ITEM 1. BUSINESS
Overview
We are deploying an advanced mobile marketing and advertising solution. The Montavo Mobile Ad Platform (mMAP™) offers advertisers the unique opportunity to review a “mobile ad spend vs. gross profit” ratio which generates a Return on Investment (“ROI”) of their mobile advertising costs. The ratio is displayed on the Montavo Mobile Ad Spend Speedometer™, which is a real-time online dashboard reporting tool that allows advertisers to monitor the performance of mobile advertising campaigns that are deployed on the mMAP™.
The mMAP™, with our patent pending technology, can anonymously report to an advertiser that a consumer who merely viewed a mobile ad on their cell phone (through any of several different ways the mMAP™ places advertising on the mobile phone in both push and pull-type ads), subsequently went into a physical location store and purchased products and/or services. This means Montavo can give an advertiser an ROI measure on their mobile advertising costs related to in-store purchases, representing a benefit that is not offered by traditional
advertising mediums today. The mMAP™ does this without any additional hardware or software or Point of Sale (“POS”) system, and no additional interaction is needed between store associates and consumers or their mobile phones.
We expect that our core revenues will be derived from advertisers, who will be charged impression views and/or monthly fees for inclusion in our permission-based database, from impressions, click-through and redemption fees for the redemption of incentives, or from fees for the development of national campaigns for brand advertisers. We plan to seek distribution agreements with advertisement campaign aggregators, including global advertising agencies, search-engine marketing optimization agencies, membership organizations and direct marketing organizations. We also intend to employ a small team of account executives that will act as a sales force and seek and solicit clients among national and regional brand leaders. There can be no assurance that we will achieve our objectives or succeed in our business plan.
We have prepared our financial statements assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2010, we had a deficit accumulated during the development stage of approximately $5.3 million, negative cash flows from operations since inception and expect to incur additional losses in the future as we continue to develop and grow our business. We have funded our losses primarily through sales of common stock and warrants in private placements and borrowings from related parties and other investors. The further development of our business will require capital. At December 31, 2010, we had a working capital deficit (current assets less current liabilities) of approximately $1.5 million and no cash.
We are dependent on external sources of financing to meet our working capital needs. Current sources of liquidity are insufficient to provide for budgeted and anticipated working capital requirements. We will therefore be required to seek additional financing to satisfy our working capital requirements. No assurances can be given that such capital will be available to us on acceptable terms, if at all. In addition to equity financing and strategic investments, we may seek additional related party loans. If we are unable to obtain any such additional financing, or if such financing cannot be obtained on terms acceptable to us, we may be required to delay or scale back our operations, including the development of our mobile marketing solution, which would adversely affect our ability to generate future revenues and may force us to curtail or cease our operating activities.
To attain profitable operations, management’s plan is to execute its strategy of (i) continuing the development of our proprietary mobile marketing solution; (ii) building additional strategic partnerships with technology partners; (iii) building strategic partnerships with premier advertising inventory partners; and (iv) executing sales relationships with national and global brands in order to drive profitability. We will continue to be dependent on outside capital to fund our operations for the foreseeable future, and continue to be involved in discussions and negotiations with investors in order to raise additional funds to provide sufficient working capital for operations with a near-term goal of generating positive cash flow from operations. Any financing we obtain may further dilute or otherwise impair the ownership interest of our current stockholders. If we fail to generate positive cash flows or fail to obtain additional capital when required, we could modify, delay or abandon some or all of our plans. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our principal executive offices are located at 4957 Lakemont Blvd, Suite 239, Bellevue, Washington 98006, and our telephone number at that address is (425) 747-5500. We maintain an Internet website at www.montavo.com. Information on our website is not part of this Annual Report.
Principal Products and Markets
Our Montavo Mobile Shopping consumer client application can be used on mobile phones and other personal mobile devices, personal navigation devices and factory-installed in-dash automobile navigation systems. The application enables end-user consumers on the go to access and find offers, including sales, discounts, coupons, product information and new product launches, from their mobile wireless devices. Our advertisement delivery platform mMAP is also used as an ad delivery network to mobile websites and mobile applications.
Our Montavo Mobile Shopping end-user client application will be marketed to wireless carriers, handset manufacturers, personal and vehicle navigation device manufacturers and application aggregators, by a small team of dedicated account executives. The advertising media will be marketed to global advertising agencies, search engine market optimization agencies, membership organizations and direct marketing organizations, as well as national and regional brand leaders.
Growth Strategy
We have developed technology that is incorporated into our Montavo Mobile Advertising Platform (mMAP), which allows wireless subscribers to search a proprietary advertisement delivery system by category of service, keyword search and location. This application can simultaneously generate ROI (return on investment) ratios on revenue and profit for the advertiser. The content is delivered to subscribers via mobile handsets and other personal mobile wireless devises as well as personal navigation devices or in-dash navigation systems installed in vehicles. Subscribers can download and view advertisements, redeem special incentives and obtain turn-by-turn directions to the nearest retail location.
We expect that our core revenues will be derived from advertisers, who will pay fees for inclusion in our mMAP, from click-through “pull” ads as well as opt-in “push” ads, and custom development of mobile applications and mobile websites. We plan to seek distribution agreements with advertisement campaign aggregators, including global advertising agencies, search-engine marketing optimization agencies, membership organizations and direct marketing organizations. We also intend to employ a small team of account executives that will act as a sales force and seek and solicit clients among global, national and regional brand leaders.
Competition
There is substantial competition in the mobile marketing industry, including competition from well-established providers such as MSN, Google, Apple, and Yahoo, and competition from smaller providers that focus specifically on the mobile environment, such as Jump Tap, Cellfire and ShopSavvy. Google, through its purchase of Admob, runs a network of mobile web sites that display mobile banner advertisements generated by Google’s advertising engine. Jump Tap is a search engine designed for the mobile environment, which allows users to search the Internet using mobile phones instead of personal computers. Cellfire is a mobile coupon distributor, which allows advertisers to develop and publish mobile coupons through mobile phones. ShopSavvy is a mobile application that allows mobile users to search for deals on their cell phone. Currently, we know of no other competitor that has a similar product to the mMAP and the patent-pending technology that can deliver an ROI on sales, revenue and profits for the advertiser. This technology would provide data for physical store locations and the advertiser without requiring a change in normal business development and advertisements for potential customers.
Sales and Marketing
We expect to hire a small team of experienced sales executives with prior relationships and experience in each of our market sectors both domestic and internally (such as advertising agencies, retailers and brand name manufacturers), to expand upon our existing relationships. We anticipate that their compensation structures will consist of base salaries with incentive commission payments. We expect that our account executives will be attending various trade shows and conventions including, but not limited to, those held by the Mobile Marketing Association and the National Restaurants Association.
Regulation
We are unaware of and do not anticipate having to expand significant resources to comply with any governmental regulations of the mobile marketing industry. We are not currently subject to direct federal, state or local regulation other than regulations applicable to businesses generally or directly applicable to online commerce. However, it is possible that a number of laws and regulations may be adopted with respect to our sales and
distribution channels. The adoption of additional laws could increase the difficulty of conducting our business and reduce the demand for our products.
Research and Development
We are not engaged in any meaningful research and development activities and we do not have a research and development staff.
Intellectual Property
We create, own and distribute intellectual property. It is our practice to protect our technology through patents, trademarks, copyrights, trade secret laws, restrictions on disclosure and other methods.
We filed a U.S. utility patent application (Application No. 11/053,095) for the invention, entitled “Method and Distribution System for Location Based Wireless Presentation of Electronic Coupons” with respect to our unique wireless delivery technology. The patent application is currently pending. We also filed a U.S. utility patent application (Application No. 12/702,250) for the invention, entitled “System and Method of Delivering Ads” with respect to our proprietary system and method for confirming sales revenue and profits in a physical store from mobile advertisements.
We have a registered trademark for the name “Montavo” and its related logo. We have applied for registration for the following marks: “Spend Speedometer”, “mDeal-Finder” and “mMap.”
We have no foreign patents or other foreign trademarks. Prior to expanding our services into foreign markets, we plan to take measures to protect our intellectual property in such markets.
Our primary Internet domain is montavo.com.
We also rely on trade secrets, know-how and other unpatented proprietary information in our business. Most of our consultants and contractors are required to enter into confidentiality and non-competition agreements. However, there is no assurance that these agreements would be enforceable if they are breached or, if enforced, that they would adequately protect us or provide an adequate remedy for the damages that may be caused by such a breach.
Industry Overview
The internet’s development into a significant global medium for communication, content and commerce has led to substantial growth in online shopping for goods and services. As use of the internet to research and purchase products and services increases, businesses are seeking ways to more effectively reach consumers online. As a result, both online and traditional retail businesses are increasingly using the internet to advertise their products and services.
The advertising industry, and specifically online advertising, is evolving to meet the increasing online demands of both consumers and businesses.
Seasonality
Both seasonal fluctuations in internet usage and traditional retail seasonality can affect our business. Internet usage generally slows during the summer months, and commercial queries typically increase significantly in the fourth quarter of each year. These seasonal trends could cause fluctuations in our quarterly results, including fluctuations in sequential revenues, as well as paid click and average cost-per-click growth rates.
Employees
As of December 31, 2010, we had no employees but were utilizing the services of independent contractors and consultants.
Development of Business
We were incorporated under the laws of the State of Delaware on April 20, 1994. From incorporation until December 13, 2004, we had no operating history other than organizational matters. On December 13, 2004, we acquired all of the issued and outstanding shares of Trans Media Inc., a Wyoming corporation engaged in the production and distribution of musical compact discs and musical performances. Through Trans Media, we engaged in the production and distribution of compact discs and musical performances targeted to the South Asian immigrant population in North America, and to date completed the production of eight compact discs.
In November 2007, we engaged in a new line of business, in the mobile communications industry, with the objective of becoming a mobile enabler and identifying, deploying and commercializing innovative mobile applications and technologies to offer targeted brand messaging.
Business of Predecessor
Trans Media, in which we acquired a 100% interest on December 13, 2004, was formed in 2004. As indicated above, Trans Media was engaged in the production and distribution of musical compact discs and musical performances. Since Trans Media was considered to be the acquirer for financial reporting purposes, our historical financial statements for any period prior to December 13, 2004, are those of Trans Media.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. - PROPERTIES
We do not own any real property. We have offices at 4957 Lakemont Blvd., Suite #239, Bellevue, Washington 98006. We are also provided space in Seattle, Washington at no cost by a strategic advisor.
ITEM 3.
ITEM 3. - LEGAL PROCEEDINGS
As previously reported in our Annual Report on Form 10-K, filed with the Commission on April 15, 2010, we are involved in one legal action. In August 2009, Robert Half International sued us claiming unpaid fees for services rendered. On February 24, 2010, a judgment was granted against us in the amount of $87,248.91, which amount bears interest at 12% per annum. We have included the judgment, net of payment of approximately $15,000, in accounts payable at December 31, 2010, and of approximately $87,000 at December 31, 2009. On June 24, 2010, we entered into a settlement and forbearance agreement with Robert Half International, whereby Robert Half International agreed not to pursue the judgment against us as long as we continued to make payments as follows: on August 1, 2010, $10,000; and $10,000 thereafter on the first day of every month until the amount of $74,000 is paid in full. We did not make the payments according to the schedule, and the entire amount, plus accrued interest, is immediately due and payable. As of December 31, 2010, we were not a party to any other pending legal proceeding and were not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.
PART II
ITEM 5.
ITEM 5. - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock became eligible for trading on the Over-The-Counter Bulletin Board on December 19, 2007, having the trading symbol “MTVO”. As of December 31, 2010, we had 71,117,241 shares issued and outstanding.
The following table reflects the high and low quarterly bid prices for the fiscal year ended December 31, 2010 and 2009.
Period
High Bid
Low Bid
1st Quarter 2009 ended 3/31/09
$0.60
$0.18
2nd Quarter 2009 ended 6/30/09
$0.26
$0.11
3rd Quarter 2009 ended 9/30/09
$0.19
$0.06
4th Quarter 2009 ended 12/31/09
$0.21
$0.04
1st Quarter 2010ended 3/31/10
$0.09
$0.02
2nd Quarter 2010 ended 6/30/10
$0.03
$0.01
3rd Quarter 2010 ended 9/30/10
$0.04
$0.01
4th Quarter 2010 ended 12/31/10
$0.02
$0.01
These quotations may reflect inter-dealer prices without retail mark-up/mark-down/commissions and may not reflect actual transactions.
We have authorized 400,000,000 shares of common stock and 25,000,000 shares of preferred stock, par value $.001. As of March 31, 2011, we had approximately 180 stockholders of record.
Dividends
We have never declared or paid any cash dividends on our common stock nor do we anticipate paying any in the foreseeable future. Furthermore, we expect to retain any future earnings to finance our operations and expansion. The payment of cash dividends in the future will be at the discretion of our board of directors and will depend upon our earnings levels, capital requirements, any restrictive loan covenants and other factors our board of directors considers relevant.
Equity Compensation Plans
In 2005, we adopted the 2005 Stock Option Plan (“the 2005 Plan”). The 2005 Plan provided for the granting of stock options to employees and consultants for services. Options granted under the 2005 Plan may be either incentive stock options or nonqualified stock options. Incentive stock options (“ISO”) may be granted only to employees (including officers and directors who are also employees). Nonqualified stock options (“NSO”) may be granted to employees and consultants. We reserved 1,000,000 shares of common stock for issuance under the 2005 Plan.
In 2009, we adopted the 2009 Stock Incentive Plan for Employees and Consultants (the “2009 Plan”). The 2009 Plan provided for the granting of stock options to employees and consultants for services rendered to the Company. Options granted under the 2009 Plan may be either incentive stock options or nonqualified stock options. Incentive stock options (“ISO”) may be granted only to employees or consultants (including officers and directors who are also employees). Nonqualified stock options may be granted to employees and consultants. Under the 2009 Plan, up to 6,000,000 shares of our common stock may be issued to directors, employees or consultants pursuant to share awards or options to purchase our common stock. We filed a form S-8 on June 12, 2009 to
register the shares of common stock issuable under the 2009 Plan. On February 11, 2010, we amended our 2009 Plan and filed a revised Form S-8 increasing the number of reserved shares to 15,000,000. On May 7, 2010, we again amended our 2009 Plan and filed a subsequent revision to the Form S-8, increasing the number of reserved shares to 35,000,000.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
In December 2010, we entered into a convertible promissory note with the same holder in the aggregate amount of $25,000 together with two-year warrants to purchase 1,875,000 shares of our common stock at an exercise price of $0.02 per share, whereby we received $20,000 in cash and an April promissory note for $3,000, an August $1,000 promissory note and $1,000 in accounts payable to the same party were settled. The December 2010 promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement.
