UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended March 31, 2007.
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 No.: 333-118799
FOLDERA, INC.
(Name of small business issuer in its charter)
Nevada | 20-0375035 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
17011 Beach Blvd., Suite 1500 | |
Huntington Beach, CA | 92647 |
(Address of principal executive offices) | (Zip Code) |
(714) 766-8700
(Issuer’s telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 14, 2007, 113,106,215 shares of the issuer’s Common Stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes o No x.
Foldera, Inc.
March 31, 2007 Form 10-QSB Quarterly Report
Table of Contents
Page | ||||
Part I Financial Information | 2 | |||
Item 1. Financial Statements | 2 | |||
Unaudited Consolidated Balance Sheet at March 31, 2007 | 2 | |||
Unaudited Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2007 and 2006 and for the Period from December 3, 2001 (Inception) to March 31, 2007 | 3 | |||
Unaudited Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2007 and 2006 and for the Period from December 3, 2001 (Inception) to March 31, 2007 | 5 | |||
Notes to Unaudited Consolidated Financial Statements | 6 | |||
Item 2. Management’s Discussion and Analysis or Plan of Operation | 18 | |||
Item 3. Controls and Procedures | 24 | |||
Part II Other Information | 25 | |||
Item 1. Legal Proceedings | 25 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 25 | |||
Item 3. Defaults Upon Senior Securities | 25 | |||
Item 4. Submission of Matters to a Vote of Security Holders | 25 | |||
Item 5. Other Information | 25 | |||
Item 6. Exhibits | 25 | |||
Signatures | 26 |
1
Item 1. Financial Statements
FOLDERA, INC.
(A Development Stage Company)
Consolidated Balance Sheet
As of March 31, 2007
(Unaudited)
ASSETS | ||||
CURRENT ASSETS: | ||||
Cash & cash equivalents | $ | 3,870,181 | ||
Prepaid expenses and other current assets | 180,336 | |||
TOTAL CURRENT ASSETS | 4,050,517 | |||
CERTIFICATE OF DEPOSIT - RESTRICTED | 67,249 | |||
PROPERTY AND EQUIPMENT, net | 1,635,372 | |||
SECURITY DEPOSIT | 34,327 | |||
$ | 5,787,465 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||
CURRENT LIABILITIES: | ||||
Accounts payable and accrued expenses | $ | 686,018 | ||
Registration rights liability | 540,986 | |||
Shares to be issued as penalty shares | 326,657 | |||
Current portion of capital lease obligations | 116,836 | |||
TOTAL CURRENT LIABILITIES | 1,670,497 | |||
CAPITAL LEASE OBLIGATIONS, net | 170,512 | |||
COMMITMENTS | - | |||
STOCKHOLDERS' EQUITY: | ||||
Common stock, $0.001 par value, 250,000,000 shares authorized, | ||||
113,049,548 shares issued and outstanding | 113,049 | |||
Additional paid in capital | 27,398,754 | |||
Shares to be issued for cash | 3,334 | |||
Deferred expense - warrants | (164,299 | ) | ||
Deficit accumulated during development stage | (23,404,382 | ) | ||
TOTAL STOCKHOLDERS' EQUITY | 3,946,456 | |||
$ | 5,787,465 |
The accompanying notes are an integral part of these consolidated financial statements
2
FOLDERA, INC
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
Cumulative From | ||||||||||
For the Three Month Periods Ended | December 3, 2001 | |||||||||
March 31, | (inception) to | |||||||||
2007 | 2006 | March 31, 2007 | ||||||||
NET REVENUE | $ | - | $ | - | $ | - | ||||
OPERATING EXPENSES | ||||||||||
General and administrative | 2,558,811 | 1,830,982 | 22,978,300 | |||||||
OPERATING LOSS | (2,558,811 | ) | (1,830,982 | ) | (22,978,300 | ) | ||||
OTHER INCOME/EXPENSE | ||||||||||
Other Income | - | - | (2,666 | ) | ||||||
Interest income | (49,549 | ) | (12,275 | ) | (196,252 | ) | ||||
TOTAL OTHER INCOME | (49,549 | ) | (12,275 | ) | (198,918 | ) | ||||
NET LOSS | $ | (2,509,262 | ) | $ | (1,818,707 | ) | $ | (22,779,382 | ) | |
LOSS PER SHARE - BASIC AND DILUTED | $ | (0.02 | ) | $ | (0.02 | ) | ||||
BASIC & DILUTED WEIGHTED AVERAGE NUMBER OF | ||||||||||
SHARES OUTSTANDING | 110,967,298 | 96,929,968 |
The accompanying notes are an integral part of these consolidated financial statements
3
FOLDERA, INC.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit)
For the Period from December 3, 2001 (inception) to March 31, 2007
(Unaudited)
Deficit | ||||||||||||||||||||||
Additional | Shares | accumulated during | Total | |||||||||||||||||||
Common stock | paid in | to be | Deferred | the development | stockholder's | |||||||||||||||||
Shares | Amount | capital | issued | expenses | stage | equity/(deficit) | ||||||||||||||||
Balance at inception (December 3, 2001) | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||
Issuance of founder's share | 40,480,000 | 40,480 | (39,468 | ) | - | - | - | 1,012 | ||||||||||||||
Issuance of shares for cash | 1,398,176 | 1,398 | 348,146 | - | - | - | 349,544 | |||||||||||||||
Issuance of shares to shareholder for acquisition of software | 2,500,000 | 2,500 | 622,500 | - | - | (625,000 | ) | - | ||||||||||||||
Net loss | (32,120 | ) | (32,120 | ) | ||||||||||||||||||
Balance at December 31, 2001 | 44,378,176 | 44,378 | 931,178 | - | - | (657,120 | ) | 318,436 | ||||||||||||||
Issuance of shares for cash | 2,857,388 | 2,857 | 711,490 | - | - | - | 714,347 | |||||||||||||||
Issuance of shares for compensation | 1,000,000 | 1,000 | 249,000 | - | - | - | 250,000 | |||||||||||||||
Shares to be issued | - | - | - | 101,212 | - | - | 101,212 | |||||||||||||||
Net loss | (1,397,155 | ) | (1,397,155 | ) | ||||||||||||||||||
Balance at December 31, 2002 | 48,235,564 | 48,236 | 1,891,667 | 101,212 | - | (2,054,275 | ) | (13,160 | ) | |||||||||||||
Issuance of shares for cash | 1,615,800 | 1,616 | 402,334 | - | - | - | 403,950 | |||||||||||||||
Issuance of shares for compensation | 2,892,896 | 2,893 | 720,331 | (101,212 | ) | - | - | 622,012 | ||||||||||||||
Issuance of shares for services | 155,400 | 155 | 38,695 | - | - | - | 38,850 | |||||||||||||||
Net loss | - | - | - | - | - | (1,134,387 | ) | (1,134,387 | ) | |||||||||||||
Balance at December 31, 2003 | 52,899,660 | 52,900 | 3,053,027 | - | (3,188,662 | ) | (82,735 | ) | ||||||||||||||
Issuance of shares for cash | 3,286,400 | 3,286 | 818,314 | - | - | - | 821,600 | |||||||||||||||
Issuance of shares for compensation | 3,129,672 | 3,130 | 779,288 | - | - | - | 782,418 | |||||||||||||||
