 (the "Debenture"). The Debenture matures on the first anniversary of the date of issuance (the "Maturity Date") and bears interest a rate of 8% per annum, payable on the Maturity Date. The Investor may convert, at any time, the outstanding principal and accrued interest on the Debenture into shares of the Company's common stock, par value $0.001 per share ("Common Stock") at a conversion price that is the lesser of (i) ninety percent (90%) discount of the average of the closing bid price of the Common Stock during the five (5) trading days immediately preceding the Conversion Date as quoted by Bloomberg, LP or (ii) the average of the closing bid price per share during the five (5) trading days prior to the date of any such conversion. The Conversion Price may be adjusted pursuant to the other terms of this Debenture "Conversion Price").
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