In October 2010, we transferred $25,000 of accounts payable due to our CEO to a third party. These amounts were then converted into a convertible promissory note for $25,000 at a stated interest rate of 12%, together with two-year warrants to purchase 1,875,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note is due within one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory notes contain an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holders may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement.
In October and December 2010, we entered into convertible promissory notes in the aggregate amount of $37,500 together with two-year warrants to purchase 2,812,500 shares of our common stock at an exercise price of $0.02 per share. The promissory notes bear interest at a rate of 12% per annum, and the notes are due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory notes contain an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holders may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement.
In February 2011, we entered into a convertible promissory note in the amount of $25,000 together with two-year warrants to purchase 1,875,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $950,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of the first $750,000 of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement.
In March 2011, we entered into a convertible promissory note in the amount of $5,000 together with two-year warrants to purchase 375,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is
18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of the first $250,000 of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement.
In March and April 2011, we issued fully vested five-year warrants to purchase an aggregate of 840,000 shares of our common stock at an exercise price of $0.001 per share for financial and advisory services to a consultant.
In April 2011, we entered into a convertible promissory note in the amount of $10,000 together with two-year warrants to purchase 750,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of the first $250,000 of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement.
Purchases of equity securities by the issuer and affiliated purchasers
None.
ITEM 7.
ITEM 7. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following management’s discussion and analysis of our financial condition and results of operations is intended to provide information necessary to understand our audited consolidated financial statements and highlight certain other information which, in the opinion of management, will enhance a reader’s understanding of our financial condition, changes in financial condition and results of operations. In particular, the discussion is intended to provide an analysis of significant trends and material changes in our financial position and operating results of our business during the year ended December 31, 2010, as compared to the year ended December 31, 2009. The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes appearing elsewhere in this Report.
This Item is organized as follows:
·
The section entitled “Background” describes our principal operational activities and summarizes significant trends and developments in our business and in our industry.
·
“Recent Developments” discusses certain management changes and significant recent contractual agreements.
·
“Critical Accounting Policies and Estimates and Recent Accounting Pronouncements” discusses our most critical accounting policies and new accounting standards.
·
“Liquidity, Capital Resources and Going Concern” discusses our cash requirements, sources and uses of cash and liquidity, including going concern qualifications.
·
“Consolidated Results of Operations” discusses the primary factors that are likely to contribute to significant variability of our results of operations for the year ended December 31, 2010, as compared to the year ended December 31, 2009.
·
“Off-Balance Sheet Arrangements” indicates that we did not have any off-balance sheet arrangements as of December 31, 2010.
In addition, Item 9A, “Controls and Procedures”, contains management’s assessment of our internal controls over financial reporting as of December 31, 2010.
Background
We were incorporated under the laws of the State of Delaware on April 20, 1994. From our incorporation and until December 13, 2004, we had no operating history other than organizational matters. On December 13, 2004, we acquired all of the issued and outstanding capital stock of Trans Media Inc. (“Trans Media”), a Wyoming corporation. The acquisition was consummated pursuant to a Plan of Arrangement and Share Exchange Agreement, dated September 29, 2004, whereby Trans Media became our wholly owned subsidiary. This transaction is commonly referred to as a “reverse acquisition”, in which all of the outstanding capital stock of Trans Media was effectively exchanged for a controlling interest in our stock. This type of transaction is considered to be a recapitalization rather than a business combination. Accordingly, for accounting purposes, no goodwill or other intangible assets were recorded.
On May 7, 2008, Trans Media, its wholly owned subsidiary North Coast Acquisition Corp., a Delaware corporation (“Acquisition Corp.”), and Montavo, Inc., a privately-held Washington corporation (“Montavo”), executed an Agreement (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, on August 29, 2008, Acquisition Corp. was merged with and into Montavo, with Montavo being the surviving entity as a wholly owned subsidiary, and all of the issued and outstanding common stock of Montavo was exchanged for newly-issued, restricted shares of common stock. The merger was accounted for as a reverse merger and recapitalization due to Montavo having control of the board of directors and control of management at the date of merger.
We are a development stage company in the process of developing a mobile Location Based Services (“LBS”) marketing solution for wireless carriers, mobile handset manufacturers, wireless carrier/device software aggregators, personal navigation device (“PND”) manufacturers, and vehicle manufacturers. We have a patent pending filed for our “method and distribution system for location based wireless presentation of electronic coupons” technology.
Recent Developments
Management Changes
Effective September 13, 2010, Brian Conte is no longer serving as the Company’s Chief Development Officer.
Critical Accounting Policies and Estimates and Recently Issued Accounting Standards
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the periods presented. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting estimates, which are those that we believe are most important to the portrayal of our financial condition and results of operations and which require our most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Other key estimates and assumptions that affect
reported amounts and disclosures include estimates as to valuation of share-based payments and valuation allowance for deferred income tax assets. We also have other policies that we consider key accounting policies; however, these policies do not meet the definition of critical accounting estimates because they do not generally require us to make estimates or judgments that are difficult or subjective.
Derivatives Embedded in Certain Debt Securities - We evaluate financial instruments for freestanding or embedded derivatives. Derivative instruments that have been separated from the host contract are recorded at fair value with changes in value recognized as other income (expense) in the statements of operations in the period of change.
Income taxes - We account for income taxes using an asset and liability method which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts expected to be realized. The provision for income taxes represents the tax payable for the period and change during the period in net deferred tax assets and liabilities.
We have identified our federal tax return as our “major” tax jurisdiction, as defined. We do not believe any reserves for uncertain income tax positions are required. Our policy for recording interest and penalties associated with uncertain income tax positions is to record such items as a component of interest expense
Debt Discounts -Debt discounts are being amortized through periodic charges to interest expense over the maximum term of the related financial instrument using the effective interest method. Total amortization of debt discounts amounted to approximately $58,000, $24,000 and $84,000 during the years ended December 31, 2010, 2009, and the period from inception to December 31, 2010, respectively.
Share-Based Payments-We have granted shares of our common stock and stock options and warrants to purchase shares of our common stock to various parties for services and in connection with financing activities. The fair values of shares issued have been based on closing market prices for periods after October 1, 2009, and at prices of recent cash transactions for periods prior. We use the Black-Scholes option-pricing model as our method of valuation for share-based awards. Share-based compensation expense is based on the value of the portion of the stock-based award that will vest during the period, adjusted for expected forfeitures. Our determination of the fair value of share-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected life of the award, expected stock price volatility over the term of the award and historical and projected exercise behaviors. The estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual or updated results differ from our current estimates, such amounts will be recorded in the period estimates are revised. Although the fair value of share-based awards is determined in accordance with authoritative guidance, the Black-Scholes option pricing model requires the input of highly subjective assumptions and other reasonable assumptions could provide differing results. Non-cash compensation expense is recognized on a straight-line basis over the applicable vesting periods of one to five years (deemed to be the service period), based on the fair value of such share-based awards on the grant date.
Liquidity, Capital Resources and Going Concern
We have prepared our condensed financial statements assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2010, we had a deficit accumulated in the development stage of approximately $5.3 million, negative cash flows from operations since inception and expect to incur additional losses in the future as we continue to develop and grow our business. We have funded our losses primarily through sales of common stock and warrants in private placements and borrowings from related parties and other investors. The further development of our business will require capital. At December 31, 2010, we had a working capital deficit (current assets less current liabilities) of $1.5 million and no cash. Our operating expenses will consume a material amount of our cash resources.
We are still in the early stages of executing our business strategy. Our current cash levels are not sufficient to enable us to execute our business strategy. We require additional financing to execute our business strategy and to satisfy our near-term working capital requirements. In the event that we cannot obtain additional funds, on a timely basis or our operations do not generate sufficient cash flow, we may be forced to curtail or cease our activities, which would likely result in the loss to investors of all or a substantial portion of their investment. We are actively seeking to raise additional capital through the sale of shares of our capital stock to institutional investors and through strategic investments. If management deems necessary, we might also seek additional loans from related parties. However, there can be no assurance that we will be able to consummate any of these transactions, or that these transactions will be consummated on a timely basis or on terms favorable to us.
Discussion of Cash Flows
We used cash of approximately $250,000, $198,000 and $1,066,000 in our operating activities in the year ended December 31, 2010 and 2009 and the period from inception to December 31, 2010, respectively. Cash used in operating activities relates primarily to funding net losses, partially offset by share-based payments of consulting and other expenses. We expect to use cash for operating activities in the foreseeable future as we continue our operating activities.
Our investing activities used cash of approximately nil, $8,000 and $45,000 in the year ended December 31, 2010 and 2009 and the period from inception to December 31, 2010, respectively. Changes in cash from investing activities are due to investment in patent. We no longer capitalize our patent expenditures.
Our financing activities provided cash of approximately $250,000, $204,000 and $1,111,000 in the year ended December 31, 2010 and 2009 and the period from inception to December 31, 2010, respectively. Changes in cash from financing activities are proceeds from related party advances, stockholder contributions to capital, proceeds from issuance of common stock and warrants and proceeds from issuance of convertible notes payable.
Recent Financing Activities
In December 2010, we entered into a convertible promissory note with the same holder in the aggregate amount of $25,000 together with two-year warrants to purchase 1,875,000 shares of our common stock at an exercise price of $0.02 per share, whereby we received $20,000 in cash and the April promissory note for $3,000, the August $1,000 promissory note and $1,000 in accounts payable to the same party were settled. The December 2010 promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. In accordance with the authoritative guidance related to instruments with down-round protection, we recorded a fair value liability of approximately $25,000 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.61%, expected life of 2 years, dividend yield of 0.0%. We recorded an increase in the fair value liability of approximately $3,100 for the three months ended December 31, 2010 as other expense.
In October 2010, we transferred $25,000 of accounts payable due to our CEO to a third party. These amounts were then converted into a convertible promissory note for $25,000 at a stated interest rate of 12%, together with two-year warrants to purchase 1,875,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note is due within one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory notes contain an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holders may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the
promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. In accordance with the authoritative guidance related to instruments with down-round protection, we recorded a fair value liability of $25,000 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.61%, expected life of 1.75 years, dividend yield of 0.0% and we recorded an increase in the fair value liability of approximately $1,900 for the three months ended December 31, 2010 as other expense.
In October and December 2010, we entered into convertible promissory notes in the aggregate amount of $37,500 together with two-year warrants to purchase 2,812,500 shares of our common stock at an exercise price of $0.02 per share. The promissory notes bear interest at a rate of 12% per annum, and the notes are due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. In accordance with the authoritative guidance related to instruments with down-round protection, we recorded a fair value liability of $28,000 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.61%, expected life of 1.75 years, dividend yield of 0.0% and we recorded an increase in the fair value liability of approximately $12,300 for the three months ended December 31, 2010 as other expense.
In February 2011, we entered into a convertible promissory note in the amount of $25,000 together with two-year warrants to purchase 1,875,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $950,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of the first $750,000 of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement.
In March 2011, we entered into a convertible promissory note in the amount of $5,000 together with two-year warrants to purchase 375,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of the first $250,000 of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement.
In March and April 2011, we issued fully vested five-year warrants to purchase an aggregate of 840,000 shares of our common stock at an exercise price of $0.001 per share for financial and advisory services to a consultant.
In April 2011, we entered into a convertible promissory note in the amount of $10,000 together with two-year warrants to purchase 750,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is
18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of the first $250,000 of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement.
Summary
We are dependent on external sources of financing to meet our working capital needs. Current sources of liquidity are insufficient to provide for budgeted and anticipated working capital requirements. We will therefore be required to seek additional financing to satisfy our working capital requirements. No assurances can be given that such capital will be available to us on acceptable terms, if at all. In addition to equity financing and strategic investments, we may seek additional related party loans. If we are unable to obtain any such additional financing or if such financing cannot be obtained on terms acceptable to us, we may be required to delay or scale back our operations, which would adversely affect our ability to generate future revenues and may force us to curtail or cease our operating activities.
To attain profitable operations, management’s plan is to execute its strategy of (i) continuing the development of our proprietary mobile marketing solution; (ii) building additional strategic partnerships with technology partners; (iii) building strategic partnerships with premier advertising inventory partners; and (iv) executing sales relationships with national and global brands in order to drive profitability. We will continue to be dependent on outside capital to fund our operations for the foreseeable future. Any financing we obtain may further dilute or otherwise impair the ownership interest of our current stockholders. If we fail to generate positive cash flows or fail to obtain additional capital when required, we could modify, delay or abandon some or all of our plans. These factors, among others, raise substantial doubt about our ability to continue as a going concern.
Comparison of the Year Ended December 31, 2010, to the Year Ended December 31, 2009
We had no revenues in the year ended December 31, 2010 and 2009. In the year ended December 31, 2010 and 2009, we incurred net losses of approximately $1,723,000 and $1,916,000, respectively. Operating expenses decreased to $1,547,000 in the year ended December 31, 2010, from $1,881,000 in the year ended December 31, 2009, due primarily to non-recurring impairment of $355,000 of patent costs which was recorded to operating expenses in the prior year.
We expect that operating expenses will increase in 2011 as we implement our growth strategy.
Interest expense was $43,000 in the prior year compared to $84,000 in the current year. Interest expense relates to convertible notes and amortization of debt discounts.
We recorded change in embedded derivative fair value liability of $92,000 to other expense in the current year compared to $8,000 recorded to other income in the prior year due to the issuance of convertible notes payable and warrants with variable terms.
Off-Balance Sheet Arrangements
As of December 31, 2010, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
ITEM 8.
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MONTAVO, INC.
(A Development Stage Company)
Index to the Audited Financial Statements
For the Year Ended December 31, 2010
Report of Independent Registered Public Accounting Firm
15-16
Balance Sheets as of December 31, 2010 and 2009
Statements of Operations for the years ended December 31, 2010 and 2009,
and for the period from December 23, 2004 (Inception) to December 31, 2010
Statement of Changes in Stockholders’ Deficit for the period from
December 23, 2004 (Inception) to December 31, 2010
Statements of Cash Flows for the years ended December 31, 2010 and 2009,
and for the period from December 23, 2004 (Inception) to December 31, 2010
Notes to the Audited Financial Statements
21-40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Montavo, Inc.