Issuance of shares for services | 3,423,224 | 3,423 | 852,383 | - | - | - | 855,806 | |||||||||||||||
Shares to be issued | - | - | - | 11,151 | - | - | 11,151 | |||||||||||||||
Net loss | - | - | - | - | - | (2,591,238 | ) | (2,591,238 | ) | |||||||||||||
Balance at December 31, 2004 | 62,738,956 | 62,739 | 5,503,012 | 11,151 | (5,779,900 | ) | (202,998 | ) | ||||||||||||||
Issuance of shares for cash | 22,549,840 | 22,550 | 7,392,353 | - | - | - | 7,414,903 | |||||||||||||||
Issuance of shares for compensation | 1,684,124 | 1,684 | 419,347 | - | - | - | 421,031 | |||||||||||||||
Issuance of shares for services | 312,800 | 313 | 152,887 | - | - | - | 153,200 | |||||||||||||||
Issuance of warrants for legal expenses | - | - | 414,980 | - | - | - | 414,980 | |||||||||||||||
Reduction of accrual relating to shares to be issued | - | - | - | (11,151 | ) | - | - | (11,151 | ) | |||||||||||||
Net loss | - | - | - | - | - | (3,081,878 | ) | (3,081,878 | ) | |||||||||||||
Balance at December 31, 2005 | 87,285,720 | 87,286 | 13,882,580 | - | - | (8,861,778 | ) | 5,108,087 | ||||||||||||||
Issuance of shares for cash | 12,577,663 | 12,578 | 9,766,818 | 8,334 | - | - | 9,787,730 | |||||||||||||||
Changes due to recapitalization | 8,559,600 | 8,560 | (9,670 | ) | - | - | - | (1,110 | ) | |||||||||||||
Issuance of shares for services | 727,500 | 728 | 1,244,758 | - | - | - | 1,245,485 | |||||||||||||||
Issuance of warrants for services | - | - | 1,535,404 | - | (234,713 | ) | - | 1,300,691 | ||||||||||||||
Issuance of stock options for services | - | - | 4,290 | - | - | - | 4,290 | |||||||||||||||
Cost of raising capital | - | - | (524,858 | ) | - | - | - | (524,858 | ) | |||||||||||||
Issuance of stock options for compensation | - | - | 545,273 | - | - | - | 545,273 | |||||||||||||||
Exercise of warrants | 1,652,713 | 1,653 | 552,993 | - | - | - | 554,646 | |||||||||||||||
Registration rights penalties | - | - | - | - | - | - | - | |||||||||||||||
Net loss | - | - | - | - | - | (12,033,342 | ) | (12,033,342 | ) | |||||||||||||
Balance at December 31, 2006 | 110,803,196 | 110,803 | 26,997,588 | 8,334 | (234,713 | ) | (20,895,120 | ) | 5,986,892 | |||||||||||||
Issuance of stock options for services | - | - | 11,361 | - | - | - | 11,361 | |||||||||||||||
Issuance of stock options for compensation | - | - | 193,969 | - | - | - | 193,969 | |||||||||||||||
Exercise of warrants for cash | 172,000 | 172 | 77,828 | - | - | - | 78,000 | |||||||||||||||
Exercise of warrants cashless | 25,072 | 25 | (25 | ) | - | - | - | - | ||||||||||||||
Exercise of warrants against settlement of debt | 2,049,280 | 2,049 | 118,033 | - | - | - | 120,082 | |||||||||||||||
Issuance of warrants for service | - | - | - | - | 70,414 | - | 70,414 | |||||||||||||||
Issuance of shares | - | - | - | (5,000 | ) | - | - | (5,000 | ) | |||||||||||||
Net loss | - | - | - | - | - | (2,509,262 | ) | (2,509,262 | ) | |||||||||||||
Balance at March 31, 2007 | 113,049,548 | $ | 113,049 | $ | 27,398,754 | $ | 3,334 | $ | (164,299 | ) | $ | (23,404,382 | ) | $ | 3,946,456 |
The accompanying notes are an integral part of these consolidated financial statements
4
FOLDERA, INC
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
Cumulative From | ||||||||||
For The Three Month Periods Ended | December 3, 2001 | |||||||||
March 31, | (inception) to | |||||||||
2007 | 2006 | March 31, 2007 | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
Net loss | $ | (2,509,262 | ) | $ | (1,818,707 | ) | $ | (22,779,382 | ) | |
Adjustments to reconcile net loss to | ||||||||||
net cash used in operating activities: | ||||||||||
Depreciation | 196,218 | 80,080 | 849,017 | |||||||
Loss on settlement of debt | - | - | 64,022 | |||||||
Impairment of property & equipment | - | - | 9,533 | |||||||
Issuance of employee stock options for compensation | 193,969 | 33,323 | 3,447,841 | |||||||
Issuance of shares for services | - | 150,000 | 3,272,993 | |||||||
Issuance of warrants for services | 70,414 | 235,737 | 835,428 | |||||||
Issuance of stock options for services | 11,361 | 39,050 | 19,400 | |||||||
Shares to be issued as penalty shares | - | - | 326,657 | |||||||
Changes in assets and liabilities: | ||||||||||
Prepaid expenses and other current assets | 118,411 | (40,958 | ) | (180,334 | ) | |||||
Deposits | (190 | ) | - | (101,576 | ) | |||||
Accounts payable, accrued expenses and other liabilities | (80,297 | ) | 39,709 | 684,632 | ||||||
Registration rights liability | 90,986 | - | 540,986 | |||||||
Total adjustments | 600,872 | 536,941 | 9,768,599 | |||||||
NET CASH USED IN OPERATING ACTIVITIES | (1,908,390 | ) | (1,281,766 | ) | (13,010,783 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||
Purchase of property and equipment | (27,533 | ) | (514,968 | ) | (1,888,610 | ) | ||||
Cash received as part of merger | - | - | (1,110 | ) | ||||||
NET CASH USED IN INVESTING ACTIVITIES | (27,533 | ) | (514,968 | ) | (1,889,720 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
Proceeds from issuance of shares for cash, net | - | 1,800,115 | 18,928,416 | |||||||
Payments to shareholders of legal acquiree | - | (175,000 | ) | - | ||||||
Cost of raising capital | - | - | (524,858 | ) | ||||||
Receipts from exercise of warrants | 73,000 | - | 627,646 | |||||||
Payments to related parties | - | (2,000 | ) | - | ||||||
Payments for leased equipment | (34,252 | ) | (67,167 | ) | (260,520 | ) | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 38,748 | 1,555,948 | 18,770,684 | |||||||
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENT | (1,897,175 | ) | (240,786 | ) | 3,870,181 | |||||
CASH & CASH EQUIVALENT- BEGINNING OF PERIOD | 5,767,356 | 4,826,045 | - | |||||||
CASH & CASH EQUIVALENT- END OF PERIOD | $ | 3,870,181 | $ | 4,585,259 | $ | 3,870,181 | ||||
SUPPLEMENTAL INFORMATION: | ||||||||||
Taxes | $ | - | $ | - | ||||||
Interest expense | $ | 98,027 | $ | 7,820 |
NON-CASH INVESTING & FINANCING ACTIVITIES:
a) The Company issued 8,559,600 shares as part of recapitalization effected on February 13, 2006.
b) The Company issued 2,049,280 shares for the exercise of warrants against settlement of debt during the quarter ended March 31, 2007.
