|TEV||7||TEV/EBIT||-1||TTM 2019-09-30, in MM, except price, ratios|
|Part I Financial Information|
|Note 1 - Organization|
|Note 2 - Summary of Significant Accounting Policies|
|Note 3 - Recent Accounting Pronouncements|
|Note 4 - Reclassifications|
|Note 5 - Sales Concentration and Concentration of Credit Risk|
|Note 6 - Convertible Debt|
|Note 6 - Convertible Debt - Con'T.|
|Note 7 - Related Party Transactions|
|Note 8 - Common and Preferred Stock|
|Note 9 - Income Taxes|
|Note 10 - Contingencies and Commitments|
|Note 11 - Going Concern|
|Note 12 - Subsequent Events|
|Item 2. Management's Discussion and Analysis or Plan of Operation|
|Item 3. Quantitative and Qualitative Disclosures About Market Risk|
|Item 4. Controls and Procedures|
|Part II. Other Information|
|Item 1. Legal Proceedings|
|Item 1A. Risk Factors|
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.|
|Item 3. Defaults Upon Senior Securities|
|Item 4. Mine Safety Disclosures|
|Item 5. Other Information|
|Item 6. Exhibits and Reports on Form 8-K|
|Balance Sheet||Income Statement||Cash Flow|
Rev, G Profit, Net Income
Ops, Inv, Fin
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2012
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to __________________
Commission File Number 000-1321002
(Exact name of registrant as specified in its charter)
Delaware _____ 20-8484256__
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
________477 South Rosemary Ave., Suite 202, West Palm Beach, FL, 33401__________
(Address of principal executive offices)
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No S
Indicate by check mark whether the registrant is a larger accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one)
|Large accelerated filer £||Accelerated filer £|
|Non-accelerated filer £ (Do not check if a smaller reporting company)||Smaller reporting company S|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No S
The number of shares outstanding of the Registrant's $0.001 par value Common Stock as of August 17, 2012 was 444,167,878 shares.
|Part I. Financial Information||Page #|
|Item 1. Financial Statements||2|
|Condensed Consolidated Balance Sheets at June 30, 2012 (Unaudited) and December 31, 2011||3|
|Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011(Unaudited)||4|
|Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (Unaudited)||5|
|Notes to Condensed Consolidated Financial Statements||6-10|
|Item 2. Management’s Discussion and Analysis||11-12|
|Item 3. Quantitative and Qualitative Disclosures about Market Risks||13|
|Item 4. Controls and Procedures||13|
|Part II. Other Information|
|Item 1. Legal Proceedings||14|
|Item 1A. Risk Factors||14|
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds||14|
|Item 3. Defaults Upon Senior Securities||14|
|Item 4. Mine Safety Disclosures||14|
|Item 5. Other Information||14|
|Item 6. Exhibits||14|
|PART I FINANCIAL INFORMATION|
|CONDENSED CONSOLIDATED BALANCE SHEETS|
|June 30,||December 31,|
|Cash and cash equivalents||$||778||$||3,355|
|Deferred financing costs||2,861||5,907|
|Total current assets||$||11,415||$||20,290|
|LIABILITIES AND STOCKHOLDERS' DEFICIENCY|
|Accounts payable and accrued expenses||$||69,912||$||62,051|
|Convertible debt, net of discounts of $45,171 (2012) and $94,477 (2011)||48,329||30,523|
|Total current liabilities||339,630||307,390|
|Series B Convertible Preferred stock, $0.01 par value; 1,000,000 shares authorized, no shares outstanding||—||—|
|Common stock, $.01 par value; 500,000,000 shares authorized; 416,608,354 shares and 374,741,470 shares issued and outstanding, respectively||4,166,086||3,747,414|
|Additional paid-in capital||25,357||466,446|
|Total company stockholders' deficiency||(328,215)||(222,269)|
|Less noncontrolling interest||—||(64,831)|
See notes to condensed consolidated financial statements
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)|
|Three months ended June 30,||Six months ended June 30,|
|Fee revenue, net||$||23,334||$||8,637||$||49,458||$||15,897|
|Administrative and management fees||34,888||212,000||60,788||212,000|
|Rent and other occupancy costs||5,957||—||11,683||—|
|Other general and administartive expenses||21,209||16,565||33,043||29,862|
|Total operating expenses||67,104||228,565||121,426||241,862|
|Other Income (Expense):|
|Derivative liability (expense) income||(26,668||)||—||18,044||—|
|Gain on deconsolidation of subsidiary||62,636||—||62,636||—|
|Total other expense, net||(10,844)||—||(12,256)||—|
|Less: net loss attributable to noncontrolling interest||413||—||695||—|
|Net loss attributable to Mediswipe, Inc.||$||(54,201)||$||(219,928)||$||(83,529)||$||(225,965)|
|Basic and diluted loss attributable to Mediswipe, Inc.|