Bellevue, Washington
We have audited the accompanying balance sheets of Montavo, Inc. (a development stage company) ("the Company") as of December 31, 2010 and 2009, and the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended, and for the period from December 23, 2004 (date of inception) to December 31, 2010. 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. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit 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 financial statements referred to above present fairly, in all material respects, the financial position of Montavo, Inc. (a development stage company) as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended, and for the period from December 23, 2004 (date of inception) to December 31, 2010, in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has experienced recurring losses from operations since inception, has a working capital deficit, and has a deficit accumulated during the development stage. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Seattle, Washington
April 15, 2011
MONTAVO, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
See notes to financial statements
MONTAVO, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
See notes to financial statements
MONTAVO, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
For the Period from Inception to December 31, 2010
See notes to financial statements
MONTAVO, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
See notes to financial statements
MONTAVO, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Note 1. Business and Organization
We were incorporated under the laws of the State of Delaware on April 20, 1994. From our incorporation and until December 13, 2004, we had no operating history other than organizational matters. On December 13, 2004, we acquired all of the issued and outstanding capital stock of Trans Media Inc. (“Trans Media”), a Wyoming corporation (inception occurred on December 23, 2004). The acquisition was consummated pursuant to a Plan of Arrangement and Share Exchange Agreement, dated September 29, 2004, whereby Trans Media became our wholly owned subsidiary. This transaction is commonly referred to as a “reverse acquisition”, in which all of the outstanding capital stock of Trans Media was effectively exchanged for a controlling interest in our stock. This type of transaction is considered to be a recapitalization rather than a business combination. Accordingly, for accounting purposes, no goodwill or other intangible assets were recorded.
On May 7, 2008 Trans Media, its wholly owned subsidiary North Coast Acquisition Corp., a Delaware corporation (“Acquisition Corp.”), and Montavo, Inc., a privately-held Washington corporation (“Montavo”), executed an Agreement (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, on August 29, 2008, Acquisition Corp. was merged with and into Montavo, with Montavo being the surviving entity as a wholly owned subsidiary, and all of the issued and outstanding common stock of Montavo was exchanged for newly-issued, restricted shares of common stock. The merger was accounted for as a reverse merger and recapitalization due to Montavo having control of the board of directors and control of management at the date of merger.
We are a development stage company in the process of deploying an advanced mobile marketing and advertising solution. We have two patents pending filed for our “method and distribution system for location based wireless presentation of electronic coupons” technology and “system and method of delivering ads”.
Note 2. Going Concern
We have prepared our financial statements assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2010, we had a deficit accumulated during the development stage of approximately $5.3 million, negative cash flows from operations since inception and expect to incur additional losses in the future as we continue to develop and grow our business. We have funded our losses primarily through sales of common stock and warrants in private placements and borrowings from related parties and other investors. The further development of our business will require capital. At December 31, 2010, we had a working capital deficit (current assets less current liabilities) of approximately $1.5 million and no cash.
We are dependent on existing cash resources and external sources of financing to meet our working capital needs. Current sources of liquidity are insufficient to provide for budgeted and anticipated working capital requirements. We will therefore be required to seek additional financing to satisfy our working capital requirements. No assurances can be given that such capital will be available to us on acceptable terms, if at all. In addition to equity financing and strategic investments, we may seek additional related party loans. If we are unable to obtain any such additional financing or if such financing cannot be obtained on terms acceptable to us, we may be required to delay or scale back our operations, including the development of our mobile marketing solution, which would adversely affect our ability to generate future revenues and may force us to curtail or cease our operating activities.
To attain profitable operations, management’s plan is to execute its strategy of (i) continuing the development of our proprietary mobile marketing solution; (ii) building additional strategic partnerships with technology partners; (iii) building strategic partnerships with premier advertising inventory partners; and (iv) executing sales relationships with national and global brands in order to drive profitability. We will continue to be dependent on outside capital to fund our operations for the foreseeable future, and continue to be involved in discussions and negotiations with investors in order to raise additional funds to provide sufficient working capital for operations with a near-term goal of generating positive cash flow from operations. Any financing we obtain may further dilute or otherwise impair the ownership interest of our current stockholders. If we fail to generate positive cash flows or fail to obtain additional capital when required, we could modify, delay or abandon some or all of our plans. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Note 3. Summary of Critical Accounting Policies and Recently Issued Accounting Standards
Use of Estimates-The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant accounting estimates inherent in preparation of our financial statements include estimates for valuation of equity related instruments and valuation allowance for deferred income tax assets.
Cash - On occasion, we maintain balances in excess of federal insurance limits.
Financial Instruments and Fair Value - Our financial instruments consist of cash, accounts payable, accrued liabilities, accounts payable - related parties, and notes payable. We consider fair value to be an exit price representing the amount that would be received upon the sale of an asset or the transfer of a liability. The fair value of financial instruments other than accounts payable - related parties, note payable to stockholder and convertible notes payable approximate the recorded value based on the short-term nature of these financial instruments. The fair value of note payable to stockholder and accounts payable - related parties is presently undeterminable due to the related party nature of the obligations.
We currently measure and report at fair value the embedded derivative liabilities for price adjustable convertible debt and warrants which are further discussed below and in detail in Note 4. The following table summarizes our financial liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009 (in thousands):
The following table is a roll forward for the year ended December 31, 2010 of the embedded derivative fair value liabilities, as to which fair value is determined by Level 3 inputs (in thousands):
The following table is a roll forward for the year ended December 31, 2009 of the embedded fair value derivative liability, as to which fair value is determined by Level 3 inputs (in thousands):
Embedded Fair Value Derivative Liabilities - We evaluate financial instruments for freestanding or embedded derivatives. Derivative instruments that have been separated from the host contract are recorded at fair value with changes in value recognized as other income (expense) in the statements of operations in the period of change. We use the Black-Scholes option-pricing model as our method of valuation for embedded fair value liabilities. Our determination of the fair value of embedded derivatives on the date of grant using the Black-Scholes model is affected by our stock price as well as highly subjective assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the contractual life of the underlying security and expected stock price volatility over the term (if the use of expected stock price volatility over the term has a material impact on the financial statements). The valuation of embedded fair value derivative liabilities does not include the impact of adjustments for the probability of certain events occurring that would have an impact on the valuations since management believes the likelihood of those events occurring is remote.
Software developed for internal use -Software development costs for internal use were capitalized in accordance with relevant authoritative accounting literature and, once placed in service, amortized using the straight-line method over the estimated useful life. We are currently developing proprietary Montavo mobile search and mobile advertising media technology. A significant portion of the costs have been incurred through a vendor which is 100%-owned by our former Chief Development Officer, Brian Conte. See Note 6 regarding the funds owed to this related-party vendor. As of December 31, 2010 and 2009, the software was still under development and had not been placed in service and therefore amortization had not yet begun. We evaluated the software development costs and determined that the costs were fully impaired, and accordingly, recorded an impairment loss of $355,000, included in operating expenses, during the fourth quarter of 2009.
Patent pending - The cost of patents represents amounts paid to third parties, including legal costs associated with successfully defending or obtaining patents. Amortization will be calculated on a straight-line basis over the estimated useful life of the related asset beginning when the patent is issued. If patent applications are unsuccessful, cost associated with these patents is expensed immediately. We have a patent pending technology filed for “Method and Distribution System for Location Based Wireless Presentation of Electronic Coupons”. We had capitalized costs for patent-related legal fees and as of December 31, 2009, the patent is still pending and therefore amortization had not yet begun. We evaluated the patent-related legal costs and determined that the costs were fully impaired, and accordingly, recorded an impairment loss of $45,000, included in operating expenses, during the fourth quarter of 2009.
Impairment of Long-Lived Assets - Long-lived assets, such as patents pending and software developed for internal use are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that would necessitate an impairment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. In the fourth quarter of 2009, we determined that the amounts previously capitalized for patent pending and software developed for internal use totaling approximately $400,000 were impaired due to uncertainty regarding our ability to continue as a going concern and accordingly recorded an impairment loss as of that date.
Income taxes - We account for income taxes using an asset and liability method which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts expected to be realized. The provision for income taxes represents the tax payable for the period and change during the period in net deferred tax assets and liabilities.
We have identified our federal tax return as our “major” tax jurisdiction, as defined. We do not believe any reserves for uncertain income tax positions are required. Our policy for recording interest and penalties associated with uncertain income tax positions is to record such items as a component of interest expense.
Net loss per common share -Basic and diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share excludes the effect of common
stock equivalents (convertible notes, stock options and warrants) since such inclusion in the computation would be anti-dilutive. The following numbers of shares have been excluded for all periods presented (in thousands), as of December 31:
December 31,
December
Convertible notes
Stock Options
14,410
11,483
Warrants
16,223
2,200
Total
30,833
13,883
On September 8, 2009, we entered into a convertible promissory note for $20,000 at a stated interest rate of 15%. The promissory note is due within twenty-four months after date of issue, and on demand thereafter. The note is convertible into shares of our common stock at $0.10 per share. Terms of the convertible note provide that the conversion price of the notes will be reduced in the event of subsequent financings at an effective price per share less than the conversion price. This provision expired as of September 8, 2010. The shares issuable under the note are included in the table above at the stated conversion rate of $0.10.
On May 4, 2010, we entered into a convertible promissory note for $40,000 at a stated interest rate of 12%. The note was due, on November 3, 2010, and carries a default rate of interest of 18%. The note is convertible into shares of our common stock at a variable conversion price, such that the average of the lowest Trading Prices (as determined by averaging the highest closing bid and lowest closing ask prices) of the Company’s common stock as listed on the OTCBB during the five (5) trading day period ending one (1) day prior to the date the conversion notice is sent by the holder to the Company multiplied by 35%. The shares issuable under the note are excluded from the table above as the note is convertible at a variable conversion price. See Note 4.
In August and September 2010, we entered into convertible promissory notes in the aggregate amount of $40,000 together with two-year warrants to purchase 3,750,000 shares of our common stock at an exercise price of $0.02 per share. The promissory notes bear interest at a rate of 12% per annum, and the notes are due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory notes contain an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holders may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. The shares issuable under the notes are excluded from the table above as the notes are convertible at a variable conversion price. See Note 4.
In September 2010, we transferred $20,000 of accounts payable due to our CEO to a third party. These amounts were then converted into a convertible promissory note for $20,000 together with two-year warrants to purchase 1,500,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. The shares issuable under the notes are excluded from the table above as the notes are convertible at a variable conversion price. See Note 4.
In October 2010, we transferred $25,000 of accounts payable due to our CEO to a third party. These amounts were then converted into a convertible promissory note for $25,000 at a stated interest rate of 12%, together with two-year warrants to purchase 1,875,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note is due within one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory notes contain an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holders may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. The shares issuable under the notes are excluded from the table above as the notes are convertible at a variable conversion price. See Note 4.
In October and December 2010, we entered into convertible promissory notes in the aggregate amount of $37,500 together with two-year warrants to purchase 2,812,500 shares of our common stock at an exercise price of $0.02 per share. The promissory notes bear interest at a rate of 12% per annum, and the notes are due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory notes contain an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holders may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. The shares issuable under the notes are excluded from the table above as the notes are convertible at a variable conversion price. See Note 4.
Debt Discounts -Debt discounts are being amortized through periodic charges to interest expense over the maximum term of the related financial instrument using the effective interest method. Total amortization of debt discounts amounted to approximately $58,000, $24,000 and $84,000 during the year ended December 31, 2010, 2009 and the period from inception to December 31, 2010, respectively.
Share-Based Payments-We have granted shares of our common stock and stock options and warrants to purchase shares of our common stock to various parties for services and in connection with financing activities. The fair values of shares issued have been based on closing market prices for periods after October 1, 2009 and at prices of recent cash transactions for periods prior. We use the Black-Scholes option-pricing model as our method of valuation for share-based awards. Share-based compensation expense is based on the value of the portion of the stock-based award that will vest during the period, adjusted for expected forfeitures. Our determination of the fair value of share-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected life of the award, expected stock price volatility over the term of the award (if the use of expected stock price volatility over the term of the award has a material impact on the financial statements) and historical and projected exercise behaviors. The estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual or updated results differ from our current estimates, such amounts will be recorded in the period estimates are revised. Although the fair value of share-based awards is determined in accordance with authoritative guidance, the Black-Scholes option pricing model requires the input of highly subjective assumptions and other reasonable assumptions could provide differing results. Non-cash compensation expense is recognized on a straight-line basis over the applicable vesting periods of one to five years (deemed to be the service period), based on the fair value of such share-based awards on the grant date.
Note 4. Notes Payable
In September 2008, we entered into a promissory note with a stockholder in the principal amount of $25,000 with a stated interest rate of 12%. Interest expense related to this note was not material in the year ended December 31, 2010 and 2009 and the period from inception to December 31, 2010.
On January 16, 2009, we entered into a convertible promissory note for $4,950 at a stated interest rate of 5% per annum. On January 16, 2009, we entered into a convertible promissory note for $5,000 at a stated interest rate of 7% per annum. On January 26, 2009, we entered into a convertible promissory note for $5,062 at a stated interest rate of 5%. In April 2009, we entered into a convertible promissory note to a related party for $3,200 at a stated interest rate of 5% per annum. The notes and related accrued interest were convertible into shares of our common stock at $0.20 per share at the option of the holder. In March 2009, the first three notes discussed above were converted into 75,060 shares of common stock at a conversion rate of $0.20 per share. On April 15, 2009, we issued 16,221 shares of our common stock at $0.20 per share pursuant to the conversion of a related party promissory note with a principal balance of approximately $3,200.
On April 6, 2009, we entered into a convertible promissory note for $23,000 at a stated rate of 7% per annum. The note and related accrued interest were convertible into shares of our common stock at 0.10 per share beginning May 30, 2009. In April 2009, the notes and accrued interest were converted into 232,683 shares of common stock for conversion of principal and accrued interest.
On September 8, 2009, we entered into a convertible promissory note for $20,000 at a stated interest rate of 15%. The promissory note is due within twenty-four months after date of issue, and on demand thereafter. The note is convertible into shares of our common stock at $0.10 per share. Terms of the convertible note provided that the conversion price of the notes be reduced in the event of subsequent financings at an effective price per share less than the conversion price, such that in the event we secure a future equity investment round totaling a minimum of $1,000,000 within 12 months of the date of the note, the convertible note will automatically be converted into shares of stock in the amount of 50% of the price per share of the equity investment or the maximum price of $0.10 per share, whichever is lower. This provision expired as of September 8, 2010. In accordance with the authoritative
guidance related to convertible notes with down-round protection, we recorded a fair value liability for price adjustable convertible notes of $12,330 at issuance. The fair value liability was revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At March 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.03, volatility of 162%, risk free rate of 3.4%, expected life of 1 year, dividend rate of 0% and we recorded a decrease in the fair value liability of approximately $2,400 as other income. At June 30, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.015, volatility of 162%, risk-free rate of 0.42%, expected life of 0.75 year, dividend yield of 0.0% and we recorded a decrease in the fair value liability of approximately $600 as other income.
