SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 6
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
SearchHelp, Inc.
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(Name of Small Business Issuer in Its Charter)
Delaware 7380 11-3621755
- ------------------------------ ---------------------------- ------------------
(State of Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
1055 Stewart Avenue, Suite 12, Bethpage, New York 11714
- -------------------------------------------------------------------------------
(Address and Telephone Number of Principal Executive Offices)
1055 Stewart Avenue, Suite 12, Bethpage, New York 11714
- -------------------------------------------------------------------------------
(Address of Principal Place of Business)
William Bozsnyak, Chief Executive Officer
SearchHelp, Inc.
1055 Stewart Avenue, Suite 12, Bethpage, New York 11714 (516) 922-4765
- -------------------------------------------------------------------------------
(Name, Address and Telephone Number of Agent for Service)
Copies to:
Stephen A. Weiss, Esq.
Gersten Savage Kaplowitz Wolf & Marcus, LLP
500 Lexington Avenue, 9th Floor
New York, NY 10022
Phone: (212) 752-9700
Facsimile: (212) 980-5192
1
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
------------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
--------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, checking the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
2
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Title of Each Proposed Proposed
Class of Shares To Be Maximum Maximum Amount of
Securities Registered (1) Offering Price Aggregate Offering Registration Fee
To Be Registered Per Share (2) Price
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Redeemable Warrants
2,474,000 $.10 per Warrant $ 742,200 $87.36
Class B Redeemable Warrants
2,474,000 $.05 per Warrant $ 742,200 $87.36
Placement Agent
Class A Redeemable Warrants 247,400 $.10 per Warrant $ 24,740 $2.91
Placement Agent 247,400 $.05 per Warrant $ 12,370 $1.46
Class B Redeemable Warrants
===================================================================================================================================
===================================================================================================================================
Common Stock Issuable upon 172,800 $.35 per Warrant $ 60,480 $7.12
Exercise of Placement Agent Warrant
===================================================================================================================================
===================================================================================================================================
ECT Warrant 2,300,000 $.35 per Warrant $805,000 $94.75
===================================================================================================================================
===================================================================================================================================
Common Stock, $.0001 par value,
Issuable on Exercise of
All Redeemable Warrants 7,915,600 $.35 per Share $2,770,460 $326.08
Total Fee $607.04
===================================================================================================================================
(1) This registration statement also covers an indeterminate number of shares of
SearchHelp, Inc.'s common stock, par value $.0001 per share, that may be
issuable by reason of stock splits, stock dividends or other adjustment
provisions of the respective warrants in accordance with Rule 416 under the
Securities Act of 1933, as amended.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended (the
"Act"), based on the average of the closing bid and asked prices for the
Registrant's common stock as reported on the NASDAQ OTC Bulletin Board on May
31, 2005.
3
Supplement Number Six
to
Prospectus
This Post-Effective Amendment No. 6 has been prepared to provide current
information to the holders of warrants to purchase our common stock in order to
assist them in making the decision of whether or not to exercise their warrants.
This supplement should be read in conjunction with our prospectus, and
particularly the risk factors described in the prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS OR THIS SUPPLEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this supplement is June 7, 2005
4
RISK FACTORS
You should carefully consider the risks described below before buying shares of
our common stock in this offering. Although, we have disclosed all material
risks, that we are aware of, the risks and uncertainties described below are not
the only risks we face. Additional risks and uncertainties not currently known
to us or that we currently deem immaterial may impair our business operations.
If any of the adverse events described in this risk factors section actually
occur, our business, results of operations and financial condition could be
materially adversely affected, the trading price of our common stock could
decline and you might lose all or part of your investment. We have had operating
losses and no revenues to date and can not assure that we will be profitable in
the foreseeable future
IF WE ARE UNABLE TO GENERATE SUFFICIENT REVENUES IN THE FUTURE, WE MAY NOT BE
ABLE TO CONTINUE OUR BUSINESS.
As an investor, you should be aware of the difficulties, delays and expenses
normally encountered by an enterprise in its development stage, many of which
are beyond our control, including unanticipated research and developmental
expenses, employment costs, and administrative expenses. We cannot assure our
investors that our business plans as described in this prospectus will
materialize as we plan or prove successful, or that we will ever be able to
operate profitably. If we cannot operate profitably, you could lose your entire
investment. As a result of the nature of our business, we have incurred
substantial operating expenses without generating significant revenues.
IF WE CONTINUE OUR HISTORY OF LOSSES, IT MAY CAUSE A DECLINE IN OUR STOCK PRICE
OR AN INABILITY TO CONTINUE OUR OPERATIONS.
We incurred net losses in fiscal 2004 of $1,338,235. We have earned less than
$22,000 in revenues from inception through December 31, 2004. As a result, as of
December 31, 2004, we had stockholders' capital of $1,653,414 and a working
capital deficiency of $554,918. For the three months ended March 31, 2005, we
had stockholders' capital of $1,399,757 and a working capital deficiency of
$777,379. We cannot be certain whether we will ever earn a significant amount of
revenues or profit, or, if we do, that we will be able to continue earning such
revenues or profit. Also, the current economic instability may limit our ability
to develop and ultimately market our technologies. Any of these factors could
cause our stock price to decline or cause us to discontinue our operations and
may result in you losing a portion or all of your investment.
IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL, OUR BUSINESS MAY FAIL OR OUR
OPERATING RESULTS AND OUR STOCK PRICE MAY BE MATERIALLY ADVERSELY AFFECTED.
We completed our public offering in July 2003 in which we sold 2,474,000 units
for a total gross proceeds of $1,237,000. Each unit consisted of one share of
common stock, one A warrant to purchase one share of common stock at $.75 and
one B warrant to purchase one share of common stock for $1.75, at a purchase
5
price of $.50 per unit. We spent most of the funds raised to pay off debt,
payables and used the balance for working capital. We then began a private
offering in September of 2003 to sell 2,400,000 shares of the Company's common
stock at a purchase price of $0.25 per share. We later increased this offering
in November 2003 to sell 7,200,000 shares for an aggregate of $1,800,000. We
sold 6,886,000 shares of the Company's common stock for total proceeds of
$1,721,500 less $52,750 in offering costs. These funds have allowed us to
continue to operate since we have not yet generated any significant revenues. If
we are unable to obtain adequate funding, we may not be able to successfully
develop and market our products and our business will most likely fail.
OUR INABILITY TO RETAIN AND ATTRACT KEY PERSONNEL COULD ADVERSELY AFFECT OUR
ABILITY TO DEVELOP OUR PRODUCTS.
We believe that our future success will depend on the abilities and continued
service of certain of our senior management and executive officers, particularly
our Chief Executive Officer and President and those persons involved in the
research and development of our products. If we are unable to retain the
services of these persons, or if we are unable to attract additional qualified
employees, researchers and consultants, we may be unable to successfully
finalize and market our products and other future products being developed.
A PORTION OF OUR IAQ LINE OF BUSINESS MAY REQUIRE US TO REGISTER AS AN
INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED ("1940
ACT") WHICH WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
We are not registered and do not intend to register as an investment company
under the 1940 Act or any similar state laws. As part of our planned IAQ
business, we entered into an agreement with Environmental Commercial Technology
Corp. to acquire for cash and securities an interest in the revenues from a mold
remediation product. If we do not undertake substantial additional activities in
connection with the product, it is possible that our investment in the product
could be viewed as an investment company activity. We do not believe that our
planned activity will constitute investment in securities and, therefore, will
not cause us to be subject to regulation as an "investment company." We may
however be required to register as an investment company in order to undertake
this investment. Although there is a safe harbor exemption in the 1940 Act that
would allow us to use up to 40% of our non-cash assets towards such investments,
even if such investments were deemed to be a security investment activity, it is
unlikely that we will be able to avail ourselves of such safe harbor exemption.
If this were to occur, our day-to-day operations would then become subject to
the regulatory and disclosure requirements imposed by the 1940 Act. We do not
have the infrastructure to operate as an investment company and therefore would
not be able to continue doing business.
6
WE CANNOT ASSURE INVESTORS THAT OUR BUSINESS STRATEGY WILL BE SUCCESSFUL OR THAT
IT WILL SUCCESSFULLY ADDRESS THESE RISKS.
Our initial success will depend almost entirely upon the acceptance of our
products and services by parents with children under the age of 17, elementary
and middle schools, media companies and households. Market acceptance will
depend upon several factors, particularly (i) the determination by parents that
they need and want to monitor and protect their children while on the Internet,
(ii) the determination by schools that they want to educate and inform their
families about the need for monitoring and knowing what their children do while
on the Internet, (iii) the recognition by home owners of the need to be
concerned about home's indoor air quality and (iv) the awareness of mold as a
growing health concern. A number of factors may inhibit acceptance, including
(i) the existence of competing products, (ii) our inability to convince families
that they need to pay for the products and services which we will offer, or
(iii) failure by households and service companies to use our products. If our
products are not accepted by the market, we may have to curtail our business
operations, which could have a material negative effect on operating results and
most likely result in lower stock price.
THERE CAN BE NO ASSURANCE THAT WE WILL EARN A PROFIT ON THE MOLD REMEDIATION
PRODUCT OR EVEN RECEIVE A RETURN OF ANY PORTION OF ITS INVESTMENT, ALL OF WHICH
COULD BE LOST
We have used a substantial amount of our resources to acquire an interest in the
mold remediation product. We have paid $500,000 in cash and are required to pay
an additional $100,000 in cash. We have also issued 2,300,000 shares of our
common stock and issued warrants to purchase 2,300,000 shares of our common
stock. This is a substantial commitment of our resources and we will not achieve
any substantial benefit unless the product is effective for its intended
purposes and achieves wide market acceptance and sales within a relatively short
period of time. We were required to effectuate and pay the costs of a
registration statement with Securities and Exchange Commission for the shares
issued and the shares underlying the warrants issued to Environmental Commercial
Technology Corp. and its parent by September 1, 2004. Since we have not
registered these securities by that date, the agreement allows the warrant
exercise price to be reduced in stages from $0.33 per share at September 1, 2004
to a low of $0.01 at January 1, 2006. At December 31, 2004, the shares were not
registered and the reduction in the warrants exercise aggregating $138,000 was
charged to operations. At April 4, 2005, the shares have not been registered and
the reduction in the aggregate exercise price of $138,000 will be charged to
operations in the first quarter of fiscal 2005. If the registration statement is
not effective by January 1, 2005, both ECT and its parent may cancel the
agreement and keep half of the common shares issued; but, they must surrender
the warrants and refund the cash to the Company. The Company is presently in
negotiations relating to the calculation of the reduction in the exercise price,
but cannot assure you as to the outcome of such negotiations.
7
ENVIRONMENTAL COMMERCIAL TECHNOLOGY CORP. MAY NOT MEET ITS OBLIGATIONS
Even if the mold remediation product is effective for its intended purposes,
there is a substantial risk that Environmental Commercial Technology Corp. may
not be able to perform adequately, that it may not be effective in marketing the
product, that its own rights may be challenged or that it will fail to comply
with its obligations, both monetary and otherwise, to us. Were any of these
possibilities to occur, we might suffer the loss of our investment in the
product.
WE WILL FACE COMPETITIVE PRESSURES
We will compete, in all of our proposed businesses, with other companies, some
of whom have far greater resources and experience than us. There are established
competitors and there is ease of market entry for other companies who choose to
compete with us. Effective competition could result in price reductions, reduced
margins or loss of market share, any of which could adversely affect our
business and chances for success. Competition is likely to increase
significantly as new companies enter the market and current competitors expand
their services. Many of these potential competitors are likely to enjoy
substantial competitive advantages, including: larger technical staffs, greater
name recognition, larger customer bases and substantially greater financial,
marketing, technical and other resources. To be competitive, we must respond
promptly and effectively to the challenges of technological change, evolving
standards and competitors' innovations by continuing to enhance its services and
sales and marketing channels. Any pricing pressures, reduced margins or loss of
market share resulting from increased competition, or our failure to compete
effectively, could seriously damage our business and chances for success.
WE MAY BE EXPOSED TO LIABILITY IN OUR INDOOR AIR QUALITY BUSINESS OR IN
CONNECTION WITH FAMILYSAFE SENTRY PRODUCTS
We intend to operate in areas which affect the health and safety of individuals
and families. It is our intention to improve such health and safety. However, if
any person should be harmed, notwithstanding the use of our products or
services, we may be sued on various grounds including product liability or
negligence. We may seek to place in force insurance to protect it against such
potential liability, but even if we do so, we may be faced with heavy litigation
costs and possible awards for damages, any of which would severely burden our
financial position and stability.
8
WE COULD EXPERIENCE EXTREMELY HIGH TECHNICAL SUPPORT NEEDS FOR OUR SENTRY CHILD
SOFTWARE PRODUCTS WHICH COULD HARM OUR BUSINESS AND REPUTATION
To succeed with our Sentry child software plans, we must be certain that the
products experience a low need for technical support. Our success in this area
depends on ease of use and customer satisfaction. Our operations depend upon its
ability to protect its network infrastructure and equipment and to keep its
information updated and correct. Although we have sought to build redundancy
into our network and hosting infrastructure, we could experience interruptions
in service and partial system failures due to routing problems, hard drive
failures, database corruption and other computer failures. Any of these problems
could seriously damage our business.
OUR OUTSTANDING SECURITIES
As of May 26, 2005, we had outstanding 29,455,033 shares of our common
stock, par value $.0001 per share, 2,474,000 class A warrants and 2,474,000
class B warrants and 247,400 placement agent warrants to purchase one share of
the Company's common stock, class A warrants to purchase one share of common
stock exercisable at $.985 and class B warrant to purchase one share of common
stock exercisable at $2.285 per share, at a purchase price of $.985 per unit. A
licensor and its parent company were issued warrants to acquire 2,300,000 common
shares at $0.33 per share. In October 2004, a placement agent was issued a
warrant to acquire 172,800 shares of the Company's common stock at $0.30 per
share.
The common stock, class A warrant and class B warrants are each quoted on
the Over-the-Counter Bulletin Board and, respectively, trade under the symbols
SHLP, SHLPW and SHLPZ. As of May 26, 2005 they had respective market prices of
$.35, $.10 and $.05.
9
SUMMARY OF FINANCIAL DATA
The following tables set forth certain summary financial data for
SearchHelp. You should read this information together with the financial
statements and the notes to the statements contained in our filings with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, particularly our Form 10-KSB for the year ending December 31, 2004 and
the three months ended March 31, 2005.
For the Fiscal Year Ended For the Three Months Ended
Statement of Operations Data: December 31, 2004 March 31, 2005
- ----------------------------- ----------------- --------------
Revenues $666 $286
Loss from operations (1,176,195) $286,936
Net loss (1,338,235) $476,517
Net loss attributable to stockholders (1,338,235) $476,517
Basic and diluted net loss per share ($0.05) ($0.02)
Weighted average shares outstanding used in basic and 26,801,275 26,801,275
diluted net loss per share calculation
Balance Sheet Data: December 31, 2004 March 31, 2005
- ------------------- ----------------- --------------
Cash and cash equivalents $2,459 $5,079
Working capital (deficit) (554,918) (777,379)
Total assets 2,248,025 2,209,329
Total liabilities 594,611 809,572
Total stockholders' capital 1,653,414 1,399,757
10
NOTE REGARDING FORWARD LOOKING STATEMENTS
This supplement and the prospectus contain forward-looking statements that
involve risks and uncertainties that could cause actual results to differ
materially from those contemplated by the forward-looking statements. The
company makes such forward-looking statements under the provisions of the "safe
harbor" section of the private securities litigation reform act of 1995.
Forward-looking statements reflect the company's views and assumptions based on
information currently available to management. such views and assumptions are
based on, among other things, the company's operating and financial performance
over recent years and its expectations about its business for the current and
future fiscal years. Although the company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. such statements are
subject to certain risks, uncertainties and assumptions, including, but not
limited to, (a) our ability to complete and sell its products and services, (b)
the company's ability to achieve levels of sales sufficient to cover operating
expenses, (c) the company's ability to conclude arrangements in the indoor air
quality business, (d) prevailing economic conditions which may significantly
deteriorate, thereby reducing the demand for the company's products and
services, (e) regulatory or legal changes affecting the company's business, (e)
the effectiveness of the company's relationships in the indoor air quality
business, (g) the effectiveness of the indoor air quality compound in which the
company invested, or (h) the company's ability to secure necessary capital for
general operating or expansion purposes.
CAPITALIZATION
The following table sets forth the total capitalization of SearchHelp,
Inc. for year ended December 31, 2004 and for the three months ended March 31,
2005.
For the Fiscal Year For the Three Months Ended
Ended March 31, 2005
December 31, 2004 --------------
-----------------
Current liabilities $594,611 809,572
Long-term Obligations 0 0
Stockholders' equity:
common stock, $.0001 par value, 100,000,000 shares authorized, 2,849 2,849
28,485,033 shares issued and outstanding
Additional paid-in capital 4,954,526 5,177,386
Deficit accumulated in development stage (3,303,961) (3,780,478)
Total stockholders' capital 1,653,414 1,399,757
Total liabilities & Stockholders' Equity 2,248,025 2,209,329
11
FINANCING TRANSACTIONS
Recent Private Offering
On September 8, 2003 we commenced a private offering of 4,000,000 shares
of common stock at $.25 per share which was increased in November 2003 to
6,000,000 shares of common stock. An aggregate of 6,886,000 shares were sold to
approximately 77 accredited investors as of the closing of the offering in
September, 2004. The gross proceeds of the offering was $1,721,500 and the net
proceeds to us, after expenses and broker commissions, was approximately
$1,668,750. S.G. Martin Securities, LLC was the placement agent for $432,000 of
the funds raised from this offering and received $43,200 in commissions and
$8,640 non-accountable expenses.
Between December 1, 2001 and February 14, 2002 promissory notes with an
interest rate of 10% were issued to 13 accredited investors at $25,000 each for
a total of $325,000. Robert M. Cohen & Co., Inc. was the placement agent and
received commissions totaling $32,500. Since we did not pay back the note
holders in full within 60 days of issuance, the note holders were entitled to
purchase up to 5,000 shares per month of our common stock at $.01 per share for
each additional month the notes remained unpaid. As of December 31, 2004,
1,125,000 shares have been purchased by the note holders. There are no other
shares of common stock issuable to our note holders. The note holders were all
repaid by July 2003 out of the proceeds of our initial public offering.
Initial Public Offering
On July 23, 2003, we completed an initial public offering of 8,000,000
units at a purchase price of $0.50 per unit. Each unit consisted of one share of
common stock, one class A warrant and one class B warrant. We sold a total of
2,474,000 units for gross proceeds of $1,237,000. Placement agent fees and
registration costs totaled $403,942 of which $234,681 was paid prior to the
commencement of the offering and, $169,311 of the proceeds was used to pay the
balance of the expenses of the offering. Of the remainder of the proceeds,
$557,518 was used to pay outstanding debt and interest thereon, $265,719 was
used to pay accounts payable and expenses and the balance was used for working
capital.
We paid the placement agent, Robert M. Cohen & Co., Inc., a commission of
10% and non-accountable expense allowance of 3% of the proceeds from the units
it placed for an aggregate of $160,810. The placement agent also received
warrants, exercisable for five years, to purchase 247,400 units at $.985 per
unit. Upon the exercise of a warrant and the payment of the exercise price, the
placement agent would be able to acquire one share of common stock, one class A
warrant to purchase one share of common stock at $.985 and one class B warrant
to purchase one share of common stock at $2.285 per share. As of May 26, 2005,
no warrants have been exercised.
12
Management's Discussion and Analysis.
Forward Looking Statements
Except for the historical information contained herein, the matters
discussed below or elsewhere in this quarterly report may contain
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from those contemplated by the
forward-looking statements. SearchHelp, Inc. (the "Company") makes such
forward-looking statements under the provisions of the "safe harbor" section of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
reflect the Company's views and assumptions based on information currently
available to management. Such views and assumptions are based on, among other
things, the Company's operating and financial performance over recent years and
its expectations about its business for the current and future fiscal years.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Such statements are subject to certain
risks, uncertainties and assumptions, including, but not limited to, (a) the
Company's ability to secure necessary capital in order to continue to operate
(b) the Company's ability to complete and sell its products and services, (c)
the Company's ability to achieve levels of sales sufficient to cover operating
expenses, (d) prevailing economic conditions which may significantly
deteriorate, thereby reducing the demand for the Company's products and
services, (e) regulatory or legal changes affecting the Company's business, (f)
the effectiveness of the Company's relationships in the indoor air quality
business, (g) the effectiveness of the indoor air quality compound in which the
Company invested, (h) the effectiveness of its relationship with Digital Card
Systems, Inc.
Liquidity and Capital Resources
The Company's liquidity and capital needs relate primarily to working
capital and other general corporate requirements. To date, the Company has
funded its operations by issuing notes and by the sale of common stock. From
inception through December 31, 2003, the Company raised net cash proceeds of
$1,543,278 from sales of common stock and the conversion of $104,075 of
indebtedness into common stock. For the year ended December 31, 2004, the
Company raised additional cash proceeds of $1,117,000 through a private
placement of its shares of common stock at a purchase price of $.25 per share.
On May 6, 2005, the Company sold 860,000 shares of restricted common stock in a
private sale at a purchase price of $.25 per share for net proceeds of $215,000.
The Company paid approximately $75,000 of its accounts payable from these
proceeds. As of May 26, 2005, the Company's cash for operations was
approximately $102,000. The Company has enough cash for operations for the next
three months.
13
Since inception, the Company has not generated any significant cash flows
from operations. As of December 31, 2003, the Company had cash and cash
equivalents of $271,800 and a working capital deficiency of $145,556. At
December 31, 2004, the Company had cash and cash equivalents of $2,459 and a
working capital deficiency of $554,918. For the three months ended March 31,
2005, the Company had cash and cash equivalents of $5,079 and a working capital
deficiency of $777,379, and for the three months ended March 31, 2004 the
Company had cash and cash equivalents of $148,578 and a working capital
deficiency of $171,209. Based on the lack of revenue and the Company's current
expense levels, management estimates that the Company has enough capital
resources to fund its operations for the next three months. If the Company does
not generate substantial revenues from the sales of its products in an amount
necessary to meet its cash needs, the Company would need additional financing to
continue to operate past the end of August 2005. As the Company increases sales
from its products and services, the Company expects to increase cash flows from
operations.
Net cash used in operating activities from inception through March 31,
2005 was $1,968,265 and for the three months ended March 31, 2005 and 2004 was
$105,301 and $311,315, respectively.
Net cash used in investing activities for the three months ended March 31,
2005 and 2004 was $0 and $500,000, respectively, and since inception through
March 31, 2005 net cash used in investing activities was $1,105,681. The use of
cash funds in investing activities since inception has been property, asset and
license acquisitions and software development costs.
Net cash provided from financing activities was $3,079,025 from inception
through March 31, 2005 of which $1,464,149 and $14,322 was generated in the
years ended December 31, 2003 and 2002, respectively. Net cash provided from
financing activities for the three months ended March 31, 2005 and 2004 was
$107,921 and $688,093, respectively. The cash flow provided from financing
activities was primarily derived from the net cash received from the sale of the
Company's securities and the proceeds from notes and loans payable.
The Company used a large portion of the funds it raised since its
inception for the extensive independent testing and development of the Company's
Sentry at Home software, formerly known as "Spike". The Company paid
approximately $200,000 to an independent consultant, Sahba Samet, and his
company, Edocusign, Inc. ("Edocusign"), to develop this product over a two year
period. The Company also granted Edocusign an option to purchase 750,000 shares
of the Company's common stock at a purchase price of $.62 per share. Edocusign
finished a beta version of the product in August 2003. In September 2003,
SearchHelp hired E2TechLabs, LLC to conduct an independent test of both Sentry
products. After a month of testing, E2TechLabs opined that the products'
infrastructure needed additional work to meet the security standards set by the
14
Company. E2TechLabs gave Edocusign a list of changes to make. E2TechLabs
continued to test the products as the changes were made. These changes, plus the
additional testing, took six months to implement.
From September 2003 through the end of March 2004, the testing costs
totaled $195,000, approximately $150,000 over budget. The cost overruns occurred
because the Company set strict security parameters so children would not be able
to bypass or override the Sentry software without their parent's knowledge. Most
of the software in the marketplace of filtering out inappropriate content have
these security holes. However, the Company wanted to release a product that did
not accept these security holes as common place. In total, the Company had
unexpected cost overruns of approximately $198,000.
The other area in which the Company has used a large part of its raised
capital is in its Indoor Air Quality division. The Company has spent $500,000 to
purchase a royalty interest from Environmental Commercial Technology, Inc.
("ECT"), a company that was granted the rights to market a compound for mold
remediation which apparently has the ability to kill and prevent the growth of
mold and fungus in an environmentally safe manner.