|common shareholders, per share||$||(0.00)||$||(0.00)||$||(0.00)||$||(0.00)|
|Weighted average number of common shares outstanding|
|Basic and diluted||395,033,751||369,141,716||384,982,232||379,070,858|
See notes to condensed consolidated financial statements
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS|
|SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (UNAUDITED)|
|CASH FLOWS FROM OPERATING ACTIVITIES|
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities:|
|Amortization of deferred financing costs||5,546||—|
|Amortization of discount on convertible notes||81,806||—|
|Change in fair market value of derivative liabilities||(19,755)||—|
|Initial derivative liability expense on convertible notes||1,711||—|
|Change in noncontrolling interest||(695)||—|
|Gain on deconsolidation of subsisiary||(62,636)||—|
|Cash effect of deconsolidation||(5,166)||—|
|Common stock issued for services||—||212,000|
|Changes in operating assets and liabilities:|
|Other assets and receivables||—||(13,689)|
|Accounts payable and accrued expenses||10,983||31,147|
|Net cash (used in) provided by operating activities||(29,577)||3,493|
|Cash flows from financing activities:|
|Issuance of common stock for cash||—||—|
|Issuance of subsidiary common stock for cash||5,000||—|
|Proceeds from issuance of convertible debt||32,500||—|
|Payment of deferred financing costs||(2,500)||—|
|Payments of convertible notes||(8,000||)||—|
|Net cash provided by financing activities||27,000||—|
|Net increase (derease) in cash and cash equivalents||(2,577)||3,493|
|Cash and cash equivalents, beginning||3,355||282|
|Cash and cash equivalents, ending||$||778||$||3,775|
|Supplemental disclosure of cash flow information:|
|Cash paid for interest||$||—||$||—|
|Cash paid for income taxes||$||—||$||—|
|Fair value of common stock issued for conversion of notes payable and interest||$||58,000||$||—|
See notes to condensed consolidated financial statements
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
MediSwipe, Inc., (referred to hereafter as “MWIP,” or, the “Company”), was initially incorporated under the laws of the State of Delaware in February 1997 under the name Easy Street Online, Inc. (“Easy Street”).
MediSwipe (www.MediSwipe.com) offers a full spectrum of secure and reliable transaction processing and security solutions for the medical and healthcare industries, using traditional, Internet Point-of-Sale (POS), e-commerce and mobile (wireless) payment solutions. The Company additionally has developed a closed loop pre-paid patient stored value and loyalty card as a unique cash alternative to these regulated and e-commerce businesses specializing within the healthcare sector. The Company is headquartered in West Palm Beach, Florida.
The Company changed its name form Easy Street to Frontline Communications Corporation in July 1997. On April 3, 2003, we acquired Proyecciones y Ventas Organizadas, S.A. de C.V. ("Provo Mexico") and in December 2003 we changed our name to Provo International Inc.
In September 2008, Provo changed its name to Ebenefits Direct, Inc., which, through its wholly-owned subsidiary, L.A. Marketing Plans, LLC, engaged in the business of direct response marketing. The Company’s principal business was to market and sell non-insurance healthcare programs designed to complement medical insurance products and to provide savings for those who cannot afford or qualify for traditional health insurance products.
On October 14, 2008, Ebenefits Direct, Inc. changed its name to Seraph Security, Inc. (“Seraph”).
On April 25, 2009, Seraph acquired Commerce Online Technologies, Inc., a credit and debit card processing company.
On May 20, 2009, Seraph Security, Inc. changed its name to Commerce Online, Inc. to more accurately reflect its core business of merchant processing, and financial services.
As of March 4, 2010, Commerce Online, Inc. changed its name to Cannabis Medical Solutions, Inc. as a provider of merchant processing payment technologies for the medical marijuana and wellness sector.
On June 14, 2011, Cannabis Medical Solutions, Inc. changed its name to MediSwipe Inc. to further expand its’ merchant and mobile payment solutions to the overall health and wellness sector.
On March 8, 2010, the company completed the acquisition of 800 Commerce, Inc., (“800 Commerce”) a Florida Corporation incorporated by the Company’s Chief Executive Officer. The company issued 10,000,000 shares of common stock to 800 Commerce for all the issued and outstanding stock of 800 Commerce, Inc. As of June 30, 2012, the Company owns approximately 33% of 800 Commerce, and accordingly the Company is no longer consolidating the results of 800 Commerce.