On March 1, 2010, we entered into a promissory note for $7,000 at a stated interest rate of 8% per annum, payable upon demand by the holder. We repaid the promissory note in May 2010.
On March 8, 2010, we entered into a promissory note for $6,000 at a stated interest rate of 8% per annum, payable upon demand by the holder. On March 8, 2010, in accordance with the terms of the promissory note, we issued 100,000 shares of our common stock to the holder as loan fees. The loan was repaid in March 2010.
On April 15, 2010, we entered into a promissory note for $3,000 at a stated interest rate of 8% per annum, payable upon demand by the holder. On April 15, 2010, in accordance with the terms of the promissory note, we issued 100,000 shares of our common stock to the holder as loan fees. In December 2010, this promissory note was settled in connection with a transaction with the same holder. See discussion below.
On May 4, 2010, we entered into a convertible promissory note for $40,000 at a stated interest rate of 12%. The note was due on November 3, 2010, and carries a default rate of interest of 18%. The note is convertible into shares of our common stock at a variable conversion price, such that the average of the lowest Trading Prices (as determined by averaging the highest closing bid and lowest closing ask prices) of the Company’s common stock as listed on the OTCBB during the five (5) trading day period ending one (1) day prior to the date the conversion notice is sent by the holder to the Company multiplied by 35%. In accordance with the authoritative guidance related to convertible notes with down-round protection, we recorded a fair value liability for price adjustable convertible notes of $34,000 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At June 30, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.015, volatility of 162%, risk-free rate of 0.22%, expected life of 0.4 year, dividend yield of 0.0% and we recorded an increase in the fair value liability of approximately $8,000 as other expense. At September 30, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.18%, expected life of 0.1 year, dividend yield of 0.0% and we recorded an increase in the fair value liability of approximately $21,100 as other expense. At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.09%, expected life of 0.001 year, dividend yield of 0.0% and we recorded an increase in the fair value liability of approximately $10,900 as other expense.
On July 28, 2010, we entered into a promissory note for $10,200 at a stated interest rate of 10% per annum, or $12,000, whichever is higher.
In August and September 2010, we entered into convertible promissory notes in the aggregate amount of $40,000 together with two-year warrants to purchase 3,750,000 shares of our common stock at an exercise price of $0.02 per share. The promissory notes bear interest at a rate of 12% per annum, and the notes are due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory notes contain an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holders may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. In accordance with the authoritative guidance related to instruments with down-round protection, we recorded a fair value liability of $16,800 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At September 30, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.53%, expected life of 2 years, dividend yield of 0.0% and we recorded an increase in the fair value liability of approximately $38,000 for the three months ended September 30, 2010 as other expense. At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.61%, expected life of 1.75 years, dividend yield of 0.0% and we recorded a decrease in the fair value liability of approximately $11,700 for the three months ended December 31, 2010 as other income.
In August 2010, we entered into a promissory note for $1,000 at a stated interest rate of 8% per annum, payable upon demand by the holder. In December 2010, we entered into a convertible promissory note with the same holder in the aggregate amount of $25,000 together with two-year warrants to purchase 1,875,000 shares of our common stock at an exercise price of $0.02 per share, whereby we received $20,000 in cash and the April promissory note for $3,000, the August $1,000 promissory note and $1,000 in accounts payable to the same party were settled. The December 2010 promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. In accordance with the authoritative guidance related to instruments with down-round protection, we recorded a fair value liability of approximately $25,000 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.61%, expected life of 2 years, dividend yield of 0.0%. We recorded an increase in the fair value liability of approximately $3,100 for the three months ended December 31, 2010 as other expense.
In September 2010, we transferred $20,000 of accounts payable due to our CEO to a third party. These amounts were then converted into a convertible promissory note for $20,000 together with two-year warrants to purchase 1,500,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. In accordance with the authoritative guidance related to instruments with down-round protection, we recorded a fair value liability of approximately $8,300 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At September 30, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.53%, expected life of 2 years, dividend yield of 0.0% and we recorded an increase in the fair value liability of approximately $19,000 for the three months ended September 30, 2010 as other expense. At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.61%, expected life of 1.75 years, dividend yield of 0.0%. We recorded a decrease in the fair value liability of approximately $5,900 for the three months ended December 31, 2010 as other income.
In October 2010, we transferred $25,000 of accounts payable due to our CEO to a third party. These amounts were then converted into a convertible promissory note for $25,000 at a stated interest rate of 12%, together with two-year warrants to purchase 1,875,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note is due within one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory notes contain an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holders may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. In accordance with the authoritative guidance related to instruments with down-round protection, we recorded a fair value liability of $25,000 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.61%, expected life of 1.75 years, dividend yield of 0.0% and we recorded an increase in the fair value liability of approximately $1,900 for the three months ended December 31, 2010 as other expense.
In October and December 2010, we entered into convertible promissory notes in the aggregate amount of $37,500 together with two-year warrants to purchase 2,812,500 shares of our common stock at an exercise price of $0.02 per share. The promissory notes bear interest at a rate of 12% per annum, and the notes are due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private
placement. In accordance with the authoritative guidance related to instruments with down-round protection, we recorded a fair value liability of $28,000 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.61%, expected life of 1.75 years, dividend yield of 0.0% and we recorded an increase in the fair value liability of approximately $12,300 for the three months ended December 31, 2010 as other expense.
Notes payable to stockholder, note payable and convertible debt consists of the following at December 31, 2010 and 2009 (amounts in thousands, except percentages):
Note 5. Stockholders’ Equity (Deficit)
Preferred Stock - On August 28, 2008, our stockholders approved an increase in the number of authorized shares of our preferred stock from 1,000,000 to 5,000,000 shares. Our board of directors has the authority, without action by the stockholders, to designate the rights, preferences and privileges of each series, any or all of which may be greater than the rights of our common stock. No shares of preferred stock have been designated or issued. On May 19, 2010, a Certificate of Amendment was filed giving effect to the increase in the number of authorized preferred shares to 25,000,000.
Common Stock - Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the holders of our common stock. Subject to the rights of the holders of any class of our capital stock having any preference or priority over our common stock, the holders of shares of our common stock are entitled to receive dividends that are declared by our board of directors out of legally available funds. In the event of our liquidation, dissolution or winding-up, the holders
of common stock are entitled to share ratably in our net assets remaining after payment of liabilities, subject to prior rights of preferred stock, if any, then outstanding. Our common stock has no preemptive rights, conversion rights, redemption rights or sinking fund provisions, and there are no dividends in arrears or default. All shares of our common stock have equal distribution, liquidation and voting rights, and have no preferences or exchange rights.
On August 28, 2008, our stockholders approved an increase in the number of authorized shares of our common stock from 20,000,000 to 99,000,000. A Certificate of Amendment was filed May 19, 2010, giving effect to the increase in the number of authorized common shares to 400,000,000.
Common Stock Issuances - In January 2008, we issued 2,000,000 shares of our common stock for services. The shares were recorded at their fair value of $47,400 and the expense was recorded to general and administrative expense during the first quarter of 2008.
In August 2008, we issued an additional 47,250 shares of our common stock related to the bridge notes previously issued in fiscal 2007, valued at $1,057. In August 2008, we issued 13,080,000 shares of our common stock in relation to the Merger Agreement with North Coast.
In the nine months ending September 30, 2008, we issued 44,375 shares of our common stock in connection with the bridge notes and accounted for the issuance as stock for cash totaling $1,114. In September 2008, we converted the bridge notes, accrued interest and accounts payable totaling $864,288 into 1,670,600 shares of our common stock. We issued an additional 169,400 shares of our common stock in excess of the original agreed upon conversion price and current market prices resulting in stock based compensation expense of $84,700. In September 2008, we issued 1,169,000 shares of our common stock for upon exercise of options and warrants with an aggregate exercise price of $10,192. We waived the exercise price resulting in stock based compensation expense of $10,192. In September 2008, we issued 525,000 shares for services. The shares were recorded at their fair value of $262,500 and the expense was recorded to general and administrative expense in the third quarter of 2008. In September 2008, $70,050 of principal and $15,628 of interest related to notes payable which we assumed in connection with the reverse merger were converted to 700,000 shares of our common stock.
On November 5, 2008, we issued 130,000 shares of our common stock at $0.40 per share for gross proceeds of $52,000. On November 28, 2008, we issued 37,500 shares of our common stock at $0.40 per share for gross proceeds of $15,000.
On December 16, 2008, we issued 37,500 shares of our common stock at $0.40 per share for gross proceeds of $15,000.
In November and December 2008, $163,549 of principal and $1,090 of interest related to notes payable which we assumed in connection with the reverse merger were converted into 698,841 shares of our common stock.
On November 28, 2008, we issued 10,089,512 shares of our common stock in connection with the recapitalization.
In February 2009, we issued an aggregate of 22,000 shares of our common stock to consultants for advisory services. The shares were recorded at their fair value of $11,453 and the expense was recorded to operating expenses during the first quarter of 2009. In addition, in February 2009, we issued 25,000 shares of our common stock to a consultant for services. The shares were recorded at their fair value of $12,000 and the expense was recorded to operating expenses during the first quarter of 2009. On February 12, 2009, we issued 45,000 shares of our common stock for cash at $0.40 per share for gross proceeds of $18,000.
In March 2009, we issued 335,000 shares of our common stock for cash at $0.20 per share for gross proceeds of $67,000. In March 2009, we issued 54,800 shares of our common stock for advisory services. The shares were recorded at their fair value of $20,782 and the expense was recorded to general and administrative expense during the first quarter of 2009. On March 25, 2009, we issued 75,060 shares of our common stock at $0.20 per share pursuant to the conversion of three promissory notes having an aggregate principal balance of $15,012 (See Note 4).
In April 2009, we issued 325,000 shares of our common stock to Wakabayashi Fund LLC for investor relations services. The shares were recorded at a fair value of $81,250 based on the price of our common stock in recent stock sales and the expense was recorded to operating expenses during the second quarter of 2009. In addition, pursuant to the consulting agreement dated April 1, 2009, we were to issue 162,500 shares of our common stock monthly for a period of four months on a performance-basis, and at management’s discretion, an additional 200,000 common shares may be issued as an incentive bonus. As of December 31, 2010, no additional shares of our common stock are issuable relating to this consulting agreement.
In April 2009, we issued 145,000 shares of our common stock for services. The shares were recorded at a fair value of $29,000 based on the price of our common stock in recent stock sales and the expense was recorded to operating expenses during the second quarter of 2009. On April 3, 2009, we issued 16,000 shares of our common stock for cash at $0.20 per share for gross
proceeds of $3,200. On April 24, 2009, we issued 50,000 shares of our common stock for cash at $0.40 per share for gross proceeds of $20,000. On April 15, 2009, we issued 16,221 shares of our common stock at $0.20 per share pursuant to the conversion of a related party promissory note with a principal balance of approximately $3,200 and in April 2009, we issued an additional 232,683 shares of our common stock pursuant to the conversion of a convertible promissory note and related accrued interest in the aggregate amount of $23,268 (See Note 4).
On May 19, 2009, we issued 1,333,333 shares of our common stock to a related party vendor for reduction of accounts payable of $100,000. The shares when issued had an estimated fair value of approximately $173,300 based on the closing market prices on the issue dates, and as a result, we recorded additional expense of approximately $73,300 in the second quarter 2009.
On June 16, 2009, we issued 200,000 shares of our common stock for legal services. The shares were recorded at a fair value of $26,000 based on the price of our common stock in recent stock sales and the expense was recorded to operating expenses during the second quarter of 2009. On June 23, 2009, we issued 15,625 shares of our common stock for cash at $0.32 per share for gross proceeds of $5,000.
In April 2009, we entered into a six-month software development services contract with Perfect Pixels Media Group, pursuant to which we agreed to issue shares of our common stock at an agreed upon rate of $0.50 per share for services to be provided under the agreement. In the fourth quarter of 2009, 40,000 shares of our common stock were issuable under the terms of the agreement, which has terminated in accordance with its terms, for software development services valued at $20,000.
On October 1, 2009, we entered into a six-month business development services contract with Openbridge, pursuant to which we issued 650,000 shares of our common stock for services to be provided under the agreement. The shares were recorded at their fair value of $65,000 based on the closing market price of our common stock on the date of issuance, and during the fourth quarter of 2009, we recognized $32,500 in operating expenses related to these shares, and the remaining $32,500 was recorded in operating expenses during the three months ended March 31, 2010. In accordance with the terms of the agreement, an additional 650,000 shares were issued in April 2010 to be earned in equal monthly installments over the next six-month term of the agreement, plus an additional 200,000 shares as a bonus for performance under the contract. We recorded the 650,000 shares at their fair value of $10,725 based on the closing market price of our common stock on the date of issuance and during the three months ended June 30, 2010, we recorded $5,400 in operating expenses related to these shares. During the three months ended September 30, 2010, we recorded an additional $5,400 in operating expenses related to these shares. The 200,000 shares were fully vested on the date of issuance and we recorded $3,300 in operating expenses based on the closing market price of our common stock on the date of issuance.
On October 9, 2009, we issued 1,000,000 units at $0.025 per unit for gross proceeds of $25,000, with each unit comprised of one share of our common stock and a two-year warrant to purchase two shares of our common stock at $0.10 per share. The warrants were immediately exercisable. We evaluated the warrants and determined that the warrants do not contain any provisions equivalent to net-cash settlement provisions, and accordingly are accounted for as equity. The relative fair value of the common stock was determined to be $10,000 and the relative fair value of the warrants was determined to be $15,000 based on the relative fair value allocation of the proceeds received.
In November 2009, we issued 340,000 shares of our common stock to vendors in settlement of accounts payable in the aggregate amount of $46,000.
In 2009, we issued 5,000 shares of our common stock to a consultant for recruiting services provided. The fair value of the shares of $1,000 was recorded to operating expenses in the fourth quarter of 2009. An additional 20,000 shares are issuable to the consultant for future services pursuant to the terms of the contract, none of which were issuable as of December 31, 2010 or 2009.
In 2009, we issued 100,000 shares of our common stock to a consultant for consulting services provided. The fair value of the shares of $20,000 was recorded to operating expenses in the fourth quarter of 2009. An additional 100,000 shares are issuable to the consultant for future services pursuant to the terms of the contract, none of which were issuable as of December 31, 2010 or 2009.