Since the Company did not have sufficient cash to operate, the Company's
Chief Executive Officer and President did not take their salaries. Their unpaid
salaries are being accrued and at December 31, 2004 and at March 31, 2005,
$59,998 and $27,640 was owed to the CEO and President, respectively. Commencing
on October 1, 2004, Ms. Seaman and Mr. Bozsnyak both have waived all future
salary under their contracts until such time as the Company's cash flow can
sustain such payments. The aggregate waived salaries through March 31, 2005 was
$75,000 and for the three months ended March 31, 2005 was $37,500, this amount
was charged to operations with a corresponding increase to additional paid-in
capital.
As of May 26, 2005, the Company's cash for operations was approximately
$102,000. The Company has enough cash for operations for the next three months.
The Company will need an additional $1,200,000 to allow it to operate for the
next twelve months through August 2006, assuming no significant revenues, to pay
off its account payables and hire the marketing experts needed to sell its
software products. For the last five months, the Company's CEO has been
providing the capital necessary to continue operating through non-interest
bearing loans to the Company. However, because of the large amount of money that
Mr. Bozsnyak has loaned the Company and the high risk factor involved,
management has decided to pay Mr. Bozsnyak interest on the outstanding loan
amount. For the three months ended March 31, 2005, operations was charged $2,577
with a corresponding increase to shareholder loan. This calculation was based on
a principal amount of $133,000 and the interest rate of 7.75%. The Interest rate
used is the same interest rate paid to the Company's short term lender.
15
The Company is therefore in need for additional capital. On April 25,
2005, the Company amended its Articles of Incorporation to create 25,000,000
shares of preferred stock as well as increasing the amount of common stock that
the Company is authorized to issue to 250,000,000. Management plans to raise
additional capital through a private offering of its new class of Convertible
Series A preferred stock. Management is planning to raise the funds by
soliciting accredited investors and small micro cap funds. Management is hopeful
that they will be able to raise between one and two million dollars within the
next 90 days, in addition to the $215,000 that has already been raised through
the sale of the Company's common stock. If the Company is unable to raise the
necessary capital, it will be unable to continue operating.
BUSINESS
Overview
SearchHelp, Inc. (the "Company") was incorporated in the State of Delaware
on September 5, 2001. The Company is a successor to SH Networks.com, Inc.,
("SHN"), formerly known as SearchHelp.com, Inc., a New York corporation formed
on January 29, 1999. SHN merged into the Company on September 5, 2001 in a
transaction in which the shareholders of SHN exchanged all of the capital stock
in SHN for 6,616,910 common shares of the Company. The merger was accounted for
as a recapitalization.
The Company's business plan is directing its efforts on investigating
opportunities that will improve family safety and well being. The Company is
currently focusing on selling its two software products through its subsidiary,
FamilySafe, Inc. ("FamilySafe").
FamilySafe Products
FamilySafe owns the technology for the Company's two software products,
Sentry At Home and Sentry Remote. Sentry At Home is a comprehensive online
monitoring software package whereby parents set the security permission levels
for their children. It enables parents to monitor their child's behavior on the
Internet by blocking and filtering out inappropriate web sites on AOL, Netscape,
Internet Explorer and MSN. It also protects children from potential online
predators by monitoring Instant Messaging applications and chat rooms. Sentry
Remote enables parents to monitor their child's behavior on the Internet, but it
can also be used remotely while the parent is not at home. It allows parents to
see on their computer screens exactly what their children are seeing on their
home screens and they can intervene if necessary. With Sentry Remote, parents
are able to be an active participant in their children's Internet experience
from any computer that is online.
16
The testing of our software products is extremely important and on going.
The Company is currently using an independent company in India to do the testing
for the Sentry products in three areas. First, upgrades and enhancements are
done on a continual basis to prolong the lifecycle of the products and as new
enhancements and upgrades are completed, each item must be tested for potential
bugs. Testing is also performed to make certain that each new component does not
affect the existing software. Finally, as with all software, the software, has
to be tested to be certain it is compatible with all third party software and
new hardware platforms.
In order to market and sell the Sentry products, the Company had entered
into an exclusive manufacturing, marketing and distribution agreement with
Family Trusted Products, LLC ("FTP"), a company dedicated to creating
technology-based products that reinforce the importance of safety for children.
Due to the lack of marketing effort from FTP the Company executed a mutual
termination agreement with FTP on April 1, 2005. The Company is currently
manufacturing 10,000 units of the Sentry At Home product for retail sales as
well as continuing to sell both products on the Internet. The date of completion
for manufacturing is on or about June 15, 2005. The Company is hopeful that the
product will be on retailer's shelves 45-60 days after the completion of the
manufacturing.
On April 1, 2004, when the development and testing of both products were
completed, the Company hired the owner of E2Techlabs to be the Company's Chief
Technical Officer and a programmer/tester from the E2Techlabs to be the
Company's in-house programmer and tester. Both of their responsibilities include
working with the developer to assist with enhancements and upgrades during the
life cycle of the products. Sentry At Home and Sentry Remote both received
enhancements and upgrades in the last six months. The testing required for these
upgrades and enhancements took approximately six weeks. The testing fees were
approximately $5,000. The Company has since hired Paradigm InfoTech, Inc., to
test the products as they go through upgrades, and enhancements. This is
extremely cost effective as we utilize Paradigm's offshore development team.
Marketing
The Company began selling its Sentry products in December of 2004 on the
Internet. The Company created literature and marketing materials for media kits.
The Company is using the media kits for retail, corporate, reseller and
community outreach programs. The Company's products were recently mentioned in a
Newsday article published on May 2, 2005 entitled, "Do you know where your
children are?". The Sentry products also won the Lisa Award for Long Island's
best software presented by ListNet, on May 4, 2005.
17
The Company will also seek to market the products focusing on grassroots
initiatives, community outreach, resellers and other media outreach initiatives.
Recently, the Company formed a partnership with AmeriCares, a nonprofit disaster
relief organization. The Company will contribute $5.00 to AmeriCares from each
software product that is purchased online. On May 11, 2005, the Company sent a
check for $180 for the first quarter ended March 31, 2005 for the sale of 36
units. The Company plans to seek other nonprofit relationships.
The Company intends that grassroots initiatives will begin with Internet
outreach, whereby the Company will seek web sites for free links or mention of
the products, such as web sites for parenting, nonprofits, education, women and
technology. The Company has recently signed an agreement with Pricegrabber and
made an agreement with Yahoo to help sell the Sentry software on the Internet.
The Company is also seeking Value Added Resellers ("VAR"), who are
resellers of software and hardware. The Company will also consider utilizing a
direct market reseller initiative to schools, nonprofit organizations, other
child activity places of business such as a pediatrician's office, school
photographers and child organizations such as the Boy Scouts, Girls Scouts and
Boys and Girls Clubs of America. The Company will consider purchasing email and
physical address lists for each group. Fundraisers for schools and nonprofits
will be addressed as well. The schools and organizations will be contacted
through Parent Teacher Associations (PTA) and Parent Teacher Organization (PTO),
web sites, conventions and other mailings. The Company intends to leverage its
personal relationships to contact various companies seeking corporate alliances.
Additional strategies include consumer offerings, expert endorsements,
private labeled offerings that leverage the influence and power of another
entity's reputation and/or positioning as well as fully embedded offerings into
complementing products, services and providers.
On April 26, 2005, the Company entered into a Securities Purchase
Agreement to purchase E-Top-Pics, Inc. ("ETP"), a Massachusetts marketing
company. Management believes that this purchase and the proven distributor
relationships with traditional retail stores that ETP has and experience with
corporate sponsorships will be enable this new subsidiary to generate net sales
of the Sentry products to approximately $6.0 million by the end of 2006, since
both products have extremely high profit margins. ETP, if acquired, will also
spearhead SearchHelp's previously intended plan to distribute Sentry to law
enforcement, educational, pediatrician, charitable organization, and
in-home-computer-technician channels. See Section "Proposed Acquisition of
E-top-Pics, Inc."
18
Competition
The Company will compete for business with other companies that have
child-monitoring software that includes the following: NetNanny, LookSmart,
Ltd., Cybersitter, Solid Oak Software, Inc. (US), CyberPatrol, SurfControl,
MacAfee Parental Controls, Networks Associates Technology, Inc., Norton Parental
Controls, Symantec Corporation, FilterPak, S4F, Inc., Cyber Sentinel, Security
Software Systems, Inc., and Cyber Snoop, Pearl Software, Inc. NetNanny is the
best known, with revenues of approximately $4 million, but PC Magazine considers
CyberSitter the best, with revenues of approximately $10 million.
The Company plans to respond promptly and effectively to the challenges of
technological change, evolving standards and the Company's competitors'
innovations by continuing to enhance the Company's products and services, as
well as the Company's sales and marketing channels. Any pricing pressures,
reduced margins or loss of market share resulting from increased competition, or
the Company's failure to compete effectively, could seriously damage the
Company's business.
Indoor Air Products
Through the Company's Indoor Air Quality subsidiary, management has been
exploring opportunities concerning the quality of living aspects of indoor air
quality ("IAQ"). The increased knowledge and concern with regards to indoor air
toxins and irritants, combined with the dramatic increase in the diagnosis of
childhood and adult asthma and the potential impact of these issues on general
family health represent, in the Company's opinion, an area in need of address
and solutions. The increasing media attention, as well as hard and soft data
related to in-home complaints and associations with IAQ problems, makes the
opportunity to develop a consumer friendly and informative home-based solution
appealing to the Company.
The Company has chosen to focus on one of the most important issues within
the broader IAQ arena - Mold. There is a great deal of both medical and media
attention being given to the detection and the removal of harmful molds from
indoor air systems. The Company has investigated the potential for engaging in
two aspects of the mold issue; (1) providing definitive products for testing for
mold conditions and (2) providing effective indoor mold remediation solutions.
On February 3, 2004, the Company entered into an agreement with
Environmental Commercial Technology Corp. ("ECT"), a company that was granted
the rights to market an organic compound for mold remediation that has the
ability to both kill and prevent the growth of mold and fungus in an
environmentally safe manner. Pursuant to the agreement the Company is entitled
to receive an interest equal to 5% of the gross revenue from the sale of the
product by ECT. In return, the Company provided immediate development capital of
19
$500,000 and was obligated to pay ECT an additional $100,000 in August 2004. The
Company will also provide consulting services in connection with the marketing
and sales of the product, especially in the consumer marketplace. The Company
granted ECT and its parent company, Bioneutral Laboratories Corporation USA
("Bioneutral"), as additional consideration, a total of 2,300,000 shares of
common stock and a warrant to purchase up to 2,300,000 shares of common stock at
a purchase price of $.33 per share. The Company is required to register the
stock issued to Bioneutral and ECT. If the shares were not registered by
September 2004, the purchase price of the common stock would fall by $.01 per
share per month through December 2004. If they continue to be unregistered by
January 2005, the purchase price of the common stock will fall by $.02 per share
per a month until they are registered or until the purchase price equals $.01
per share in January 2006. If the shares are not registered by January 1, 2005,
ECT can terminate the agreement, but would have to return the Company's $500,000
and a portion of the stock issued to ECT and Bioneutral. For the year ended
December 31, 2004, the price of the warrants fell a total of $.06 and the
operations of the Company were charged $138,000. For the first quarter ended
March 31, 2005 the warrants fell an additional $.08 and operations were charged
$184,000. At May 11, 2005, the shares were not registered. Management is
currently negotiating with ECT to change the way the purchase price is
calculated, but cannot assure you as to the outcome of such negotiations.
The Company has been recently informed by ECT's parent company, Bioneutral
that the Environmental Protection Agency ("EPA") is expected to issue guidelines
specific to mold prior to the end of fiscal year 2005. To date, the EPA does not
have specific guidelines pertaining to mold. Companies, such as ECT/Bioneutral,
who wish to obtain EPA approval for a specific application, such as for mold,
must submit the specific protocol to the EPA for approval. Currently,
ECT/Bioneutral have submitted their specific protocol to the EPA for mold that
pertains to hard surface applications. No assurance can be given whether or not
the EPA will ever grant Bioneutral/ ECT a registration.
Since ECT/Bioneutral is waiting for EPA approval, the Company will not
make the final payment of $100,000 until ECT begins to generate revenue from the
mold compound. The Company expects to begin to receive its 5% interest from this
venture at such time.
Marketing
ECT continues to be the responsible party for all marketing and sales of
the mold remediation compound. The product will be marketed through remediation
companies that specialize in the remediation of mold and fungi.
Competition
The Company will compete for business with many IAQ companies, many of
whom have greater experience, expertise and/or greater resources than ECT.
20
Proposed Acquisition of E-Top-Pics, Inc.
General.
In order to immediately establish a distribution network for our products,
on April 26, 2005, the Company entered into an agreement to purchase a
privately-held marketing and distribution company called E-Top-Pics, Inc., a
Massachusetts corporation ("ETP"). At closing, SearchHelp will acquire 100% of
the ETP capital stock in exchange for 4.0 million shares of our common stock,
and ETP will become a wholly-owned subsidiary of SearchHelp. The acquisition is
expected to close in the next two weeks.
Future products
SearchHelp continues to evaluate the viability and need for other security
and imaging type products. With this in mind, it has just completed its beta
version of a corporate monitoring product called Sentry Office Controls, that
will allow employers to not only monitor the time efficiency of their employees,
but also to filter and/or eliminate access to web sites deemed inappropriate
during work hours.
Legal Proceedings.
None
Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock, ("SHLP"), Class A Warrants ("SHLPW") and Class
B Warrants ("SHLPZ") are thinly traded.
As of May 26, 2005, the Company had outstanding 29,455,033 shares of its
common stock, par value $.0001 per share, 2,474,000 Class A Warrants and
2,474,000 Class B Warrants and a placement agent warrant to purchase 247,400
units comprised of one share of common stock, one Class A warrant and one Class
B warrant and another placement agent a warrant to purchase 172,800 shares of
the Company's common stock at a purchase price of $.30 per share.
On February 3, 2004, the Company issued a warrant to purchase 2,300,000
shares of common stock at a purchase price of $.33 per share.
On March 12, 2004, the Company issued an option to purchase 750,000 shares
at a purchase price of $.25 per share.
21
On October 15, 2004, S.G. Martin Securities, LLC was issued a warrant to
purchase a total of 172,800 shares at a purchase price of $.30 per share. This
warrant is for a five year term and may be redeemed when our common stock has
traded at $1.50 for a consecutive five day period.
In September 2004, William Bozsnyak, the Company's Chief Executive
Officer, purchased an aggregate of 400,000 shares of the Company's restricted
common stock through a private sale, for a price of $.25 per share. The total
purchase price was $100,000.
In September 2004, the Company issued 520,753 shares of its common stock
to William Bozsnyak, the Company's Chief Executive Officer, in consideration for
repayment of his loan to the Company for $130,188. Also in September 2004, the
Company issued 59,280 shares of the Company's common stock to Debbie Seaman, the
Company's former President, in consideration for repayment of her loan to the
Company in the amount of $14,820. The price was determined by using the imputed
value of the stock on the date of grant.
On November 1, 2004, the Company's former Chief Financial Officer and the
Chief Technical Officer were each granted an option to purchase 50,000 shares
each at a purchase price of $.25 per share. These options were granted in lieu
of salary and fully vested in 90 days from the date of grant and expire in five
years. Mr. Elgar resigned from his position as Chief Technical Officer of the
Company on May 1, 2005.
Mr. Bonilla, the Company's CFO, died on March 9, 2005. Upon his death, Mr.
Bonilla's employment contract terminated and his options were cancelled. The
Company plans to issue Mr. Bonilla's estate an option to purchase 230,000 shares
of the Company's common stock representing an option to purchase 130,000 shares
of the Company's common stock previously issued and an option to purchase an
additional 100,000 shares of the Company's common stock that was granted in
April 2005, as soon a practical. Mr. Bozsnyak was appointed interim CFO until
the Company can find a suitable replacement.
On April 1, 2005, Mr. David Barnes, a director of the Company, was issued
200,000 shares of the Company's restricted common stock for serving as a
director of the Company as well as chairman and financial expert of the audit
committee and chairman of the compensation committee. Mr. Barnes will also
receive $3,500 per quarter.
On April 21, 2005, options were granted to the President and one director
to purchase 560,000 shares of the Company's common stock at a purchase price of
$.27 per share. 500,000 vested immediately and 60,000 vest over 4 years. Both
have a five year option life.
On April 21, 2005, options were granted from the 2004 Stock Plan to
employees to purchase 460,000 shares of the Company's common stock at a purchase
price of $.27 per share. These options vest over a four year period and have a
five year option life.
22
On April 26, 2005, Mr. Carrizzo, as part of his employment agreement, was
granted an option to purchase 3,000,000 shares of the Company's common stock at
a purchase price of $.20 per share. These options will fully vest over three
years and will expire in five years.
On May 1, 2005, Mr. Bozsnyak was granted an option to purchase 1,000,000
shares of the company's common stock at a purchase price of $.20 per share.
These options have a life of 5 years and vest equally over 3 years.
On May 6, 2005, the Company sold 860,000 restricted common shares to an
accredited buyer through a private sale. The purchase price was $.25 per share.
Employees
As of May 26, 2005, the Company had four full time employees and one part-time
employee.
Description of Property
The Company leases an executive office at 1055 Stewart Avenue, Suite 12,
Bethpage, New York 11714. The lease was renewed for an additional year on
December 1, 2004 and is guaranteed by the Company's president. The rent is
$1,107 per month ($13,280 per year). There was an annual increase of $320 from
the 2004 lease. The Company has a security deposit with its landlord of $2,155.
23
MANAGEMENT
Directors and Executive Officers
The Company has a five-member board of directors. Each director holds
office until the next annual stockholders meeting or until a successor is duly
elected or appointed. The biographies of the members of the board and our
executive officers appear below.
Year
Name Age Position Began Service
- ---- --- -------- -------------
William Bozsnyak 44 Chairman of the Board of Directors, Chief Executive 2001
Officer, acting Chief Financial Officer, Vice President
and Treasurer
Debbie Seaman 46 Director and Secretary 2001
Joel San Antonio 52 Director 2001
Joseph Carrizzo 47 President and Director 2001
David Barnes 62 Director 2005
William Bozsnyak has served as the Chief Executive Officer, Treasurer and
Chairman of the Board of the Company since its inception in January 2001 and
became its Chief Financial Officer and Vice President in September 2002. Mr.
Bozsnyak served as Chief Financial Officer until April 2004 and as President
until September 2002. Mr. Bozsnyak will serve as interim Chief Financial Officer
until the Company is able to find a suitable replacement. In 1998, Mr. Bozsnyak
created a local portal that focused on small businesses whose needs were not
being met on a national level. This portal ultimately became the Company. Prior
thereto, Mr. Bozsnyak had worked in the financial services industry, having
joined J.P. Morgan Securities Inc. in 1982 and become a vice president in its
Institutional Fixed Income Sales Department. In 1993, Mr. Bozsnyak left Morgan
to join UBS Securities Inc. (Union Bank of Switzerland) where he remained until
1998. He was a vice president in its Global Fixed Income Department and sold
U.S. fixed income securities to major institutional U.S. firms. Mr. Bozsnyak
graduated in 1982 from the New York Institute of Technology with a B.S. degree
in Business Administration and a minor in Finance.
24
Debbie Seaman has served as a Director and Secretary of the Company since
its inception and has been President since September 2002. Ms. Seaman resigned
her position as President of the Company on April 26, 2005. Ms. Seaman remains
Secretary and Director of the Company. Before September 2002 she had served as
Vice President. Ms. Seaman has, since 1987, been an independent consultant to
small and medium sized construction, law, marketing, publishing, politics and
travel companies. In this capacity, Ms. Seaman works as a strategist to increase
the value of the companies as a whole, while also helping management and staff
foster improved performance and cooperation. Ms. Seaman continues to provide
consulting services on a part-time basis. She has also worked for numerous
nonprofit organizations such as the National Multiple Sclerosis Society,
Nassau/Suffolk Law Services, NYS Youth Bureaus, Surrogate's Court and North
Shore Child & Family Guidance Center where her responsibilities included
departmental administration, policy and program development, community project
organizing, public speaking, grant writing and clinical practice. Ms. Seaman
received her Bachelors degree from State University College of New York and her
Masters degree in Social Work from Virginia Commonwealth University in 1981. In
2000, Ms. Seaman was awarded the Outstanding Community Leadership Award from the
National Multiple Sclerosis Society, Long Island Chapter.
Joel San Antonio has been a Director of SearchHelp, Inc. since September
2001 and has served on the Company's Audit Committee and Compensation Committee
since their formation. Mr. San Antonio resigned from his position of chairman of
the audit committee on April 26, 2005. Mr. San Antonio began his career as
co-founder of a sportswear manufacturer in the women's fashion industry. In
1983, Mr. San Antonio and his partner exited the fashion industry and founded
Warrantech Corporation, a third party administrator of service contracts and
extended warranty programs. The Company went public in 1984 and in September
1997 was recognized by Fortune Magazine as one of the "100 Fastest Growing
Companies in America". Today, Mr. San Antonio serves as Chairman of the Board
and Chief Executive Officer of Warrantech Corporation. Since December 1999, Mr.
San Antonio serves as Chairman of the Board of MedStrong International
Corporation, a public company that transports medical records over the Internet
and as Chairman of the Board of Marc Pharmaceuticals, Inc., a pharmaceutical
company focusing on the development and commercialization of innovative products
for the treatment of cancer and other diseases.
Joseph Carrizzo has served as a Director of the Company since its
inception and has served on the Company's Audit Committee and Compensation
Committee since their formation. Mr. Carrizzo accepted the appointment of
President of the Company on April 26, 2005. Mr. Carrizzo began his career in
1983 at Lehman Brothers in the corporate bond department where he became a
senior level medium term note trader. In 1995, he left Lehman to become an
independent distributor of personal care and anti-aging products.
25
David M. Barnes. Mr. Barnes became a director of the Company in April of
2005. Mr. Barnes was also appointed to serve as chairman and financial expert of
the Company's audit committee. Mr. Barnes will also be the chairman of the
Company's compensation committee. Mr. Barnes has served as the chief financial
officer of American United Global, Inc. ("AUGI") since May 15, 1996, and was a
director of AUGI from November 8, 1996 through June 17, 2003. Mr. Barnes
resigned as a member of AUGI's board of directors effective on June 17, 2003 but
was reappointed thereto effective December 9, 2003. Mr. Barnes is also presently
a member of the Advisory Board of Interactive Imagination, Inc., a
privately-held video game developer based in Seattle, WA. Mr. Barnes is a
Certified Public Accountant with over 40 years of experience in the private
industry as well as public companies. Mr. Barnes has been a Chief Financial
Officer of eight public companies.
Executive Compensation
The following table sets forth, for the fiscal years indicated, certain
information concerning the compensation of our Chief Executive Officer and each
other most highly compensated executive officers of our company whose aggregate
compensation exceeded $100,000 during the years ended December 31, 2004, 2003
and 2002.
Long-term Compensation Awards
Annual Compensation Securities Underlying Options
------------------- -----------------------------
Name and Position Salary($) Bonus($)
- ----------------- --------- --------
William Bozsnyak $120,000(3) (1) 1,200,000(2)
Debbie Seaman $70,000(4) (1) 120,000(2)
Joseph Carrizzo $120,000(5) $0 1,270,000(5)
Noel C. Bonilla * $36,000(6) (1) 130,000(7)
Eric Elgar $100,000(8) (1) 200,000(9)
* Mr. Bonilla passed away on March 9, 2005.
(1) An incentive bonus to be determined prior to commencement of each year
determined by the Compensation Committee.
(2) Stock option to purchase up to $200,000 worth of the Company's common stock
which are to be granted from the Company's 2004 Stock Option Plan (the "2004
Plan"), at the exercise price equal to the midpoint between the bid and ask
price of the company's common stock on the date of grant.
26
(3) On May 1, 2005, Mr. Bozsnyak signed a new employment contract with the
Company. This contract states Mr. Bozsnyak will receive an annual salary of
$120,000 and an option to purchase 1,000,000 shares of the Company's common
stock at a purchase price of $0.20 per share. These options have a life of five
years and vest equally over 3 years. Mr. Bozsnyak was not taking his salary and
has accrued his salary from January 1, 2004 through September 30, 2004 in the
amount of $59,999 and taxes of $4,506. Commencing on October 1, 2004, Mr.
Bozsnyak waived all future salary under his contract until such time as the
Company's cash flow can sustain such payments. The aggregate waived salary
through December 31, 2004 of $20,000 was charged to operations with a
corresponding increase to additional paid-in capital. The same entry was made in
the first quarter ended March 31, 2005. Mr. Boznyak did not take or accrue a
salary in 2002 or 2003.
(4) On April 26, 2005, Ms. Seaman resigned her position with the Company as
President. Ms. Seaman remains Secretary and Director. As of this date, Ms.