The accompanying notes are an integral part of these consolidated financial statements
5
FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Note 1. Description of Business and Basis of Presentation
Taskport, Inc. (“TI”), a California corporation, was incorporated in 2001 to develop a proprietary, web-based software system that enables users to work collaboratively in a highly organized fashion within a shared electronic workspace.
On February 13, 2006, TI entered into a merger agreement with Expert Systems, Inc., a Nevada corporation, whereby, Expert Systems, Inc. issued 91,313,720 shares to acquire 100% of TI’s stock. Expert Systems, Inc. had 8,559,600 shares outstanding immediately prior to the merger. As a result of the merger, the stockholders of TI owned approximately 92% of the combined entity. Accordingly, the merger was accounted for as a reverse acquisition of Expert Systems, Inc. by TI and resulted in a recapitalization of TI in a manner similar to the pooling of interest method. No pro forma financial information is disclosed as the amounts involved are immaterial. Concurrent with the merger, the name of Expert Systems, Inc. was changed to Foldera, Inc.
The accompanying consolidated financial statements include the accounts of Foldera, Inc. and its wholly owned subsidiary, TI (collectively, the “Company”). All significant inter-company accounts and transactions have been eliminated in consolidation. The historical results for the year ended December 31, 2006 include both Foldera, Inc. (from the acquisition date) and TI (for the full period), while the historical results prior to the acquisition date only include TI. Additionally, all historical share count and per share information has been adjusted for the Company’s 4-for-1 forward stock split that became effective on May 16, 2006.
The Company is a development stage company as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises.” The Company is devoting substantially all of its present efforts to establishing its new business, and its planned principal operations have not yet commenced. All losses accumulated since inception has been considered as part of the Company’s development stage activities.
The audited consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these consolidated financial statements reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations.
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104. Revenue is recognized when a formal arrangement exists, the price is fixed or determinable, all obligations have been performed pursuant to the terms of the formal arrangement and collectibility is reasonably assured. The Company anticipates generating revenue from two primary sources: the up-selling of Premium Services and Paid Search.
The Company anticipates deriving Premium Service revenue from the sale of extra data storage, vanity email, domain hosting, custom branding and technical support, which will be recorded when the service has been provided to clients or, in the case of extra storage, on an accrual basis, after monthly fees have been billed to clients.
Another anticipated revenue source is Paid Search. The Company anticipates that each time a user uses the Company’s embedded search box and clicks on an ad of an advertiser in the search network, revenue will be generated. Revenue will be recognized on a daily basis, based upon reported revenue from the selected search company.
6
FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Depreciation and Amortization
Property and equipment are being depreciated on the straight-line basis over the following estimated useful lives:
Machinery & equipment | 2-5 years |
Leasehold improvements | 10 years |
Furniture & fixture | 5-7 years |
Included in property and equipment is approximately $517,433 of assets, which are leased under non-cancelable leases and accounted for as capital leases, which expire through November 2011. The accumulated depreciation included in the property and equipment for these leases is approximately $197,197.
Depreciation and amortization expense for the three-month period ended March 31, 2007 and 2006 was $196,218 and $80,080, respectively.
The Company capitalizes expenditures that materially increase asset lives and charges ordinary repairs and maintenance to operations as incurred. When assets are sold or otherwise disposed of, the cost and related depreciation or amortization is removed from the accounts and any resulting gain or loss is included in other income (expense) in the accompanying statements of operations.
Property and equipment consisted of the following as of March 31, 2007:
Computer & equipment | $ | 2,262,844 | ||
Furniture & fixtures | 160,806 | |||
Software | 60,739 | |||
Accumulated depreciation | (849,017 | ) | ||
Net fixed assets | $ | 1,635,372 |
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash in banks in demand and time deposit accounts with maturities of 90 days or less.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, and cash equivalents and trade receivables. The Company maintains cash and cash equivalents with high-credit quality financial institutions. At March 31, 2007, the cash balances held at financial institutions were either in excess of federally insured limits or not subject to the federal insurance system.
Credit is generally extended based upon an evaluation of each customer’s financial condition, with terms consistent in the industry and no collateral required. The Company determines an allowance for collectibility on a periodic basis. Amounts are written off against the allowance in the period the Company determines that the receivable is uncollectible.
Fair Value of Financial Instruments
The Company considers its financial instruments, which are carried at cost, to approximate fair value due to their near-term maturities.
Long-Lived Assets
Property and equipment is stated at cost and depreciation is provided for by the straight-line method over the related assets’ estimated economic lives ranging from three to five years. Amortization of leasehold improvements is provided for by the straight-line method over the lesser of the estimated economic useful lives or the lease term. Property under capital leases is amortized over the lease terms and included in depreciation and amortization expense.
The Company also adopted FAS 142, “Goodwill and Other Intangible Assets,” which recognizes impairment testing for those long-lived assets that are not subject to amortization. The Company currently does not have any long-lived assets that are not amortized. However, the Company does perform periodic impairment tests of all long-lived assets.
7
FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between the financial statements and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income (loss). A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
Earnings Per Share
The Company uses SFAS No. 128, Earnings Per Share, for calculating the basic and diluted income (loss) per share. Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed in a similar manner to basic income (loss) per share, except that all potentially dilutive shares are excluded from the calculation in a (loss) situation. All potentially dilutive shares as of March 31, 2007 and 2006 have been excluded from diluted loss per share, as their effect would be anti-dilutive for the year then ended.
Basic and diluted (loss) income per common share is computed as follows:
Three Months Periods Ended March 31, | |||||||||||||||||||
2007 | 2006 | ||||||||||||||||||
Per | Per | ||||||||||||||||||
Loss | Shares | Share | Loss | Shares | Share | ||||||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | ||||||||||||||
Basic EPS | |||||||||||||||||||
Loss available to common stockholders | $ | (2,509,262 | ) | 110,967,298 | $ | (0.02 | ) | $ | (1,818,707 | ) | 96,929,968 | $ | (0.02 | ) | |||||
Effect of Dilutive Securities | |||||||||||||||||||
None | — | — | — | — | |||||||||||||||
Diluted EPS | |||||||||||||||||||
Loss available to common stockholders | $ | (2,509,262 | ) | 110,967,298 | $ | (0.02 | ) | $ | (1,818,707 | ) | 96,929,968 | $ | (0.02 | ) |
Potentially dilutive shares include:
Three-Month Periods Ended March 31, | |||||||
2007 | 2006 | ||||||
Warrants outstanding | 16,160,932 | 9,229,564 | |||||
Stock options outstanding | 7,741,668 | 8,900,000 |
8
FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Accounting for Stock-Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123-R, “Share-Based Payment” (“SFAS 123-R”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including stock options based on their fair values. SFAS 123-R supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), which the Company previously followed in accounting for stock-based awards. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) to provide guidance on SFAS 123-R. The Company has applied SAB 107 in its adoption of SFAS 123-R.