The Company generates revenues by charging fees for the electronic processing of payment transactions and related services. The Company charges certain merchants for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. The Company charges other merchant customers a flat fee per transaction, and may also charge miscellaneous fees to our customers, including fees for returns, monthly minimums, and other miscellaneous services. The Company operates solely in the United States as a single operating segment.
The Company’s card-based processing services enable merchants to process both traditional card-present, or "swipe," transactions, as well as card-not-present transactions. A traditional card-present transaction occurs whenever a cardholder physically presents a credit or debit card to a merchant at the point-of-sale. A card-not-present transaction occurs whenever the customer does not physically present a payment card at the point-of-sale and may occur over the internet, mail, fax or telephone. The Company’s electronic payment processing may take place in a variety of forms and situations. For example, the Company’s capabilities allow merchants to have their customer service representatives take e-check or card payments from their consumers by telephone, and enable their consumers to make e-check or card payments directly through the use of a web site or by calling an Interactive Voice Response telephone system.
Presently, the Company provides merchant services to approximately forty medical dispensaries and wellness centers throughout California and Colorado through our sponsor bank Electronic Merchant Systems (“EMS”). EMS has advised all medical dispensaries that they will no longer accept their Visa and MasterCard transactions. This change is effective on July 1, 2012 and will have a materially adverse effect on our business. EMS did tell their clients that they can still take Discover cards, but asked that medical dispensary merchants batch and settle any Visa and Mastercard transactions by June 30, 2012. Mediswipe has moved over the last several months to expand and offer its merchant processing and payments services to the overall health and wellness sector, as well as to seek strategic partnerships within the mobile healthcare industry to lessen the impact of the dispensary processing business division.
The Company has a number of additional merchants through our banking partner EMS in which we receive residuals from each merchant account each month. In order to provide payment-processing services for Visa, MasterCard and Discover transactions, the Company must be sponsored by a financial institution that is a principal member of the respective Visa, MasterCard and Discover card associations. The Company has agreements with several processors to provide to us, on a non-exclusive basis, transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools. The Company also maintains a bank sponsorship agreement for our prepaid card programs. Monthly revenues are derived through new existing merchant account residual payments paid to us via wire transfer or ACH each month by our three banking partners. The Company will seek to further capitalize on the health and wellness marketplace and is in the unique position to access this distribution channel, by managing and leveraging its’ merchant relationships as a vertical pipeline and distribution channel for its growing patient database and clients.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present the financial position, results of operations and cash flows for the stated periods have been made. Except as described below, these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included in the Company’s annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with a reading of the Company’s consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report filed with the Securities and Exchange Commission (SEC) on April 16, 2012. Interim results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of future results for the full year. Certain amounts from the 2011 period have been reclassified to conform to the presentation used in the current period.
The condensed consolidated financial statements include the accounts of the Company and 800 Commerce, until May 10, 2012 when 800 Commerce sold shares of its common stock to third parties resulting in the Company no longer holding a controlling interest in 800 Commerce. All material intercompany balances and transactions have been eliminated
NONCONTROLLING INTEREST AND DECONSOLIDATION
On January 1, 2011, the Company adopted authoritative accounting guidance that requires the ownership interests in subsidiaries held by parties other than the parent, and income attributable to those parties, be clearly identified and distinguished in the parent’s consolidated financial statements. The Company’s noncontrolling interest is now disclosed as a separate component of the Company’s consolidated equity deficiency on the balance sheets. Earnings and other comprehensive income are separately attributed to both the controlling and noncontrolling interests. Earnings per share are calculated based on net income attributable to the Company’s controlling interest.
From January 1, 2011 through May 31, 2011, the Company owned 100% of 800 Commerce. From June 1, 2011 through October 1, 2011 800 Commerce sold 155,000 shares of its common stock and issued 1,178,000 shares of its common stock to its officers as compensation. After these transactions, the Company owned 60% of 800 Commerce. On May 10, 2012, 800 Commerce sold 1,050,000 shares of its common stock, reducing the Company’s ownership to 45%. On May 18, 2012, 800 Commerce sold 500,000 shares of its common stock, reducing the Company’s ownership to 40%, and on June 10, 2012 issued 500,000 shares of common stock pursuant to a consulting agreement and 667,000 shares of common stock for legal services and in lieu of compensation. Subsequent to these issuances the Company currently owns 33% of the outstanding common stock of 800 Commerce. Effective May 10, 2012, the Company is no longer consolidating 800 Commerce in its’ financial statements. The noncontrolling interest included in the Company’s consolidated statement of operations is a result of noncontrolling interest investments in 800 Commerce up to the date of deconsolidation of May 10, 2012. Noncontrolling interests through May 10, 2012 are classified in the condensed consolidated statements of operations as part of consolidated net loss.