Seaman's employment contract cancelled. Ms. Seaman was granted an option to
purchase 60,000 shares of the Company's common stock at a purchase price of
$0.27 per share. This option has a life of five years and vests over four years.
Ms. Seaman was not taking her salary and has accrued her salary from January 1,
2004 through September 30, 2004 in the amount of $27,640 and taxes of $2,073.
Commencing on October 1, 2004, Ms. Seaman waived all future salary under her
contract until such time as the Company's cash flow can sustain such payments.
The aggregate waived salary through December 31, 2004 of $17,500 was charged to
operations with a corresponding increase to additional paid-in capital. The same
entry was made for the first quarter ended March 31, 2005. For the year ended
December 31, 2003 Ms. Seaman received $26,246 in compensation. For the years
ended December 31, 2001 and 2002 Ms. Seaman received a total of $7,500 for child
care.
(5) In December 2003, Mr. Carrizzo agreed to accept an option to purchase
750,000 shares of the Company's common stock, at a purchase price of $.25 per
share, for business and marketing services rendered to us by him. The value of
the services rendered as determined by both management and Mr. Carrizzo and the
fair value of the option granted, as determined using the Black-Scholes option
pricing method, was $187,500. In April 21, 2005, Mr. Carrizzo received an option
to purchase 500,000 shares of the Company's common stock for a purchase price of
$.27 per share for business and marketing services. These options are fully
vested and expire in 5 years. The fair market value using the Black-Scholes
pricing method was $130,000. On April 26, 2005, Mr. Carrizzo entered into a
three year employment agreement with the Company, entitling Mr. Carrizzo to
receive a base salary of $120,000 per year and to an increase of 10% per year.
Mr. Carrizzo was also granted an option to purchase 3,000,000 shares of the
Company's common stock at a purchase price of $.20 per share. These options will
fully vest over three years and will expire in five years.
27
(6) On March 18, 2004, the Company hired Mr. Bonilla as a part time Chief
Financial Officer. Mr. Bonilla entered into an employment agreement with the
Company pursuant to which he was to receive an annual salary of $36,000. Mr.
Bonilla was paid $14,000 of his salary. In October 2004, Mr. Bonilla stopped
receiving his salary. Mr. Bonilla passed away on March 9, 2005.
(7) Mr. Bonilla, who passed away on March 9, 2005, was granted an option to
purchase 70,000 shares of the Company's common stock under the Company's 2004
Plan at a purchase price of $0.47 per share, for becoming the Chief Financial
Officer. The option was to vest equally each year over the next four years. On
November 1, 2004, Mr. Bonilla agreed to take an option, in lieu of his salary,
to purchase 50,000 shares of the Company's common stock at a purchase price of
$.25 per share. This option vested 90 days from the date of grant and was to
expire five years there from. Mr. Bonilla also served on the Company's advisory
board for which he was given an option each fiscal year to purchase 10,000
shares of the Company's common stock for attending meetings. For fiscal year
2004, he received an option to purchase 10,000 shares at a purchase price of
$.70 per share. The Company intends to issue Mr. Bonilla's estate a new option
for the cancelled options of 130,000 shares, as well as the right to purchase an
additional 100,000 shares of the Company's common stock at a purchase price of
$.27 per share and will vest over a four year period and will expire in 5 years.
(8) On March 18, 2004, the Company hired Eric Elgar as the Company's Chief
Technical Officer. Mr. Elgar entered into an employment agreement with the
Company in which he will receive an annual salary of $100,000. Mr. Elgar was
guaranteed employment for at least six months. For the year ended December 31,
2004 the Company has paid Mr. Elgar $57,408 in compensation. Mr. Elgar stopped
receiving his salary on October 31, 2004. Mr. Elgar will not receive a salary
nor will he accrue his salary until the Company can afford to pay him. Mr. Elgar
resigned from his position of Chief Technical Officer on May 1, 2005.
(9) Mr. Elgar was also granted the right to purchase 150,000 shares of the
Company's stock at $0.47 per share for becoming the Chief Technical Officer. The
option will vest fully one year from the date of grant. On November 1, 2004, Mr.
Elgar agreed to take an option, in lieu of his salary, to purchase 50,000 shares
of the Company's common stock at a purchase price of $.25 per share. This option
will vest in ninety days from the date of grant and will expire in five years.
28
OPTION/SAR GRANTS IN LAST FISCAL YEAR
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
Number of securities Percent of total
Name underlying options/SARs granted Exercise or base Expiration date
options/SARs granted to employees in price ($/Sh)
(#) fiscal year
(a) (b) (c) (d) (e)
William Bozsnyak CEO 60,000 9% $0.77 5/21/09
Debbie Seaman
President 60,000 9% $0.77 5/21/09
70,000 10% $0.47 3/18/09
Noel Bonilla 10,000 1% $0.70 5/21/09
CFO 50,000 7% $0.25 11/1/09
Eric Elgar 150,000 22% $0.25 3/18/09
CTO 50,000 7% $0.47 11/1/09
Director Compensation
Directors who are employees of the Company do not receive any fees for
their service on the Board. During fiscal year 2004, the Board of Directors did
not receive compensation. However, in fiscal year 2004, each non-employee
Director received an option to purchase 20,000 shares of the Company's common
stock at a purchase price of $.70 per share. The exercise price was determined
by using the midpoint between the bid and ask price of the Company's common
stock on the date of grant. Mr. Barnes will receive an annual compensation of
$14,000. An accrual for $3,500 was made for Mr. Barnes for the quarter ended
March 31, 2005 and paid in May 2005. Mr. Barnes was also issued 200,000 shares
of the Company's restricted common stock.
Employment Agreements:
In January 2004, the Company and William Bozsnyak entered into a three
year employment agreement. The employment agreement provides for a base salary
of $80,000 with a minimal annual 5% increase. Mr. Bozsnyak will also receive an
incentive bonus to be determined prior to commencement of each year. The
Company's Compensation Committee will determine the criteria for Mr. Bozsnyak's
bonus. Mr. Bozsnyak will be granted options to purchase up to $200,000 worth of
shares of common stock under the Company 2004 Stock Plan, at a price equal to
the midpoint between the bid and ask price of the Company's common stock on the
date of the grant. On May 1, 2005, Mr. Bozsnyak signed a new three year
employment contract with the Company. Mr. Bozsnyak will receive a base salary of
$120,000 per year with a 10% increase each year. Mr. Bozsnyak was also granted
an option to purchase 1,000,000 shares of the Company's stock at a purchase
price of $.20 per share. These options vest fully in three years and have a five
year life.
29
In December 2003, the Company and Debbie Seaman entered into a three year
employment agreement. The employment agreement provides for a base salary of
$70,000 with a minimal annual 5% increase. Ms. Seaman will also receive an
incentive bonus to be determined prior to commencement of each year. The
Company's Compensation Committee will determine the criteria for Ms. Seaman's
bonus. Ms. Seaman will be granted options to purchase up to $200,000 worth of
shares of common stock under the Company 2004 Stock Plan, at a price equal to
the midpoint between the bid and ask price of the Company's common stock on the
date of the grant. On April 26, 2005, Ms. Seaman resigned her position with the
Company as President. She remains Secretary and Director. As of this date, Ms.
Seaman's employment contract has been cancelled. Ms. Seaman was granted an
option to purchase 60,000 shares of the Company's common stock at a purchase
price of $.27 per share. This option has a life of five years and vests over
four years.
On March 18, 2004, the Company hired Eric Elgar as the Company's Chief
Technical Officer. Mr. Elgar entered into an employment agreement with the
Company in which he received, beginning April 1, 2004, an annual salary of
$100,000. Mr. Elgar was guaranteed employment for at least six months and was
granted the right to purchase 150,000 shares of the Company's stock at $0.47 per
share. The option will vest fully one year from the date of grant. For the year
ended December 31, 2004 the Company has paid Mr. Elgar $57,408 in compensation.
Mr. Elgar stopped receiving his salary on October 31, 2004. On November 1, 2004,
Mr. Elgar agreed to take an option, in lieu of his salary, to purchase 50,000
shares of the Company's common stock at a purchase price of $.25 per share. This
option vested ninety days from the date of grant and will expire in five years
there from. Mr. Elgar will not receive a salary nor will he accrue his salary
until the Company can afford to pay him. Mr. Elgar resigned his position of
Chief Financial Officer on May 1, 2005.
On April 26, 2005, Mr. Carrizzo entered into a three year employment
agreement with the Company. Mr. Carrizzo will receive a base salary of $120,000
per year and is entitled to an increase of 10% per year. Mr. Carrizzo was also
granted an option to purchase 3,000,000 shares of the Company's common stock at
a purchase price of $.20 per share. These options will fully vest over three
years and will expire in five years.
Each employment agreement will be automatically extended each year unless
notice of termination thereof is received by either the employee or the Company.
30
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The following table sets forth certain information, as of the date hereof, with
respect to the beneficial ownership of our common stock by each: (i) holder of
more than five percent (5%) of the outstanding shares of our common stock; (ii)
our executive officers and directors; and (iii) all our executive officers and
directors as a group. The Company's issued and outstanding voting securities at
the close of business on May 26, 2005, consisted of 29,455,033 shares of common
stock, $.0001 par value per share. Unless otherwise indicated, the address of
each of the named persons is care of SearchHelp, Inc., 1055 Stewart Avenue,
Bethpage, New York, 11714.
Name and Address Shares Percentage
- ---------------- Beneficially Owned (1) Beneficially Owned
---------------------- ------------------
William Bozsnyak (2) 4,796,771 16.0%
Debbie Seaman (3) 3,243,505 11.0%
Joel San Antonio (4) 5,535,000 20.0%
Joseph Carrizzo (5) 4,470,000 15.0%
Eric Elgar (6) 200,000 *
David Barnes (8) 200,000 *
Bioneutral Laboratories (7) 4,600,000 16.0%
All directors and executive officers as a group (6
persons) 18,445,276 63.0%
========== =====
* less than one percent
(1) Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of the
Company's common stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities which may be acquired by such person within 60
days from the date on which beneficial ownership is to be determined, upon the
exercise of options, warrants or convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that options, warrants and
convertible securities that are held by such person (but not those held by any
other person) and which are exercisable within such 60 day period, have been
exercised.
(2) Includes an option to acquire 383,333 shares of common stock.
(3) Includes an option to acquire 45,000 shares of common stock.
(4) Mr. San Antonio's address is c/o Warrantech Corporation, 350 Bedford Street,
Stamford, CT 06901. Includes options to acquire 35,000 shares of common stock.
(5) Mr. Carrizzo's address is 35 Marie Drive, Huntington, New York 11743.
Includes options to acquire 2,270,000 shares of common stock.
31
(6) Mr. Elgar resigned on May 1, 2005. Includes options to acquire 200,000
shares of common stock.
(7) Bioneutral Laboratories Corp USA's address is c/o Reed & Smith, 599
Lexington Avenue, New York, New York 10022. Consists of: (i) 1,725,000 shares of
common stock and a warrant to acquire an additional 1,725,000 such shares, each
held in the name of Bioneutral; (ii) and 575,000 shares of common stock and a
warrant to acquire an additional 575,000 such shares, each held in the name of
Bio-Neutral's wholly owned subsidiary ECT and its affiliates.
(8) Mr. Barnes's address is 108 Village Square #327, Somers, New York, 10589.
Mr. Barnes will receive an annual compensation of $14,000 and was also issued
200,000 shares of the Company's restricted common stock.
32
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
I N D E X
Page No.
--------
FINANCIAL STATEMENTS:
Consolidated Balance Sheet as at March 31, 2005 (Unaudited) and
December 31, 2004 (Audited) 34-35
Consolidated Statements of Operations
For the Three months ended March 31, 2005 and 2004 and Cumulative For
the Period from January 29, 1999 (Inception) to March 31, 2004
(Unaudited)
36
Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 2005 (Unaudited) 38
Consolidated Statements of Cash Flows
For the Three Months ended March 31, 2005 and 2004 and
Cumulative For the Period From January 29, 1999 (Inception) to
March 31, 2005 (Unaudited) 38-41
Notes to Consolidated Financial Statements (Unaudited) 42-60
33
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2005 2004
------------ ------------
Current assets:
Cash $ 5,079 $ 2,459
Accounts receivable 651 951
Prepaid insurance 20,074 18,519
Prepaid consulting fees 6,389 17,764
------------ ------------
Total current assets 32,193 39,693
------------ ------------
Property and equipment - at cost,
less accumulated depreciation -- --
------------ ------------
Other assets:
Software development costs, less accumulated
amortization of $337,496 and $306,300, respectively 224,981 256,177
Deferred license fee 1,950,000 1,950,000
Security deposit 2,155 2,155
------------ ------------
Total other assets 2,177,136 2,208,332
------------ ------------
Total assets $ 2,209,329 $ 2,248,025
============ ============
See notes to consolidated financial statements.
34
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2005 2004
------------ ------------
Current liabilities:
Note payable - bank $ 50,000 $ 49,450
Note payable - Insurance 10,621 11,474
Current portion of long-term debt -- 2,353
Due to stockholders 352,349 236,641
Deferred revenues 1,594 500
Accounts payable and accrued expenses 395,008 294,193
------------ ------------
Total current liabilities 809,572 594,611
------------ ------------
Commitments and contingencies -- --
Stockholders' equity
Common stock - $.0001 par value
Authorized - 100,000,000 shares
Issued and outstanding -28,485,033
shares, respectively 2,849 2,849
Additional paid-in capital 5,177,386 4,954,526
Deficit accumulated in the development stage (3,780,478) (3,303,961)
------------ ------------
Total stockholders' equity 1,399,757 1,653,414
------------ ------------
Total liabilities and stockholders'
equity $ 2,209,329 $ 2,248,025
============ ============
See notes to consolidated financial statements
35
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Cumulative From
For the Three For the Three January 29, 1999
Months Ended Months Ended (Inception) to
March 31, 2005 March 31, 2004 March 31, 2005
-------------- -------------- --------------
Revenues $ 286 $ 592 $ 21,602
-------------- -------------- --------------
Operating expenses:
Selling 41,040 41,098 561,181
Web site costs 13,290 17,472 217,379
Software development costs -- 75,000 285,524
General and administrative 201,695 162,769 1,577,152
Amortization and impairment of
license costs and deferred
promotional incentives -- 63,667
Depreciation and amortization 31,197 14,757 357,618
-------------- -------------- --------------
Total operating expenses 287,222 311,096 3,062,521
-------------- -------------- --------------
Loss from operations (286,936) (310,504) (3,040,919)
-------------- -------------- --------------
Other expenses:
Interest 3,004 483 109,827
Interest-related party 2,577 10,577
Warrant penalty-related party 184,000 322,000
Compensatory element of
noteholders purchase rights -- -- 231,450
Amortization of deferred
financing costs -- -- 52,500
Loss on disposal of equipment -- -- 13,205
-------------- -------------- --------------
Total other expenses 189,581 483 739,559
-------------- -------------- --------------
Net loss $ (476,517) $ (310,987) $ (3,780,478)
============== ============== ==============
Per share data:
Loss per share - basic and diluted $ (.02) $ (.01)
============== ==============
Weighted average number of
shares outstanding 26,801,275 24,638,198
============== ==============
See notes to consolidated financial statements
36
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CUMULATIVE FROM JANUARY 29, 1999 (INCEPTION) TO DECEMBER 31, 2004
Deficit
Accumulated Total
Additional in the Stock Stockholders'
Common Stock Paid-In Development Subscriptions Equity (Capital
Shares Amount Capital Stage Receivable Deficiency)
----------- ----------- ----------- ----------- ----------- -----------
Common stock issued to founders 6,616,910 $ 662 $ 1,338 $ -- $ -- $ 2,000
Net loss for the period from
January 29, 1999 (inception)
to December 31, 1999 -- -- -- (24,056) -- (24,056)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 6,616,910 662 1,338 (24,056) -- (22,056)
Net loss from the year ended
December 31, 2000 -- -- -- (56,775) -- (56,775)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 6,616,910 662 1,338 (80,831) -- (78,831)
Loan converted to common stock 1,123,090 112 103,963 -- -- 104,075
Common stock subscribed 7,160,000 716 6,234 -- (6,450) 500
Common stock issued for
services rendered 100,000 10 8,990 -- -- 9,000
Promotional incentives with
respect to exercise stock
purchase rights -- -- 44,500 -- -- 44,500
Net loss from the year ended
December 31, 2001 -- -- -- (221,790) -- (221,790)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 15,000,000 1,500 165,025 (302,621) (6,450) (142,546)
Proceeds from exercise of
noteholders' purchase rights 310,000 31 3,069 -- -- 3,100
Payment of subscriptions -- -- -- -- 6,450 6,450
Compensatory element of
noteholders' purchase rights -- -- 62,400 -- -- 62,400
Net loss from the year ended
December 31, 2002 -- -- -- (594,672) -- (594,672)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2002 15,310,000 1,531 230,494 (897,293) -- (665,268)
Proceeds from exercise of
noteholders' purchase rights 815,000 82 8,068 -- -- 8,150
Compensatory element of
noteholders' purchase rights -- -- 169,050 -- -- 169,050
Proceeds from sale of securities,
net of registration costs 5,272,000 527 1,520,851 -- -- 1,521,378
Net loss from the year ended
December 31, 2003 -- -- -- (1,068,433) -- (1,068,433)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2003
(consolidated) 21,397,000 2,140 1,928,463 (1,965,726) -- (35,123)
Issuance of securities as partial
payment for license:
Common stock 2,300,000 230 574,770 -- 575,000
Warrants to acquire 2,300,000 shares 575,000 -- 575,000
Net proceeds from sale of securities 4,078,000 408 976,047 -- 976,455
Compensatory value of stock options
issued for services rendered 290,000 -- 290,000
Compensatory value of common stock
issued to Advisory Board Members 130,000 13 90,987 -- 91,000
Compensatory value of stock options
issued to Advisory Board Members 3,309 -- 3,309
Issuance of common stock options
to non employee directors 187,500 -- 187,500
Stockholder's loans converted
to common stock 580,033 58 152,950 153,008
Officers' salaries waived 37,500 37,500
Warrant penalty -- -- 138,000 -- 138,000
Net loss -- -- -- (1,338,235) -- (1,338,235)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2004 28,485,033 $ 2,849 $ 4,954,526 ($3,303,961) $ -- $ 1,653,414
=========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements
37
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(Unaudited)
Deficit
Accumulated Total
Additional in the Stockholders'
Common Stock Paid-In Development Equity (Capital
Shares Amount Capital Stage Deficiency)
-------------- -------------- -------------- -------------- --------------
Balance at January 1, 2005 28,485,033 $ 2,849 $ 4,954,526 $ 93,303,961) $ 1,653,414
Issuance of common stock options 1,360 1,360
Officer's salaries waived 37,500 37,500
Warrant penalty 184,000 184,000
Net loss -- -- -- (476,517) (476,517)
-------------- -------------- -------------- -------------- --------------
Balance at March 31, 2005 28,485,033 $ 2,849 $ 5,177,386 $ (3,780,478) $ 1,399,757
============== ============== ============== ============== ==============
See notes to consolidated financial statements.
38
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Cumulative From
For the Three January 29, 1999
Months Ended (Inception) to
March 31, March 31,
--------- ---------
2005 2004 2005
-------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (476,517) $ (310,987) $ (3,780,478)
-------------- -------------- --------------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Deferred revenue 1,094 33 1,594
Warrant penalty 184,000 322,000
Waiver of officer's salaries 37,500 -- 75,000
Imputed interest -- -- 8,000
Compensatory element of stock options 1,360 1,360
Compensatory element of noteholders'
purchase rights 231,450
Depreciation -- 1,457 14,288
Amortization of deferred financing costs -- -- 52,500
Amortization of software development costs 31,196 13,299 337,496
Amortization of consulting fees 12,735 -- 89,280
Amortization and impairment of licenses and -- --
deferred promotional incentives -- -- 44,500
Amortization and write off of deferred license costs -- -- 25,000
Loss on disposal of equipment 13,205
Common stock issued for legal fees 9,000
Increase (decrease) in cash flows as a result of -- --
changes in asset and liability account balances:
Accounts receivable 300 (1,156) (651)
Prepaid insurance (1,555) (872) (20,074)
Due to placement agent -- 4,800 --
Due to stockholders 3,771 -- 215,412
Security deposits -- -- (2,155)
Accounts payable and accrued expenses 100,815 (17,889) 395,008
-------------- -------------- --------------
Total adjustments 371,216 (328) 1,812,213
-------------- -------------- --------------
Net cash used in operating activities (105,301) (311,315) (1,968,265)
-------------- -------------- --------------
Cash flows from investing activities:
Equipment purchases -- -- (8,204)
Software development costs -- (247,477)
Deferred license costs (50,000)
Deferred license fee -- (500,000) (800,000)
-------------- -------------- --------------
Net cash used in investing activities -- (500,000) (1,105,681)
-------------- -------------- --------------
Net cash used in operating and investing activities (105,301) (811,315) (3,073,946)
-------------- -------------- --------------
See notes to consolidated financial statements.
39
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Cumulative From
For the Three January 29, 1999
Months Ended (Inception) to
March 31, March 31, 2004
2005 2004
---- ----
Net cash used in operating and
investing activities brought forward: $ (105,301) $ (811,315) $ (3,073,946)
-------------- -------------- --------------
Cash flows from financing activities:
Due to stockholders 110,577 -- 468,085
Note payable - bank 550 -- 50,000
Loans payable (3,206) (1,252) 93,707
Deferred financing costs -- -- (52,500)
Deferred registration costs -- -- (234,681)
Proceeds from sale of securities -- 689,345 2,747,964
Proceeds from stock
subscriptions receivable -- -- 6,450
-------------- -------------- --------------
Net cash provided by financing activities 107,921 688,093 3,079,025
-------------- -------------- --------------
Net increase (decrease) in cash 2,620 (123,222) 5,079
Cash at beginning of period 2,459 271,800 --
-------------- -------------- --------------
Cash at end of period $ 5,079 $ 148,578 $ 5,079
============== ============== ==============
Supplemental disclosure of cash flow information:
Cash payment made during the period
Interest $ 12,979 $ 533 $ 116,634
============== ============== ==============
See notes to consolidated financial statements.
40
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
For the Three Cumulative From
Months Ended January 29, 1999
March 31, (Inception) to
March 31,
2005 2004 2005
---- ---- ----
Supplemental Schedules of Noncash Investing
and Financing Activities:
Assets acquired for debt -- -- $ 19,289
============
Deferred promotional incentives acquired through
exercise of common stock purchase rights -- -- $ 44,500
============
Common stock issued for services rendered -- -- $ 100,000
============
Stockholder's loans converted to common stock -- $ 257,083
============
Compensatory element of note holders'
purchase rights -- -- $ 231,450
============
Due to placement agent -- $ 1,700
============
Issuance of stock options as partial payment
For software -- $ 290,000
============
Issuance of common stock options for
services rendered -- -- $ 190,809
============
Warrant penalty $ 184,000 -- $ 322,000
============ ============
Issuance of common stock and common stock
warrants for license -- $ 1,150,000
------------
Officers' salaries waived $ 37,500 -- $ 75,000
============ ============
See notes to consolidated financial statements.
41
SEARCHHELP, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
March 31, 2005
NOTE 1 - PLAN OF ORGANIZATION:
(a) Organization and Presentation of Financial Statements:
SearchHelp, Inc. (the "Company") was incorporated in the State of
Delaware on September 5, 2001 at which time the founding shareholders
subscribed for 6,660,000 shares of the Company's common stock for an
aggregate of $6,450. The stock subscriptions were paid in January and
February 2002. The Company is a successor to SH Networks.com, Inc.,
("SHN"), formerly known as SearchHelp.com, Inc., a New York corporation
formed on January 29, 1999. SHN merged into the Company on September 5,
2001 in a transaction in which the shareholders of SHN exchanged all of
the capital stock in SHN for 6,616,910 common shares of the Company. The
merger was accounted for as a recapitalization. Certain creditors of SHN
simultaneously converted their debt of $104,075 into 1,123,090 shares of
the Company's common stock ($.09 per share). Since its inception through
December 31, 2004, the Company and its predecessor have not generated any
significant revenues and have not carried on any significant operations.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company has recorded a net loss of $476,517 and $310,987
for the three months ended March 31, 2005 and 2004, respectively and a
cumulative loss $3,780,478 from January 29, 1999 (Inception) to March 31,
2005.
This condition raises substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Management's efforts have been directed towards the development and
implementation of a plan to generate sufficient revenues to cover all of
its present and future costs and expenses. The plan includes, among other
things, developing and selling products and services oriented towards
improving family well being.