The Company adopted SFAS 123-R on January 1, 2006 using the modified prospective transition method. In accordance with the modified prospective transition method, the Company’s financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123-R. Share-based compensation expense recognized is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Share-based compensation expense recognized in the Company’s Consolidated Statement of Operations for the three month periods ended March 31, 2007 and 2006 includes compensation expense for share-based payment awards granted after December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123-R.
Recent Pronouncements
In February 2007, the Financial Accounting Standards Board issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” FAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted subject to specific requirements outlined in the new Statement. Therefore, calendar-year companies may be able to adopt FAS 159 for their first quarter 2007 financial statements.
The new Statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. FAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. The management is currently evaluating the effect of this pronouncement on financial statements.
In September 2006, FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This Statement improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. The Company currently does not have any defined benefit plan and so FAS 158 will not affect the financial statements.
In September 2006, FASB issued SFAS 157 “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.
In March 2006, FASB issued SFAS 156 “Accounting for Servicing of Financial Assets.” This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. The Company does not have any servicing assets and, therefore, the statement will not have any impact on the financial statements.
In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 155 amends SFAS No 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAF No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The Company currently does not have any derivative instruments requiring bifurcation and, therefore, this statement will not have any impact on the financial statements.
9
FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Going Concern
As shown in the accompanying consolidated financial statements, the Company incurred losses of $2,509,262 and $1,818,707 for the three-month periods ending March 31, 2007 and 2006, respectively. Negative cash flows from the operations of $1,908,390 and $1,281,766 were noted for the three month periods ended March 31, 2007 and 2006, respectively. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
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. Successful completion of the Company’s development program and its transition to attaining profitable operations is dependent upon obtaining additional financing adequate to fulfill its product development activities and achieving a level of revenue adequate to support its cost structure. The Company believes that it can effectively manage its working capital to fund operations through December 2007; however, the Company does not anticipate having significant revenue from operations until the third or fourth quarter of 2007, and, therefore, it is actively seeking additional debt or equity financing until it becomes cash flow positive. There can be no assurances that there will be adequate financing available to the Company and the consolidated financial statements do 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 may result from the outcome of this uncertainty.
The Company has taken certain restructuring steps to provide the necessary capital to continue its operations. These steps included: 1) reducing payroll and payroll related expenses, 2) outsourcing a portion of our software development work and 3) terminating relationships with certain consultants. The Company plans to continue actively seeking additional funding opportunities and plans to further restructure the operations to decrease operating expenses and to minimize the liabilities.
Note 3. Accounts Payable and Accrued Expenses
Following is the detail of accounts payable and accrued expenses as of March 31, 2007.
Accounts payable | $ | 108,241 | ||
Accrued vacation | 331,565 | |||
Accrued wages | 207,852 | |||
Professional fees | 38,360 | |||
Total | $ | 686,018 |
Note 4. Registration Rights Liability
As part of the Company’s August and October 2006 private placements, a separate registration rights agreement was entered into with each investor. Under the terms of the registration rights agreements, the Company agreed to submit a SB-2 registration statement to the Securities and Exchange Commission on a timely basis, to respond to questions posed by the SEC and to attempt to have the registration statement declared effective per the terms of the registration rights agreements.
Through December 31, 2006 and up to the date of this report, we have been unable to meet the deadline to get our registration statement declared effective and we have, therefore, accrued the maximum penalties allowed under the agreements related to the private placements closed in August and October 2006 which started accruing on February 16, 2007.
Specifically, the Company has recorded a penalty shares expense of $326,657 as shares to be issued based on its August 2006 private placement registration rights agreement and $450,000 as liquidated damages plus $90,986 in interest based on its October 2006 private placement registration rights agreement as registration rights liability in the financial statements.
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FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Note 5. Related-Party Transactions
During the quarter ended March 31, 2007, the Company paid $10,000 to Jnan Dash, TI’s Chief Technology Evangelist pursuant to the agreement signed in March 2004. The agreement was terminated in January 2007. (See Note 8)
We ceased paying Mr. Dash the monthly fee as of February 2007 but will issue 200,000 shares when we reach the final milestone as per the agreement.
The Company has entered into indemnification agreements with each of its directors and officers. The indemnification agreements and the Company’s certificate of incorporation and bylaws require it to indemnify its directors and officers to the fullest extent permitted by Nevada law.
Note 6. Stockholders’ Equity
On May 10, 2006, the board of directors and holders of a majority of the outstanding shares of common stock of the Company, approved (i) an increase in the number of authorized shares of common stock from 100,000,000 shares to 250,000,000 shares and (ii) a 4-for-1 forward split of the outstanding shares of common stock of the Company to effect the Shares Increase and Forward Stock Split by filing a Certificate of Amendment with the Nevada Secretary of State on May 15, 2006, with the Forward Stock Split becoming effective on May 16, 2006.
All stock issuances have been retroactively updated for the effect of 4-for-1 forward split.
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FOLDERA, INC.
(A Development Stage Company)
Notes to Audited Consolidated Financial Statements
Following is the summary of the Company’s equity-related transactions during the quarter ended March 31, 2007.
1. | On January 16, 2007, Mr. Robert Rein, an affiliate of Trilogy Capital Partners, an outside investor relations consultant, exercised 10,000 warrants at an exercise price of $0.50 per share. |
2. | On January 16, 2007, Trilogy Capital Partners, an outside investor relations consultant, exercised 50,000 warrants at an exercise price of $0.50 per share. |
3. | On February 13, 2007, Mr. William Dabney, the father of our CFO, Mr. Reid Dabney, exercised 32,000 warrants at an exercise price of $0.25 per share. |
4. | On February 16, 2006, a Brookstreet Securities broker requested a cashless exercise of 42,980 warrants at an exercise price of $0.50 per share. Based on the formula provided in the Brookstreet agreement, the broker received 25,072 shares. |
5. | On February 22, 2007, Mr. Robert Rein, an affiliate of Trilogy Capital Partners, an outside investor relations consultant, exercised 10,000 warrants at an exercise price of $0.50 per share. |
6. | On March 20, 2007, Mr. Robert Rein, an affiliate of Trilogy Capital Partners, an outside investor relations consultant, exercised 20,000 warrants at an exercise price of $0.50 per share. |
7. | On March 21, 2007, St. George and Carnegie, an outside legal consultant, exercised 2,049,280 warrants at an exercise price of $0.0625 per share. The Company settled $120,080 payable to St. George against exercise of warrants. |
8. | On March 29, 2007 Trilogy Capital Partners, an outside investor relations consultant, exercised 50,000 warrants at an exercise price of $0.50 per share. |
Warrants outstanding:
Aggregate Intrinsic Value | Number of Warrants | ||||||
Outstanding at December 31, 2006 | $ | - | 18,425,192 | ||||
Granted | - | ||||||
Exercised | 2,246,352 | ||||||
Cancelled | 17,908 | ||||||
Outstanding at March 31, 2007 | $ | - | 16,160,932 |
Outstanding Warrants | |||||||
Range of Exercise Price | Number | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | ||||
$0.0625-$2.25 | 16,160,932 | 4 years | $1.20 |
All outstanding warrants were exercisable as of March 31, 2007.