As a result of the deconsolidation of 800 Commerce, Inc., the Company recorded a gain of $62,636, consisting of the following:
|Fair value of consideration received||$||—|
|Carrying value of the non-controlling interest in 800 Commerce, Inc. in as of the change in control date||(65,526)|
Net deficit of 800 Commerce, Inc. as of May 10, 2012
Subsequent to May 10, 2012, the Company’s investment in 800 Commerce is accounted for using the equity method and was reduced to zero.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.
The Company records accounts receivable from amounts due from its processors. The Company charges certain merchants for processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. The Company charges other merchant customers a flat fee per transaction, and may also charge miscellaneous fees to our customers, including fees for returns, monthly minimums, and other miscellaneous services. All the charges and collections thereon flow through our processors who then remit the fee due the Company within the month following the actual charges.
DEFERRED FINANCING COSTS
The costs related to the issuance of debt are capitalized and amortized to interest expense using the straight-line method over the lives of the related debt.
The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” (“SAB No. 104”). SAB 104 clarifies application of generally accepted accounting principles related to revenue transactions. The Company also follows the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF Issue No. 00-21"), in arrangements with multiple deliverables.
The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured.
The Company recognizes revenue during the month in which commissions are earned.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The three hierarchy levels are defined as follows:
Level 1 – Quoted prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in the credit default swap market.
The Company's financial instruments consist primarily of cash, accounts payable and accrued expenses, and convertible debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.
We account for income taxes in accordance with ASC 740-10, Income Taxes. We recognize deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. We record a valuation allowance related to a deferred tax asset when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. We classify interest and penalties as a component of interest and other expenses. To date, we have not been assessed, nor have we paid, any interest or penalties.
We measure and record uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized. The Company’s tax years subsequent to 2005 remain subject to examination by federal and state tax jurisdictions.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed in accordance with SFAS No. 128, "Earnings per Share". Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period. There were not any outstanding warrants or options as of June 30, 2012 and 2011. As of June 30, 2012, the Company’s outstanding convertible debt is convertible into 91,944,444 shares of common stock, which was not included in the computation of dilutive loss per share because their impact is antidilutive.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete. Stock awards granted to non-employees are valued at their respective measurement dates based on the trading price of the Company’s common stock and recognized as expense during the period in which services are provided.
For the three and six months ended June 30, 2012 and 2011, the Company did not grant any stock based compensation. As of June 30, 2012, we do not have any outstanding stock options or warrants.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 will result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011, with early application not permitted, and became effective for the Company on January 1, 2012. The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
NOTE 4 - RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the current period's financial statement presentation. These reclassifications had no impact on previously reported results of operations or stockholders' deficiency.
NOTE 5 – SALES CONCENTRATION AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The Company maintains cash balances at one financial institution, which is insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insured institution insures up to $250,000 on account balances. The company has not experienced any losses in such accounts.
None of our customers account for more than 10% of our business, however we rely on a few processors to provide to us, on a non-exclusive basis, transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools.
NOTE 6 – CONVERTIBLE DEBT
In December 2011 the Company issued a $50,000 convertible promissory note as part of a guaranty fee due (the “Guaranty Note”) to a Company that is affiliated with a former shareholder of the Company. Terms of the note include an eight percent per annum interest rate and the note matures on the one year anniversary on December 20, 2012. Additionally, the holder of the Note has the right to convert the note into shares of common stock of the Company at a conversion price equal to eighty percent (80%) of the lowest closing bid price of the common stock within five (5) days of the conversion. The beneficial conversion feature included in the Guaranty Note resulted in an initial debt discount and derivative liability of $36,765. The fair value of the embedded conversion feature of the Guaranty Note was calculated at the issue date utilizing the following assumptions:
|Issuance Date||Fair Value||Term||Assumed Conversion Price||Market Price on Grant Date||Expected Volatility Percentage||Risk free Interest Rate|
As of December 31, 2011, the Company revalued the Guaranty Note. For the period from issuance to December 31, 2011, the Company decreased the derivative liability of $36,765 by $1,050 resulting in a derivative liability balance of $35,715 at December 31, 2011. During the six months ended June 30, 2012, the company made payments of $8,000, reducing the balance of the Guaranty Note to $42,000 as of June 30, 2012. The Company revalued the remaining balance of the Guaranty Note as of June 30, 2012 and based on the valuation, the Company decreased the derivative liability balance by $6,547 resulting in a derivative liability balance of $29,167 at June 30, 2012.