The Company offered for sale to the public in an initial public
offering ("IPO"), through a placement agent, on a best efforts basis, up
to 8,000,000 units (each consisting of one share of common stock, one A
warrant to purchase one share of common stock at $.75 per share and one B
warrant to purchase one share of common stock for $1.75 per share) at a
purchase price of $.50 per unit. The IPO was declared effective on January
22, 2003. The Company sold 2,474,000 units for total gross proceeds of
$1,237,000. The placement agent received 10% of the gross proceeds from
the offering, plus certain warrants and reimbursement of expenses.
Placement agent fees and registration costs were $403,942 of which
$234,681 had been paid in 2002 and 2001 and the balance of $169,311 was
paid from the proceeds of the offering. From the proceeds of the IPO the
Company repaid all previously outstanding notes totaling $475,000 and
interest of $82,518. $265,719 of the proceeds from the IPO was used to pay
accounts payable and expenses. The balance of $244,452 was used for
working capital and was fully expended to support operations.
42
Accordingly, effective September 8, 2003, after the IPO had closed
and, in part, because the IPO had not been fully subscribed, the Company
commenced a best efforts private offering of up to 4,000,000 shares of its
common stock, $0.0001 par value at $0.25 per share. The per share offering
price was established by the Company because of the restrictions on
transfer of the shares and the fact that prospective investors were
required to purchase a substantial number of shares (20,000 for $5,000) in
order to participate. In November 2003, the offering was increased to
6,000,000 shares at the same purchase price. The offering was extended
through August 31, 2004 and further increased to raise $1,800,000 and to
sell 7,200,000 shares of the Company's common stock. As of September 30,
2004, the offering was completed. Under this private offering, 6,886,000
shares of the Company's common stock were sold for gross proceeds of
$1,721,500 less $52,750 in offering costs. The Company paid the placement
agent a commission of 10% of the proceeds of all the shares placed by the
placement agent and non-accountable expense allowance of 2% of the
proceeds of all the shares placed by the placement agent. In addition to
the placement agent's cash compensation, the Company gave the placement
agent warrants to purchase up to 720,000 shares of common stock at a
purchase price of $.30 per share which are exercisable for a period of 5
years, which means that the placement agent received a warrant to purchase
one share of common stock for every 10 shares sold by the placement agent.
The placement agent's warrants and the underlying shares of common stock
were not registered at the time of grant. The placement agent has certain
piggyback rights to cause the registration of the shares if the Company
effects a registration of its securities. For the year ended December 31,
2004, 4,078,000 shares were purchased for $976,455, net of $43,045 in
offering costs. One placement agent received warrants to purchase 34,000
shares of the Company's common stock at a purchase price of $0.30 per
share at December 31, 2003 and 138,800 shares of the Company's common
stock at a purchase price of $0.30 per share for the quarter ending
September 30, 2004, for a aggregate of 172,800 shares of the Company's
common stock for the year ended December 31, 2004. These warrants were
issued to this placement agent in October 2004. The net proceeds of this
offering have been used to support the Company's operations.
Since the Company has not generated significant revenues and as
management does not anticipate the Company will generate substantial
revenues from the sale of its products in an amount necessary to meet its
cash needs for the next twelve months, management believes the Company
will need additional financing to continue operating. On April 25, 2005,
the Company amended its Articles of Incorporation to issue 25,000,000
shares of preferred stock as well as increasing the amount of common stock
that the Company is authorized to issue to 250,000,000 from 100,000,000.
Management plans to raise additional capital through a private offering of
its new class of preferred stock. Management is planning to raise the
funds by soliciting accredited investors and small micro cap funds.
Management is hopeful that they will be able to raise between one and two
million dollars within the next 90 days, in addition to the $215,000 that
has already been raised through a private sale of the Company's common
stock. If the Company is unable to raise the necessary capital, within the
next three month, it will be unable to continue operating.
(b) Principal Business Activity:
The Company is focused on utilizing new and emerging technology to
develop products and services oriented toward improving family and
well-being, primarily but not exclusively in the home, having shifted its
primary focus from providing small businesses with online forums. The
Company intends to continue to develop software intended to keep children
safe while online, and its more expanded purpose will be to seek out
emerging technologies, products and services that exhibit significant
promise of improving family safety and well being and to participate in
their development and marketing.
43
The Company's two existing software products, Sentry At Home and
Sentry Remote, formerly known as Secure Protect Identify Kids Everywhere
(S.P.I.K.E.), and S.P.I.K.E. Remote Sentry, were developed to keep
children safe while online. The Company had entered into an exclusive five
year licensing agreement with Family Trusted Products, LLC ("FTP"). FTP
was to be responsible for the manufacturing, marketing and distribution of
the Sentry Products. FTP was to pay the Company a royalty of 10% on all
FTP sales of the Sentry products. The Company signed a termination
agreement with FTP on April 1, 2005. The Company is currently
manufacturing the products and expects completion sometime in June 2005.
Expanded Areas of Development
Indoor Air Quality (IAQ)
The Company has been exploring opportunities with the "at home"
quality of living aspects of indoor air quality ("IAQ"). The Company has
formed a subsidiary, Indoor Air Quality Services, Inc., to pursue the IAQ
business. The increased knowledge and concern regarding indoor air toxins
and irritants, combined with the increase in the diagnosis of childhood
and adult asthma and the potential impact of these issues on general
family health, represent, in the Company's opinion, an area in need of
address and solutions. The increasing media attention, as well as hard and
soft data related to in-home complaints and associations with IAQ
problems, makes the opportunity to develop a consumer friendly/informative
home-based solution attractive to the Company.
The Company has chosen to focus on one of the most important issues
within the broader IAQ arena - Mold. There is a great deal of both medical
and media attention being given to the detection and the removal of
harmful molds from both indoor residential and commercial structures. The
Company is investigating the potential for engaging two aspects of the
mold issue: (1) providing definitive products for screening for mold
conditions and (2) providing effective indoor mold remediation solutions.
On February 3, 2004, the Company entered into a Participation
Agreement with Environmental Commercial Technology Corp. ("ECT"). ECT has
been granted the rights to market a product, an organic compound, intended
for the prevention of the growth of mold and fungus. The Company received
the right to receive 5% of the gross revenue from the sale of the product.
In return, the Company provided development capital of $500,000 plus an
additional payment of $100,000 by August 2004. Due to the delay in the
Environmental Protection Agency approval, the Company will make the final
payment of $100,000 when ECT begins to generate revenue from the mold
compound. The Company will also provide consulting services in connection
with the marketing and sales of the product for a 5 1/2-year term. As
additional consideration, the Company also granted ECT and its parent
company, Bioneutral Laboratories Corporation USA, a total of 2,300,000
shares of common stock and warrants to purchase up to an additional
2,300,000 shares of common stock.
The fair value paid for the participation agreement aggregated
$1,950,000 of which a total of $600,000 will be in cash and the balance
was the fair value of the securities issued and is included in the
accompanying financial statements as the cost of the license. The fair
value of the common shares issued of $575,000 was determined by the
selling price of the Company's unregistered restricted common stock on the
transaction date of $0.25 per share. The fair value of the warrants using
the Black-Scholes pricing method with a 6% risk-free interest rate and
200% volatility is $575,000. The estimated registration costs to be borne
by the Company are $200,000 and are included in accounts payable and
44
accrued expenses. Under the participation agreement, the Company was
required to effectuate and pay the costs of a registration statement to be
filed with the Securities and Exchange Commission for the shares issued
and the shares underlying the warrants issued to ECT and its parent by
September 1, 2004. If the Company was not successful in registering the
securities by that date, the agreement allows the warrant exercise price
to be reduced in stages from $0.33 per share at September 1, 2004 to a low
of $0.01 per share at January 1, 2006. If the registration statement was
not effective by January 1, 2005, both ECT and its parent could cancel the
agreement and within ten (10) days of such termination, return to the
Company (i) the cash of $600,000, less any revenue sharing payments made
to the Company, (ii) the warrants and (iii) half of the common shares
issued and to the extent that the shares are not then in ECT or its parent
company's possession, they must pay fifteen cents ($0.15) for each such
share that is no longer in their possession. The Company does not intend
to make this payment until revenues are generated from the compound. The
Company has requested an extension to effect a registration statement as
well as a freeze in the exercise price of the warrants. For the three
months ended March 31, 2005, operations was charged $184,000 for the $.08
penalty incurred between the difference of the issue price of $0.27 and
the warrant schedule price of $0.19.
NOTE 2 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES:
(a) Basis of Presentation:
The accompanying unaudited financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America. The Company in August 2003 incorporated its wholly
owned subsidiary, Indoor Air Quality Services, Inc., which has had no
activity through March 31, 2005. The accompanying unaudited financial
statements for the three months ended March, 31, 2005 include the accounts
of the Company and its wholly owned subsidiaries. All intercompany
transactions have been eliminated in consolidation. The accompanying
unaudited financial statements for the three months ended March 31, 2005
include the accounts of the Company and its wholly owned subsidiaries
Indoor Air Quality Services, Inc., FamilySafe, Inc., which was
incorporated in February 2004 for the software activities of the Company,
and the Company's newest subsidiary, Digital I.D. Systems, Inc., which was
incorporated in August 2004 which intends to concentrate on digital
security technology.
In the opinion of management, the unaudited financial statements
contain all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial position of the Company as of
March 31, 2005 and the results of operation and cash flows for the three
months ended March 31, 2005 and 2004. The results of operation for the
three months ended March 31, 2005 and 2004 are not necessarily indicative
of results to be expected for the full year.
The December 31, 2004 balance sheet was derived from the audited
financial statements included in the Company's report on Form 10-KSB for
the ended December 31, 2004 and should be read in conjunction therewith.
(b) Revenue Recognition:
For the three months ended March 31, 2005 the Company has not
generated significant revenues and is in the development stage. The
Company recognizes revenues in accordance with accounting principles
generally accepted in the United States of America. Income from contracts
for advertising income, web site services and solutions will be earned on
a pro-rata basis throughout the life of the related contract. The Company
reported consolidated revenues at March 31, 2005 of $286 and deferred
revenues of $1,594. Royalty income will be recognized in the same period
as the underlying licensees' sales are reported
45
NOTE 2 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES (Continued):
as income. Revenues in the form of sales and commissions from the on-line
sale of products, if any, will be recognized at the date of shipment. (c)
Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ
from those estimates.
(d) Concentration of Credit Risk:
Financial instruments that potentially subject the Company to a
significant concentration of credit risk consist of cash. The Company
places its cash with high credit quality financial institutions that at
times maybe in excess of the FDIC insurance limit.
(e) Depreciation and Amortization:
Depreciation of property and equipment is provided by the
straight-line method over the estimated useful lives of the related assets
ranging from five to seven years. Significant improvements are
capitalized; maintenance and repairs are charged to income. When assets
are retired or otherwise disposed of, the cost and related accumulated
depreciation are eliminated from the accounts and the resulting gain or
loss, if any, is reflected in income.
Costs associated with the development of software that is not
intended for sale are capitalized. Costs incurred in the securing of
financing and for promotional incentives are also capitalized.
Amortization of software development costs, finance costs and promotional
incentives are provided by the straight-line method, over estimated useful
lives of three years, sixty days and eighteen months, respectively.
(f) Earnings Per Share:
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share". Basic earnings per share is based on the
weighted effect of all common shares issued and outstanding, and is
calculated by dividing net income available to common stockholders by the
weighted average shares outstanding during the period. Diluted earnings
per share, which is calculated by dividing net income available to common
stockholders by the weighted average number of common shares used in the
basic earnings per share calculation, plus the number of common shares
that would be issued assuming conversion of all potentially dilutive
securities outstanding, is not presented as it is anti-dilutive.
(g) Stock Based Compensation:
The Company elected to use the intrinsic value method to account for
future options granted to employees for the purchase of common stock as
per Accounting Principles Board Opinion No.25 "Accounting for Stock Issued
to Employees" ("APB 25"). The Company will disclose the pro forma effect
of accounting for stock options under the fair value method as prescribed
in SFAS No. 123, "Accounting for Stock-Based Compensation" ("FASB 123").
For transactions in which goods and services are the consideration
received for the issuance of common stock, the accounting shall be the
fair value of the common stock issued or the fair value of the
consideration received whichever is more reliably measurable at the date
the options are issued. The Company has
46
NOTE 2 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES (Continued):
chosen not to adopt SFAS 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure" which was issued in December 2002. This
statement amends SFAS No. 123, to provide alternative methods of
transition for a voluntary change to the fair value based method.
(h) Advertising Costs.
The Company expenses ordinary advertising and promotion costs as
incurred. Advertising and promotion costs were $12,410 and $1,745 for the
three months ended March 31, 2005 and 2004, respectively.
(i) Software Research and Development Costs:
Research and development costs are expensed as incurred. Software
development costs are subject to capitalization beginning when a product's
technological feasibility has been established and ending when a product
is available for release to customers. The Company intends to release its
products as soon as possible after technological feasibility has been
established. As a result, costs subsequent to achieving technological
feasibility should not be significant and all software development costs
will be expensed. Commencing in April 2002, the Company incurred software
research and development costs of $204,342 which were charged to
operations ($154,609 in 2003 and $49,715 in 2002) in connection with the
initial development phase of two products. For the three months ended
March 31, 2005 the Company did not incur any software development costs
and incurred $75,000 for the three months ended March 31, 2004.
(j) Recently Issued Accounting Pronouncements:
In December 2004, the FASB issued SFAS No. 153, Exchange of
Non-monetary Assets. SFAS No. 153 amends APB Opinion No. 29, Accounting
for monetary Transactions, to eliminate the exception for non-monetary
exchanges of similar productive assets. The Company will be required to
apply this statement to non-monetary exchanges after December 31, 2005.
The adoption of this standard is not expected to have a material effect on
the Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment, which is an amendment to SFAS No. 123, Accounting for
Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees In. This new standard eliminates the ability to
account for share-based compensation transactions using Accounting
Principles Board (APB) No. 25, Accounting for Stock Issued to Employees
(APB 25) and requires such transactions to be accounted for using a
fair-valued-based method, with the resulting cost recognized in the
Company's financial statements. This new standard is effective for annual
periods beginning after June 15, 2005. The Company has not awarded or
granted any share-based compensation to date and, therefore, the adoption
of this standard is not expected to have any effect on the Company's
financial position or results of operations until such time as share-based
compensation is granted.
Management believes the adoption of these pronouncements will not
have a material impact on the Company.
47
NOTE 3 - PROPERTY AND EQUIPMENT.
Property and equipment consist of the following:
March 31, December 31,
2005 2004
------------ ------------
Computers $ -- $ --
Furniture and fixtures -- 803
------------ ------------
-- 803
Less: Accumulated depreciation -- 803
------------ ------------
$ -- $ --
============ ============
Depreciation expense charged to operations for the year ended
December 31, 2004 was $1,457 and for the three months ended March 31, 2005
there was no charge to operations for depreciation.
NOTE 4 - INTANGIBLE ASSETS.
In connection with the December 31, 2001 private placement of the
Company's notes, the placement agent has received a fee of $27,500 through
December 31, 2001 and an additional fee of $25,000 for the year ended
December 31, 2002. The fee was charged to operations as additional
interest over the 60-day term of the notes. Amortization of these fees
charged to operations was $625 for the year ended December 31, 2003 and
the three months ended March 31, 2003.
In accordance with the American Institute of Certified Public
Accountants Statement of Position No. 98-1, "Accounting for the Cost of
Computer Software Developed or Attained for Internal Use," the Company,
since inception, capitalized costs of $247,477 of which $33,625 and
$59,830 were capitalized in 2003 and 2002. These costs consisting of
amounts paid to independent consultants related to the implementation and
enhancement of its propriety related database and interactive operating
software. The Company is amortizing these costs over their estimated
useful lives of the three years. Amortization charged to operations during
the years ended December 31, 2003 and 2002 was $59,000 and $35,584 and
$33,625 for the nine months ended September 30, 2004 and 2003,
respectively. In August 2003, the Company agreed to purchase certain
software from the entity that had been licensing the software to the
Company. The total purchase price is cash of $25,000 and options to
acquire 750,000 shares of the Company's common stock, See Note 12. The
Company received the deliverables and paid the remaining $15,000 to the
vendor in March 2004. Amortization for the additional software costs was
$31,196 and $4,792 for the three months ended March 31, 2005 and 2004.
NOTE 5 - NOTES PAYABLE - BANK.
The Company has a $50,000 revolving line of credit with a bank.
Interest on borrowings is charged at 2.25% above the bank's prevailing
prime rate. The average interest rate charged to the Company for the three
months ended March 31, 2005 was 7.9% and 7.50% at December 31, 2004.
Interest expense of $2,152 was charged to operations during the year ended
December 31, 2004, $3,004 and $483 were charged to operations for the
three months ended March 31, 2005 and 2004 respectively. At December 31,
2004 and March 31, 2005, $50,000 of the line has been utilized. The debt
is guaranteed by the CEO of the Company and is collateralized by
marketable securities which he owns which had a fair market value of
approximately $36,000 at December 31, 2004 and $35,000 at March 31, 2005.
48
NOTE 6 - NOTES PAYABLE - OTHER.
During December 2001, the Company initiated a private placement
offering to raise capital in order to fund the creation of its web site.
The offering consisted of thirteen $25,000 notes bearing interest at 10%
per annum payable in sixty (60) days from issuance. If the notes were not
repaid in full on their due dates, then each note holder has the right to
purchase 10,000 shares of the Company's common stock at $.01 per share and
then 5,000 shares at the end of each additional thirty (30) day period the
notes remain outstanding. The variance between the purchase right's
exercise price per share and the fair value of the securities acquired
will be charged to operations as additional interest. Additionally, the
placement agent was to be paid ten (10%) percent of the proceeds of the
offering, plus out-of-pocket expenses. Amortization of deferred financing
costs is charged to operations over the sixty (60) day term of the notes.
At December 31, 2001, the Company had sold nine notes, one of which
was to its former CFO. In January and February 2002, the remaining four
notes were sold at par value. The notes were repaid with accrued interest
in July 2003. A placement agent fee of $25,000 was paid in December 31,
2002 and is reflected on the accompanying balance sheet as deferred
financing costs. During the year ended December 31, 2003, an additional
compensatory element interest charged to operations for the excess of the
fair value of the note holders purchase rights received over their
exercise price was $45,200. The fair value of the purchase rights was
determined by management at $.09 per share which was the ascribed fair
value of the purchase rights using the Black-Scholes Option Pricing Model
for determining fair value. During the year ended December 31, 2003, an
additional compensatory interest element for purchase rights to acquire
345,000 common shares was charged to operations for the excess of the fair
value of the note holders' purchase rights received over their exercise
price of $169,050. The fair value of the purchase rights was determined by
management to be $.49 per share which was the difference between the $.50
per unit price the Company's securities were being offered to the public
at the date of issuance of the purchase rights and the $.01 per share note
holders' purchase price.
During the year ended December 31, 2002, the note holders exercised
rights to acquire an aggregate 310,000 common shares for $3,100 including
the Company's former CFO who exercised rights to acquire 55,000 common
shares for $550. During the year ended December 31, 2003, the note holders
exercised rights to acquire 815,000 common shares in the aggregate for
$8,150. These notes and the accrued interest were repaid in 2003.
NOTE 7 - NOTE PAYABLE-INSURANCE.
Long-term debt is comprised of the following:
March 31, December 31,
2005 2004
-------------- --------------
Obligation under equipment financed
payable in installments of $495 including
13% interest through March 2005 $ -- $ 2,353
Insurance premium finance loan payable in
installments of $2,253 including 7% interest 10,621 11,474
Less: Current portion (10,621) (13,827)
-------------- --------------
$ -- $ --
============== ==============
49
NOTE 8 - DUE TO STOCKHOLDERS.
At December 31, 2003, the Company was indebted to its CEO, William
Bozsnyak, in the amount of $130,188 and its President, Debbie Seaman, in
the amount of $14,820 for non-interest bearing cash working capital
advances made to the Company. The results of operations for 2004 include a
charge for imputed interest of $8,000 on these advances at 7.25% which is
the rate charged on the Company's short term debt to a bank. In September
2004, the Company issued 520,753 shares of the Company's common stock to
William Bozsnyak and 59,280 shares of the Company's common stock to Debbie
Seaman in full repayment and satisfaction of the loans and imputed
interest thereon. In December 2004, Mr. Bozsnyak made an additional loan
to the Company of $25,000 and additional loans of $83,000 through March
31, 2005. Because of the large amount of money that Mr. Bozsnyak has
loaned the Company Management has decided to accrue interest on the
outstanding loan amount. For the three months ended March 31, 2005,
operations was charged $2,577 with a corresponding credit to shareholder
loan. The Interest rate used in this calculation is the same interest rate
paid to the Company's short term lender. Under the terms of their
respective employment contracts, Ms. Seaman and Mr. Bozsnyak are owed
$27,640 and $59,998, respectively, at March 31, 2005 for unpaid wages
earned through September 30, 2004. Commencing on October 1, 2004, Ms
Seaman and Mr. Bozsnyak both have waived all future salary under their
contracts until such time as the Company's cash flow can sustain such
payments. The salaries waived through December 31, 2004 were $37,500. For
the three months ended March 31, 2005, $37,500 in salaries were also
waived. Operations was charged with a corresponding increase to additional
paid-in capital.
The Company's former securities counsel is owed $ 22,663 for unpaid
legal services at December 31, 2004 and $28,375 at March 31, 2005.
The Company owes $100,000 to the seller of its mold license at March
31, 2005 and it owes $759 to a corporation, the CEO of which is also a
director of the Company, for reimbursement of administrative costs
expended by that corporation on behalf of the Company.
On December 30, 2003, management agreed to issue non-employee
director options to acquire 750,000 restricted shares of the Company's
common stock for business and marketing advice rendered by the director in
the last quarter of 2003. The fair value of the services rendered as
determined by both the director and management is the fair market value of
the options to be issued, as determined by utilizing the Black-Scholes
option pricing model, based upon the then selling price of restricted
shares through the Company's private placement, $0.25 per share. Such fair
value of $187,500 has been charged to operations in 2003 with a
corresponding increase in due to stockholders. The options were physically
granted on March 12, 2004 at which time the liability to stockholders was
reduced by $187,500 and additional paid-in capital was increased by
$187,500.
As of March 31, 2005, the options have not been exercised and no
stock has been issued.
50
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES.
Accounts payable and accrued expenses consist of the following at:
March 31, December 31,
2005 2004
------------ ------------
Professional fees $ 107,344 $ 58,226
Estimated registration costs 200,000 200,000
Interest on notes payable 334 315
Consultants 9,322 9,742
Accrued Officer Payroll -- --
Accrued Payroll other & payroll taxes 23,333 6,580
Sundry operating expenses 54,675 19,330
------------ ------------
$ 395,008 $ 294,193
============ ============
NOTE 10 - INCOME TAXES.
The Company does not have any currently payable or deferred federal
or local tax benefit since its inception to March 31, 2005. At December
31, 2004 the Company had a net operating loss carryforward available to
reduce future taxable income amounting to $3,056,000 of which $131,000
expires in 2021, $557,000 expires in 2022 and $1,041,000 expires in 2023
and $1,327,000 which expires in 2024. Management is unable to determine if
the utilization of the future tax benefit is more likely than not and,
accordingly, the asset for federal and local carry forwards of
approximately $982,000 has been fully reserved. A reconciliation of the
actual tax provision to the expected statutory rate is as follows:
For the Three Months Ended March 31,
---------------------------------------------------------------------
2005 2004
----- ----
Loss before income taxes $ (484,000) $ (311,000)
============== ==============
Expected statutory tax benefits $ (165,000) -34.0% $ (105,700) -34.0%
Warrant price reduction $ 16,940 3.5% $ -- 0.0%
Nondeductible expenses 7,300 1.5% 16,400 5.3%
Net operating loss valuation reserve 141,000 29.0% 89,300 28.7%
-------------- -------------- -------------- --------------
Total tax benefit $ -- 0.0% $ -- 0.0%
============== ============== ============== ==============
NOTE 11 - COMMON STOCK.
On September 5, 2001, the founding shareholders subscribed for
6,660,000 common shares for an aggregate of $6,450. The subscriptions were
paid in January, February and July 2002 and are reflected as stock
subscriptions receivable in the financial statements as at December 31,
2001.
On September 5, 2001, the shareholders of SH Networks.com, Inc.
(SHN) and the Company agreed to merge SHN into the Company. The SHN
shareholders received 6,616,910 shares of the Company's common stock in
exchange for all of the outstanding capital stock of SHN. At the date of
the merger, SHN's liabilities exceeded its assets by $131,461.
Simultaneously with the merger, certain creditors agreed to exchange
$104,075 in debts for 1,123,090 shares of the Company's common stock ($.09
per share).
51
NOTE 11 - COMMON STOCK. (Continued)
On September 5, 2001, counsel for the Company accepted 100,000
shares of the Company's common stock as partial payment for services
rendered. The fair value of the services rendered and the shares at date
of issuance was $9,000 ($.09 per share).