In 2009, 190,000 shares of our common stock were issued or issuable to consultants for services provided. The aggregate fair value of the shares of $9,500 based on the closing price of our common stock on December 31, 2009 was recorded to operating expenses in 2009.
In 2009, we issued 400,000 shares of our common stock for future software development services valued at $100,000 based on the closing market price on the date of issuance of the shares, pursuant to a three-year contract with Treemo, Inc. As of December 31, 2009, none of the software development services had been utilized, and accordingly these costs were recorded as prepaid expenses in
our balance sheet as of that date. During the fourth quarter of 2010, we determined that, of the $100,000 recorded as a prepaid, $90,000 was impaired and we recorded an immediate charge to operating expenses.
On December 4, 2009, we entered into an agreement with Fuselier Holdings I, Inc. (“Fuselier Holdings”). Under the terms of the agreement, Fuselier Holdings will negotiate with vendors on our behalf and settle certain accounts payable in exchange for shares of our common stock. We receive cash under the terms of the agreement from Fuselier Holdings, and such cash is used to settle certain accounts payable at our discretion. Fuselier Holdings is authorized under the agreement to settle accounts payable in incremental amounts up to $25,000, and negotiate settlement in shares of our common stock at a per share price determined by averaging the closing price of the previous three (3) full trading days as reported on the over-the-counter bulletin board (“OTCBB”) commencing on the day immediately preceding the day on which our stock is deemed to be freely tradable upon delivery to Fuselier Holdings, or a mutually agreed upon price (“Per Share Price Calculation”). On December 4, 2009, we also entered into a consulting agreement with Dr. Jean Fuselier Sr., whereby we will issue shares of our common stock to Dr. Fuselier equal to the amount of the accounts payable settled, at a per share price determined in accordance with the Per Share Price Calculation. In connection with these agreements, in December 2009, 382,848 shares of our common stock were issued or issuable to Dr. Fuselier for services, and 714,286 shares of our common stock were issued or issuable to Fuselier Holdings in settlement of accounts payable of $25,000. In connection with the drafting of these agreements, we issued an additional 232,258 shares of our common stock to Dr. Fuselier for legal services in October 2009. The fair value of the shares of $24,000 based on the closing price of our common stock on the date of issuance was recorded to operating expenses in the fourth quarter of 2009. In January 2010, 654,450 shares of our common stock were issued or issuable to Dr. Fuselier for services valued at $25,000 under the contract as previously discussed above, and 797,658 shares of our common stock were issued or issuable to Fuselier Holdings in settlement of accounts payable totaling $25,000. In February 2010, 1,250,000 shares of our common stock were issued or issuable to Dr. Fuselier for services valued at $25,000 under the contract as previously discussed above, and 1,250,000 shares of our common stock were issued or issuable to Fuselier Holdings in settlement of accounts payable totaling $25,000.
In April 2010, we amended our agreement with Fuselier Holdings, such that if our common stock closed at prices below $0.03 per share at three mutually agreed upon intervals during April 2010, we would issue shares of our common stock to Fuselier Holdings at a per share price of $0.02 rather than the price determined in accordance with the Per Share Price Calculation. In addition, we agreed that, for a period of 180 days after the date of issuance, should Fuselier Holdings sell the stock and be unable to receive net proceeds equal to $8,000, at our option, we will either issue additional shares to Fuselier Holdings or pay cash such that the amount received by Fuselier Holdings is equal to $8,000. In April 2010, we also amended our consulting agreement with Dr. Jean Fuselier, previously described above, such that our common stock closed at prices below $0.03 per share at three mutually agreed upon intervals during April 2010, we would issue shares of our common stock to Dr. Jean Fuselier equal to the amount of the accounts payable settled, at a per share price of $0.02 rather than the price determined in accordance with the Per Share Calculation. In addition, we agreed that, for a period of 180 days after the date of issuance, should Dr. Fuselier sell the stock and be unable to receive net proceeds equal to $8,000, at our option, we will either issue additional shares to Dr. Jean Fuselier or pay cash such that the amount received by Dr. Fuselier is equal to $8,000. The amendments to the Fuselier Holdings agreement and the Dr. Jean Fuselier consulting agreement were only applicable to the April 2010 settlement of $8,000 in accounts payable and not to future or past Fuselier Holdings or Dr. Jean Fuselier consulting agreement transactions. In April 2010, 400,000 shares of our common stock were issued or issuable to Dr. Fuselier for services valued at $8,000 under the amended contract, and 400,000 shares of our common stock were issued or issuable to Fuselier Holdings in settlement of accounts payable totaling $8,000. As a result of the April 2010 amendment, in June 2010 we issued an additional 400,000 shares of our common stock to Fuselier Holdings and in June 2010 we issued an additional 400,000 shares of our common stock to Dr. Jean Fuselier. There is no further obligation to issue shares under this agreement.
In January 2010, we issued 400,000 shares of our common stock for $20,000 in legal services. In February 2010, we issued 133,333 shares of our common stock for approximately $9,000 of legal services to settle accounts payable.
In February 2010, we entered into a one-year agreement with Moxie Ventures, Inc. for business development services. Pursuant to the terms of the agreement, we will issue Moxie Ventures, Inc. $5,000 in shares of our common stock on a monthly basis, as determined by dividing $5,000 by the closing price of our common stock as of the first five trading days of each month, up to a maximum of 20,000 shares per month. In addition, under the terms of the agreement, we will pay them certain cash success fees upon capital raising activities. During 2010, an aggregate of 220,000 shares of our common stock were issuable under the agreement and we recorded $55,000 in related operating expense.
In March 2010, in connection with the promissory note transaction described in Note 4, we also entered into an advisory services agreement with the noteholder, pursuant to which we will issue him 150,000 shares of our common stock over a period of 12 months for services rendered under the agreement. In the first quarter of 2010, 12,500 shares were issued or issuable under the terms of the agreement and accordingly we recorded expense of $375 during the three months ended March 31, 2010 related to the value of the shares based on the closing price of our common stock on March 31, 2010. In the second quarter of 2010, 37,500 shares were issued or issuable under the terms of the agreement and accordingly we recorded expense of approximately $570 for the three months
ended June 30, 2010, related to the value of the shares based on the closing price of our common stock on June 30, 2010. In the third quarter of 2010, 37,500 shares were issued or issuable under the terms of the agreement and accordingly we recorded expense of approximately $900 for the three months ended September 30, 2010, related to the value of the shares based on the closing price of our common stock on September 30, 2010. In the fourth quarter of 2010, 37,500 shares of our common stock were issued or issuable under the terms of the agreement and accordingly we recorded expense of $750 during the three months ended December 31, 2010 related to the value of the shares based on the closing price of our common stock on December 31, 2010.
In the first quarter of 2010, 75,000 shares of our common stock were issued or issuable to consultants for services provided. The aggregate fair value of the shares of approximately $2,000 based on the closing price of our common stock on March 31, 2010 was recorded to operating expenses in the first quarter of 2010. In the second quarter of 2010, 45,000 shares of our common stock were issued or issuable to consultants for services provided. The aggregate fair value of the shares of approximately $675 based on the closing price of our common stock on June 30, 2010 was recorded to operating expenses in the second quarter of 2010. In September 2010, we entered into a one-year agreement with a consultant for services. Pursuant to the term of the agreement, we will issue the consultant 40,000 shares of our common stock on a monthly basis. In the third quarter of 2010, 70,000 shares of our common stock were issued or issuable to a consultant for services provided. The aggregate fair value of the shares of approximately $1,700 based on the closing price of our common stock on September 30, 2010 was recorded to operating expenses in the third quarter of 2010. In the fourth quarter of 2010, 120,000 shares of our common stock were issued or issuable to a consultant for services provided. The aggregate fair value of the shares of approximately $2,400 based on the closing price of our common stock on December 31, 2010 was recorded to operating expenses in the fourth quarter of 2010.
In March 2010, we entered into an agreement with a consultant for capital raising services. Under the terms of the agreement, we issued the consultant 150,000 shares of our common stock upon signing. An additional 650,000 shares are issuable on a performance basis pursuant to the terms of the contract. In any event, if the consultant secures financing for the Company of $1,000,000 or more, all 800,000 shares become immediately earned and issuable. The consultant is also entitled to a 10% cash fee and 5% warrant coverage on qualified financings, such warrants to be two-year warrants with exercise price at 10% above the price of the qualified financing and be provided piggyback registration rights.
On March 19, 2010, we issued 1,000,000 shares of our common stock for cash at $0.01 per share for gross proceeds of $10,000. On March 22, 2010, we issued 500,000 shares of our common stock for cash at $0.01 per share for gross proceeds of $5,000. On March 25, 2010, we issued 1,000,000 shares of our common stock for cash at $0.01 per share for gross proceeds of $10,000. On March 29, 2010, we issued 600,000 shares of our common stock for cash at $0.025 per share for gross proceeds of $15,000.
In April 2010, we entered into a nine-month agreement with a consultant for investor relations services. Pursuant to the terms of the agreement, we issued the consultant 300,000 shares of our common stock upon signing of the agreement. The aggregate fair value of the shares of approximately $12,000 based on the closing price of our common stock was recorded to operating expenses in the second quarter of 2010. Under the terms of the agreement, an additional 200,000 shares are issuable to the consultant for future services pursuant to the terms of the contract, none of which were issuable as of December 31, 2010 or December 31, 2009.
In the second quarter of 2010, we entered into a consulting agreement with a company for advisory services. Under the terms of the agreement, we issued 1,000,000 shares of our common stock to the consultant for prior services. The fair value of the shares of approximately $16,000 based on the closing price of our common stock on April 28, 2010 was recorded to operating expenses in the second quarter of 2010.
In the second quarter of 2010, we entered into a consulting agreement with an individual for advisory services. Under the terms of the agreement, we issued 1,000,000 shares of our common stock to the consultant for prior services. The fair value of the shares of approximately $16,000 based on the closing price of our common stock on April 28, 2010 was recorded to operating expenses in the second quarter of 2010.
In July 2010, we entered into a six-month consulting agreement for business advisory services, pursuant to which we will issue the consultant 100,000 shares of our common stock per month. As of September 30, 2010, 300,000 shares of our common stock were issuable. The aggregate fair value of the shares of approximately $7,000 based on the closing price of our common stock on September 30, 2010 was recorded to operating expenses in the third quarter of 2010. As of December 31, 2010, an additional 300,000 shares of our common stock were issued or issuable under this contract, which has terminated in accordance with its terms. The aggregate fair value of the shares of approximately $6,000 based on the closing price of our common stock on December 31, 2010 was recorded to operating expenses in the fourth quarter of 2010.
In July 2010, we entered into an advisory services agreement with a consulting firm, pursuant to which we issued 2,000,000 shares of our common stock valued at $30,000 for services.
On August 6, 2010, we issued 133,333 shares of our common stock to a vendor in payment of finance charges.
In October 2010, we entered into advisory services agreements with two consultants whereby we agreed to issue an aggregate of 11,250,000 shares of our common stock for services over the one-year term of the agreements.
Stock Incentive Plans - In May 2009, our board of directors approved the 2009 Employee Stock Incentive Plan (the “2009 Plan”). Under the 2009 Plan, up to 6,000,000 shares of our common stock may be issued to directors, employees or consultants pursuant to share awards or options to purchase our common stock. We filed a Form S-8 on June 12, 2009 to register the shares of common stock issuable under the 2009 Plan. On February 11, 2010, we amended our 2009 Plan and filed a revised Form S-8 increasing the number of reserved shares to 15,000,000. On May 7, 2010, we again amended our 2009 Plan and filed a subsequent revision to the Form S-8, increasing the number of reserved shares to 35,000,000.
Stock Options - Stock options to purchase shares of our common stock are granted under our 2009 Plan to certain employees and consultants, at prices at or above the fair market value on the date of grant.
Non-cash compensation expense is recognized on a straight-line basis over the applicable vesting periods of one to five years, based on the fair value on the grant date. The vesting period is deemed to be the requisite service period. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the 2009 Plan and certain employment agreements we have with key officers).
The fair value of stock-based option awards was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions for the periods presented as follows:
Option activity was as follows during the years ended December 31, 2009 and 2010:
As of December 31, 2010, we had approximately $217,000 of total unrecognized compensation cost related to unvested stock options. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize this cost over a weighted average period of approximately three and a quarter years.
The intrinsic value of stock options outstanding and exercisable at December 31, 2010 is based on the $0.02 closing market price of our common stock on that date, and is calculated by aggregating the difference between $0.02 and the exercise price of each of the outstanding vested and unvested stock options which have an exercise price less than $0.02. The total fair value of options that vested during the years ended December 31, 2010 and 2009, net of forfeitures, was approximately $730,000 and $485,000 respectively.
Non-Employee Stock Option Grants - In March, June, September and December 2010, we granted options under our 2009 Plan to purchase 691,360, 739,729, 1,345,000 and 125,641 shares, respectively, of our common stock at an exercise price of $0.001 pursuant to our CEO’s employment contract. As the options were fully vested on the date of grant as described in Note 6, we recognized immediate expense of approximately $21,000, $11,000, $32,000 and $3,000, respectively, related to the fair value of the options. The options have a 10-year term.
In January 2010, we issued options, pursuant to terms of a consulting agreement for software design services, to a consultant to purchase 55,000 shares of our common stock at an exercise price of $0.05 per share, of which options 10,000 vested immediately and the remainder vest in equal monthly installments of 5,000 options through September 2010 pursuant to the terms of the software design services contract.
In June 2009, we issued options under our 2009 Plan to purchase 160,000 shares of our common stock at an exercise price of $0.13 per share to a consultant engaged in providing strategic advisory services to our company, of which options 30,000 were vested as of June 30, 2009. The remaining options were forfeited by the consultant due to his termination. The options expired on December 31, 2010. During the second quarter of 2009, we recorded expense of approximately $3,800 related to the fair value of the options, which was determined using the Black-Scholes model using the following assumptions: stock price of $0.13 (based on closing price on date of grant), volatility of 162%, risk free rate of 0.56%, expected term of 1.5 years, dividend yield of 0.0%.
In June 2009, we issued options under our 2009 Plan to purchase 1,000,000 shares of our common stock at an exercise price of $0.001 to our former Chief Development Officer, who was engaged in software development. The options vested as follows: 1/3 vested immediately, and the remainder vested monthly over two years beginning June 1, 2008. Through December 31, 2010, we recorded expense of approximately $129,700 related to the fair value of the options, which was determined using the Black-Scholes model using the following assumptions: stock price of $0.13, volatility of 162%, risk free rate of 3.40%, expected term of 5.75 years, dividend yield of 0.0%. The options expire on May 15, 2019.