The fair value of the embedded conversion feature of the Guaranty Note was calculated at June 30, 2012 utilizing the following assumptions:
|Assumed Conversion Price|| |
In September, October and December 2011, the Company entered into three separate note agreements with an unaffiliated investor for the issuance of three convertible promissory notes each in the amount of $25,000 (the “2011 Notes”). Among other terms the 2011 Notes are due nine months from their issuance dates, bear interest at 8% per annum, payable in cash or shares at the Conversion Price as defined herewith, and are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements) per share of the Company’s common stock for the ten trading days immediately preceding the date of conversion. Upon the occurrence of an event of default, as defined in the 2011 Notes, the Company is required to pay interest at 22% per annum and the holders may at their option declare a Note, together with accrued and unpaid interest, to be immediately due and payable. In addition, the 2011 Notes provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company. The Company may at its own option prepay the 2011 Notes and must maintain sufficient authorized shares reserved for issuance under the 2011 Notes.
We received net proceeds of $67,500 from the 2011 Notes after debt issuance costs of $7,500 paid for lender legal fees. These debt issuance costs will be amortized over the earlier of the terms of the Note or any redemptions and accordingly $2,807 and $4,935 and has been expensed as debt issuance costs (included in interest expense) during the three and six months ended June 30, 2012.
On March 26, 2012, the investor converted $10,000 of the September 2011 Note. Pursuant to the Conversion Price, the Company issued 4,545,455 shares of common stock at approximately $0.0022 per share. As of March 31, 2012, the outstanding principal balance of the 2011 Notes was $65,000.
On April 23, 2012, the investor converted $10,000 of the September 2011 Note. Pursuant to the Conversion Price, the Company issued 5,000,000 shares of common stock at $0.002 per share.
On May 3, 2012, the investor converted $5,000 of the September Note and $1,000 of accrued and unpaid interest. Pursuant to the Conversion Price, the Company issued 3,750,000 shares of common stock at $0.0016 per share.
On May 16, 2012, the investor converted $12,000 of the October 2011 Note. Pursuant to the Conversion Price, the Company issued 8,571,429 shares of common stock at $0.0014 per share.
On May 31, 2012, the investor converted $13,000 of the October 2011 Note and $1,000 of accrued and unpaid interest. Pursuant to the Conversion Notice, the Company issued 14,000,000 shares of common stock at $0.001 per share.
On June 21, 2012, the investor converted $6,000 of the December 2011 Note. Pursuant to the Conversion Price, the Company issued 6,000,000 shares of common stock at $0.001 per share.
As of June 30, 2012, the outstanding principal balance of the 2011 Notes was $19,000.
On April 24, 2012, the Company entered into a $32,500 convertible note agreement (the 2012 Note) with the same investor under the same terms and conditions as the 2011 Notes. We received net proceeds of $30,000 from the 2012 Note after debt issuance costs of $2,500 paid for lender legal fees. These debt issuance costs will be amortized over the earlier of the terms of the Note or any redemptions and accordingly $611 and has been expensed as debt issuance costs (included in interest expense) during the three and six months ended June 30, 2012.
We have determined that the conversion feature of the 2011 Notes and 2012 Note (together the “Notes”) represent an embedded derivative since each Note is convertible into a variable number of shares upon conversion. Accordingly, the Notes are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of this derivative instrument has been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note. Such discount will be accreted from the date of issuance to the maturity dates of each Note. The change in the fair value of the liability for derivative contracts will be recorded in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The beneficial conversion feature included in the 2012 Notes resulted in an initial debt discount of $32,500 and an initial loss on the valuation of derivative liabilities of $1,711 for a derivative liability initial balance of $34,211.
NOTE 6 – CONVERTIBLE DEBT - Con’t.
The fair value of the embedded conversion feature 2012 Note was calculated at issue date utilizing the following assumptions:
Assumed Conversion Price
Market Price on Grant Date
As of June 30, 2012, the Company revalued the embedded conversion feature of the 2012 Note. For the period from April 24, 2012 through June 30, 2012, the Company increased the derivative liability of $34,211 by $1,900 resulting in a derivative liability balance of $36,111.