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Note 7. Stock-Based Compensation
Stock-Based Compensation Plan
The May 2005 Stock Option Plan (the “Plan”) gives the board of directors the ability to provide incentives through grants or awards of stock options, stock appreciation rights and restricted stock awards (collectively, “Awards”) to present and future employees of us and our affiliated companies. Outside directors, consultants and other advisors are also eligible to receive Awards under the Plan.
A total of 12,000,000 shares of our Common Stock are reserved for issuance under the Plan. If an incentive award expires or terminates unexercised or is forfeited, or if any shares are surrendered to us in connection with an Award, the shares subject to such award and the surrendered shares will become available for further awards under the Plan.
Shares issued under the Plan through the settlement, assumption or substitution of outstanding Awards or obligations to grant future Awards as a condition of acquiring another entity will not reduce the maximum number of shares available under the Plan. In addition, the number of shares subject to the Plan, any number of shares subject to any numerical limit in the Plan, and the number of shares and terms of any Award may be adjusted in the event of any change in our outstanding common stock by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares or similar transaction.
The board of directors or one of its committees will administer the Plan. If Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), and Rule 16b-3 under the Securities Exchange Act of 1934, as amended, apply to us and the Plan, then each member of the board or committee, which must have at least two members, must meet the standards of independence necessary to be classified as an “outside director” for purposes of Section 162(m) of the Code and an outside director for the purposes of Rule 16b-3. Subject to the terms of the Plan, the committee will have complete authority and discretion to determine the terms of Awards.
The Plan authorizes the grant of Incentive Stock Options and Nonqualified Stock Options. Incentive Stock Options are stock options that satisfy the requirements of Section 422 of the Code. Nonqualified Stock Options are stock options that do not satisfy the requirements of Section 422 of the Code. Options granted under the Plan entitle the grantee, upon exercise, to purchase a specified number of shares from us at a specified exercise price per share. The committee determines the period of time during which an Option may be exercised, as well as any vesting schedule, except that no Option may be exercised more than 10 years after the date of grant. The exercise price for shares of common stock covered by an Option cannot be less than the fair market value of the common stock on the date of grant.
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FOLDERA, INC.
(A Development Stage Company)
Notes to Audited Consolidated Financial Statements
There are no specific required minimum service periods for option grants, however, options generally have a three-year vesting schedule with 1/3 cliff vesting after one-year and 1/24 of the remaining options on a monthly basis over the two remaining years and the maximum contractual option term is 10 years.
In February 2006, options to purchase 8,900,000 shares of common stock were granted under the Plan and no additional options were granted since that date but the Board is considering the grant of approximately 3,080,000 options to meet the contractual obligations of the optionees. During the three-month period ended March 31, 2007, no options were forfeited or exercised. As of March 31, 2007, 7,741,668 options were outstanding and 4,258,332 options were available for future option grants.
The Company adopted SFAS No. 123-R effective January 1, 2006 using the modified prospective method. Under this transition method, stock compensation expense recognized during the quarter ended March 31, 2007 includes compensation expense for all stock-based compensation awards granted on or after January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123-R. The outstanding options as of December 31, 2006 and 2005 were 7,741,668 and zero respectively.
Prior to January 1, 2006, the company measured stock compensation expense using the intrinsic value method of accounting in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations (“APB No. 25”). Thus, expense was generally not recognized for the Company’s employee stock option and purchase plans.
Impact of Adoption of SFAS No. 123-R in January 2006
Employee related stock-based compensation expense measured in accordance with SFAS No. 123-R totaled approximately $193,969 or $(0.00) per basic and fully diluted share in the three-month period ended March 31, 2007. The adoption of SFAS No. 123-R resulted in increased expense of approximately $193,969 as compared to the stock compensation expense that would have been recorded pursuant to APB No. 25.
During the three month period ended March 31, 2007, no stock options were granted to consultants. 80,556 of the 200,000 options granted to consultants during 2006 were vested as of March 31, 2007 and the Company recorded $11,361 in expenses related to these options for the three-month period ended March 31, 2007.
Under both SFAS No. 123-R and under the fair value method of accounting under SFAS No. 123 (i.e., SFAS No. 123 Pro Forma), the fair value of restricted stock is determined based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant. The fair value of stock options is determined using the Black-Scholes model.
The weighted-average assumptions used in estimating the fair value of stock options granted during the period, along with the weighted-average grant date fair values, were as follows:
Expected volatility | 42.68 | % | ||
Expected life in years | 6 years | |||
Risk free interest rate | 4.6 | % | ||
Dividend yield | 0 | % | ||
Wt. average grant date fair value | $ | 0.24 |
The Company adopted SFAS No. 123-R as of December 15, 2005 and as such, applied the pronouncement starting in its fiscal year ended December 31, 2006. Foldera completed its reverse merger on February 13, 2006 and as such, became a publicly traded company at that time. Although the Company initially used a diminimus volatility factor for its stock option and warrant grants in the Black-Scholes Pricing Option formula, and could do so for grants prior to the adoption of FAS 123-R, given the low trading volume in the Company’s stock, the Company believes that utilizing an appropriate industry sector index more accurately reflect the value and the cost of the stock option and warrant grants.
Per paragraph 23 and A32 of SFAS No. 123-R, surrogate public entities and indices are recommended for nonpublic and newly public entitles where the historical volatility is difficult to estimate. Foldera has chosen to follow this recommendation and is using an industry sector index for software companies: the Dow Jones Small Cap Software Index. The historical volatility as calculated from the index is 42.68% and has been applied in the Black Scholes formula.
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The risk-free interest rate for the expected term of the option is based on the U.S. Treasury Zero Coupon Bond rate in effect at the time of grant.
Stock compensation expense recognized during the year ended 2006 is based on awards expected to vest and there were no estimated forfeitures. SFAS No. 123-R requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.
Options outstanding:
Weighted Average Exercise Price | Aggregate Intrinsic Value | Number of Options Outstanding | ||||||||
Outstanding at December 31, 2006 | $ | 0.51 | $ | 3,001,667 | 7,741,668 | |||||
Granted | - | - | - | |||||||
Forfeited | - | - | - | |||||||
Exercised | - | - | - | |||||||
Outstanding at March 31, 2007 | $ | 0.46 | $ | 1,917,834 | 7,741,668 |
Options Outstanding | Exercisable Options | |||||||||||
Range of Exercise Price | Number | Weighted Average Remaining Life | Weighted Average Exercise Price | Weighted Average Remaining Life | Number | Weighted Average Exercise Price | ||||||
$0.50-$0.55 | 7,741,668 | 5 years | $0.51 | 5 years | 3,927,207 | $0.51 |
15
FOLDERA, INC.
(A Development Stage Company)
Notes to Audited Consolidated Financial Statements
Details of the Company’s non-vested options are as follows:
Non-Vested Options | Weighted Average Exercise Price | Weighted Average Vesting Period | Grant Date Fair Value | ||||||||||
Non-vested - December 31, 2006 | 3,814,464 | $ | 0.51 | 1.5 Years | $ | 0.24 | |||||||
Granted | - | - | - | - | |||||||||
Forfeited | - | - | - | - | |||||||||
Vested | 752,771 | - | - | - | |||||||||
Exercised | - | - | - | - | |||||||||
Non-vested - March 31, 2007 | 3,061,693 | 0.46 | 1.2 Years | $ | 0.24 |
The total compensation cost not yet recognized related to non-vested stock options is $819,351, which is expected to be recognized over a period of 1.2 years.