In June 2009, we issued options under our 2009 Plan to purchase 1,000,000 shares of our common stock at an exercise price of $0.001 to Armada Capital, who was engaged in providing advisory services to the Company. The options vested as follows: 1/3 vested immediately, and the remainder vested monthly over two years beginning June 1, 2008. Through December 31, 2010, we recorded expense of approximately $129,700 related to the fair value of the options, which was determined using the Black-Scholes model using the following assumptions: stock price of $0.13, volatility of 162%, risk free rate of 3.40%, expected term of 5.75 years, dividend yield of 0.0%. The options expire on May 15, 2019.
In June 2009, we issued options under our 2009 Plan to purchase 1,500,000 shares of our common stock at an exercise price of $0.001 to Brook Lang, who was engaged in providing management services to the Company and is now the Company’s CEO. The options vested as follows: 1/3 vested immediately, and the remainder vested monthly over two years beginning June 1, 2008. Through December 31, 2010, we recorded expense of approximately $195,000 related to the fair value of the options, which was determined using the Black-Scholes model using the following assumptions: stock price of $0.13, volatility of 162%, risk free rate of 3.40%, expected term of 5.75 years, dividend yield of 0.0%. The options expire on May 15, 2019.
In August 2009, we issued options under our 2009 Plan to purchase 83,333 shares of our common stock at an exercise price of $0.01 per share to a consultant engaged in providing strategic advisory services to our company, which options vest according to performance under the terms of the consulting agreement. As the options were immediately vested on the date of grant, we recorded expense of approximately $12,500 during the third quarter of 2009 related to the fair value of the options, which was determined using the Black-Scholes model using the following assumptions: stock price of $0.15, volatility of 162%, risk free rate of 1.78%, expected term of three years, dividend yield of 0.0%. The options expire on August 15, 2014.
In August 2009, we issued options under our 2009 Plan to purchase 60,000 shares of our common stock at an exercise price of $0.01 per share to a consultant engaged in providing strategic advisory services to our company, of which options 20,000 vested immediately and the remainder vest in equal monthly installments of 5,000 options through August 2010 pursuant to the terms of the advisory services contract. During the third quarter of 2009, we recorded expense of approximately $500 related to the fair value of
the options, which was determined using the Black-Scholes model using the following assumptions: stock price of $0.11, volatility of 162%, risk free rate of 1.78%, expected term of three years, dividend yield of 0.0%. The options expire on August 10, 2014.
Warrants - On January 26, 2009, we entered into an agreement with Newport Capital for broker relations services. Under the terms of the agreement, we issued a warrant to purchase 100,000 shares of our common stock at an exercise price of $0.80 and a warrant to purchase 100,000 shares of our common stock at an exercise price of $1.00, exercisable for two years. The warrants vested immediately. The warrants were recorded as expense in 2009 at their fair value of approximately $26,800, which was determined using the Black-Scholes model using the following assumptions: stock price of $0.20 (based on recent stock sales), volatility of 162%, risk free rate of 0.47%, expected term of two years, dividend yield of 0.0%. We evaluated the warrants and determined that the warrants do not contain any provisions equivalent to net-cash settlement provisions, and accordingly are accounted for as equity.
As noted above, on October 9, 2009, we issued 1,000,000 units at $0.025 per unit for gross proceeds of $25,000, with each unit comprised of one share of our common stock and a two-year warrant to purchase two shares (2,000,000 total) of our common stock at $0.10 per share. The warrants were immediately exercisable. We evaluated the warrants and determined that the warrants do not contain any provisions equivalent to net-cash settlement provisions, and accordingly are accounted for as equity.
On May 10, 2010, we entered into an agreement with a consultant for financial and business advisory services. Under the terms of the agreement, we issued a five-year fully-vested warrant to purchase up to 200,000 shares of our common stock at an exercise price of $0.01 and on May 31, 2010, we issued a five-year fully vested warrant to purchase up to 100,000 shares of our common stock at an exercise price to the consultant for services rendered under the agreement. The warrants were recorded as expense in the second quarter of 2010 at their fair value of approximately $3,000, which was determined using the Black-Scholes model using the following assumptions: stock price of $0.01, volatility of 162%, risk free rate of 2.26%, expected term of 5 years, dividend yield of 0.0%. We evaluated the warrants and determined that the warrants do not contain any provisions equivalent to net-cash settlement provisions, and accordingly are accounted for as equity. Additional warrants were granted during July and August 2010 to this consultant pursuant to the terms of the consulting agreement. During July 2010, we issued five-year warrants to purchase an additional 500,000 shares of our common stock at an exercise price of $0.01 per share for financial and advisory services to the same consultant. The warrants were recorded as expense in the third quarter of 2010 at their fair value of approximately $6,000, which was determined using the Black-Scholes model using the following assumptions: stock price of $0.01, volatility of 162%, risk free rate of 2.26%, expected term of 5 years, dividend yield of 0.0%. We evaluated the warrants and determined that the warrants do not contain any provisions equivalent to net-cash settlement provisions, and accordingly are accounted for as equity.
On August 2, 2010, the consulting agreement was amended to provide for the issuance to the consultant of 20% of any shares or warrants issued under an August 2010 agreement with a public relations and marketing consulting firm. Accordingly, in August 2010, we issued two-year warrants to purchase an additional 220,000 shares of our common stock at an exercise price of $0.001 per share to the consultant under the terms of the consulting agreement, as amended and two-year warrants to purchase an additional 140,000 shares of our common stock at an exercise price of $0.05 per share under the terms of the consulting agreement, as amended (see below). The warrants were recorded as expense in the third quarter of 2010 at their fair value of approximately $4,000, which was determined using the Black-Scholes model using the following assumptions: stock price of $0.01, volatility of 162%, risk free rate of 0.56%, expected term of 2 years, dividend yield of 0.0%. We evaluated the warrants and determined that the warrants do not contain any provisions equivalent to net-cash settlement provisions, and accordingly are accounted for as equity.
Under a success-based arrangement discussed below, two-year warrants to purchase an additional 500,000 shares of our common stock at an exercise price of $0.05 per share and two year warrants to purchase an additional 500,000 shares of our common stock at an exercise price of $0.10 per share are also potentially issuable to the consultant.
In August 2010, we entered into an annual contract with a public relations and marketing consulting firm for services. Under the terms of the contract, we issued two-year warrants to purchase 400,000 shares of our common stock at an exercise price of $0.001 to the consulting firm for services. In addition, we are required to make monthly cash payments of $10,000, with the first two months’ cash payments deferred for two months. In August 2010, we issued two-year warrants to purchase 700,000 shares of our common stock at an exercise price of $0.001 per share for public relations and marketing services to the same public relations and marketing consulting firm. In addition, in August 2010, we issued additional two-year warrants to purchase 700,000 shares of our common stock at an exercise price of $0.05 to the same consulting firm for services under the agreement. The warrants were recorded as expense in the third quarter of 2010 at their fair value of approximately $21,000, which was determined using the Black-Scholes model using the following assumptions: stock price of $0.01, volatility of 162%, risk free rate of 0.53%, expected term of 2 years, dividend yield of 0.0%. We evaluated the warrants and determined that the warrants do not contain any provisions equivalent to net-cash settlement provisions, and accordingly are accounted for as equity.
In addition, we agreed to a success-fee arrangement with the public relations and marketing consulting firm, under which if certain performance criteria met, two-year warrants to purchase 2,500,000 shares of our common stock at an exercise price of $0.05
per share and two-year warrants to purchase 2,500,000 shares of our common stock at an exercise price of $0.10 per share are potentially issuable to the consulting firm as a success fee.
As disclosed in Note 4, in August and September 2010, we entered into convertible promissory notes in the aggregate amount of $40,000 together with two-year warrants to purchase 3,750,000 shares of our common stock at an exercise price of $0.02 per share. The promissory notes bear interest at a rate of 12% per annum, and the notes are due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory notes contain an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holders may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. In accordance with the authoritative guidance related to instruments with down-round protection, we recorded a fair value liability of $16,800 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At September 30, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.53%, expected life of 2 years, dividend yield of 0.0% and we recorded an increase in the fair value liability of approximately $38,000 for the three months ended September 30, 2010 as other expense. At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.61%, expected life of 1.75 years, dividend yield of 0.0% and we recorded a decrease in the fair value liability of approximately $11,700 for the three months ended December 31, 2010 as other income.
As disclosed in Note 4, in September 2010, we transferred $20,000 of accounts payable due to our CEO to a third party. These amounts were then converted into a convertible promissory note for $20,000 together with two-year warrants to purchase 1,500,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. In accordance with the authoritative guidance related to instruments with down-round protection, we recorded a fair value liability of approximately $8,300 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At September 30, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.53%, expected life of 2 years, dividend yield of 0.0% and we recorded an increase in the fair value liability of approximately $19,000 for the three months ended September 30, 2010 as other expense. At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.61%, expected life of 1.75 years, dividend yield of 0.0%. We recorded a decrease in the fair value liability of approximately $5,900 for the three months ended December 31, 2010 as other income.
As disclosed in Note 4, in October 2010, we transferred $25,000 of accounts payable due to our CEO to a third party. These amounts were then converted into a convertible promissory note for $25,000 at a stated interest rate of 12%, together with two-year warrants to purchase 1,875,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note is due within one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. In accordance with the authoritative guidance related to instruments with down-round protection, we recorded a fair value liability of $25,000 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.61%, expected life of 1.75 years, dividend yield of 0.0% and we recorded an increase in the fair value liability of approximately $1,900 for the three months ended December 31, 2010 as other expense.
As disclosed in Note 4, in October and December 2010, we entered into convertible promissory notes in the aggregate amount of $37,500 together with two-year warrants to purchase 2,812,500 shares of our common stock at an exercise price of $0.02 per share. The promissory notes bear interest at a rate of 12% per annum, and the notes are due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory notes contain an
optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holders may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. In accordance with the authoritative guidance related to instruments with down-round protection, we recorded a fair value liability of $28,000 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.61%, expected life of 1.75 years, dividend yield of 0.0% and we recorded an increase in the fair value liability of approximately $12,300 for the three months ended December 31, 2010 as other expense.
In December 2010, we entered into a convertible promissory note in the aggregate amount of $25,000 together with two-year warrants to purchase 1,875,000 shares of our common stock at an exercise price of $0.02 per share, whereby we received $20,000 in cash and an April 2010 promissory note for $3,000, an August 2010 $1,000 promissory note and $1,000 in accounts payable to the same party were settled. The December 2010 promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. In accordance with the authoritative guidance related to instruments with down-round protection, we recorded a fair value liability of approximately $25,000 at issuance. The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At December 31, 2010, the Black-Scholes assumptions utilized were as follows: stock price of $0.02, volatility of 162%, risk-free rate of 0.61%, expected life of 2 years, dividend yield of 0.0%. We recorded an increase in the fair value liability of approximately $3,100 for the three months ended December 31, 2010 as other expense.
The following summarizes warrant activity during the year ended December 31, 2010 (in thousands):
Note 6. Related Party Transactions
As disclosed in Note 4, in September 2010, we transferred $20,000 of accounts payable due to our CEO to a third party. These amounts were then converted into a convertible promissory note for $20,000 together with two-year warrants to purchase 1,500,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. See Note 4.
As disclosed in Note 4, in October 2010, we transferred $25,000 of accounts payable due to our CEO to a third party. These amounts were then converted into a convertible promissory note for $25,000 at a stated interest rate of 12%, together with two-year warrants to purchase 1,875,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note is due within one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory notes contain an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holders may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory
note agreement, if the share price of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement. See Note 4.
In June 2009, we entered into an employment agreement with our CEO, pursuant to which, among other things, the CEO will be entitled to annual base compensation at up to $196,000, an annual bonus of up to 50% of base compensation (with actual amount to be determined by our board of directors) and a grant of options to purchase 7,500,000 shares of our common stock. The options vest in 1/60 monthly installments beginning January 1, 2009, over a period of five years. Pursuant to the employment contract, we are also required to issue the CEO additional options to purchase shares of our common stock over a three-year period to maintain the executive’s percentage ownership in our common stock on a fully diluted basis at 10% of the Company. In December 2010, the provision with respect to the requirement to issue the CEO additional options to purchase shares of our common stock to maintain the executive’s percentage ownership in our common stock on a fully diluted basis at 10% of the Company was extended additional 12-months. As a result of this provision, as previously discussed at Note 5, options to purchase 691,360, 739,729, 1,345,000 and 125,641shares of our common stock at an exercise price of $0.001 were granted pursuant to our CEO’s employment contract as of March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010, respectively. The options were fully vested on the date of grant.
At December 31, 2010 and December 31, 2009, approximately $534,000 and $302,000, which represented amounts due to our CEO, were included in accounts payable - related parties on the accompanying balance sheet.
As discussed in Note 5, on June 15, 2009, we issued options under the 2009 Plan to purchase 1,500,000 shares of our common stock to our CEO outside of his employment agreement. Options to purchase 1,000,000 shares of our common stock were immediately vested as of the date of grant. The remainder vested in monthly installments of 41,667 through June 2010. The options have a term of ten years. On December 31, 2009, we issued options under the 2009 Plan to purchase 7,500,000 shares of our common stock at an exercise price of $0.001 per share to our CEO pursuant to his employment agreement. The options vest in 1/60 monthly installments beginning January 1, 2009, over a period of five years. The options have a term of ten years.
As discussed in Note 5, above, on May 19, 2009, we issued 1,333,333 shares of our common stock to our former Chief Development Officer (“CDO”) for reduction of accounts payable of $100,000. The shares when issued had an estimated fair value of approximately $173,300 based on the closing market prices on the issue dates, and as a result, we recorded additional expense of approximately $73,300 in the second quarter of 2009. As discussed in Note 5, above, in June 2009, we issued options under our 2009 Plan to purchase 1,000,000 shares of our common stock at an exercise price of $0.001 to our former CDO, who was engaged in software development. The options vested as follows: 1/3 vested immediately, and the remainder vested monthly over two years beginning June 1, 2008. The options expire on May 15, 2019. At December 31, 2010 and December 31, 2009, approximately $114,000 and $42,000, which represented amounts due to a company owned by our former CDO, were included in accounts payable - related parties on the accompanying balance sheet.
In September 2008, we entered into a promissory note with a stockholder in the principal amount of $25,000 with a stated interest rate of 12%.
Note 7. Income Taxes
Deferred income tax assets and related valuation allowances are as follows as of December 31 (in thousands):
Deferred tax assets
Net operating loss carryforwards
$
$
Other
1,598
1,013
Valuation allowance
(1,598)
(1,013)
Deferred tax assets, net of allowance
$
-
$
-
The difference between taxes computed by applying the U.S. federal corporate tax rate of 34% and the actual income tax provisions in 2010 and 2009 is primarily the result of establishing a valuation allowance on the deferred tax assets. The valuation allowance increased approximately $585,000 and $651,000 during 2010 and 2009, respectively.