The fair value of the 2012 Note was calculated at June 30, 2012 utilizing the following assumptions:
|Assumed Conversion Price|| |
The beneficial conversion feature included in the 2011 Notes resulted in an initial debt discount of $75,000 and an initial loss on the valuation of derivative liabilities of $41,882 for a derivative liability initial balance of $116,882. The fair value of the embedded conversion feature 2011 Notes was calculated at each issue date utilizing the following assumptions:
Assumed Conversion Price
Market Price on Grant Date
10/25/11 $31,915 9 months $0.00235 $0.0045 142% 0.03%
12/20/11 $29,412 9 months $0.0017 $0.0033 147% 0.03%
At December 31, 2011, the Company revalued the embedded conversion feature of the 2011 Notes. For the period from their issuance to December 31, 2011, the Company decreased the derivative liability of $116,862 by $27,781 resulting in a derivative liability balance of $89,101 at December 31, 2011.
As of March 31, 2012, the Company revalued the embedded conversion feature of the 2011 Notes. For the period from January 1, 2012 through March 31, 2012, the Company decreased the derivative liability of $89,101 by $34,177 resulting in a derivative liability balance of $54,924. As of June 30, 2012, the Company revalued the remaining $19,000 of the 2011 Notes. For the period from March 31, 2012 to June 30, 2012 the Company decreased the derivative liability balance by $14, resulting in a derivative liability balance of $21,111 related to the 2011 Notes.
The fair value of the remaining 2011 Notes was calculated at June 30, 2012 utilizing the following assumptions:
|Assumed Conversion Price|| |
The inputs used estimate the fair value of the derivative liabilities are considered to be level 2 inputs within the fair value hierarchy.
A summary of the derivative liability balance as of December 31, 2011 and June 30, 2012 is as follows:
Initial Derivative Liability
|Redeemed convertible notes||Fair value change- six months ended 6/30/12|
Derivative Liability Balance 6/30/12
*Comprised of $32,500, the discount on the face value of the convertible note and the initial derivative liability expense of $1,711 which is included in the derivative liability expense of $18,044 on the condensed statement of operations for the six months ended June 30, 2012, included herein.
NOTE 7 – RELATED PARTY TRANSACTIONS
Management and administration fees
During the three and six months ended June 30, 2012 the Company paid management fees of $4,128 and $6,028, respectively, to Michael Friedman (CEO), $3,260 for the three and six months ended June 30, 2012, respectively, to Eric Rodriguez (President) and $5,000 and $6,500, respectively, to Barry Hollander, our Chief Financial Officer (“CFO”). Additionally the Company, effective January 1, 2011 has agreed to annual compensation of $90,000 for its CEO and accordingly has expensed $22,500 and $45,000 for the three and six months ended June 30, 2012, which is included in deferred compensation, which totaled $135,000 and $90,000 as of the June 30, 2012 and December 31, 2011, respectively. The Company also paid Michele Friedman, the wife of our CEO, $3,600 and $5,700, respectively, during the three and six months ended June 30, 2012 as compensation for office administration and bookkeeping.
Agreements with prior management
In December 2011 the Company issued a $50,000 convertible promissory note as part of a guaranty fee due to a Company that is affiliated with a former officer of the Company. Terms of the note include an eight percent per annum interest rate and the note matures on the one year anniversary on December 20, 2012. Additionally, the holder of the Note has the right to convert the note into shares of common stock of the Company at a conversion price equal to eighty percent (80%) of the lowest closing bid price of the common stock within five (5) days of the conversion.
The Company has agreed to pay an additional $50,000 in common stock, which is included in accounts payable and accrued expenses on the June 30, 2012 and December 31, 2011 balance sheets. See Note 6.
NOTE 8 – COMMON AND PREFERRED STOCK
During the quarter ended June 30, 2012, the Company issued 37,321,349 shares of common stock upon the conversion of $46,000 of debentures and $2,000 of accrued and unpaid interest. The shares were issued at an average price of approximately $0.0013 per share.
On June 20, 2012m the Company cancelled and returned to authorized but unissued one million shares of Preferred A Stock, and authorized 1,000,000 shares of Class B Convertible Preferred Stock (the “Class B Preferred Stock”), par value $0.01. The rights, preferences and restrictions of the Class B Preferred Stock state; i) each share of the Class B Convertible Preferred Stock shall be entitled to a number of votes determined at any time and from time to time determined by dividing the number of then issued and outstanding shares of the Corporation’s common stock by one million; ii) the Class B Convertible Preferred Stock shall have a right to vote on all matters presented or submitted to the Corporation’s stockholders for approval in pari passu with holders of the Corporation’s common stock, and not as a separate class; iii) each share of the Class B Preferred Stock shall be convertible into shares of the Company’s common stock at the option of the holder into a number of shares of common stock determined by dividing the number of then issued and outstanding shares of the Company’s common stock by one million.