On November 26, 2001, the individual assignees of an advertising
agreement exercised the purchase right contained in the agreement to
acquire 500,000 shares of the Company's common stock for $500. The fair
value for the securities issued was $45,000 ($.09 per share) on the date
of issuance, which was the ascribed fair value of the purchase rights
using the Black-Scholes Option Pricing Model for determining fair value.
Commencing in February 2002 through December 2002, seven note
holders exercised their purchase rights and acquired 310,000 common shares
for $3,100 in cash. During fiscal 2003, nine note holders exercised their
purchase rights for 815,000 common shares for $8,150 in cash.
In December 2003, management agreed to issue to a director options
to acquire 750,000 restricted shares of the Company's common stock as
payment for services rendered by the director. The fair value of option
for the services rendered of $187,500, as determined by the Black-Scholes
option pricing model, was charged to operations in 2003 with a
corresponding increase in due to stockholders. The options were physically
granted on March 12, 2004 at which time the liability to stockholders was
reduced by $187,500 and additional paid-in capital was increased by
$187,500.
In February 2004, Environmental Commercial Technology Corp. was
issued 2,300,000 shares of the Company's common stock and warrants to
acquire an additional 2,300,000 common shares at an initial exercise price
of $0.33 per share. The fair value of the common stock issued was
determined by the selling price of the Company's unregistered restricted
common stock on the transaction date of $0.25 per share. The fair value of
the warrants using the Black-Scholes pricing method with a 6% risk-free
interest rate and 200% volatility is $575,000.
In May 2004, three members of the Company's Advisory Board were
issued an aggregate of 130,000 shares of the Company's common stock whose
fair value on the date of issuance was $91,000. Half of these shares are
being held in escrow as the recipients will earn these escrowed shares on
a pro rata basis if they continue to serve on the Advisory Board for one
year. The other 50% was earned by the recipients when issued. Amortization
of the 50% to be earned and the initial 50% aggregated through March 31,
2005 was $80,819 and for the three months ended March 31, 2005 was
$11,375. In April 2004, management decided to disband the Advisory Board
for the IAQ area due to the inactivity of the IAQ division, this board
never met and no stock was earned. Therefore, 90,000 shares of common
stock were returned to the transfer agent. In April an entry was made to
operations crediting Advisory Board consulting for $45,500 with a
corresponding debit to additional paid-in capital.
In May 2004, management issued 90,000 options to purchase the
Company's restricted common stock to Directors and Advisory Board Members.
The Advisory Board Members were issued 50,000 options of which 10,000 were
granted to the Chief Financial Officer who also serves on the Advisory
board. On March 9, 2005, Noel C. Bonilla, the Company's CFO passed away.
Mr. Bonilla's options were cancelled upon his death and will no longer be
accounted for under APB 25. The other 40,000 options were granted to four
non-employees. The fair value of the option as determined by the
Black-Scholes option pricing model of $1,360 was charged to operations
with a corresponding increase to paid in
52
NOTE 11 - COMMON STOCK. (Continued)
capital. An additional 40,000 options were granted to two directors who
also serve on the Audit and Compensation Committees. The fair value of
these options was $1,360 using the Black-Scholes option method and will be
accounted for under APB 25. For the three months ended March 31, 2005,
$1,360 was charged to operations for the Advisory Board Members options.
The fair value of the Advisory Board Members options as determined by the
Black-Scholes option pricing model and accounted for under APB 25 was also
$1,360 for the three month ended March 31, 2005.
In November 2004, the Company issued the Chief Financial Officer and
the Chief Technical Officer each an option to purchase 50,000 shares of
the Company's common stock for a purchase price of $.25 per share. These
options vest fully in 90 days and have an option life of 5 years. On March
9, 2005, Noel C. Bonilla, the Company's CFO passed away. Mr. Bonilla's
options were cancelled upon his death. The fair value of the CTO's option
for the three months ended March 31, 2005 was $400 using the Black-Scholes
option method and will be accounted for under APB 25.
Initial Sale of the Company's Securities to the Public:
The Company entered into an agreement with a placement agent to
offer for sale to the public on a best efforts basis up to 8,000,000 units
(each consisting of one share of common stock, one warrant to purchase one
share of common stock at a price of $.75 per share and a warrant to
purchase one common share at $1.75) at $0.50 per unit, which became
effective on January 22, 2003. The Company granted the placement agent and
its designee warrants, which expire on December 31, 2007, to purchase up
to 247,000 units at $.985 per unit for five years. Upon the exercise of a
warrant by the placement agent, the placement agent shall receive a share
of the Company's common stock, a class A redeemable warrant to purchase
one share of common stock exercisable at $.985 per share for five years
and class B redeemable warrant to purchase one share of the Company's
common stock for five years at $2.285. Management and the placement agent
consider the placement agent warrants to be additional compensation for
the agent's services in the offering. If these warrants are exercised in
whole or in part, any excess of the fair value of the securities issued
over the warrant exercise price will be reflected as cost of raising
capital and not a charge to operations and, accordingly, will be charged
to additional paid in capital. The offering which originally terminated on
June 30, 2003 was extended to July 31, 2003. The Company sold 2,474,000
units for total gross proceeds of $1,237,000. The placement agent received
10% of the gross proceeds from the offering, plus certain warrants and
reimbursement of expenses of 3% of the gross proceeds. Placement agent
fees and registration costs were $403,942 of which $234,681 had been paid
in 2002 and 2001 and the balance of $169,311 was paid from the proceeds of
the offering. From the proceeds of the IPO the Company repaid all
previously outstanding notes totaling $475,000 and interest of $82,518.
$265,719 of the proceeds from the IPO was used to pay accounts payable and
expenses. The balance of $244,452 was used for working capital and was
fully expended to support operations.
53
NOTE 11 - COMMON STOCK. (Continued)
Private Placement of the Company's Securities:
On September 8, 2003, the Company commenced a best efforts private
offering of up to 4,000,000 shares of its common stock, $0.0001 par value,
at $0.25 per share. The per share offering price was established by the
Company because of the restrictions on transfer of the shares and the fact
that prospective investors will be required to purchase a substantial
number of shares (20,000 for $5,000) in order to participate. In November
2003, the offering was increased up to 6,000,000 shares of the Company's
common stock at the same purchase price and provided that the Company may
use one or more placement agents to assist in the sale. This offering was
further extended through September 30, 2004 as well as increased to raise
$1,800,000 and to sell 7,200,000 shares of the Company's common stock.
This was primarily due to the delay in launching the Company's software
products. The placement agent earned a commission of 10% of the proceeds
of all the shares placed by the placement agent and non-accountable
expenses of 2% of the proceeds of all the shares placed by the placement
agent. In addition to the placement agents' cash compensation, the Company
has agreed to give the placement agent warrants to purchase up to an
aggregate of 720,000 shares of common stock at a purchase price of $.30
per share which will be exercisable for a period of 5 years. This means
that the placement agent will receive a warrant to purchase one share of
common stock for every 10 shares sold by the placement agent. For the nine
months ended September 30, 2004 one Placement Agent sold a total of
1,388,000 shares for an aggregate of $347,000 net of $41,640 in
commissions. Through September 30, 2004, the same placement agent was paid
in full the 10% commission and 2% non accountable expense fee. The
placement agent was entitled to receive a warrant to purchase 172,800
common shares of the Company's stock at $0.30 per share. The offering was
closed on September 30, 2004, and the warrant was issued on October 15,
2004.
In September 2004, the Company's Chief Executive Officer purchased
an aggregate of 400,000 shares of the Company's restricted common stock
through a private sale for a purchase price of $.25 per share. The total
purchase price was $100,000.
Stock Option Plan:
On December 15, 2003, the Company's stockholders ratified the
SearchHelp, Inc. 2004 Stock Plan ("Plan") which became effective January
1, 2004. Under the Plan, 1,500,000 shares of the Company's common stock
are reserved for issuance to employees (including officers), directors and
consultants upon exercise of options, stock awards, and stock purchase
rights. Options intended to qualify as incentive stock options ("ISO")
under Section 422(b) of the Internal Revenue Code of 1986 are to be
granted to employees only at an exercise price not less than 100% of the
fair market value of the Company's common stock at date of grant except
for employees holding more than 10% of the Company's common stock whose
option price shall be 110% of fair market value at date of grant. Options,
stock awards and purchase rights not intended to qualify as ISOs may be
granted to employees, officers, directors and consultants to the Company.
The minimum exercise price of non-qualified ISOs shall be not less than
the minimum legal consideration required under the laws of jurisdiction
where the Company was organized. The number of shares granted, terms of
exercise, and expiration dates are to be decided at the date of grant of
each option, award and purchase right by the Company's Compensation
Committee of the Board of Directors. The maximum term of an ISO is five
(5) years and ten (10) years for non-qualifying ISO. The Plan commenced on
January 1, 2004 and will terminate on December 31, 2014 unless sooner
terminated by the Board of Directors.
54
NOTE 11 - COMMON STOCK. (Continued)
For the three months ended March 31, 2005, options under the Plan to
acquire 675,590 common shares were issued to employees, officers and
directors of the Company at prices ranging from $0.25 to $0.77 per share,
which was the average of the bid and ask of our common stock on the dates
of grant. However, due to the Company's CFO passing away, options to
purchase 130,000 shares of the Company's common stock that had been
granted to Mr. Bonilla were cancelled upon his death leaving an aggregate
balance of 545,590 shares issued. The Company plans to issue an option to
Mr. Bonilla's estate for the 130,000 shares plus an additional option to
purchase 100,000 shares of the Company's common stock as soon as
practical. If the Company had determined compensation cost for its stock
option plan based on the fair value at the grant dates for awards under
the Plan, consistent with the method prescribed by FASB 123, the Company's
net loss and loss per share would have been increased by (i) $11,870 to
$488,387 ($0.02) per share for the three months ended March 31, 2005. The
fair value of stock options used to compute pro forma net income and
earnings per share disclosures is the estimated value at grant date using
the Black-Scholes option-pricing model with the following weighted average
assumptions: expected dividend yield of 0%; expected volatility of 200%; a
risk free interest rate of 6.0%; and expected option life of 5 years.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure, an Amendment of FASB Statement No. 123" (SFAS No. 148).
SFAS No. 148 provides alternative methods of transition for companies
making a voluntary change to fair value-based accounting for stock-based
employee compensation. The Company continues to account for its stock
option plan under the intrinsic value recognition and measurement
principles of APB Opinion No. 25 "Accounting for Stock Issued to
Employees," and related Interpretations. Effective for interim periods
beginning after December 15, 2002, SFAS No. 148 also requires disclosure
of pro-forma results on a quarterly basis as if the Company had applied
the fair value recognition provisions of SFAS No. 123.
As the exercise price of all options granted under the plan was
equal to or above the market price of the underlying common stock on the
grant date, no stock-based employee compensation is recognized in net
income. The following table illustrates the effect on net income and
earnings per share if the company had applied the fair value recognition
provisions of SFAS No. 123, as amended, to options granted under the stock
option plans and rights to acquire stock granted under the company's Stock
Participation Plan, collectively called "options." For purposes of this
pro-forma disclosure, the value of the options is estimated using a
Black-Scholes option pricing model and amortized ratably to expense over
the options' vesting periods. Because the estimated value is determined as
of the date of grant, the actual value ultimately realized by the employee
may be significantly different. The fair value of the Company's stock
options used to compute pro forma net income and earnings per share
disclosures is the estimated value at grant date using the Black-Scholes
option-pricing model with the following weighted average assumptions for
three months ended March 31, 2005 and 2004, respectively: expected
dividend yield of 0%; expected volatility of 200%; a risk free interest
rate of 6.0%; and expected option life of 5 years.
For the Three Months Ended Cumulative From
March 31, January 29, 1999
2005 2004 To March 31, 2005
---- ---- -----------------
Net loss as reported ($476,517) ($310,987) ($3,780,478)
Net loss pro forma ($488,387) ($314,403) ($3,792,348)
Shares - Basic 28,485,033 26,530,000
Basic loss per share as reported ($0.02) ($0.01)
Basic loss per share pro forma ($0.02) ($0.01)
55
NOTE 11 - COMMON STOCK. (Continued)
Presented below is a summary of the status of the stock options in
the plan and the related transactions for the three months ended March 31,
2005:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -----
Options outstanding as of January 1, 2005 675,590 $0.25 to $0.077
===============
Granted 675,590 $0.25 to $0.077
===============
Canceled/Surrendered 130,000
Exercised 0
Forfeited 0
-------
Options outstanding at March 31, 2005 545,590 $0.44
======= =====
For the three months ended March 31, 2005, the Plan has 954,410
shares available for grant.
The weighted average fair value of stock options at date of grant,
calculated using the Black-Scholes option-pricing model, granted during
the three months ended March 31, 2005 was $0.44.
The Company may issue options to purchase the Company's common stock
to officers, non-employees, non-employee directors or others as part of
settlements in disputes and/or incentives to perform services for the
Company. The Company accounts for stock options issued to vendors and
non-employees of the Company under SFAS No. 123 "Accounting for
Stock-Based Compensation." The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing
model is charged to operations utilizing weighted average assumptions
identical to those used for options granted to employees.
The following table summarizes the status of all the Company's stock
options outstanding and exercisable at March 31, 2005.
STOCK OPTIONS STOCK OPTIONS
OUTSTANDING EXERCISIABLE
----------- ------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
EXERCISE PRICES SHARES PRICE SHARES PRICE
--------------- ------ ----- ------ -----
$0.25 800,000 $0.24 800,000 $0.24
$0.33 2,300,000 $0.32 0 $0.32
$0.47 375,590 $0.46 285,590 $0.46
$0.62 750,000 $0.61 375,000 $0.61
$0.70 80,000 $0.68 40,000 $0.68
$0.77 120,000 $0.75 60,000 $0.75
------- ----- ------- -----
Total at March 31, 2005 4,425,590 $0.51 1,515,590 $0.51
--------- ----- --------- -----
56
NOTE 11 - COMMON STOCK. (Continued)
As of March 31, 2005, outstanding options to purchase a total of
40,000 shares of the Company's common stock were granted to members of the
Company's Advisory Board in May 2004. A consultant was also granted two
options to purchase an aggregate of 750,000 shares of the Company's common
stock which are also outstanding at March 31, 2005 (See note 12b). None of
the options have been exercised at March 31, 2005.
In November 2004, management also granted the Chief Financial
Officer and the Chief Technical Officer an option to purchase 50,000
shares each of the Company's common stock at a purchase price of $.25 per
share. Mr. Bonilla's option to purchase 50,000 shares was automatically
cancelled upon his death on March 9, 2005.
At March 31, 2005 none of the options have been exercised.
Warrants:
As part of its initial sale of its securities to the public the
Company sold Class A warrants to acquire 2,474,000 common shares at $0.75
per share and Class B warrants to acquire 2,474,000 common shares at $1.75
per share. As additional compensation to the placement agent who placed
the Company's securities, the agent and its designees received rights to
acquire 247,000 units of the Company's securities for $0.985 each for five
years. Each unit is comprised of one share of common stock, a warrant to
acquire one share of common stock at $0.985 and another warrant to acquire
one share of common stock at $2.285 per share. Warrants to acquire 172,800
shares of the Company's common stock at $0.030 per share was issued to a
placement agent exercisable for five years as part of its compensation for
its services in the Company's private placement of its securities in 2004.
As part of the purchase price of a license (See Note 1 (b)), the
Company issued a warrant to acquire 2,300,000 shares of common stock at an
initial price of $0.33 per share. Due to the Company's not registering the
underlying common stock in the prescribed time frame, the exercise price
of the warrants has been reduced to $0.27 per share at December 31, 2004
and another $.08 per share for the three months ended March 31, 2005
At March 31, 2005, none of the warrants were exercised.
NOTE 12 - COMMITMENTS AND CONTINGENCIES.
(a) Stock Purchase Rights:
Certain notes payable include a default penalty that entitles the
holder to purchase (i) 10,000 shares of the Company's common stock for
$.01 per share if the note is not repaid on its original due date and (ii)
5,000 shares of the Company's common stock for $.01 per share for each
thirty day period the note remains unpaid past its original due date. Each
note holder receives these purchase rights regardless of whether the
individual note holder agrees to extend the due date of the note. Through
December 31, 2002, the note holders received rights to acquire 780,000
shares of the Company's common stock at purchase price of $.01 per share.
The difference between the fair value of the common stock underlying the
purchase rights ($.09 per share, which was the ascribed fair value of the
purchase rights using the Black-Scholes Option Pricing Model for
determining fair value) and the exercise price of $.01 per share is
charged to operations as additional interest on the date the purchase
rights are issued.
57
NOTE 12 - COMMITMENTS AND CONTINGENCIES. (Continued)
Through December 31, 2002, the note holders exercised rights to acquire
310,000 shares of the Company's common stock. During the year ended
December 31, 2003, the note holders received additional rights to acquire
345,000 shares of the Company's common stock at a purchase price of $.01
per share, which is the difference between the fair value of the common
stock underlying the purchase rights ($.49 per share which was determined
by management as the difference between the $.50 per unit price the common
stock was then being offered to the public and the $.01 per share note
holders purchase price). During the year ended December 31, 2003, the note
holders exercised purchase rights to acquire 815,000 shares of the
Company's common stock. At March 31, 2005, no purchase rights to acquire
common stock were outstanding.
(b) Former License and Distribution Agreement.
In June 2002, the Company entered into a 5 year license agreement
with Edocusign, Inc., to be the exclusive licensee through December 31,
2003 and a non-exclusive licensee thereafter to manufacture, package,
promote, advertise, market and sell a software package designed to assist
parents to monitor their child's on-line behavior. The Company was
required to pay the licensor an initial license fee of $50,000 and
thereafter a royalty of $4 for each product sold. At December 31, 2002 the
unamortized portion of the deferred license fee was $44,167 and the
licensor was owed $50,000 which is included in accounts payable and
accrued expenses at December 31, 2002. Through August 15, 2003, the
Company paid the licensor $25,000.
Effective August 15, 2003, the parties terminated the agreement by
entering into a software purchase and services agreement. Under the terms
of this agreement the Company is not required to pay the balance owed of
$25,000 under the license agreement. The Company, under the new agreement,
will acquire the software and all related documents which it had licensed
in the June 2002 agreement. The purchase price for the software is $50,000
in cash of which $10,000 was paid at the signing of the agreement, the
Company was given a $25,000 credit for the cash paid under the old license
agreement and the balance of $15,000 was paid on March 26, 2004 on the
date of the closing. The seller also received additional compensation for
the software in the form of two options to buy a total of 750,000 shares
of the Company's common stock at an exercise price of $ .62 per share,
which is the average of the Company's trading prices for the thirty (30)
day period immediately preceding the effective date of the agreement. One
option to purchase 250,000 shares of the Company's common stock is
exercisable only if the Company sells 3,000,000 units of the software in
the five (5) year period immediately following the closing. The other
option to purchase 500,000 shares of the Company's common stock is
exercisable at any time up to five (5) years. The fair value of the option
for 500,000 shares at the date of grant was $290,000 which along with the
$50,000 in cash is reflected in the accompanying financial statements as
capitalized software costs of $562,477. This asset will be amortized over
its estimated useful life of three years.
The option to purchase 250,000 shares of the Company's common stock
will be reflected in financial statements upon the fulfillment of the
conditional sale of product. The agreement also requires the licensor to
perform certain consulting services for the Company for $8,000 per month
commencing in October 2003 through April 2004. The Company extended the
agreement for an additional three months to July 2004 and is currently
working on a month to month consulting basis. The consulting services
include, among other items, assistance in hiring, training and overseeing
a technical support team for the Company.
58
NOTE 12 - COMMITMENTS AND CONTINGENCIES. (Continued)
(c) Lease:
The Company is obligated under an operating lease for its office,
which expires on December 31, 2005, at an annual rent of $13,280. The
Company's former President guaranteed the lease payments.
Rent expense was $3,320 and $3,240 for the three months ended March
31, 2005 and 2004, respectively.
(d) Employment Agreements:
On December 8, 2003, William Bozsnyak entered into an amended and
restated three year employment agreement with the Company. Currently, Mr.
Bozsnyak is the Chief Executive Officer and Treasurer, Vice President and
Chairman of the Board of Directors. Mr. Bozsnyak has also been appointed
interim CFO until a suitable replacement can be found for Mr. Bonilla, who
passed away on March 9, 2005. The agreement provides for a base salary of
$80,000 and a minimum annual increase in base salary of 5% if approved by
the Board of Directors. His salary may be increased to $150,000 per annum
upon the Company's successful completion of future sales of stock with
total gross proceeds of at least $2,400,000. As of September 30, 2004 the
Company has accrued $59,998 of Mr. Bozsnyak's compensation. Commencing
October 1, 2004, Mr. Bozsnyak waived any future salary until such time as
the Company's cash flows are sufficient to sustain operations. During
2004, the $20,000 of his salary that was waived by him was charged to
operations and credited to additional paid-in capital. For the three
months ended March 31, 2005, Mr. Bozsnyak's salary of $20,000 was again
waived and an additional charge was made to operations with a
corresponding entry to additional paid-in capital. On May 1, 2005, Mr.
Bozsnyak signed a new three year employment contract with the Company. Mr.
Bozsnyak will receive a base salary of $120,000 per year with a 10%
increase each year. Mr. Bozsnyak was also granted an option to purchase
1,000,000 shares of the Company's stock at a purchase price of $.20 per
share. These options vest fully in three years and have a five year option
life.
On December 8, 2003, Debbie Seaman entered into an amended and
restated three year employment agreement with the Company. Currently, Ms.
Seaman is the Secretary and Director. The agreement provides for a base
salary of $70,000 and a minimum annual increase in base salary of 5% if
approved by the Board of Directors. Her salary may be increased to
$140,000 per annum upon the Company's successful completion of future
sales of stock with total gross proceeds of at least $2,400,000. For the
nine months ended September 30, 2004, Ms. Seaman received $14,860 in
compensation. Ms. Seaman stopped receiving her salary in May, 2004. As of
March 31, 2005, the Company has accrued $27,640 of her compensation.
Commencing October 1, 2004, Ms. Seaman waived any future salary until such
time as the Company's cash flows are sufficient to sustain operations.
During 2004, the $17,500 of her salary that was waived by her was charged
to operations and credited to additional paid-in capital. For the three
months ended March 31, 2005, Ms. Seaman's salary of $17,500 was again
waived and an additional charge was made to operations with a
corresponding entry to additional paid-in capital. On April 26, 2005, Ms.
Seaman resigned from her position with the Company as President. She
remains Secretary and Director. As of this date, Ms. Seaman's employment
contract is cancelled. Ms. Seaman was granted an option to purchase 60,000
shares of the Company's common stock at a purchase price of $.27 per
share. This option has a life of five years and vests over four years.
59
NOTE 12 - COMMITMENTS AND CONTINGENCIES. (Continued)
Mr. Bozsnyak would have received incentive bonuses to be determined
prior to the commencement of each year if he satisfied the criteria for
such bonuses as determined by the Company's compensation committee. Both
Ms. Seaman and Mr. Bozsnyak were entitled to receive options to purchase
up to $200,000 worth of shares of common stock at a price equal to the
midpoint between the bid and ask price of a share of common stock on the
date of the grant from the Company's 2004 Stock Plan. In May 2004 they
were granted options to acquire an aggregate of 120,000 common shares at
exercise prices totaling $92,400. In April 2004, both Mr. Bozsnyak and Ms.
Seaman were granted an option to purchase 140,000 shares and 60,000
shares, respectively, of the Company's common stock at a purchase price of
$.27 per share. These options will vest fully in four years and expire in
five years.
On March 18, 2004, the Company hired a part time Chief Financial
Officer, Noel C. Bonilla. Mr. Bonilla passed away on March 9, 2005. Mr.
Bonilla's employment agreement terminated upon his death.
On March 18, 2004, the Company hired Eric Elgar as the Company's
Chief Technical Officer. Mr. Elgar entered into an employment agreement
with the Company in which he will receive, beginning April 1, 2004, an
annual salary of $100,000. Mr. Elgar is guaranteed employment for at least
six months and has been granted the right to purchase 150,000 shares of
the Company's stock at $0.47 per share. The option will vest fully one
year from the date of grant and expires in five years. For the year ended
December 31, 2004, the Company has paid Mr. Elgar $57,408 in compensation.
Mr. Elgar stopped receiving his salary on October 31, 2004. On November 1,
2004, Mr. Elgar agreed to take an option, in lieu of his salary, to
purchase 50,000 shares of the Company's common stock at a purchase price
of $.25 per share. This option vested in 90 days from the date of grant
and will expire in 5 years. Mr. Elgar will not receive a salary nor will
he accrue his salary until the Company can afford to pay him. Mr. Elgar
resigned from his position of Chief Technical Officer on May 1, 2005.