Note 8. Commitments
(a) SAVVIS agreement:
On December 28, 2004, the Company entered into a collocation agreement with SAVVIS, Inc. SAVVIS is a global information technology (“IT”) utility services provider. With an IT services platform that extends to 47 countries, SAVVIS is an industry leader in delivering secure, reliable and scalable hosting and network and application services.
Under the terms of this agreement, SAVVIS will provide collocation facilities, cage space, bandwidth, power, backup power and security. The term of the agreement shall continue until the expiration of the last expiring service term. On June 30, 2006, the Company signed a twelve-month service agreement whereby the Company agreed to pay $15,566 per month for services to be provided by SAVVIS.
(b) Office Space Lease:
On September 15, 2005, the Company entered into a lease agreement to lease 15,154 square feet of office space in Huntington Beach, California to house its administrative, marketing, system development and technical support operations. The Company pays approximately $29,950 per month in rent under this lease, which expires in September 2010. In 2006, the company also rented three satellite offices for executives working out of California. The Chicago, IL office was rented in April 2006 at $1,335 per month, the Bellevue, Washington office in July 2006 at $725 per month and the Albuquerque, New Mexico office in August 2006 at $1,029 per month. The Company recognized $96,494 in office occupancy expenses for the three-month period ended March 31, 2007 compared to $86,378 for the same period in 2006.
(c) Equipment Leases:
As of March 31, 2007, the Company had entered into capital leases with nine strategic vendors for the financing of computer equipment. The Company pays approximately $15,691 per month under these leases, the last of which expires in November 2011.
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Capital | Operating | |||||||||
Leases | Leases | Total | ||||||||
2007 | $ | 110,074 | 239,432 | $ | 349,506 | |||||
2008 | 106,735 | $ | 366,727 | 473,462 | ||||||
2009 | 73,623 | 375,819 | 449,442 | |||||||
2010 | 32,153 | 350,057 | 382,211 | |||||||
2011 | 29,474 | - | 29,474 | |||||||
Thereafter | - | - | - | |||||||
$ | 352,059 | $ | 1,332,035 | $ | 1,684,095 | |||||
Less: Amount representing interest | 64,711 | |||||||||
Present value of minimum lease payments | 287,348 | |||||||||
Less: Current portion | 116,836 | |||||||||
$ | 170,512 |
(d) Consulting agreements:
On March 24, 2004, the Company entered into an agreement with its Chief Technology Evangelist. As part of this service agreement, the Chief Technology Evangelist is also responsible for assisting in the closing of certain financings. The term of the service agreement began on April 1, 2004 and was for a term of ninety (90) days, with automatic monthly renewals until terminated. As of December 31, 2006, the Company had issued 1,000,000 shares as per terms of the agreement in addition to paying $120,000 in cash. This consulting agreement was terminated in January, 2007. The Company is no longer obligated to pay the monthly consulting fee, but will issue 200,000 shares of its common stock when it reaches the final milestone as per the agreement.
On February 13, 2006, the Company signed a letter of engagement with Trilogy Capital Partners, Inc. According to the terms of the agreement, Trilogy agreed to structure and implement a marketing program designed to create extensive financial market and investor awareness for the Company. The agreement was for a twelve-month period and the Company agreed to pay $12,500 per month to Trilogy and issue warrants to purchase 2,900,000 shares of the Company’s common stock at an exercise price of $0.50 per share. These warrants were recorded at the fair value of $635,331 based on 42.68% volatility, 4.5% discount rate and 0% annual rate of quarterly dividends. On October 3, 2006, the Company cancelled its investor relations consulting agreement with Trilogy and signed a one-year contract with Corporate Communications Network, Inc. (CCN) to provide similar services. As part of the cancellation agreement, Trilogy transferred 1,535,000 warrants, which are exercisable at $0.50 per share, to CCN. The Company has been expensing the fair value of these warrants over the term of the agreement. During the quarter ended March 31, 2007 the Company expensed $70,414 and deferred $164,299 in the consolidated financial statements.
In April 2006, the Company entered into a one-year consulting agreement with Ibis Consulting Group for the purpose of providing investor relations services. Pursuant to the contract, the Company agreed to pay Ibis $3,500 per month upon commencement of the contract and to issue a total of 160,000 shares of common stock based on the following schedule: 80,000 shares to be issued on October 1, 2006 and the remaining 80,000 shares to be issued on April 1, 2007. 80,000 shares were issued on October 1, 2006 and these shares were recorded at fair value of $118,900, based on the price of our stock on October 1, 2006, as per the agreement.
Note 9. Subsequent events
On May 10, 2007, we entered into a $4,000,000 common stock purchase agreement with Vision Opportunity Master Fund, Ltd., a qualified institutional investment firm and previous investor in the Company. Under the agreement, Vision funded $1,000,000 on May 10, 2007, purchasing 1,666,667 shares of Foldera’s common stock at $0.60 per share. Vision has the option, but not the obligation, to purchase an additional $3,000,000, or up to 5,000,000 shares of our common stock, through July 31, 2007, at a fixed price of $0.60 per share. Additionally, to induce Vision to enter into the Common Stock Purchase Agreement and to reduce potential dilution to our existing shareholders, Richard Lusk, our President and Chief Executive Officer, agreed to transfer to Vision, for nominal consideration, a total of 4,000,000 unregistered shares of our common stock
As part of the financing transaction, Foldera and Vision agreed to cancel the three outstanding warrants held by Vision from its previous financing in October 2006. Additionally, the Company agreed to issue a new warrant, with an exercise price of $0.60 per share, to purchase 5,401,235 shares of Foldera’s common stock.
Finally, pursuant to the anti-dilution provisions in the warrants issued in the October 2006 private placement, we reduced the exercise price of the warrant issued to Crescent International Ltd. to $0.60 per share from $1.75 per share and increased the number of shares underlying such warrant from 231,481 to 675,152, and we reduced the exercise price of the warrant issued to HPC Capital Management Corporation to $0.60 per share from $1.08 per share and increased the number of shares underlying such warrant from 416,667 to 750,000.
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Item 2. Management’s Discussion and Analysis or Plan of Operation
Unless the context otherwise requires, “we,” “our,” “us” and similar phrases refer to Foldera, Inc., together with its wholly-owned subsidiary, Taskport, Inc.
Overview
We are a public company whose common stock is quoted on the OTC Bulletin Board under the symbol “FDRA.OB.” On February 6, 2006, Expert Systems, Inc., a Nevada corporation, entered into an Agreement and Plan of Merger with Taskport, Inc., a California corporation, principally engaged in the development of a proprietary, web-based software system which is a free and easy-to-use online service that combines email, shared folders, document management, calendar, contacts and task management applications into one seamless interface. Immediately prior to the merger, Expert Systems, Inc. had 100,000,000 shares of common stock authorized and 8,559,600 shares issued and outstanding. Pursuant to the merger, all of the 91,313,720 outstanding shares of Taskport, Inc. were exchanged for shares of the Expert Systems, Inc. on a 1-for-1 basis for a total of 99,873,320 shares of common stock issued and outstanding. Immediately after the merger, all then existing officers and directors of Expert Systems, Inc. resigned, and the directors and officers of Taskport, Inc. were elected and appointed to such positions, thereby effecting a change of control. Although Taskport, Inc. became Expert Systems, Inc.’s wholly-owned subsidiary following the transaction, because the transaction resulted in a change of control, the transaction was recorded as a “reverse merger,” whereby Taskport, Inc. was considered to be Expert Systems, Inc.’s accounting acquirer. Concurrently with the merger, the name of Expert Systems, Inc. was changed to Foldera, Inc. On May 16, 2006, we declared a 4-for-1 forward stock split.