NOTE 9 – INCOME TAXES
Deferred income taxes reflect the net tax effects of operating loss and tax credit carry forwards and temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Due to the uncertainty of the Company’s ability to realize the benefit of the deferred tax assets, the deferred tax assets are fully offset by a valuation allowance at June 30, 2012 and 2011.
As of June 30, 2012, the Company had a tax net operating loss carry forward of approximately $432,000. Any unused portion of this carry forward expires in 2029. Utilization of this loss may be limited in the event of an ownership change pursuant to IRS Section 382.
NOTE 10 – CONTINGENCIES AND COMMITMENTS
The Company is not aware of any legal proceedings against it as of June 30, 2012. No contingencies have been provided in the financial statements.
Effective on December 1, 2011 the Company and its then majority owned subsidiary entered into a two year agreement to rent executive office space in West Palm Beach, Florida. The lease automatically renews for 3 month periods unless terminated in writing 30 days prior to the then current end date by either party. Totaling approximately 1,200 square feet, effective March 1, 2012 the Company’s portion of the monthly rent is $1,250.
NOTE 11 – GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of June 30, 2012 the Company had an accumulated deficit of $4,519,658 and a working capital deficit of $328,215. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We presently maintain our daily operations and capital needs through the receipts of the monthly account residuals we receive directly from the Company’s processors. From time to time when we need additional working capital we have been able to issue convertible promissory notes to an unaffiliated investor. Additionally, the Company’s CEO. B. Michael Friedman has loaned the Company money in the past. The Company plans to increase sales of additional merchant accounts over the course of this fiscal year and has received term sheets for additional credit facilities for working capital if needed.
NOTE 12 – SUBSEQUENT EVENTS
In July 2012, holders of the Company’s convertible debt converted the remaining principal balance of the December 2011 Note of $19,000 and accrued interest of $1,000 into 27,559,524 shares of common stock at approximately $0.00726 per share.
On August 12, 2012 the Board of directors of the Company authorized the issuance of 800,000 shares of Class B Preferred stock. The shares were issued as follows: B. Michael Friedman, 250,000 shares issued in lieu of $135,000 in accrued and unpaid salary due Mr. Friedman for his role as CEO of the Company; Eric Rodriguez, 250,000 shares issued pursuant to a twelve month employment agreement dated August 10, 2012; Philip Johnston, 100,000 shares issued pursuant to legal services to be provided for one year beginning August 12, 2012; Barry Hollander, 50,000 shares issued for his services as CFO and Capital Strategy Corp., 150,000 shares for consulting services, including merger and acquisition consulting.
Management performed an evaluation of the Company’s activity through the date these financials were issued to determine if they must be reported. The Management of the Company determined that there were no other reportable subsequent events to be disclosed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2011 and 2010, included in our annual report on Form 10-K filed with the SEC on April 16, 2012.
The independent auditors reports on our financial statements for the years ended December 31, 2011 and 2010 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 10 to the condensed consolidated financial statements filed herein.
(a) Liquidity and Capital Resources.
For the six months ended June 30, 2012, net cash used in operating activities was $29,957 compared to cash provided by operations of $3,493 for the six months ended June 30, 2011. The company had a net loss $83,529 for the six months ended June 30, 2012 compared to a net loss of $225,965 for the six months ended June 30, 2011. The net loss for the six months ended June 30, was impacted by a gain of $62,636 for the deconsolidation of 800 Commerce. The results in the current period were also impacted by the amortization of the initial discount of $81,806 on the convertible notes and amortization of deferred financing fees of $5,546 also related to the convertible promissory notes. These amounts and the current six month loss were offset by a decrease in the change of the market value of derivative liabilities of $19,755.
During the six months ended June 30, 2012, net cash provided by financing activity was $27,000. This was comprised of issuance of a convertible promissory note of $32,500 and sales of stock by our subsidiary of $5,000. Payments of $8,000 on a convertible promissory note and a deferred financing fee of $2,500 were expended during the six months ended June 30, 2012.
For the six months ended June 30, 2012, cash and cash equivalents decreased by $2,577 compared to an increase of $3,493 for the six months ended June 30, 2011. Ending cash and cash equivalents at June 30, 2012 was $778 compared to $3,775 at June 30, 2011.
We have limited cash and cash equivalents on hand. We presently maintain our daily operations and capital needs through the receipts of our monthly account residuals. We will need to raise funds to continue to be able to support our operating expenses and to meet our other obligations as they become due. Sources available to us that we may utilize include the sale of unsecured convertible debentures from unaffiliated investors which may cause dilution to our stockholders. Additionally, our CEO has loaned the Company money in the past. The company expects to increase sales of additional merchant accounts over the course of this fiscal year and has received term sheets for additional credit facilities for working capital if needed.