60
SEARCHHELP, INC. AND SUBSIDIARY
(A Development Stage Company)
FINANCIAL STATEMENTS
DECEMBER 31, 2004
61
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
I N D E X
Page No.
FINANCIAL STATEMENTS:
Independent Auditors' Report 63
Consolidated Balance Sheets as at December 31, 2004 and 2003 64-65
Consolidated Statements of Operations
For the Years Ended December 31, 2004 and 2003
and Cumulative from January 29, 1999 (Inception)
to December 31, 2004 66
Consolidated Statement of Stockholders' Equity (Capital Deficiency)
Cumulative from January 29, 1999 (Inception)
to December 31, 2004 67
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2004 and 2003
and Cumulative from January 29, 1999 (Inception)
to December 31, 2004 68-70
Notes to Consolidated Financial Statements 70-89
62
WEINICK
SANDERS 1375 BROADWAY
LEVENTHAL & CO., LLP NEW YORK, N.Y. 10018-7010
- --------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS 212-869-3333
---------------------------- FAX 212-764-3060
WWW.WSLCO.COM
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
SearchHelp, Inc.
We have audited the accompanying consolidated balance sheets of SearchHelp, Inc.
(A Development Stage Company) as at December 31, 2004) and 2003, and the related
consolidated statements of operations and cash flows for the years ended
December 31, 2004 and 2003 and cumulative from January 29, 1999 (inception) to
December 31, 2004 and stockholders' equity (capital deficiency) cumulative from
January 29, 1999 (inception) to December 31, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SearchHelp, Inc. (A
Development Stage Company) as at December 31, 2004 and 2003 and the results of
their operations and their cash flows for the years ended December 31, 2004 and
2003 and cumulative from January 29, 1999 (inception) to December 31, 2004 in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As disclosed in Note 1 to the
financial statements, the Company is a development stage company and incurred
losses since inception. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plan regarding
those matters is also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ WEINICK SANDERS LEVENTHAL & CO., LLP
New York, New York
February 15, 2005
See notes to consolidated financial statements.
63
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
-------------------------------
2004 2003
-------------- --------------
Current assets:
Cash $ 2,459 $ 271,800
Accounts receivable 951 1,237
Prepaid insurance 18,519 598
Prepaid consulting fees 17,764 --
-------------- --------------
Total current assets 39,693 273,635
-------------- --------------
Property and equipment - at cost,
less accumulated depreciation -- 17,262
-------------- --------------
Other assets:
Software development costs, less accumulated
amortization of $306,300 and $179,054, respectively 256,177 93,423
Deferred license fee 1,950,000 --
Security deposit 2,155 2,155
-------------- --------------
Total other assets 2,208,332 95,578
-------------- --------------
Total assets $ 2,248,025 $ 386,475
============== ==============
See notes to financial statements.
64
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
December 31,
--------------------------------
2004 2003
-------------- --------------
Current liabilities:
Note payable - bank $ 49,450 $ 14,450
Current portion of long-term debt 13,827 5,206
Due to stockholders 236,641 332,508
Due to placement agent -- 1,700
Deferred revenues 500 120
Accounts payable and accrued expenses 294,193 65,207
-------------- --------------
Total current liabilities 594,611 419,191
-------------- --------------
Long-term debt, less current portion -- 2,407
-------------- --------------
Commitments and contingencies -- --
Stockholders' equity (capital deficiency):
Common stock - $.0001 par value
Authorized - 100,000,000 shares
Issued and outstanding -28,485,033 and
21,397,000 shares, respectively 2,849 2,140
Additional paid-in capital 4,954,526 1,928,463
Deficit accumulated in the development stage (3,303,961) (1,965,726)
-------------- --------------
Total stockholders' equity (capital deficiency) 1,653,414 (35,123)
-------------- --------------
Total liabilities and stockholders'
equity (capital deficiency) $ 2,248,025 $ 386,475
============== ==============
See notes to financial statements.
65
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative From
For the Year For the Year January 29, 1999
Ended Ended (Inception) to
December 31, 2004 December 31, 2003 December 31, 2004
---------------- ---------------- ----------------
Revenues $ 666 $ 4,556 $ 21,316
---------------- ---------------- ----------------
Operating expenses:
Selling 161,084 295,918 520,141
Web site costs 64,704 24,394 204,089
Software development costs 81,200 154,609 285,524
General and administrative 741,170 308,196 1,375,457
Amortization and impairment of
license costs and deferred
promotional incentives -- 19,167 63,667
Depreciation and amortization 128,703 64,972 326,421
---------------- ---------------- ----------------
Total operating expenses 1,176,861 867,256 2,775,299
---------------- ---------------- ----------------
Loss from operations (1,176,195) (862,700) (2,753,983)
---------------- ---------------- ----------------
Other expenses:
Interest 2,835 36,058 106,823
Interest - related party 8,000 -- 8,000
Compensatory element of noteholders'
purchase rights -- 169,050 231,450
Amortization of deferred financing costs -- 625 52,500
Warrant penalty - related party 138,000 -- 138,000
Loss on disposal of equipment 13,205 -- 13,205
---------------- ---------------- ----------------
Total other expenses 162,040 205,733 549,978
---------------- ---------------- ----------------
Net Loss $ (1,338,235) $ (1,068,433) $ (3,303,961)
================ ================ ================
Per share data:
Loss per share - basic and dilutive $ (.05) $ ( .06)
================ ================
Weighted average number of shares
outstanding 26,801,275 17,518,014
================ ================
See notes to financial statements.
66
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CUMULATIVE FROM JANUARY 29, 1999 (INCEPTION) TO DECEMBER 31, 2004
Deficit
Accumulated Total
Additional in the Stock Stockholders'
Common Stock Paid-In Development Subscriptions Equity (Capital
Shares Amount Capital Stage Receivable Deficiency)
------------ ------------ ------------ ------------ ------------ ------------
Common stock issued to founders 6,616,910 $ 662 $ 1,338 $ -- $ -- $ 2,000
Net loss for the period from
January 29, 1999 (inception)
to December 31, 1999 -- -- -- (24,056) -- (24,056)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 6,616,910 662 1,338 (24,056) -- (22,056)
Net loss from the year ended
December 31, 2000 -- -- -- (56,775) -- (56,775)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 6,616,910 662 1,338 (80,831) -- (78,831)
Loan converted to common stock 1,123,090 112 103,963 -- -- 104,075
Common stock subscribed 7,160,000 716 6,234 -- (6,450) 500
Common stock issued for
services rendered 100,000 10 8,990 -- -- 9,000
Promotional incentives with
respect to exercise stock
purchase rights -- -- 44,500 -- -- 44,500
Net loss from the year ended
December 31, 2001 -- -- -- (221,790) -- (221,790)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 15,000,000 1,500 165,025 (302,621) (6,450) (142,546)
Proceeds from exercise of
noteholders' purchase rights 310,000 31 3,069 -- -- 3,100
Payment of subscriptions -- -- -- -- 6,450 6,450
Compensatory element of
noteholders' purchase rights -- -- 62,400 -- -- 62,400
Net loss from the year ended
December 31, 2002 -- -- -- (594,672) -- (594,672)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 15,310,000 1,531 230,494 (897,293) -- (665,268)
Proceeds from exercise of
noteholders' purchase rights 815,000 82 8,068 -- -- 8,150
Compensatory element of
noteholders' purchase rights -- -- 169,050 -- -- 169,050
Proceeds from sale of securities,
net of registration costs 5,272,000 527 1,520,851 -- -- 1,521,378
Net loss from the year ended
December 31, 2003 -- -- -- (1,068,433) -- (1,068,433)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003
(consolidated) 21,397,000 2,140 1,928,463 (1,965,726) -- (35,123)
Issuance of securities as partial
payment for license:
Common stock 2,300,000 230 574,770 -- 575,000
Warrants to acquire 2,300,000 shares 575,000 -- 575,000
Net proceeds from sale of securities 4,078,000 408 976,047 -- 976,455
Compensatory value of stock options
issued for services rendered 290,000 -- 290,000
Compensatory value of common stock
issued to Advisory Board Members 130,000 13 90,987 -- 91,000
Compensatory value of stock options
issued to Advisory Board Members 3,309 -- 3,309
Issuance of common stock options
to non employee directors 187,500 -- 187,500
Stockholder's loans converted
to common stock 580,033 58 152,950 153,008
Officers' salaries waived 37,500 37,500
Warrant penalty -- -- 138,000 -- 138,000
Net loss -- -- -- (1,338,235) -- (1,338,235)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 28,485,033 $ 2,849 $ 4,954,526 $ (3,303,961) $ -- $ 1,653,414
============ ============ ============ ============ ============ ============
See notes to financial statements.
67
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative From
For the Year For the Year January 29, 1999
Ended Ended (Inception) to
December 31, 2000 December 31, 2000 December 31, 2004
------------------ ------------------ ------------------
Cash flows from operating activities:
Net loss $ (1,338,235) $ (1,068,433) $ (3,303,961)
------------------ ------------------ ------------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Deferred revenue 380 120 500
Warrant penalty 138,000 -- 138,000
Waived of officers' salaries 37,500 37,500
Imputed interest 8,000 8,000
Compensatory element of
noteholders' purchase rights -- 169,050 231,450
Depreciation 1,457 5,972 14,288
Amortization of deferred financing costs -- 625 52,500
Amortization of software
development costs 127,246 59,000 306,300
Amortization of consulting costs 76,545 76,545
Amortization and impairment of
deferred promotional incentives -- -- 44,500
Amortization and write off of
deferred license costs -- 19,167 25,000
Loss on disposal of equipment 13,205 -- 13,205
Common stock issued for legal fees -- -- 9,000
Increase (decrease) in cash flows as
a result of changes in asset and
liability account balances:
Accounts receivable 286 2,479 (951)
Prepaid interest (17,921) 3,095 (18,519)
Due to stockholders 211,641 -- 211,641
Due to placement agent (1,700) -- --
Security deposits -- -- (2,155)
Accounts payable and accrued expenses 228,986 (350,811) 294,193
------------------ ------------------ ------------------
Total adjustments 823,625 (91,303) 1,440,997
------------------ ------------------ ------------------
Net cash used in operating activities (514,610) (1,159,736) (1,862,964)
------------------ ------------------ ------------------
Cash flows from investing activities:
Equipment purchases (sales) 2,600 -- (8,204)
Software development costs -- (33,625) (247,477)
Deferred license costs -- -- (50,000)
Deferred license fee (800,000) -- (800,000)
------------------ ------------------ ------------------
Net cash used in investing activities (797,400) (33,625) (1,105,681)
------------------ ------------------ ------------------
Net cash used in operating and investing activities $ (1,312,010) $ (1,193,361) $ (2,968,645)
------------------ ------------------ ------------------
See notes to financial statements.
68
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Cumulative From
For the Year For the Year January 29, 1999
Ended Ended (Inception) to
December 31, 2004 December 31, 2003 December 31, 2004
-------------- -------------- --------------
Net cash used in operating and
investing activities brought forward $ (1,312,010) $ (1,193,361) $ (2,968,645)
-------------- -------------- --------------
Cash flows from financing activities:
Due to stockholder 25,000 202,500 357,508
Note payable - bank 35,000 (25,000) 49,450
Notes payable - other -- (475,000) --
Loans payable 6,214 (4,260) 96,913
Deferred financing costs -- -- (52,500)
Deferred registration costs -- -- (234,681)
Proceeds from sale of securities 976,455 1,765,909 2,747,964
Proceeds from stock
subscriptions receivable -- -- 6,450
-------------- -------------- --------------
Net cash provided by financing activities 1,042,669 1,464,149 2,971,104
-------------- -------------- --------------
Net increase (decrease) in cash (269,341) 270,788 2,459
Cash at beginning of period 271,800 1,012 --
-------------- -------------- --------------
Cash at end of period $ 2,459 $ 271,800 $ 2,459
============== ============== ==============
Supplemental disclosures of cash flows information:
Cash payments made during period for:
Interest $ 2,170 $ 79,500 $ 105,825
============== ============== ==============
See notes to financial statements.
69
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Cumulative From
For the Year For the Year January 29, 1999
Ended Ended (Inception) to
December 31, 2004 December 31, 2003 December 31, 2004
----------------- ----------------- -----------------
Supplemental schedules of noncash operating,
investing and financing activities:
Assets acquired for debt $ -- $ -- $ 19,289
================== ================== ==================
Deferred promotional incentive acquired
through exercise of common stock purchase rights $ -- $ -- $ 44,500
================== ================== ==================
Common stock issued for services rendered $ 91,000 $ -- $ 100,000
================== ================== ==================
Stockholder's loans converted to common stock $ 153,008 $ -- $ 257,083
================== ================== ==================
Compensatory element of noteholders' purchase rights $ -- $ 169,050 $ 231,450
================== ================== ==================
Due to placement agent $ -- $ 1,700 $ 1,700
================== ================== ==================
Issuance of stock options as
partial payment for software $ 290,000 $ -- $ 290,000
================== ================== ==================
Issuance of common stock options for
services rendered $ 190,809 $ -- $ 190,809
================== ================== ==================
Issuance of common stock and
common stock warrants for license $ 1,150,000 $ -- $ 1,150,000
================== ================== ==================
Warrant penalty $ 138,000 $ -- $ 138,000
================== ================== ==================
Officers' salaries waived $ 37,500 $ -- $ 37,500
================== ================== ==================
See notes to financial statements.
70
SEARCHHELP, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 1 - PLAN OF ORGANIZATION.
(a) Organization and Presentation of Financial Statements:
SearchHelp, Inc. (the "Company") was incorporated in the State of
Delaware on September 5, 2001 at which time the founding shareholders
subscribed for 6,660,000 shares of the Company's common stock for an
aggregate of $6,450. The stock subscriptions were paid in January and
February 2002. The Company is a successor to SH Networks.com, Inc.,
("SHN"), formerly known as SearchHelp.com, Inc., a New York corporation
formed on January 29, 1999. SHN merged into the Company on September 5,
2001 in a transaction in which the shareholders of SHN exchanged all of
the capital stock in SHN for 6,616,910 common shares of the Company. The
merger was accounted for as a recapitalization. Certain creditors of SHN
simultaneously converted their debt of $104,075 into 1,123,090 shares of
the Company's common stock ($.09 per share). Since its inception through
December 31, 2004, the Company and its predecessor have not generated any
significant revenues and have not carried on any significant operations.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company has a net loss of $1,338,235 and $1,068,433 for
the years ended December 31, 2004 and 2003, respectively and $3,303,961
cumulative from January 29, 1999 (Inception) to December 31, 2004.
This condition raises substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Management's efforts have been directed towards the development and
implementation of a plan to generate sufficient revenues to cover all of
its present and future costs and expenses. The plan includes, among other
things, developing and selling products and services oriented towards
improving family well being.
The Company offered for sale to the public in an initial public
offering ("IPO"), through a placement agent, on a best efforts basis, up
to 8,000,000 units (each consisting of one share of common stock, one A
warrant to purchase one share of common stock at $.75 and one B warrant to
purchase one share of common stock for $1.75) at a purchase price of $.50
per unit. The IPO was declared effective on January 22, 2003. The Company
sold 2,474,000 units for total gross proceeds of $1,237,000. The placement
agent received 10% of the gross proceeds from the offering, plus certain
warrants and reimbursement of expenses. Placement agent fees and
registration costs were $403,942 of which $234,681 had been paid in 2002
and 2001 and the balance of $169,311 was paid from the proceeds of the
offering. From the proceeds of the IPO the Company repaid all previously
outstanding notes totaling $475,000 and interest of $82,518. $265,719 of
the proceeds from the IPO was used to pay accounts payable and expenses.
The balance of $244,452 was used for working capital and was fully
expended to support operations.
71
NOTE 1 - PLAN OF ORGANIZATION. (Continued)
Accordingly, effective September 8, 2003, after the IPO had closed
and, in part, because the IPO had not been fully subscribed, the Company
commenced a best efforts private offering of up to 4,000,000 shares of its
common stock, $0.0001 par value at $0.25 per share. The per share offering
price was established by the Company because of the restrictions on
transfer of the shares and the fact that prospective investors were
required to purchase a substantial number of shares (20,000 for $5,000) in
order to participate. In November 2003, the offering was increased to
6,000,000 shares at the same purchase price. The offering was extended
through August 31, 2004 and further increased to raise $1,800,000 and to
sell 7,200,000 shares of the Company's common stock. As of September 30,
2004, the offering was completed. Under this private offering, 6,886,000
shares of the Company's common stock were sold for gross proceeds of
$1,721,500 less $52,750 in offering costs. The Company paid each placement
agent a commission of 10% of the proceeds of all the shares placed by the
placement agent and non-accountable expenses of 2% of the proceeds of all
the shares placed by the placement agent. In addition to the placement
agent's cash compensation, the Company gave the placement agent warrants
to purchase up to 720,000 shares of common stock at a purchase price of
$.30 per share which are exercisable for a period of 5 years, which means
that the placement agent received a warrant to purchase one share of
common stock for every 10 shares sold by the placement agent. The
placement agent's warrants and the underlying shares of common stock were
not registered at the time of grant. The placement agent has certain piggy
back rights to cause the registration of the shares if the Company effects
a registration of its securities. For the year ended December 31, 2004,
4,078,000 shares were purchased for $976,455 net of $43,045 in offering
costs. One placement agent received warrants to purchase 34,000 shares of
the Company's common stock at a purchase price of $0.30 per share at
December 31, 2003 and 138,800 shares of the Company's common stock at a
purchase price of $0.30 per share for the quarter ending September 30,
2004 for a aggregate of 172,800 shares of the Company's common stock for
the year ended December 31, 2004. These warrants were issued to this
placement agent in October 2004. The net proceeds of this offering have
been used to support the Company's operations
Since the Company has not generated significant revenues and as
management does not anticipate the Company will generate substantial
revenues from the sale of its products in an amount necessary to meet its
cash needs for the next twelve months to December 2005, management
believes the Company will need additional financing to continue operating.
(b) Principal Business Activity:
The Company is focused on utilizing new and emerging technology to
develop products and services oriented toward improving family safety and
well-being, primarily but not exclusively in the home, having shifted its
primary focus from providing small businesses with online forums. The
Company intends to continue to develop software intended to keep children
safe while online, and its more expanded purpose will be to seek out
emerging technologies, products and services that exhibit significant
promise of improving family safety and well being and to participate in
their development and marketing.
The Company's two existing software products, Sentry At Home and
Sentry Remote, formerly known as Secure Protect Identify Kids Everywhere
(S.P.I.K.E.), and S.P.I.K.E. Remote Sentry, were developed to keep
children safe while online. These monitoring programs are currently being
manufactured at the distribution center. The Company had entered into an
exclusive five year licensing agreement with Family Trusted Products, LLC
("FTP"). FTP was to be responsible for the manufacturing, marketing and
distribution of the Sentry Products. FTP was to pay the Company a royalty
of 10% on all FTP sales of the Sentry products. Marketing has not
commenced under the agreement and the Company is seeking a mutual
termination of the license agreement, after which, the Company will
utilize other channels in its efforts to market these products.
72
NOTE 1 - PLAN OF ORGANIZATION: (Continued)
(c) Expanded Areas of Development:
Indoor Air Quality (IAQ)
The Company has been exploring opportunities with the "at home"
quality of living aspects of indoor air quality ("IAQ"). The Company has
formed a subsidiary, Indoor Air Quality Services, Inc., to pursue the IAQ
business. The increased knowledge and concern regarding indoor air toxins
and irritants, combined with the increase in the diagnosis of childhood
and adult asthma and the potential impact of these issues on general
family health, represent, in the Company's opinion, an area in need of
address and solutions. The increasing media attention, as well as hard and
soft data related to in-home complaints and associations with IAQ
problems, makes the opportunity to develop a consumer friendly/informative
home-based solution attractive to the Company. The Company has chosen to
focus on one of the most important issues within the broader IAQ arena -
Mold. The Company is investigating the potential for engaging two aspects
of the mold issue: (1) providing definitive products for screening for
mold conditions and (2) providing effective indoor mold remediation
solutions.
On February 3, 2004, the Company entered into a Participation
Agreement with Environmental Commercial Technology Corp. ("ECT"). ECT has
been granted the rights to market a product, an organic compound, intended
for the prevention of the growth of mold and fungus. The Company received
the right to receive 5% of the gross revenue from the sale of the product.
In return, the Company provided development capital of $500,000. An
additional payment of $100,000 was due by August 2004. Due to the delay in
the Environmental Protection Agency approval, the Company will make the
final payment of $100,000 when ECT begins to generate revenue from the
mold compound. This liability is included in Due To Stockholders. The
Company will also provide consulting services in connection with the
marketing and sales of the product for a 5 1/2-year term. As additional
consideration, the Company also granted ECT and its parent company,
Bioneutral Laboratories Corporation USA, a total of 2,300,000 shares of
common stock and warrants to purchase up to 2,300,000 shares of common
stock.
The fair value paid for the participation agreement aggregated
$1,950,000 of which a total of $600,000 will be in cash and the balance
was the fair value of the securities issued and is included in the
accompanying financial statements as the cost of the license. The fair
value of the common shares issued of $575,000 was determined by the
selling price of the Company's unregistered restricted common stock on the
transaction date of $0.25 per share. The fair value of the warrants using
the Black-Scholes pricing method with a 6% risk-free interest rate and
200% volatility is $575,000. The estimated registration costs to be borne
by the Company are $200,000 and are included in accounts payable and
accrued expenses. Under the participation agreement, the Company was
required to effectuate and pay the costs of a registration statement to be
filed with the Securities and Exchange Commission for the shares issued
and the shares underlying the warrants issued to ECT and its parent by
September 1, 2004. If the Company was not successful in registering the
securities by that date, the agreement allows the warrant exercise price
to be reduced in stages from $0.33 per share at September 1, 2004 to a low
of $0.01 at January 1, 2006. If the registration statement was not
effective by January 1, 2005, both ECT and its parent could cancel the
agreement and within ten (10) days of such termination, return to the
Company (i) the cash of $600,000, less any revenue sharing payments made
to the Company, (ii) the warrants and (iii) half of the common shares
issued and to the extent that the shares are not then in ECT or its parent
company's possession, they must pay fifteen cents ($0.15) for each such
share that is no longer in their possession. The Company does not intend
to make this payment until revenues are generated from the compound. The
Company has requested an extension to effect a registration statement as
well as a freeze in the exercise price of the warrants. As of December 31,
2004, operations were charged $138,000 for the $.06 penalty incurred
between the difference of the issue price of $0.33 and the warrant
schedule price of $0.27.
73
NOTE 2 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES:
(a) Basis of Presentation:
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America. The Company in August 2003 incorporated its wholly
owned subsidiary, Indoor Air Quality Services, Inc., which has had no
activity through December 31, 2004. The accompanying financial statements
for the year ended December 31, 2004 includes the accounts of the Company
and its wholly owned subsidiaries. All intercompany transactions have been
eliminated in consolidation. The accompanying financial statements for the
year ended December 31, 2004 include the accounts of the Company and its
wholly owned subsidiaries Indoor Air Quality Services, Inc., FamilySafe,
Inc., which was incorporated in February 2004 for the software activities
of the Company, and the Company's newest subsidiary, Digital I.D. Systems,
Inc., which was incorporated in August 2004 and will concentrate on
digital security technology.
(b) Revenue Recognition:
Through the year ended December 31, 2004, the Company has not
generated significant revenues and is in the development stage. The
Company recognizes revenues in accordance with accounting principles
generally accepted in the United States of America. Income from contracts
for advertising income, web site services and solutions will be earned on
a pro-rata basis throughout the life of the related contract. The Company
had earned consolidated revenues at December 31, 2004 of $666 and deferred
revenues of $500. Royalty income will be recognized in the same period as
the underlying licensees' sales are reported as income. Revenues in the
form of sales and commissions from the on-line sale of products, if any,
will be recognized at the date of shipment.
(c) Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ
from those estimates.
(d) Earnings Per Share:
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share". Basic earnings per share is based on the
weighted effect of all common shares issued and outstanding, and is
calculated by dividing net income available to common stockholders by the
weighted average shares outstanding during the period. Diluted earnings
per share, which is calculated by dividing net income available to common
stockholders by the weighted average number of common shares used in the
basic earnings per share calculation, plus the number of common shares
that would be issued assuming conversion of all potentially dilutive
securities outstanding, is not presented as it is anti-dilutive.
74
NOTE 2 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES: (Continued)
(e) Depreciation and Amortization:
Depreciation of property and equipment is provided by the
straight-line method over the estimated useful lives of the related assets
ranging from five to seven years. Significant improvements are
capitalized; maintenance and repairs are charged to income. When assets
are retired or otherwise disposed of, the cost and related accumulated
depreciation are eliminated from the accounts and the resulting gain or
loss, if any, is reflected in income.
Costs associated with the development of software that is not
intended for sale are capitalized. Costs incurred in the securing of
financing and for promotional incentives are also capitalized.