We have not generated any revenues as of March 31, 2007 and so are considered a development stage company. We ended the first quarter of 2007 with $3.87 million of cash on our balance sheet. Given our current cash usage rate and our expectations to begin generating revenue during the beginning of the second quarter of 2007, a risk exists that our available cash on hand and the cash we anticipate generating from operating activities will be insufficient to sustain our operations. To address the potential cash shortfall situation, the Company sold 1,666,667 of our common stock to the Vision Opportunity Master Fund on May 10, 2007 at $0.60 per share and received 982,837 net of $17,163 in expenses. Vision has the option to purchase an additional 5,000,000 shares of common stock at $0.60 per share. Additionally, to induce Vision to enter into the Common Stock Purchase Agreement and to reduce potential dilution to our existing shareholders, Richard Lusk, our President and Chief Executive Officer, agreed to transfer to Vision, for nominal consideration, a total of 4,000,000 unregistered shares of our common stock. Furthermore, we have historically been able to issue shares, warrants or stock options to pay for certain operating expenses. We believe that our pro-forma working capital on hand as of the date of this report, along with our ability to raise capital and meet certain operating expense obligations through the issuance of stock or stock equivalents, will provide us with the capital we need through the next 12 months. However, we believe that our ability to operate beyond the next 12 months will require us to raise significant additional capital, of which there can be no assurance. We are, therefore, actively seeking additional debt or equity financing until we become cash flow positive.
To date, we have spent a significant amount of time and money developing our collaboration software product and no revenue has been generated from operations. We anticipate this will change since we released a more robust version of our product late in the first quarter of 2007 with commensurate revenue expected to be generated during the second quarter of 2007 (primarily, at least initially, through paid search). We anticipate being in a continuous beta version upgrade cycle of our product as time goes on as we receive feedback from our user base and incorporate that feedback into future versions of our software product.
Due to the ongoing cost of operations and the uncertainty of generating enough revenues to cover those operating expenses, there is a probability that the Company will not remain a going concern without additional funding. See Note 2 to the accompanying financial statements, regarding going concern.
The following discussion of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes.
Application of Critical Accounting Policies
Critical accounting policies are those that are most important to the portrayal of the financial condition and results of operations, and require our management’s significant judgments and estimates. The application of such critical accounting policies fairly depicts the financial condition and results of operations for all periods presented.
Use of Estimates. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires our 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition. Our revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104. Revenue is recognized when a formal arrangement exists, the price is fixed or determinable, all obligations have been performed pursuant to the terms of the formal arrangement and collectibility is reasonably assured. We anticipate generating revenue from two primary sources: from the up-selling of Premium Services and from Paid Search.
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We anticipate deriving Premium Service revenue from the sale of extra data storage, vanity email, domain hosting, custom branding and technical support, which will be recorded when the service has been provided to clients or, in the case of extra storage, on an accrual basis, after monthly fees have been billed to clients.
Another anticipated revenue source is Paid Search. We anticipate that each time a user uses the embedded search box and clicks on an ad of an advertiser in the search network, revenue will be generated. Revenue will be recognized on a daily basis, based upon reported revenue from the selected search company.
Depreciation and Amortization. Property and equipment are depreciated on the straight-line basis over estimated useful lives.
Included in property and equipment is approximately $517,433 of assets, which are leased under non-cancelable leases, and accounted for as capital leases, which expire through November 2011. The accumulated depreciation included in the property and equipment for these leases is approximately $197,197.
We capitalize expenditures that materially increase asset lives and charges ordinary repairs and maintenance to operations as incurred. When assets are sold or otherwise disposed of, the cost and related depreciation or amortization is removed from the accounts and any resulting gain or loss is included in other income (expense) in the accompanying statements of operations.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand and cash in banks in demand and time deposit accounts with maturities of 90 days or less. We also have restricted cash of $67,249 held at a bank, which is shown as a certificate of deposit.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash, and cash equivalents and trade receivables. We maintain cash and cash equivalents with high-credit quality financial institutions. At March 31, 2007, the cash balances held at financial institutions were either in excess of federally insured limits or not subject to the federal insurance system.
Credit is generally extended based upon an evaluation of each customer’s financial condition, with terms consistent in the industry and no collateral required. We determine an allowance for collectibility on a periodic basis. Amounts are written off against the allowance in the period we determine that the receivable is uncollectible.
Fair Value of Financial Instruments
We consider our financial instruments, which are carried at cost, to approximate fair value due to their near-term maturities.
Long-Lived Assets. Property and equipment is stated at cost and depreciation is provided for by the straight-line method over the related assets’ estimated economic lives ranging from three to five years. Amortization of leasehold improvements is provided for by the straight-line method over the lesser of the estimated economic useful lives or the lease term. Property under capital leases is amortized over the lease terms and included in depreciation and amortization expense.
We also adopted FAS 142, “Goodwill and Other Intangible Assets” which recognizes impairment testing for those long-lived assets that are not subject to amortization. We currently do not have any long-lived assets that are not amortized. However, we do perform periodic impairment tests of all long-lived assets.
Income Taxes. We follow Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” which requires 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 tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Accounting for Stock-Based Compensation
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123-R, “Share-Based Payment” (“SFAS 123-R”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including stock options based on their fair values. SFAS 123-R supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), which we previously followed in accounting for stock-based awards. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) to provide guidance on SFAS 123-R. We have applied SAB 107 in its adoption of SFAS 123-R.
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We adopted SFAS 123-R on January 1, 2006 using the modified prospective transition method as of and for the year ended December 31, 2006. In accordance with the modified prospective transition method, our financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123-R. Share-based compensation expense recognized is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Share-based compensation expense recognized in our Consolidated Statement of Operations during the year ended December 31, 2006 includes compensation expense for share-based payment awards granted after December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123.
Please refer to Note 2, for additional Critical Accounting Policies.
Financial Condition and Results of Operations for the three-month period year ended March 31, 2007
We are a development stage company and have not yet generated any revenue and consequently have also not generated any gross profit.
Operating Expenses
Total operating expenses for the three-month period ended March 31, 2007 increased to $2,558,811, or $(0.02) per share, from $1,830,982, or $(0.02) per share, for the three-month period ended March 31, 2006. The overall increase in expenses of $727,829, or approximately 39.8% over the prior year period, is due to increases in payroll, employee option expense, depreciation, interest expense, investor relations, technical outsourcing, hosting services and employee benefits offset somewhat by a decrease in legal and accounting expenses.