At December 31, 2010, we had a net operating loss carryforwards for federal income tax reporting purposes of approximately $2.1 million, which are available to offset future taxable income, and expire beginning in 2030 if not otherwise utilized. Our ability to use
such net operating losses is dependent on future taxable income and could be subject to an annual limitation due to change of control provisions under Sections 382 and 383 of the Internal Revenue Code.
Note 8. Commitments and Contingencies
Acxiom Corporation - In February 2010, we entered into a database license agreement with Acxiom Corporation under which we will license their InfoBase-X telephone directories commencing February 5, 2010 for an initial term of six months (“Initial Term”). In October 2010, we amended our agreement with Acxiom whereby the Initial Term will extend for an additional six months. Unless terminated, the license term automatically extends to a period of one year (“First One Year Term”), and will continue to automatically renew for successive one-year terms (“Renewal Term”) unless terminated by either party upon 30 days notice or for cause as defined in the agreement. In consideration of the license grant, we will pay no fees for the Initial Term, and will pay annual minimum fees of $30,000 for the First One Year Term and any Renewal Term, payable monthly at a rate of $2,500 per month, plus certain additional per-click volume-based fees, based upon the following schedule:
Volume-
Based Fees
Up to 2,500,000
$
-
2,500,001 - 5,000,000
0.010
5,000,001 - 7,500,000
0.008
7,500,001 - unlimited
-
infoUSA, Inc. - In April 2009, we entered into a three-year database license agreement with infoUSA, Inc. under which we licensed their Yellow Pages database commencing April 15, 2009. In consideration of the license grant, we will pay the greater of royalties calculated at $0.15 per user per month or calculated based on transaction volume, or annual minimum license fees of $100,000 for the first year and $125,000 for the second year of the agreement and thereafter. The agreement automatically renews for an additional two year term unless terminated upon 60-day notice by either party. Minimum fees under this agreement totaled $67,000 through December 31, 2009. The remaining first year fees of $33,000 were due as of March 31, 2010. We terminated this agreement effective January 19, 2010 and our remaining liability with InfoUSA, Inc. is $75,000 as of December 31, 2010.
Robert Half International -In August 2009, Robert Half International sued us claiming unpaid fees for services rendered. On February 24, 2010, a judgment was granted against us in the amount of $87,248.91, which amount bears interest at 12% per annum. We have included the judgment, net of payment of approximately $15,000, in accounts payable at December 31, 2010 and at approximately $87,000 at December 31, 2009. On June 24, 2010, we entered into a settlement and forbearance agreement with Robert Half International, whereby Robert Half International agreed not to pursue the judgment against us as long as we continued to make payments as follows: on August 1, 2010, $10,000.00; and $10,000 thereafter on the first day of every month until the amount of $74,000 is paid in full. We have not made the payments as indicated under the terms of the settlement and forbearance agreement and as a result, there is no assurance that Robert Half International will not pursue judgment against us.
Moody Capital - In April 2010, we entered into an agreement with Moody Capital for investment banking services. Under the agreement, Moody Capital will receive upon the placement of debt or equity, an 8% cash fee and 5% warrant coverage with an exercise price equal to 1.05 times the offering price of the equity transaction. We may terminate this agreement within 30 days upon giving written notice.
Note 9. Subsequent Events
In February 2011, we entered into a convertible promissory note in the amount of $25,000 together with two-year warrants to purchase 1,875,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $950,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of the first $750,000 of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement.
In March 2011, we entered into a convertible promissory note in the amount of $5,000 together with two-year warrants to purchase 375,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of the first $250,000 of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement.
In March and April 2011, we issued fully vested five-year warrants to purchase an aggregate of 840,000 shares of our common stock at an exercise price of $0.001 per share for financial and advisory services to a consultant.
In the first quarter of 2011, an aggregate of 165,000 shares of our common stock were issued or issuable to consultants for services provided during the three months ended March 31, 2011.
In April 2011, we entered into a convertible promissory note in the amount of $10,000 together with two-year warrants to purchase 750,000 shares of our common stock at an exercise price of $0.02 per share. The promissory note bears interest at a rate of 12% per annum, and the note is due in one year. Upon default, the interest rate is 18%. As the Company is currently seeking to raise financing under a private placement transaction, the promissory note contains an optional conversion clause whereby, during a 30-day period after the completion of such private placement transaction raising in excess of $250,000, the holder may either convert the promissory note at the share price of such private placement transaction or demand repayment out of the proceeds of such financing. Under the terms of the promissory note agreement, if the share price of the first $250,000 of such private placement is below $0.02 (the strike price of the warrants), the strike price of the warrants will be downward adjusted to such share price of the private placement.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On April 9, 2010, the Board of Directors appointed Peterson Sullivan LLP (“PSCPA”) as Montavo’s independent auditors for the Company, replacing Malone & Bailey PC (“Malone”).
On April 9, 2010, the Company dismissed Malone, effective April 9, 2010. The report of Malone on the Company’s financial statements for the years ended December 31, 2008 and 2007, and the quarters ended March 31, 2009, June 30, 2009, and September 30, 2009, did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles, except that such reports on our financial statements contained an explanatory paragraph with respect to uncertainty as to the Company’s ability to continue as a going concern.
For the years ended December 31, 2008 and 2007, and through April 9, 2010, there have been no disagreements with Malone on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to Malone’s satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their reports. For the years ended December 31, 2008 and 2007, and through April 9, 2010, there were no “reportable events” as that term is described in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of senior management, including Mr. Brook W. Lang, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our CEO/CFO concluded that our disclosure controls and procedures were not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act. A discussion of the material weaknesses in our controls and procedures is described below.
(b) Internal Control over Financial Reporting. There have been no changes in our internal controls over financial reporting or in other factors during the fourth fiscal quarter ended December 31, 2010, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting subsequent to the date we carried out our most recent evaluation.
(c) Management Report on Internal Control. Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, is a process designed by, or under the supervision of, our CEO/CFO, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management, with the participation of our CEO/CFO, has established and maintained policies and procedures designed to maintain the adequacy of our internal control over financial reporting, and include those policies and procedures that:
·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our 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 statements.
Management has used the framework set forth in the report entitled Internal Control - Integrated Framework published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission to evaluate the effectiveness of our internal
control over financial reporting. As a result of the material weaknesses described below, management has concluded that our internal control over financial reporting was not effective as of December 31, 2010.
Management’s Assessment
Management has determined that, as of the December 31, 2010, evaluation date, there were deficiencies in both the design and the effectiveness of our internal control over financial reporting. Management has assessed these deficiencies and determined that there were various material weaknesses in our internal control over financial reporting. As a result of our assessment that material weaknesses in our internal control over financial reporting existed as of December 31, 2010, management has concluded that our internal control over financial reporting was not effective as of December 31, 2010. The existence of a material weakness or weaknesses is an indication that there is a more than remote likelihood that a material misstatement of our financial statements will not be prevented or detected in a future period.
Management has assigned a high priority to the short- and long-term improvement of our internal control over financial reporting. We have listed below the nature of the material weaknesses we have identified, the steps we are taking to remediate these material weaknesses and when we expect to have the material weaknesses remediated.
Inadequate entity-level controls. As of December 31, 2010, we did not have effective entity level controls with respect to our overall control environment and monitoring efforts as defined in the COSO framework. The pervasive nature of the material weaknesses in our internal control over financial reporting in itself constitutes a material weakness. We failed to systematically communicate company-wide policies and procedures and to uniformly and consistently communicate the importance of controls. We also had failed to implement processes to ensure periodic monitoring of our internal control activities. As a result, management concluded that there are deficiencies in the design and execution of our entity-level controls that constitute a material weakness in our internal control over financial reporting and errors in our financial statements that have not been prevented by our entity level controls could occur.
·
Remediation. In April 2010, we retained accounting consultants to advise our company on improving internal controls and procedures. In addition, we retained new legal counsel to advise on disclosure requirements and new independent registered public accountants to audit our financial statements. Under the guidance of our CEO and new legal and financial advisors, we began to implement new controls and procedures designed to ensure that company-wide policies and procedures are systematically communicated and that documentation evidencing employees’ receipt thereof is retained. In the second quarter of 2010, we also began developing an ongoing monitoring system to facilitate continuous monitoring of our internal control over financial reporting.
·
Timing. We are continuing to remediate these deficiencies and anticipate completing our remediation efforts during the third quarter 2011.
Deficiencies pertaining to inadequate segregation of duties consistent with control objectives. The lack of segregation of duties among management resulted in deficiencies in our financial reporting.
·
Remediation. We retained accounting consultants to assist the company in meeting its control objectives.
·
Timing. We are continuing to remediate these deficiencies and anticipate completing our remediation efforts during the third quarter 2011.
Deficiencies pertaining to insufficiently skilled personnel and a lack of human resources within our finance and accounting reporting functions. The lack of appropriately skilled personnel could result in material misstatements to financial statements not being detected in a timely manner.
·
Remediation. As discussed above, we retained accounting consultants to assist our finance and accounting reporting functions.
·
Timing. We are continuing to remediate these deficiencies and anticipate completing our remediation efforts during the third quarter 2011.
Insufficient oversight of financially significant processes and systems, including deficiencies relating to monitoring and oversight of the work performed by our finance and accounting personnel. Due primarily to the lack of human resources in our accounting and finance department during 2009 and 2010, we noted deficiencies related to insufficient review and approval and documentation of the review and approval of the work being performed by employees within our accounting and finance department relating to the following matters:
·
All journal entries;
·
Periodic reconciliations of sub ledgers, balance sheet and income statement accounts;
·
Accrual of expenses;
·
Documents supporting the monthly, quarterly and annual general ledger closing process; and
·
Periodic financial reporting.
As a result, we do not have sufficient internal control over financial reporting to ensure underlying transactions are being appropriately and timely accounted for, which could lead to material misstatements in the financial statements not being detected in a timely manner.
·
Remediation. As discussed above, we retained accounting consultants to assist our finance and accounting reporting functions.
·
Timing. We are continuing to remediate these deficiencies and anticipate completing our remediation efforts during the third quarter 2011.
Deficiencies relating to insufficient analysis, documentation and review of the selection and application of generally accepted accounting principles, or GAAP, to significant non-routine transactions, including the preparation of financial statement disclosures relating thereto. We did not have appropriate personnel in place at December 31, 2010, to review and document the application of GAAP to significant non-routine transactions, including the preparation of related financial statement disclosures. As a result, we do not have sufficient internal control over financial reporting to ensure that underlying non-routine transactions are appropriately and timely accounted for in the general ledger.
·
Remediation. As discussed above, we retained accounting consultants to assist our finance and accounting reporting functions.
·
Timing. We are continuing to remediate these deficiencies and anticipate completing our remediation efforts during the third quarter 2011.
Inability to demonstrate through testing that our internal control over financial reporting was effective as of December 31, 2010. We were unable to demonstrate through testing the effectiveness of our remediation efforts with respect to the material weaknesses described above. Our processes with respect to quarterly and annual controls, such as our control processes relating to general ledger close procedures and periodic financial reporting, were not implemented as of the year ended December 31, 2010.
·
Remediation. We have dedicated significant internal and external resources to our remediation efforts with respect to material weaknesses in our internal control over financial reporting as noted above. We expect to have a sufficient sampling base to enable us to test the effectiveness of our remediation efforts at future measurement dates and testing periods for our internal control over financial reporting.
·
Timing. Due to lack of financial resources, management was unable to fully implement its remediation efforts nor test the effectiveness of our remediation efforts with respect to the remediation efforts described above. We expect to complete the testing of effectiveness in 2011.
The steps described above, including the hiring of additional qualified accounting and finance personnel, are designed to ensure that management’s evaluation of our internal control over financial reporting is thorough and complete and that a timely and appropriate remediation plan is implemented. The effectiveness of the steps we have taken to date and the steps we are still in the
process of completing is subject to continued management review, as well the oversight of our board of directors, and we may make additional changes to our internal controls and procedures. Although we have undertaken the foregoing initiatives, in the future we may identify further material weaknesses or significant deficiencies in our internal control over financial reporting that have not previously been identified.
Management estimates that we will incur additional costs in connection with our remediation efforts including outside advisor fees and incremental personnel costs. Management estimates that these costs will aggregate approximately $25,000 for the year ended December 31, 2011.
There were no changes in our disclosure controls and procedures, including our internal control over financial reporting, during the quarter ended December 31, 2010, that had materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures, including our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
Part III
ITEM 10.
ITEM 10. - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth the names and ages, as of March 31, 2011, of each of our executive officers and directors:
Name
Age
Positions and Offices
Brook W. Lang
Chief Executive Officer of the Company since May 19, 2008, director since April 22, 2009
Set forth below is biographical information concerning our executive officers and directors.
Brook W. Lang has served as our chief executive officer since May 8, 2008. Mr. Lang is a seasoned executive with over 20 years of experience in sales and marketing, financial management, operations, and product development capacities in high tech industries. In several executive, senior executive, sales and business development, advisory, board and board advisory roles, Mr. Lang has conducted business domestically in the U.S. and internationally in Europe and Asia building company relationships and working with industry, trade and standards - setting organizations. In 2002, Mr. Lang worked for T-Mobile, a leading provider of wireless telecommunications services. In his position, he was directly responsible for $800 million in yearly acquisition revenue and co-managed a field sales-force of over 400 salespeople. Prior to joining T-Mobile, in 1998, Mr. Lang founded and served as CEO of Infomove, and their spin-out division Biospin, a leading wireless technology company, growing the company from the intellectual property development phase to securing funding through to successful product launch. In 2003, Mr. Lang worked through a company called L & S on several executive projects in the wireless industry, helping launch products and services to the wireless market in hardware, services, content, games, retail, distribution and enterprise markets. In December of 2004, as part of these projects, Mr. Lang was actively recruited, together with some of his own intellectual property, to help lead Montavo, Inc., a wireless Location Based Services (“LBS”) mobile application company focused on the mobile search and advertising market. Mr. Lang works closely with the technology team to develop and evolve the technologies and is responsible for marketing, distribution and branding for our applications, targeting national and regional brand advertisers and small to medium sized local advertisers. Mr. Lang is also responsible for development of relationships with mobile software aggregators and global wireless carriers, to offer private labeled solutions and other mobile marketing solutions. Mr. Lang holds a Bachelor’s degree in Business Administration from the University of Washington.