Amortization of software development costs, finance costs and promotional
incentives are provided by the straight-line method, over estimated useful
lives of three years, sixty days and eighteen months, respectively.
(f) Concentration of Credit Risk:
Financial instruments that potentially subject the Company to a
significant concentration of credit risk consist of cash. The Company
places its cash with high credit quality financial institutions that at
times maybe in excess of the FDIC insurance limit.
(g) Stock Based Compensation:
The Company elected to use the intrinsic value method to account for
future options granted to employees for the purchase of common stock as
per Accounting Principles Board Opinion No.25 "Accounting for Stock Issued
to Employees" ("APB 25"). The Company will disclose the pro forma effect
of accounting for stock options under the fair value method as prescribed
in SFAS No. 123, "Accounting for Stock-Based Compensation" ("FASB 123").
For transactions in which goods and services are the consideration
received for the issuance of common stock, the accounting shall be the
fair value of the common stock issued or the fair value of the
consideration received whichever is more reliably measurable at the date
the options are issued. The Company has chosen not to adopt SFAS 148
"Accounting for Stock-Based Compensation - Transition and Disclosure"
which was issued in December 2002. As required by SFAS 148, the Company
will adopt the statement for the period beginning after June 15, 2005.
This statement amends SFAS No. 123, to provide alternative methods of
transition for a voluntary change to the fair value based method. Although
the Company has elected not to adopt the provisions of SFAS No. 148 until
the interim period beginning after June 15, 2005, the Company will provide
all newly required disclosures under SFAS No. 123.
(h) Advertising Costs:
The Company expenses ordinary advertising and promotion costs as
incurred. Advertising and promotion costs were $22,321 and $20,325 for the
years ended December 31, 2004 and 2003, respectively.
(i) Software Research and Development Costs:
Research and development costs are expensed as incurred. Software
development costs are subject to capitalization beginning when a product's
technological feasibility has been established and ending when a product
is available for release to customers. The Company began to release its
products in the fourth quarter of 2004 after technological feasibility was
established. Costs subsequent to achieving technological feasibility
should not be significant and all software development costs will be
expensed. Commencing in April 2002, the Company incurred software research
and development costs of $285,524 which were charged to operations
($81,200 in 2004, $154,609 in 2003 and $49,715 in 2002) in connection with
the initial development phase of two products.
75
NOTE 2 - SUMMARY OF SIGNIFICANT AND CRITICAL ACCOUNTING POLICIES: (Continued)
(j) Recently Issued Accounting Pronouncements:
In December 2003, the FASB issued Interpretation No. 46 (Revised)
"Consolidation of Variable Interest Entities". This interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements",
describes the circumstances under which a variable special purpose entity
is to be consolidated with entities that do not have the characteristics
of a controlling interest in the special purpose entity.
In April 2003, the FASB issued SFAS No. 149 which amends and
clarifies SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity. This
statement establishes standards for how an issuer classifies certain
financial instruments with characteristics of both liabilities and equity.
Management believes the adoption of these pronouncements will not
have a material impact on the Company.
NOTE 3 - PROPERTY AND EQUIPMENT.
Property and equipment consist of the following:
December 31,
2004 2003
---------- ----------
Computers $ -- $ 29,290
Furniture and fixtures 803 803
---------- ----------
803 30,093
Less: Accumulated depreciation 803 12,831
---------- ----------
$ -- $ 17,262
========== ==========
Depreciation expense charged to operations was $1,457 and $5,972 for
the year ended December 31, 2004 and 2003 respectively. To provide state
of the art support and web interface, management, after much research,
made the decision not to buy new equipment but sign a two year contract
with Invision, Inc. to rent a portion of their servers and to trade the
old equipment in exchange for a credit to the VMWare set up fees. The
Company expensed the equipment and received a $2,600 credit. The two year
contract was signed in January 2004 and required a one time set up fee of
$14,770 plus a monthly fee of $3,830 for server space rental. In December
2004, management renegotiated the current monthly fee to $2,960 per month
with Invision for an annual savings of approximately $10,400.
NOTE 4 - INTANGIBLE ASSETS.
In connection with the December 31, 2001 private placement of the
Company's notes, the placement agent has received a fee of $27,500 through
December 31, 2001 and an additional fee of $25,000 for the year ended
December 31, 2002. The fee was charged to operations as additional
interest over the 60-day term of the notes. Amortization of these fees
charged to operations was $625 for the year ended December 31, 2003.
76
NOTE 4 - INTANGIBLE ASSETS. (Continued)
In accordance with the American Institute of Certified Public
Accountants Statement of Position No. 98-1, "Accounting for the Cost of
Computer Software Developed or Attained for Internal Use," the Company,
since inception, capitalized costs of $562,477 of which $315,000 and
33,625 were capitalized in 2004 and 2003. These costs, consisting of
amounts paid to independent consultants, related to the implementation and
enhancement of its propriety related database and interactive operating
software. The Company is amortizing these costs over their estimated
useful lives of three years. Amortization charged to operations during the
years ended December 31, 2004 and 2003 was $127,246 and $59,000,
respectively.
The Company, having previously agreed to purchase certain software
from the entity that had been licensing the software to the Company,
acquired the software in 2004. The total purchase price was cash of
$25,000 and options to acquire 750,000 shares of the Company's common
stock of which 500,000 were issued immediately and are exercisable for
five years and 250,000 are to be granted only if certain sales milestones
are met. At December 31, 2004 these milestones have not been met and the
option has not been granted. If the milestones are met in the future then
the option will be granted and reflected in the financial statements at
that date. The fair value ascribed to the option for the 500,000 shares as
determined by the Black-Scholes option pricing model was $290,000. See
Note 12.
NOTE 5 - NOTES PAYABLE - BANK.
The Company has a $50,000 revolving line of credit with a bank.
Interest on borrowings is charged at 2.25% above the bank's prevailing
prime rate which was 7.50% at December 31, 2004 and 6.25% at December 31,
2003. The weighted average interest rate for the year ended December 31,
2004 was 6.50%. Interest expense of $2,152 was charged to operations
during the year ended December 31, 2004 and $36,059 for 2003. At December
31, 2004 and 2003, $49,450 and $14,450 of the line has been utilized. The
debt is guaranteed by the current CEO of the Company and is collateralized
by marketable securities, which he owns. The fair market value of this
account was approximately $35,000 and $36,000 at December 31, 2004 and
2003 respectively.
NOTE 6 - NOTES PAYABLE - OTHER.
During December 2001, the Company initiated a private placement
offering to raise capital in order to fund the creation of its web site.
The offering consisted of thirteen $25,000 notes bearing interest at 10%
per annum payable in sixty (60) days from issuance. If the notes were not
repaid in full on their due dates, then each note holder had the right to
purchase 10,000 shares of the Company's common stock at $.01 per share and
then 5,000 shares at the end of each additional thirty (30) day period the
notes remain outstanding. The variance between the purchase right's
exercise price per share and the fair value of the securities acquired was
charged to operations as additional interest. Additionally, the placement
agent was paid ten (10%) percent of the proceeds of the offering, plus
out-of-pocket expenses. Amortization of deferred financing costs was
charged to operations over the sixty (60) day term of the notes.
77
NOTE 6 - NOTES PAYABLE - OTHER. (Continued)
By December 31, 2001 the Company had sold nine notes, one of which
was to its former CFO. In January and February 2002, the remaining four
notes were sold at par value. The notes were repaid with accrued interest
in July 2003. A placement agent fee of $25,000 was paid in December 31,
2002. During the year ended December 31, 2003, the additional compensatory
element interest charged to operations for the excess of the fair value of
the note holders purchase rights received over their exercise price was
$45,200. The fair value of the purchase rights was determined by
management at $.09 per share which was the ascribed fair value of the
purchase rights using the Black-Scholes option pricing model for
determining fair value. During the year ended December 31, 2003, an
additional compensatory interest element for purchase rights to acquire
345,000 common shares was charged to operations for the excess of the fair
value of the note holders' purchase rights received over their exercise
price of $169,050. The fair value of the purchase rights was determined by
management to be $.49 per share which was the difference between the $.50
per unit price the Company's securities were being offered to the public
at the date of issuance of the purchase rights and the $.01 per share note
holders' purchase price. During the year ended December 31, 2002, the note
holders exercised rights to acquire an aggregate 310,000 common shares for
$3,100 including the Company's former CFO who exercised rights to acquire
55,000 common shares for $550. During the year ended December 31, 2003,
the note holders exercised rights to acquire 815,000 common shares in the
aggregate for $8,150. These notes and the accrued interest were repaid in
2003.
NOTE 7 - LONG-TERM DEBT:
Long-term debt is comprised of the following:
December 31,
2004 2003
------------ ------------
Obligation under equipment financed
payable in installments of $495 including
13% interest through March 2005 $ 2,353 $ 7,613
Insurance premium finance loan payable in
installments of $2,253 including 7% interest 11,474
Less: Current portion (13,827) (5,206)
------------ ------------
$ -- $ 2,407
============ ============
NOTE 8 - DUE TO STOCKHOLDERS.
At December 31, 2003, the Company was indebted to its CEO, William
Bozsnyak, in the amount of $130,188 and its President, Debbie Seaman, in
the amount of $14,820 for non-interest bearing cash working capital
advances made to the Company. The results of operations for 2004 include a
charge for imputed interest of $8,000 on these advances at 7.25% which is
the rate charged on the Company's short term debt to a bank. In September
2004, the Company issued 520,753 shares of the Company's common stock to
William Bozsnyak and 59,280 shares of the Company's common stock to Debbie
Seaman in full repayment and satisfaction of the loans and imputed
interest thereon. In December 2004, Mr. Bozsnyak made an additional
non-interest bearing loan to the Company of $25,000 and additional loans
of $50,000 through February 15, 2005. Interest at the rate paid to the
Company's short term lender will be imputed on the advances and charged to
operations with a corresponding credit to additional paid-in capital.
78
NOTE 8 - DUE TO STOCKHOLDERS. (Continued)
Under the terms of their respective employment contracts, Ms Seaman
and Mr. Bozsnyak are owed $27,640 and $59,998 at December 31, 2004 for
unpaid wages earned through September 30, 2004. Commencing on October 1,
2004, Ms Seaman and Mr. Bozsnyak both have waived all future salary under
their contracts until such time as the Company's cash flow can sustain
such payments. The aggregate waived salaries through December 31, 2004 of
$37,500 was charged to operations with a corresponding increase to
additional paid-in capital.
The Company's CFO and its former securities counsel are owed $390
and $ 22, 663 for unpaid legal services at December 31, 2004. During 2004
the Company charged operations $390 and $95,485 for legal services
rendered by the CFO and counsel, respectively.
The Company owes $100,000 to the seller of its mold license at
December 31, 2004 and it owes $950 to a corporation, the CEO of which is
also a director of the Company, for reimbursement of administrative costs
expended by that corporation on behalf of the Company.
On December 30, 2003, management agreed to issue a non employee
director options to acquire 750,000 restricted shares of the Company's
common stock for business and marketing advice rendered by the director in
the last quarter of 2003. The fair value of the services rendered as
determined by both the director and management is the fair market value of
the options to be issued, as determined by utilizing the Black-Scholes
option pricing model, based upon the then selling price of restricted
shares through the Company's private placement, $0.25 per share. Such fair
value of $187,500 has been charged to operations in 2003 with a
corresponding increase in due to stockholders. The options were physically
granted on March 12, 2004 at which time the liability to stockholders was
reduced by $187,500 and additional paid-in capital was increased by
$187,500. As of December 31, 2004, the options have not been exercised and
no stock has been issued.
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES.
Accounts payable and accrued expenses consist of the following at:
December 31,
2004 2003
------------ ------------
Professional fees $ 58,226 $ 20,548
License costs -- 15,000
Estimated registration costs 200,000 --
Interest on notes payable 315 127
Consultants 9,742 25,000
Accrued Payroll taxes 6,580 --
Sundry operating expenses 19,330 4,532
------------ ------------
$ 294,193 $ 65,207
============ ============
79
NOTE 10 - INCOME TAXES.
The Company has not had any currently payable federal income taxes
since its inception through December 31, 2004. The Company has not charged
operations for any deferred federal or local tax liability or benefit
since its inception to December 31, 2004. At December 31, 2004, the
Company had a net operating loss carryforward available to reduce future
taxable income amounting to $3,056,000 of which $131,000 expires in 2021,
$557,000 expires in 2022, $1,041,000 expires in 2023 and $1,327,000
expires in 2024. Management is unable to determine if the utilization of
the future tax benefit is more likely than not and, accordingly, the net
deferred tax asset for federal carry forwards of approximately $982,000
has been fully reserved. A reconciliation of the actual tax provision to
the expected statutory rate is as follows:
For the Period From
For the Years Ended December 31, January 29, 1999 to
2004 2003 December 31, 2004
------------------------------------- -------------------
Loss before income taxes $(1,338,235) $(1,068,433) $(3,303,961)
============ =========== ===========
Expected statutory tax benefits $ (455,000) -34.0% $ (363,300) -34.0% $(1,123,300) -34.0%
Warrant price reduction 46,900 3.5% 2,700 0.2% 46,900 1.4%
Nondeductible expenses 17,800 1.3% -- 0.0% 94,100 2.8%
Net operating loss valuation reserved 390,300 29.2% 360,600 33.8% 982,300 29.7%
----------- ------------ ----------- ------------ ----------- ------------
Total tax benefit $ -- 0.0% $ -- 0.0% $ -- 0.0%
=========== ============ =========== ============ =========== ============
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income taxes. The components of the deferred tax assets and liabilities
are as follows:
December 31,
--------------------------------
2004 2003
-------------- --------------
Deferred tax assets:
Net operating loss deduction $ 1,039,000 $ 587,900
Accrued salaries 29,800 --
Other 300 300
-------------- --------------
Total assets 1,069,100 588,200
-------------- --------------
Deferred tax liabilities:
Depreciation and amortization (87,100) (23,300)
-------------- --------------
Total liabilities (87,100) (23,300)
-------------- --------------
982,000 564,900
Less: Valuation allowance (982,000) (564,900)
-------------- --------------
$ -- $ --
============== ==============
NOTE 11 - COMMON STOCK.
On September 5, 2001, the founding shareholders subscribed for
6,660,000 common shares for an aggregate of $6,450. The subscriptions were
paid in January, February and July 2002 and are reflected as stock
subscriptions receivable in the financial statements as at December 31,
2001.
80
NOTE 11 - COMMON STOCK. (Continued)
On September 5, 2001, the shareholders of SH Networks.com, Inc.
(SHN) and the Company agreed to merge SHN into the Company. The SHN
shareholders received 6,616,910 shares of the Company's common stock in
exchange for all of the outstanding capital stock of SHN. At the date of
the merger, SHN's liabilities exceeded its assets by $131,461.
Simultaneously with the merger, certain creditors agreed to exchange
$104,075 in debts for 1,123,090 shares of the Company's common stock ($.09
per share).
On September 5, 2001, counsel for the Company accepted 100,000
shares of the Company's common stock as partial payment for services
rendered. The fair value of the services rendered and the shares at date
of issuance was $9,000 ($.09 per share).
On November 26, 2001, the individual assignees of an advertising
agreement exercised the purchase right contained in the agreement to
acquire 500,000 shares of the Company's common stock for $500. The fair
value for the securities issued was $45,000 ($.09 per share) on the date
of issuance, which was the ascribed fair value of the purchase rights
using the Black-Scholes Option pricing model for determining fair value.
Commencing in February 2002 through December 2002, seven note
holders exercised their purchase rights and acquired 310,000 common shares
for $3,100 in cash. During fiscal 2003, nine note holders exercised their
purchase rights for 815,000 common shares for $8,150 in cash.
In December 2003, management agreed to issue to a director options
to acquire 750,000 restricted shares of the Company's common stock as
payment for services rendered by the director. The fair value of option
for the services rendered of $187,500, as determined by the Black-Scholes
option pricing model, was charged to operations in 2003 with a
corresponding increase in due to stockholders. The options were physically
granted on March 12, 2004 at which time the liability to stockholders was
reduced by $187,500 and additional paid-in capital was increased by
$187,500.
In February 2004, Environmental Commercial Technology Corp. was
issued 2,300,000 shares of the Company's common stock and warrants to
acquire an additional 2,300,000 common shares at an initial exercise price
of $0.33 per share. The fair value of the common stock issued was
determined by the selling price of the Company's unregistered restricted
common stock on the transaction date of $0.25 per share. The fair value of
the warrants using the Black-Scholes pricing method with a 6% risk-free
interest rate and 200% volatility was $575,000.
In May 2004, three members of the Company's Advisory Board were
issued an aggregate of 130,000 shares of the Company's common stock whose
fair value on the date of issuance was $91,000. Half of these shares are
being held in escrow as the recipients will earn these escrowed shares on
a pro rata basis if they continue to serve on the Advisory Board for one
year. The other 50% was earned by the recipients when issued. Amortization
of the 50% to be earned and the initial 50% aggregated $73,236 and was
charged to operations in the year ended December 31, 2004.
81
NOTE 11 - COMMON STOCK. (Continued)
In May 2004, management issued 90,000 options to purchase the
Company's restricted common stock to Directors and Advisory Board Members.
The Advisory Board Members were issued 50,000 options of which 10,000 was
granted to the Chief Financial Officer who also serves on the Advisory
board. The fair value of the option as determined by the Black-Scholes
option pricing model of $827 will be accounted for under APB 25. The other
40,000 options were granted to four non-employees. The fair value of the
option as determined by the Black-Scholes option pricing model of $3,309
was charged to operations with a corresponding increase to paid-in
capital. An additional 40,000 options were granted to two directors who
also serve on the Audit and Compensation Committees. The fair value of
these options was $3,309 using the Black-Scholes option method and will be
accounted for under APB 25. For the year ended December 31, 2004, $3,309
was charged to operations for the Advisory Board Members options. The fair
value of the Chief Financial Officer's and directors' options as
determined by the Black-Scholes option pricing model and accounted for
under APB 25 was $4,136.
In November 2004, the Company issued the Chief Financial Officer and
The Chief Technical Officer each an option to purchase 50,000 shares of
the Company's common stock for a purchase price of $.25. These options
vest fully in 90 days and have a option life of 5 years. The fair value of
these options for the quarter and year ended December 31, 2004, was $800
using the Black-Scholes option method and will be accounted for under APB
25.
Initial Sale of the Company's Securities to the Public:
The Company entered into an agreement with a placement agent to
offer for sale to the public on a best efforts basis up to 8,000,000 units
(each consisting of one share of common stock, one warrant to purchase one
share of common stock at a price of $.75 per share and a warrant to
purchase one common share at $1.75) at $0.50 per unit, which became
effective on January 22, 2003. The placement agent was to receive 10% of
the gross proceeds from the offering plus certain warrants and
reimbursements of expenses of 3% of the gross proceeds and certain
placement agent warrants. The Company granted the placement agent and its
designee warrants which expire on December 31, 2007, to purchase up to
247,000 units at $.985 per unit for five years. Upon the exercise of a
warrant by the placement agent, the placement agent shall receive a share
of the Company's common stock, a class A redeemable warrant to purchase
one share of common stock exercisable at $.985 per share for five years
and class B redeemable warrant to purchase one share of the Company's
common stock for five years at $2.285. Management and the placement agent
consider the placement agent warrants to be additional compensation for
the agent's services in the offering. If these warrants are exercised in
whole or in part, any excess of the fair value of the securities issued
over the warrant exercise price will be reflected as cost of raising
capital and not a charge to operations and, accordingly, will be charged
to additional paid-in capital. The offering which originally terminated on
June 30, 2003 was extended to July 31, 2003. The Company sold 2,474,000
units for a total gross proceeds of $1,237,000. The placement agent
received 10% of the gross proceeds from the offering, plus certain
warrants and reimbursement of expenses. Placement agent fees and
registration costs were $403,942 of which $234,681 had been paid in 2002
and 2001 and the balance of $169,311 was paid from the proceeds of the
offering. From the proceeds of the IPO the Company repaid all previously
outstanding notes totaling $475,000 and interest of $82,518. $265,719 of
the proceeds from the IPO was used to pay accounts payable and expenses.
The balance of $244,452 was used for working capital and was fully
expended to support operations.
82
NOTE 11 - COMMON STOCK. (Continued)
Private Placement of the Company's Securities:
On September 8, 2003, the Company commenced a best efforts private
offering of up to 4,000,000 shares of its common stock, $0.0001 par value,
at $0.25 per share. The per share offering price was established by the
Company because of the restrictions on transfer of the shares and the fact
that prospective investors will be required to purchase a substantial
number of shares (20,000 for $5,000) in order to participate. In November
2003, the offering was increased up to 6,000,000 shares of the Company's
common stock at the same purchase price and provided that the Company may
use one or more placement agents to assist in the sale. This offering was
further extended through September 30, 2004 as well as increased to raise
$1,800,000 and to sell 7,200,000 shares of the Company's common stock.
This was primarily due to the delay in launching the Company's software
products. Each placement agent earns a commission of 10% of the proceeds
of all the shares placed by the placement agent and non-accountable
expenses of 2% of the proceeds of all the shares placed by the placement
agent. In addition to the placement agent's cash compensation, the Company
has agreed to give the placement agent warrants to purchase up to 720,000
shares of common stock at a purchase price of $.30 per share which will be
exercisable for a period of 5 years, which means that the placement agent
will receive a warrant to purchase one share of common stock for every 10
shares sold by the placement agent. For the year ended December 31, 2004,
one Placement Agent sold a total of 1,388,000 shares for an aggregate of
$347,000 net of $41,640 in commissions. Through December 31, 2004, the
same placement agent was paid in full the 10% commission and 2% non
accountable expense fee. The placement agent is entitled to receive a
warrant to purchase 172,800 common shares of the Company's stock at $0.30
per share. The offering was closed on September 30, 2004, and the warrant
was issued on October 15, 2004.
In September 2004, the Company's Chief Executive Officer, purchased
an aggregate of 400,000 shares of the Company's restricted common stock
through a private sale for a purchase price of $.25 per share. The
aggregate purchase price was $100,000.
Stock Options:
On December 15, 2003, the Company's stockholders ratified the
SearchHelp, Inc. 2004 Stock Plan ("Plan") which became effective January
1, 2004. Under the Plan, 1,500,000 shares of the Company's common stock
are reserved for issuance to employees (including officers), directors and
consultants upon exercise of options, stock awards, and stock purchase
rights. Options intended to qualify as incentive stock options ("ISO")
under Section 422(b) of the Internal Revenue Code of 1986 are to be
granted to employees only at an exercise price not less than 100% of the
fair market value of the Company's common stock at date of grant except
for employees holding more than 10% of the Company's common stock whose
option price shall be 110% of fair market value at date of grant. Options,
stock awards and purchase rights not intended to qualify as ISOs may be
granted to employees, officers, directors and consultants to the Company.
The minimum exercise price of non-qualified ISOs shall be not less than
the minimum legal consideration required under the laws of jurisdiction
where the Company was organized. The number of shares granted, terms of
exercise, and expiration dates are to be decided at the date of grant of
each option, award and purchase right by the Company's Compensation
Committee of the Board of Directors. The maximum term of an ISO is five
(5) years and ten (10) years for non-qualifying ISO. The Plan commenced on
January 1, 2004 and will terminate on December 31, 2014 unless sooner
terminated by the Board of Directors.
83
NOTE 11 - COMMON STOCK. (Continued)
Stock Options: (Continued)
For the year ended December 31, 2004 options under the Plan to
acquire 675,590 common shares were issued to employees, officers and
directors of the Company at prices ranging from $0.25 to $0.77 which was
the average of the bid and ask of the common stock on the dates of grant.
As the Company has elected to use APB 25 for accounting for its employee
stock plan, no compensation has been recognized for its fixed stock option
plan. If the Company had determined compensation cost for its stock option
plan based on the fair value at the grant dates for awards under the Plan,
consistent with the method prescribed by FASB 123, the Company's net loss
and loss per share would have been increased by (i) $48,099 to $1,386,334
($0.05) per share for the year ended December 31, 2004. The fair value of
stock options used to compute pro forma net income and earnings per share
disclosures is the estimated value at grant date using the Black-Scholes
option-pricing model with the following weighted average assumptions:
expected dividend yield of 0%; expected volatility of 200%; a risk free
interest rate of 6.0%; and expected option life of 5 years.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure, an Amendment of FASB Statement No. 123" (SFAS No. 148).
SFAS No. 148 provides alternative methods of transition for companies
making a voluntary change to fair value-based accounting for stock-based
employee compensation. The Company continues to account for its stock
option plan under the intrinsic value recognition and measurement
principles of APB Opinion No. 25 "Accounting for Stock Issued to
Employees," and related Interpretations. Effective for interim periods
beginning after December 15, 2002, SFAS No. 148 also requires disclosure
of pro-forma results on a quarterly basis as if the Company had applied
the fair value recognition provisions of SFAS No. 123.