(b) Results of Operations
Results of operations for the three and six months ended June 30, 2012 vs. June 30, 2011
Revenues for the three and six months ended June 30, 2012 were $23,334 and $49,458 respectively, compared to $8,637 and $15,897 for the three and six months ended June 30, 2011, respectively. Revenues increased for the three and six months ended June 30, 2012 compared to 2011 as a result of additional merchant accounts.
Operating expenses were $67,104 and $121,246 for the three and six months ended June 30, 2012 compared to $228,565 and $241,862 for the three and six months ended June 30, 2011. The decrease in operating expenses for the three and six months ended June 30, 2012 was primarily attributable to $212,000 of stock based compensation expense recorded in 2011 associated with the issuance of stock to officers and consultants for services. Included in the 2012 expenses are $34,888 and $60,788 for the three and six months ended June 30, 2012, respectively of management fees, of which $22,500 (three months ended June 30, 2012) and $45,000 (six months ended June 30, 2012) was deferred by our CEO.
OTHER INCOME (EXPENSE)
Other expense for the three and six months ended June 30, 2012 was $10,844 and $12,256, respectively. Included in this amount is the gain of $62,636 recorded on the deconsolidation of 800 Commerce. Also included is interest expense of $46,812 and $92,936 for the three and six months ended June 30, 2012 respectively. For the three months ended June 30, 2012, interest expense is comprised of $41,477 related to the amortization of the initial discount on convertible promissory notes, $2,739 for the amortization of the deferred financing costs and $2,596 for the interest expense on the face value of the notes. For the six months ended June 30, 2012, interest expense is comprised of $81,806 related to the amortization of the initial discount on convertible promissory notes, $5,546 for the amortization of the deferred financing costs and $5,584 for the interest expense on the face value of the notes. Also included in other income for the three months ended June 30, 2012 was an expense of $26,668 for the fair market value change in the derivative liability associated with convertible promissory notes. For the six months ended June 30, 2012 the cumulative effect of the fair market value change resulted in a decrease to the liability and other income of $18,044.
OFF BALANCE SHEET ARRANGEMENTS
Critical Accounting Policies
See Note 2 to the condensed consolidated financial statements included herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation our Chief Executive Officer and Chief Financial Officer concluded that, at June 30, 2012, our disclosure controls and procedures are not effective.
Management’s Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
|•||Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;|
|•||Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and|
|•||Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statement.|
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our CEO and CFO have evaluated the effectiveness of our internal control over financial reporting as described in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report based upon criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to the extent possible given the limited personnel resources and technological infrastructure in place to perform the evaluation. Based upon our management’s discussions with our auditors and other advisors, our CEO and CFO believe that, during the period covered by this report, such internal controls and procedures were not effective as described below.
We assessed the effectiveness of the Company’s internal control over financial reporting as of evaluation date and identified the following material weaknesses:
Insufficient Resources: We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting.
Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement control procedures.
Lack of Audit Committee: We do not have a functioning audit committee, resulting in lack of independent oversight in the establishment and monitoring of required internal controls and procedures.
We are committed to improving the internal controls and will (1) consider to use third party specialists to address shortfalls in staffing and to assist us with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel and (3) may consider appointing additional outside directors and audit committee members in the future.
We have discussed the material weakness noted above with our independent registered public accounting firm. Due to the nature of this material weakness, there is a more than remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Act of 1934 and are not required to provide the information under this item.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the quarter ended June 30, 2012, the Company issued 37,321,349 shares of common stock upon the conversion of $46,000 of debentures and $2,000 of accrued and unpaid interest. The shares were issued at an average price of approximately $0.0013 per share.
ITEM 3. Defaults upon Senior Securities
Item 4. MINE SAFETY DISCLOSURES
ITEM 5. Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit index
31.1 Certification of Chief Executive Officer, and Director Pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer, and Director Pursuant to Section 906 of the Sarbanes-Oxley Act.
32.1 Certification of Chief Executive Officer, and Director Pursuant to Section 302 of the Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer, and Director Pursuant to Section 906 of the Sarbanes-Oxley Act.
(b) Reports on Form 8-K. During the fiscal quarter ended June 30, 2012, the Company filed the following reports:
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 17, 2012
By: /s/ B. Michael Friedman
B. Michael Friedman
Chief Executive Officer and Director
(Principal Executive Officer)