Net Loss
Our net loss for the three-month period ended March 31, 2007 increased to $2,509,262, or $(0.02) per share, from $1,818,707, or $(0.02) per share, for the three-month period ended March 31, 2006. The overall increase in net loss of $690,555, or approximately 38.0% over the prior year period, is due to increases in payroll, employee option expense, depreciation, interest expense, investor relations, technical outsourcing, hosting services and employee benefits offset somewhat by a decrease in legal and accounting expenses.
Assets
Assets decreased by $545,725 to $5,787,465 as of March 31, 2007, or approximately 8.6%, from $6,333,190 as of March 31, 2006. This reduction was primarily due to the decrease in cash and cash equivalent balances as the Company funded the net loss for the quarter somewhat offset by increase in property and equipment.
Liabilities
Total liabilities increased by $1,151,664 to $1,841,009 as of March 31, 2007, or approximately 167%, from $689,345 as of March 31, 2006. The increase was due to the expansion of accounts payable and accrued expenses, the recognition of registration rights liability, shares to be issued as penalty shares related to registration rights penalties and capital lease obligations.
Stockholders’ Equity
Stockholders’ equity decreased by $1,697,388 to $3,946,457 as of March 31, 2007 or approximately 30.1% from $5,643,845 as of March 31, 2006. The decrease was due primarily to a net loss during the three-month period ended March 31, 2007 and partially offset by increase in additional paid in capital as warrants were exercised.
Liquidity and Capital Resources
General
Overall, we had a decrease in cash flows of $1,897,175 for the three-month period ended March 31, 2007 resulting from $1,908,390 cash used in operating activities and $27,533 of cash used in investing activities, offset by $38,748 of cash provided by our financing activities.
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Cash Flows from Operating Activities
Net cash used in operating activities of $1,908,390 for the three-month period ended March 30, 2007 was primarily attributable to a net loss of $2,509,262, the adjustments to reconcile the net loss to net cash, including depreciation and amortization expense of $196,218, employee options expense of $193,969, a decrease in prepaid expenses and other current assets of $118,411, registration rights liability of $90,986, deferred expense of $70,414, the issuance of stock options for services of $11,361 partially offset by a decrease in accounts payable and accrued expenses of $80,297 and an increase in deposits of $190.
Cash Flows from Investing Activities
Net cash used in investing activities of $27,533 for the three-month period ended March 31, 2007 was primarily attributable to an investment in fixed assets.
Cash Flows from Financing Activities
Net cash of $38,748 generated in financing activities in the three-month period ended March 31, 2007 was primarily due to the exercise of warrants for cash of $73,000 offset by payments for leased equipment of $34,252.
Financing
In the three-month period ended March 31, 2007, our funds from operations were insufficient to fund our daily operations. Therefore, we may be required to seek additional funds either through debt or equity financing to finance these debts and contingencies. Failure to raise additional funds could have a material adverse effect on our long-term operations and viability.
Internal Sources of Liquidity
For the three-month period ended March 31, 2007, the funds generated from our operations were insufficient to fund our daily operations. There is no assurance that funds from our operations will meet the requirements of our daily operations in the future. In the event that funds from our operations will be insufficient to meet our operating requirements, we will need to seek other sources of financing to maintain liquidity.
External Sources of Liquidity
We will actively pursue all potential financing options as we look to secure additional funds to both stabilize and grow our business operations. Our management will review any financing options at their disposal and will judge each potential source of funds on its individual merits. We cannot assure you that we will be able to secure additional funds from debt or equity financing, as and when we need to, or if we can, that the terms of such financing will be favorable to us or our existing shareholders.
During the three-month period ended March 31, 2007, we issued 2,246,352 shares and 6,667 are to be issued as compared to zero shares were issued or were to be issued during the three-month period ended March 31, 2006, respectively.
As of March 31, 2007, we had entered into seventeen capital leases with various equipment suppliers in the amount of $517,433, of which $287,348 was outstanding as of March 31, 2007.
Inflation
Our management believes that inflation has not had a material effect on our results of operations, and does not expect that it will in fiscal year 2007, except that rising oil and gas prices may materially and adversely impact the economy generally.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Subsequent Events
On May 10, 2007, we entered into a $4,000,000 common stock purchase agreement with Vision Opportunity Master Fund, Ltd., a qualified institutional investment firm and previous investor in the Company. Under the agreement, Vision funded $1,000,000 on May 10, 2007, purchasing 1,666,667 shares of Foldera’s common stock at $0.60 per share. Vision has the option, but not the obligation, to purchase an additional $3,000,000, or up to 5,000,000 shares of our common stock, through July 31, 2007, at a fixed price of $0.60 per share. Additionally, to induce Vision to enter into the Common Stock Purchase Agreement and to reduce potential dilution to our existing shareholders, Richard Lusk, our President and Chief Executive Officer, agreed to transfer to Vision, for nominal consideration, a total of 4,000,000 unregistered shares of our common stock
As part of the financing transaction, Foldera and Vision agreed to cancel the three outstanding warrants held by Vision from its previous financing in October 2006. Additionally, the Company agreed to issue a new warrant, with an exercise price of $0.60 per share, to purchase 5,401,235 shares of Foldera’s common stock.
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Finally, pursuant to the anti-dilution provisions in the warrants issued in the October 2006 private placement, we reduced the exercise price of the warrant issued to Crescent International Ltd. to $0.60 per share from $1.75 per share and increased the number of shares underlying such warrant from 231,481 to 675,152, and we reduced the exercise price of the warrant issued to HPC Capital Management Corporation to $0.60 per share from $1.08 per share and increased the number of shares underlying such warrant from 416,667 to 750,000.
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CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
Statements contained in this report contain information that includes or is based upon certain “forward-looking statements” relating to our business. These forward-looking statements represent our management’s current judgment and assumptions, and can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are frequently accompanied by the use of such words as “anticipates,” “plans,” “believes,” “expects,” “projects,” “intends” and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, including without limitation, those relating to our limited operating history, uncertain market acceptance of our products and services, technology changes, competition, changes in our business strategy or development plans, our ability to attract and retain qualified personnel, and our ability to attract substantial additional capital.
Any one of these or other risks, uncertainties, other factors, and any inaccurate assumptions, may cause actual results to be materially different from those described herein or elsewhere by us. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they were made. Certain of these risks, uncertainties, and other factors are described in greater detail in our filings from time to time with the Securities and Exchange Commission, which we strongly urge you to read and consider, all of which may be accessed from the Securities and Exchange Commission website at www.sec.gov. Subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above and elsewhere in our reports filed with the Securities and Exchange Commission. We expressly disclaim any intent or obligation to update any forward-looking statements.
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Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2007.
Evaluation of Disclosure Controls and Procedures
There was no change in our internal control over financial reporting during the quarter ended March 31, 2007 that has materially affected, or is reasonably likely to material affect, our internal control over financial reporting.
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Part II Other Information
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
31.1 | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act 2002. | |
31.2 | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act 2002. | |
32.1 | Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act 2002. | |
32.2 | Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act 2002. |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
FOLDERA, INC. | ||
| | |
Dated: May 15, 2007 | By: | /s/ Richard Lusk |
Richard Lusk Chief Executive Officer and President (principal executive officer) |
Dated: May 15, 2007 | By: | /s/ Reid Dabney |
Reid Dabney Senior Vice President and Chief Financial Officer (principal accounting and financial officer) |
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