As the exercise price of all options granted under the plan was
equal to or above the market price of the underlying common stock on the
grant date, no stock-based employee compensation is recognized in net
income. The following table illustrates the effect on net income and
earnings per share if the company had applied the fair value recognition
provisions of SFAS No. 123, as amended, to options granted under the stock
option plans and rights to acquire stock granted under the company's Stock
Participation Plan, collectively called "options."
For purposes of this pro-forma disclosure, the value of the options
is estimated using a Black-Scholes option pricing model and amortized
ratably to expense over the options' vesting periods. Because the
estimated value is determined as of the date of grant, the actual value
ultimately realized by the employee may be significantly different. The
fair value of the Company's stock options used to compute pro forma net
income and earnings per share disclosures is the estimated value at grant
date using the Black-Scholes option-pricing model with the following
weighted average assumptions for year ended December 31, 2004 and 2003,
respectively: expected dividend yield of 0%; expected volatility of 200%;
a risk free interest rate of 6.0%; and expected option life of 5 years.
Cumulative From
For the Years Ended
December 31, January 29, 1999
2004 2003 To December 31, 2004
---- ---- --------------------
Net loss as reported ($1,338,235) ($1,068,433) ($3,303,961)
Net loss pro forma ($1,386,334) ($1,068,433) ($3,352,060)
Shares - Basic 26,801,275 17,518,014
Basic loss per share as reported ($0.05) ($0.06)
Basic loss per share pro forma ($0.05) ($0.06)
84
NOTE 11 - COMMON STOCK. (Continued)
Stock Options: (Continued)
Presented below is a summary of the status of the stock options in
the plan and the related transactions for the year ended December 31,
2004:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -----
Options outstanding at the beginning of year 0
Granted 695,590 $0.25 to $0.077
===============
Canceled/Surrendered 20,000 $0.25
=====
Exercised 0
Forfeited 0
-------
Options outstanding at the end of year 675,590 $0.44
======= =====
Options exercisable at the end of the year 258,898 $0.40
======= =====
At December 31, 2004, the Plan has 824,410 shares available for
grant.
The weighted average fair value of stock options at date of grant,
calculated using the Black-Scholes option-pricing model, granted during
the year ended December 31, 2004 was $0.46.
The Company may issue options to purchase the Company's common stock
to officers, non-employees, non-employee directors or others as part of
settlements in disputes and/or incentives to perform services for the
Company. The Company accounts for stock options issued to vendors and
non-employees of the Company under SFAS No. 123 "Accounting for
Stock-based Compensation." The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing
model is charged to operations utilizing weighted average assumptions
identical to those used for options granted to employees.
As of December 31, 2004, outstanding options to purchase a total of
40,000 shares of the Company's common stock were granted to members of the
Company's Advisory Board in May 2004. A consultant was also granted two
options to purchase an aggregate of 750,000 shares of the Company's common
stock which are outstanding at December 31, 2004 (See note 12c). In
November 2004, management also granted the Chief Financial Officer and the
Chief Technical Officer an option to purchase 50,000 shares each of the
Company's common stock at a purchase price of $.25 per share. None of the
options have been exercised at December 31, 2004.
The following table summarizes the status of all the Company's stock
options outstanding and exercisable at December 31, 2004.
STOCK OPTIONS STOCK OPTIONS
OUTSTANDING EXERCISABLE
----------- -----------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
EXERCISE PRICES SHARES PRICE SHARES PRICE
--------------- ------ ----- ------ -----
$0.25 750,000 750,000 $0.25
$0.47 445,590 $0.47 223,898 $0.47
$0.62 750,000 $0.62 125,000 $0.62
$0.70 90,000 $0.70 22,500 $0.70
$0.77 120,000 $0.77 30,000 $0.77
------- ----- ------ -----
Total for year Ended
December 31, 2004 2,255,590 $0.46 1,151,398 $0.39
========= ===== ========= =====
85
NOTE 11 - COMMON STOCK. (Continued)
Warrants:
As part of its initial sale of its securities to the public the
Company sold Class A warrants to acquire 2,474,000 common shares at $0.75
per share and Class B warrants to acquire 2,474,000 common shares at $1.75
per share. As additional compensation to the placement agent who placed
the Company's securities, the agent and its designees received rights to
acquire 247,000 units of the Company's securities for $0.985 each for five
years. Each unit is comprised of one share of common stock, a warrant to
acquire one share of common stock at $0.985 and another warrant to acquire
a common share at $2.285 per share. Warrants to acquire 172,800 shares of
the Company's common stock at $0.030 per share was issued a placement
agent exercisable for five years as part of his compensation for his
services in the Company's private placement of its securities in 2004.
As part of the purchase price of a license (See Note 1 (b)), the
Company issued a warrant to acquire 2,300,000 common shares at an initial
price of $0.33 per share. Due to the Company's not registering the
underlying common shares in the prescribed time frame, the exercise price
of the warrants has been reduced to $0.27 per share at December 31, 2004
and is subject to further reduction.
At December 31, 2004, none of the warrants were exercised.
NOTE 12 - COMMITMENTS AND CONTINGENCIES.
(a) Stock Purchase Rights:
Certain notes payable included a default penalty that entitled the
holder to purchase (i) 10,000 shares of the Company's common stock for
$.01 per share if the note is not repaid on its original due date and (ii)
5,000 shares of the Company's common stock for $.01 per share for each
thirty day period the note remained unpaid past its original due date.
Each note holder received these purchase rights regardless of whether the
individual note holder agreed to extend the due date of the note. Through
December 31, 2002, the note holders received rights to acquire 780,000
shares of the Company's common stock at a purchase price of $0.01 each.
The difference between the fair value of the common stock underlying the
purchase rights ($.09 per share, which was the ascribed fair value of the
purchase rights using the Black-Scholes option pricing model for
determining fair value) and the exercise price of $.01 was charged to
operations as additional interest on the date the purchase rights were
issued. Through December 31, 2002, the note holders exercised rights to
acquire 310,000 shares of the Company's common stock. During the year
ended December 31, 2003, the note holders received additional rights to
acquire 345,000 shares of the Company's common stock at a purchase price
of $.01 per share. The difference between the fair value of the common
stock underlying the purchase rights ($.49 per share which was determined
by management as the difference between the $.50 per unit price the common
stock was then being offered to the public and the $.01 par share note
holders purchase price). During the year ended December 31, 2003, the note
holders exercised purchase rights to acquire 815,000 shares of the
Company's common stock. At December 31, 2004 and 2003, no purchase rights
to acquire common shares were outstanding.
(b) Lease:
The Company is obligated under an operating lease for its office,
which expires on December 31, 2005, at an annual rent of $13,280. The
Company's President has guaranteed the lease payments.
Rent expense was $12,987 and $12,960 for the years ended December
31, 2004 and 2003, respectively.
86
NOTE 12 - COMMITMENTS AND CONTINGENCIES. (Continued)
(c) License and Distribution Agreement:
In June 2002, the Company entered into a 5 year license agreement
with Edocusign, Inc., to be the exclusive licensee through December 31,
2003 and a non-exclusive licensee thereafter to manufacture, package,
promote, advertise, market and sell a software package designed to assist
parents to monitor their child's on-line behavior. The Company was
required to pay the licensor an initial license fee of $50,000 and
thereafter a royalty of $4 for each product sold. Through August 15, 2003,
the Company paid the licensor $25,000.
Effective August 15, 2003, the parties terminated the agreement by
entering into a software purchase and services agreement. Under the terms
of this agreement the Company is not required to pay the balance owed of
$25,000 under the license agreement. The Company, under the new agreement,
will acquire the software and all related documents which it had licensed
in the June 2002 agreement. The purchase price for the software is $50,000
in cash of which $10,000 was paid at the signing of the agreement, the
Company was given a $25,000 credit for the cash paid under the old license
agreement and the balance of $15,000 was paid on March 26, 2004 on the
date of the closing. The seller also received additional compensation for
the software in the form of two options to buy a total of 750,000 shares
of the Company's common stock. The exercise price of the shares is $ .62
per share which is the average of the Company's trading prices for the
thirty (30) day period immediately preceding the effective date of the
agreement. One option to purchase 250,000 shares of the Company's common
stock is exercisable only if the Company sells 3,000,000 units of the
software in the five (5) year period immediately following the closing.
The other option to purchase 500,000 shares of the Company's common stock
is exercisable at any time up to five (5) years. The fair value of the
option for 500,000 shares at the date of grant was $290,000 which along
with the $50,000 in cash is reflected in the accompanying financial
statements as capitalized software costs of $562,477. This asset will be
amortized over its estimated useful life of three years.
The option to purchase 250,000 shares of the Company's common stock
will be reflected in financial statements upon the fulfillment of the
conditional sale of product. The agreement also required the licensor to
perform certain consulting services for the Company for $8,000 per month
commencing in October 2003 through April 2004. The Company extended the
agreement for an additional three months to July 2004 and is currently
working on a month to month consulting basis. The consulting services
include, among other items, assistance in hiring, training and overseeing
a technical support team for the Company.
(d) Employment Agreements:
On December 8, 2003, William Bozsnyak entered into an amended and
restated 3-year employment agreement with the Company. Currently, Mr.
Bozsnyak is the Chief Executive Officer and Treasurer, Vice President and
Chairman of the Board of Directors. The agreement provides for a base
salary of $80,000 and a minimum annual increase in base salary of 5% if
approved by the Board of Directors. His salary may be increased to
$150,000 per annum upon the Company's successful completion of future
sales of stock with total gross proceeds of at least $2,400,000 As of
September 30, 2004 the Company has accrued $59,998 of his compensation.
Commencing October 1, 2004, Mr. Bozsnyak waived any future salary until
such time as the Company's cash flows are sufficient to sustain
operations. During 2004 the $20,000 of his salary that was waived by him
was charged to operations and credited to additional paid-in capital.
87
NOTE 12 - COMMITMENTS AND CONTINGENCIES. (Continued)
On December 8, 2003, Debbie Seaman entered into an amended and
restated 3-year employment agreement with the Company. Currently, Ms.
Seaman is the President and Secretary. The agreement provides for a base
salary of $70,000 and a minimum annual increase in base salary of 5% if
approved by the Board of Directors. Her salary may be increased to
$140,000 per annum upon the Company's successful completion of future
sales of stock with total gross proceeds of at least $2,400,000. For the
nine months ended September 30, 2004, Ms. Seaman received $14,860 in
compensation. Ms. Seaman stopped receiving her salary in May, 2004. As of
September 30, 2004 the Company has accrued $27,640 of her compensation.
Commencing October 1, 2004, Ms Seaman waived any future salary until such
time as the Company's cash flows are sufficient to sustain operations.
During 2004 the $17,500 of her salary that was waived by her was charged
to operations and credited to additional paid-in capital.
Both of these employment agreements will be automatically extended
each year unless either the employee or the Company gives notice. Both Mr.
Bozsnyak and Ms. Seaman will receive incentive bonuses to be determined
prior to the commencement of each year if they satisfy the criteria for
such bonuses as determined by the Company's compensation committee. Both
Ms. Seaman and Mr. Bozsnyak will be granted options to purchase up to
$200,000 worth of shares of common stock at a price equal to the midpoint
between the bid and ask price of a share of common stock on the date of
the grant from the Company's 2004 Stock Plan. In May 2004 they were
granted options to acquire an aggregate of 120,00 common shares at
exercise prices totaling $92,400.
On March 18, 2004, the Company hired a part time Chief Financial
Officer, Noel C. Bonilla. Mr. Bonilla entered into an employment agreement
with the Company in which he will receive, beginning April 1, 2004, $2,000
per month salary; $1,000 per month will be deferred until the Company has
sufficient funds to pay him. Mr. Bonilla also has been granted the right
to purchase 70,000 shares of the Company's common stock under the
Company's 2004 Stock Plan at a purchase price of $0.47. The option will
vest equally each year over the next four years. For the year ended
December 31, 2004 the Company has paid Mr. Bonilla $14,000 in
compensation. Mr. Bonilla stopped receiving and accruing his salary in
October 2004. On November 1, 2004, Mr. Bonilla agreed to take an option,
in lieu of his salary, to purchase 50,000 shares of the Company's common
stock at a purchase price of $.25. This option will vest in 90 days from
the date of grant and will expire in 5 years. Mr. Bonilla will not receive
a salary nor will he accrue his salary until the Company can afford to pay
him.
On March 18, 2004, the Company hired Eric Elgar as the Company's
Chief Technical Officer. Mr. Elgar entered into an employment agreement
with the Company in which he will receive, beginning April 1, 2004, an
annual salary of $100,000. Mr. Elgar is guaranteed employment for at least
six months and he also has been granted the right to purchase 150,000
shares of the Company's stock at $0.47. The option will vest fully one
year from the date of grant. For the year ended December 31, 2004 the
Company has paid Mr. Elgar $57,408 in compensation. Mr. Elgar stopped
receiving his salary on October 31, 2004. On November 1, 2004, Mr. Elgar
agreed to take an option, in lieu of his salary, to purchase 50,000 shares
of the Company's common stock at a purchase price of $.25. This option
will vest in 90 days from the date of grant and will expire in 5 years.
Mr. Elgar will not receive a salary nor will he accrue his salary until
the Company can afford to pay him.
88
NOTE 13 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company's quarterly financial data for the years ended December
31, 2004 and 2003 follow below.
--------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------------------------------------
December 31, 2004:
--------------------------------------------------------------------------------------------
Net loss $(310,987) $(329,277) $(275,628) $(422,343)
========== ========== ========== ==========
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Loss per share $(.01) $(.01) $(.01) $(0.02)
====== ====== ====== =======
--------------------------------------------------------------------------------------------
Shares used in computation
24,638,198 26,780,100 27,027,180 28,485,033
========== ========== ========== ==========
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
December 31, 2003:
--------------------------------------------------------------------------------------------
Net loss $(245,800) $(234,461) $(107,280) $(480,892)
========== ========== ========== ==========
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Loss per share $(.02) $(.01) $(.01) $(.01)
====== ====== ====== ======
--------------------------------------------------------------------------------------------
Shares used in
computation 15,684,811 16,356,032 18,261,760 19,722,913
========== ========== ========== ==========
--------------------------------------------------------------------------------------------
89
Part II. Information Not Required in the Prospectus
Item 24: Indemnification of Directors and Officers
Our Certificate of Incorporation (the "Certificate") provides that, except
to the extent prohibited by the Delaware General Corporation Law, as amended
(the "DGCL"), the Registrant's directors shall not be personally liable to the
Registrant or its stockholders for monetary damages for any breach of fiduciary
duty as directors of the Registrant. Under the DGCL, the directors have a
fiduciary duty to the Registrant which is not eliminated by this provision of
the Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the DGCL
for breach of the director's duty of loyalty to the Registrant, for acts or
omissions which are found by a court of competent jurisdiction to be not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are prohibited by
the DGCL. This provision also does not affect the directors' responsibilities
under any other laws, such as the Federal securities laws or state or Federal
environmental laws. The Registrant has applied for liability insurance for its
officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv)
for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL
and provides that the Registrant may fully indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was a director or
officer of the Registrant, or is or was serving at the request of the Registrant
as a director or officer of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
90
Item 25: Other Expenses of Issuance and Distribution.
Not applicable.
Item 26: Unregistered Securities Issued or Sold within One Year.
On September 8, 2003 we commenced a private offering of 4,000,000 shares
of common stock at $.25 per share which was increased in November 2003 to
6,000,000 shares of common stock. A total of 6,886,000 shares were sold to
approximately 77 accredited investors as of the close of the offering on
September 30, 2004. The gross proceeds of the offering was $1,721,500 and the
net proceeds to the Company, after expenses and broker commissions, was
approximately $1,668,750. The placement agent, S.G. Martin Securities, LLC was
issued a warrant to purchase 172,800 shares of the Company's common stock at a
purchase price of $.30 per share. The placement agent also received $43,200 in
commissions and $8,640 of non-accountable expenses.
In September 2004, William Bozsnyak the Company's Chief Executive Officer,
purchased an aggregate of 400,000 shares of the Company's restricted common
stock through a private sale, for a price of $.25 per share. The total purchase
price was $100,000.
In September 2004, the Company issued 520,753 shares of its common stock
to William Bozsnyak the Company's Chief Executive Officer in consideration for
repayment of his loan to the Company for $130,188. Also in September 2004, the
Company issued 59,280 shares of the Company's common stock to Debbie Seaman, the
Company's President in consideration for repayment of her loan to the Company in
the amount of $14,820. The price was determined by using the imputed value of
the stock on the date of grant.
In February 2004, the Company issued 2,300,000 of its common shares valued
at $575,000 and warrants to acquire another 2,300,000 common shares at $0.33 in
partial payment for royalties as per a participation agreement with the mold
remediation licensee and its parent.
In May 2004, the Company issued 130,000 shares of the Company's restricted
stock to 3 advisory board members.
Between December 1, 2001 and February 14, 2002 promissory notes were
issued to 13 accredited investors at $25,000 each for a total of $325,000.
Robert M. Cohen & Co., Inc. was the placement agent and received commissions
totaling $32,500. Since we did not pay back the note holders in full within 60
days of issuance, the note holders were entitled to purchase up to 5,000 shares
per month of our common stock at $.01 per share for each additional month the
note remains unpaid. As of December 31, 2004, 1,125,000 shares have been
purchased by the note holders. There are no other shares of common stock
issuable to our note holders. The note holders were all repaid by July 2003 out
of the proceeds of our initial public offering.
On December 30, 2003, management agreed to issue an option to purchase
750,000 common shares at $.25 per share to a non-employee director for business
and marketing services rendered by the director. The option was issued on March
12, 2004.
91
On April 12, 2005, management issued David Barnes 200,000 shares of the
Company's restricted common stock for servings as a director, financial expert
and chairman or the audit committee and compensation committee.
On April 21, management granted Mr. Carrizzo an option to purchase 500,000
shares of the Company's common stock at a purchase price of $.27 for business
and marketing services rendered by the director. On April 26, 2005, Mr. Carrizzo
signed a three year employment contract with the Company and was issued an
option to purchase 3,000,000 shares of the Company's common stock at a purchase
price of $.20 per share. This option vests equally over a three year period and
has an option life of five years.
On April 26, 2005, Mr. Bozsnyak signed a three year employment contract
with the Company and was issued an option to purchase 1,000,000 shares of the
Company's common stock at a purchase price of $.20 per share. This option vest
equally over a three year period and has an option life of five years.
Item 27: Index to Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
1(a) Placement Agent Registration Rights Agreement, dated January
22, 2003, between the Company and Robert M. Cohen & Co, Inc.
(2)
1(b) Form of Placement Agent Warrant. (2)
3(a) Articles of Incorporation of the Company. (2)
3(b) By-laws of the Company. (2)
4(a) Specimen Common Stock Certificate of the Company. (2)
4(b) Specimen Class A Warrant Certificate of the Company. (2)
4(c) Specimen Class B Warrant Certificate of the Company. (2)
5 Consent of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP. (3)
10(a) Agreement of Lease, dated December 1, 2000, between the
Company and Briarcliffe Foundation, Inc. (2)
10(b) Extension of Agreement of Lease, dated March 18, 2002, between
the Company and Briarcliffe Foundation, Inc. (2)
10(c) Form Lock-Up Agreement between the Company and non-public
Stockholders.(2)
92
10(d) Warrant Agreement, dated January 22, 2003, between the Company
and American Stock Transfer and Trust Company. (2)
10(e) Company 2004 Stock Plan, dated January 1, 2004. (4)
10(f) Participation Agreement, dated February 3, 2004, between the
Company and Environmental Commercial Technology Corp. (4)
10(g) Letter Agreement, dated February 3, 2004, between the Company
and Bioneutral Laboratories Corporation USA. (4)
10(h) Letter Agreement, dated February 3, 2004, between the Company
and Bioneutral Laboratories Corporation (Worldwide) Limited.
(4)
10(i) Warrant to purchase 575,000 shares of the Company's common
stock granted from the Company to Environmental Commercial
Technology Corp. (4)
10(j) Warrant to purchase 1,725,000 shares of the Company's common
stock granted from the Company to Bioneutral Laboratories
Corporation USA. (4)
10(k) Amended and Restated Employment Agreement, dated December,
2003, between the Company and Debbie Seaman. (4)
10(l) Amended and Restated Employment Agreement, dated January 1,
2004, between the Company and William Bozsnyak. (4)
10(m) 10(n) Placement Agent Agreement, dated November 7, 2003, by
and between the Company and S.G. Martin Securities LLC. (4)
10(n) Registration Rights Agreement, dated November 7, 2003, by and
between the Company and S.G. Martin Securities LLC. (4)
10(o) Software Purchase and Service Agreement, dated as of August
15, 2003, by and between the Company and Edocusign, Inc. (4)
10(p) Software License Agreement, dated August 29, 2003, by and
between the Company and Family Trusted Products, LLC. (4)
10(q) Form Lock-up Extension for Board of Directors. (4)
10(r) Schedule 10.21 identifying extensions that are substantially
similar to Exhibit 10.20 in all material respects except as to
the parties thereto and the amount of shares of common stock
of the Company that are locked up. (4)
10(s) Form Lock-up Extension for the Founding Shareholders and
Previous Noteholders. (4)
10(t) Schedule 10.23 identifying extensions that are substantially
similar to Exhibit 10.22 in all material respects except as to
the parties thereto and the amount of shares of common stock
of the Company that are locked up. (4)
10(u) Code of Ethics of the Company. (4)
93
10(v) On April 12, 2005, appointment of David Barnes as a Director,
financial expert and chairman of the audit committee as well
as chairman of the compensation committee of the Company.
(Incorporated herin by reference to the Company's 8-K dated
April 15, 2005).
10(w) Employment Agreement dated April 26, 2005, by and between the
Company and Mr. Joseph Carrizzo. (Incorporated herin by
reference to the Company's 8-K dated April 28, 2005).
10(x) Employment Agreement dated May 1, 2005, by and between the
Company and Mr. William Bozsnyak. (Incorporated herin by
reference to the Company's 8-K dated May 3, 2005).
10(y) Securities Purchase Agreement signed on April 26, 2005, by and
between the Company and E-Top-Pics, Inc. (Incorporated herin
by reference to the Company's 8-K dated May 2, 2005).
10(z) March 31, 2005 financials filed on May 18, 2005 (Incorporated
herin by reference to the Company's 10-QSB dated May 18,
2005).
10(aa) On April 26, 2005, the Company announced the resignation of
Joel San Antonio as chairman of the audit committee.
(Incorporated herin by reference to the Company's 8-K dated
April 27, 2005).
10(bb) On May 1, 2005, the Company announced the resignation of Eric
Elgar as Chief Technical Officer of the Company. (Incorporated
herin by reference to the Company's 8-K dated May 2, 2005).
(23)(a) Consent of Weinick Sanders Leventhal & Co., LLP. (3)
(23)(b) Consent of Gersten Savage Kaplowitz Wolf & Marcus, LLP
(included in Exhibit 5). (3)
(2) Incorporated herein by reference to the Company's Form
SB-2 filed with the Securities and Exchange Commission, File
No. 333-97687.
(3) Filed herewith.
(4) Incorporated herein by reference to the Company's Annual
Report on Form 10-KSB for the period ended December 31, 2003,
File No. 333-9768.
94
Item 28: Undertakings.
A. Registrant hereby undertakes:
a. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(1) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(2) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
(3) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
b. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
c. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
B. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
C. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceedings) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
95
D. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred
or paid by a director, officer or controlling person of the small business
issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection
with the securities being registered, the small business issuer will,
unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
E. The undersigned Registrant hereby undertakes to deliver or cause to
be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report, to security
holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or
Rule 14c-3 under the Securities Exchange Act 1934; and, where
interim financial information required to be presented by Article 3
of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent
or given, the latest quarterly report that is specifically
incorporated by reference in the prospectus to provide such interim
financial information.
96
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it meets all the requirements for filing the Post
Effective Amendment No.6 on Form SB-2 and has duly caused this amendment to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the city of Bethpage, state of New York, on June 7th, 2005.
By: /s/ William Bozsnyak
---------------------------------
Name: William Bozsnyak
Title: Chief Executive Officer, Interim
Chief Financial Officer, Vice President
and Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates as indicated.
By: /s/ Debbie Seaman Date: June 7, 2005
--------------------
Name: Debbie Seaman
Title: Secretary and Director
By: /s/ Joel San Antonio Date: June 7, 2005
--------------------
Name: Joel San Antonio
Title: Director
By: /s/ Joseph Carrizzo Date: June 7, 2005
---------------------
Name: Joseph Carrizzo
Title: President and Director
By: /s/ David Barnes Date: June 7, 2005
---------------------
Name: David Barnes
Title: Director
97