Composition of Board of Directors
Our bylaws authorize no less than one (1) and no more than thirteen (13) directors. We currently have one (1) director on our board of directors (the “Board”): Brook W. Lang.
Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by the Board and hold office until removed by the Board.
Family Relationships
None.
Director or Officer Involvement in Certain Legal Proceedings
Except as otherwise indicated below, to the best of our knowledge, our directors and executive officers were not involved in any legal proceedings as described in Item 401(f) of Regulation S-K.
One of our officers, Mr. Lang, backed funds that were to be paid to him by a partner company of ComRoad AG. Comroad AG failed, and as such, he was required in 2002 to file a planned restructure bankruptcy. We are not aware of any proceedings to which any of our officers or directors, or any associate of any such officers or directors, is a party adverse to the Registrant, the Company or any of our subsidiaries or has a material interest adverse to us.
Section 16(a) Beneficial Ownership Reporting Compliance
Our officers, directors and shareholders owning greater than ten percent (10%) of our shares are not required to file beneficial ownership reports pursuant to Section 16(a) of the Securities and Exchange Act (the “Exchange Act”) because we do not have a class of securities registered under Section 12 of the Exchange Act.
Committees of the Board
We do not currently have a separately-designated nominating or compensation committee. Due to the size of our company and the size of the Board, our Board performs the functions of these committees.
Audit Committee
We do not have a separately-designated audit committee. The entire Board performs the functions of an audit committee, but no written charter governs the actions of the Board when performing the functions of what would generally be performed by an audit committee. The Board approves the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related to financial reporting. In addition, the Board reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance of the independent auditor.
Summary Compensation
The following Summary Compensation Table sets forth certain information concerning the compensation of (ii) our Chief Executive Officer/Chief Financial Officer, (ii) our other two most highly compensated executive officers, and (iii) other personnel required to be disclosed by this Item whose compensation exceeds $100,000, for each of the years ended December 31, 2009 and 2010 (collectively, our “named executive officers”).
(1)
On May 8, 2008, Brook W. Lang was appointed CEO and he was appointed to the Board of Directors on April 22, 2009.
(2)
Amount is the result of options to purchase 1,500,000 shares of our common stock at an exercise price of $0.001 per share outside of his employment agreement. Options to purchase 1,000,000 shares of our common stock were immediately vested as of the date of grant. The remainder vested in monthly installments of 41,667 through June 2010. The options have a term of ten years. On December 31, 2009, we issued options under the 2009 Plan to purchase 7,500,000 shares of our common stock at an exercise price of $0.001 per share to our CEO pursuant to his employment agreement. The options vest in 1/60 monthly installments beginning January 1, 2009, over a period of five years. The options have a term of ten years. See Note 3 to Notes to Financial Statements for a description regarding the valuation methodology of stock based awards.
(3)
The company has retained a company called L & S, from which Mr. Lang receives compensation, for management services & expenses. These management services and expenses incurred totaled approximately $323,000 in both 2009 and 2010.
(4)
Amount is the result of further vesting of options described in (2) above, as well as additional grants made pursuant to Mr. Lang’s employment contract during 2010. Pursuant to the employment contract, we are required to issue Mr. Lang additional options to purchase shares of our common stock over a three-year period to maintain his percentage ownership in our common stock on a fully diluted basis at 10% of the Company. As a result of this provision, options to purchase 691,360, 739,729, 1,345,000 and 125,641 shares of our common stock at an exercise price of $0.001 were granted to Mr. Lang as of March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010, respectively. The options were fully vested on the date of grant.
(5)
Brian Conte was appointed Chief Development Officer in May 2008. Effective September 13, 2010, Mr. Conte no longer serves as the Company’s Chief Development Officer. Mr. Conte was compensated as a consultant.
(6)
Amount is the result of options to purchase 1,000,000 shares of our common stock at an exercise price of $0.001 per share. Options to purchase 333,333 shares of our common stock were immediately vested as of the date of grant. The remainder vested in monthly installments through beginning June 1, 2008 through June 2010. The options have a term of ten years.
(7)
On May 19, 2009, we issued 1,333,333 shares of our common stock to Mr. Conte for reduction of accounts payable of $100,000. The shares when issued had an estimated fair value of approximately $173,300 based on the closing market prices on the issue dates, and as a result, we recorded additional expense of approximately $73,300 in the second quarter of 2009.
Narrative Disclosure to the Summary Compensation Table
Brook W. Lang Employment Agreement
In June 2009, we entered into an employment agreement (the “Lang Agreement”) with our CEO, pursuant to which, among other things, the CEO will be entitled to annual base compensation at up to $196,000, an annual bonus of up to 50% of base compensation (with actual amount to be determined by our board of directors) and a grant of options to purchase 7,500,000 shares of our common stock. Pursuant to the employment contract, we are also required to issue the CEO additional options to purchase shares of our common stock over a three-year period to maintain the executive’s percentage ownership in the company’s common stock on a fully diluted basis at 10% of the Company. In December 2010, the provision with respect to the requirement to issue the CEO additional options to purchase shares of our common stock to maintain the executive’s percentage ownership in our common stock on a fully diluted basis at 10% of the Company was extended additional 12-months.
On December 31, 2009, we issued options under the 2009 Plan to purchase, over a five-year period, a total of 7,500,000 shares of our common stock at an exercise price of $0.001 per share to our CEO pursuant to his employment agreement. The options vest in 1/60 monthly installments beginning January 1, 2009, over a period of five years. The options have a term of ten years.
In the event that Mr. Lang’s employment is terminated without cause or Mr. Lang chooses to terminate his employment for good reason or upon a change of control, all options granted to Mr. Lang pursuant to the Lang Agreement shall be fully vested and exercisable upon such termination at a price of nil and shall remain exercisable in accordance with the grant agreements.
In the event that Mr. Lang’s employment is terminated by Mr. Lang for good reason or for any reason by the Company other than cause, death or disability, Mr. Lang will receive an amount equal to two years of his specified base salary and all other bonuses and compensation at the rate in effect on the date of termination
Regardless of the nature of his separation from the company, Mr. Lang will also receive salary, a pro-rated amount of incentive cash compensation for the fiscal year in which the termination occurs, pay for accrued but unused paid time off, and reimbursement of expenses through the date of termination.
Although Mr. Lang has an employment agreement, as discussed above, the Company has retained a company called L & S, from which Mr. Lang receives compensation, for management services & expenses. These management services and expenses incurred totaled approximately $323,000 in both 2009 and 2010. Mr. Lang does not receive a salary or bonus as an employee from the Company.
Outstanding Equity Awards At Fiscal Year-End
The following table provides information related to outstanding equity awards for each of the Named Executive Officers as of December 31, 2010:
(1)
Pursuant to the employment contract, we are required to issue Mr. Lang additional options to purchase shares of our common stock over a three-year period to maintain his percentage ownership in our common stock on a fully diluted basis at 10% of the Company. As a result of this provision, options to purchase 691,360, 739,729, 1,345,000 and 125,641 shares of our common stock at an exercise price of $0.001 were granted to Mr. Lang as of March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010, respectively. The options were fully vested on the date of grant.
(2)
The options vested as follows: 1/3 vested immediately, and the remainder vested monthly over two years beginning June 1, 2008.
(3)
The options vest in 1/60 monthly installments beginning January 1, 2009, over a period of five years.
(4)
Brian Conte is our former Chief Development Officer.
(5)
The options vested as follows: 1/3 vested immediately, and the remainder vested monthly over two years beginning June 1, 2008.
ITEM 12.
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 31, 2011, the names, addresses and number of shares of our common stock beneficially owned by (i) all stockholders known to us to be the beneficial owner of more than five percent (5%) of our common stock, (ii) each member of our board of directors, (iii) each of our named executive officers and (iv) all of our directors and executive officers as a group.
Beneficial ownership of shares is determined under the rules of the Securities and Exchange Commission and generally includes any shares over which a person exercises sole or shared voting or investment power. For purposes of the following table, a person is deemed to have beneficial ownership of any shares of common stock that such person has the right to acquire within 60 days after the date of this prospectus. For purposes of computing the percentage of outstanding shares of our common stock held by each person, any shares that such person has the right to acquire within 60 days after the date of this prospectus are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as otherwise noted, the persons named in the table have sole voting and investment power with respect to all of the shares of common stock beneficially owned by them. Unless otherwise indicated, the address of each person listed is c/o Montavo, Inc., 4957 Lakemont Blvd, Suite 239, Bellevue, Washington 98006.
Percentage ownership in the following table is based on 71,282,241 shares of common stock outstanding on March 31, 2011.
PRINCIPAL STOCKHOLDER TABLE
(1)
Includes 7,776,730 shares of common stock issuable upon the exercise of options that vest within 60 days. Excludes 4,125,000 shares of common stock issuable upon the exercise of options that do not vest within 60 days. Mr. Lang does not have voting and dispositive control over the shares held by Tracie Lang.
Securities Authorized for Issuance under Equity Compensation Plans
In 2005, we adopted the 2005 Stock Option Plan (“the 2005 Plan”). The 2005 Plan provided for the granting of stock options to employees and consultants for services. Options granted under the 2005 Plan may be either incentive stock options or nonqualified stock options. Incentive stock options (“ISO”) may be granted only to employees (including officers and directors who are also employees). Nonqualified stock options (“NSO”) may be granted to employees and consultants. We reserved 1,000,000 shares of common stock for issuance under the 2005 Plan.
In 2009, we adopted the 2009 Stock Incentive Plan for Employees and Consultants (the “2009 Plan”). The 2009 Plan provided for the granting of stock options to employees and consultants for services rendered to the Company. Options granted under the 2009 Plan may be either incentive stock options or nonqualified stock options. Incentive stock options (“ISO”) may be granted only to employees or consultants (including officers and directors who are also employees). Nonqualified stock options may be granted to employees and consultants. Under the 2009 Plan, up to 6,000,000 shares of our common stock may be issued to directors, employees or consultants pursuant to share awards or options to purchase our common stock. We filed a form S-8 on June 12, 2009 to register the shares of common stock issuable under the 2009 Plan. On February 11, 2010, we amended our 2009 Plan and filed a revised Form S-8 increasing the number of reserved shares to 15,000,000. On May 7, 2010, we again amended our 2009 Plan and filed a subsequent revision to the Form S-8, increasing the number of reserved shares to 35,000,000.
The following table summarizes the number of shares of our common stock authorized for issuance under our equity compensation plans as of December 31, 2010.
ITEM 13.
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
At December 31, 2010 and 2009, approximately $534,000 and $302,000, which represented amounts due to our CEO, were included in accounts payable - related parties on the accompanying balance sheet.
On May 19, 2009, we issued 1,333,333 shares of our common stock to our former Chief Development Officer for reduction of accounts payable of $100,000. The shares when issued had an estimated fair value of approximately $173,300 based on the closing market prices on the issue dates, and as a result, we recorded additional expense of approximately $73,300 in the second quarter of 2009. At December 31, 2010 and 2009, approximately $165,500 and $42,000, which represented amounts due to our CDO, were included in accounts payable - related parties on the accompanying balance sheet.
In September 2008, we entered into a convertible promissory note with a shareholder in the principal amount of $25,000 with a stated interest rate of 12%. The note is convertible at the option of the holder into shares of our common stock at $0.50 per share.
Director Compensation
We do not currently provide compensation to our directors for serving on our board of directors.
ITEM 14.
ITEM 14. - PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees billed by our auditors for professional services rendered in connection with a review of the financial statements included in our quarterly reports on Form 10-Q and the audit of our annual consolidated financial statements for the fiscal year ended December 31, 2009 was approximately $25,000.
The aggregate fees billed by our auditors for professional services rendered in connection with a review of the financial statements included in our quarterly reports on Form 10-Q and the audit of our annual consolidated financial statements for the fiscal year ended December 31, 2010 was $62,221.
Audit-Related Fees
We were not billed any fees by our auditors for professional services for audit-related services in the fiscal year ended December 31, 2009 or 2010.
Tax Fees
We were not billed any fees by our auditors for professional services for tax compliance, tax advice, and tax planning in the fiscal years ended December 31, 2009 and 2010.
All Other Fees
We were not billed any fees by our auditors for all other non-audit services in the fiscal years ended December 31, 2009 and 2010.
PART IV
ITEM 15.
ITEM 15. - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1)(2) Financial Statements.
The financial statements listed in the Index to Financial Statements are filed as part of this Annual Report on Form 10-K, immediately following the signature page.
(a)(3) Exhibits.
The exhibits required by this item are set forth on the Exhibit Index attached hereto.
3.1
Certificate of Incorporation (filed as Exhibit 3.1 to our registration statement on Form 10-SB filed with the SEC on February 8, 2000 (SEC File No. 000-29397) (the “2000 Form 10-SB”) and incorporated herein by reference).
3.1.1
Certificate of Amendment (filed as Exhibit 3.1.1 to our Current Report on Form 8K filed with the SEC on August 29, 2008, and incorporated herein by reference).
3.1.2
Certificate of Amendment (filed as Exhibit 3.1 to our Current Report on Form 8K filed with the SEC on May 7, 2010, and incorporated herein by reference).
3.2
Bylaws (filed as Exhibit 3.2 to the 2000 Form 10-SB and incorporated herein by reference).
10.1
Employment Agreement with Craig Moody (filed as Exhibit 10.3 to our Current Report on Form 8K filed with the SEC on November 14, 2007, and incorporated herein by reference).
10.2
Mutual Release Agreement with Craig Moody (filed as Exhibit 10.2 to our Current Report on Form 8K filed with the SEC on May 9, 2008, and incorporated herein by reference).
10.3
Agreement between North Coast Partners, Inc. (now Montavo, Inc.) and North Coast Acquisition Corp. (filed as Exhibit 10.1 to our Current Report on Form 8K filed with the SEC on May 9, 2008, and incorporated herein by reference).
10.4
Asset Sale and Assignment Agreement (filed as Exhibit 10.3 to our Current Report on Form 8k filed with the SEC on August 29, 2008, and incorporated herein by reference).
10.5
Convertible Promissory Note dated August 28, 2008 (filed as Exhibit 10.4 to our Current Report on Form 8K filed with the SEC on August 29, 2008, and incorporated herein by reference).
10.6
Investment Agreement dated January 8, 2010 (filed as Exhibit 10.1 to our Current Report on Form 8K filed with the SEC on January 19, 2010, and incorporated herein by reference).
10.7
Registration Rights Agreement dated January 8, 2010 (filed as Exhibit 10.2 to our Current Report on Form 8K filed with the SEC on January 19, 2010, and incorporated herein by reference).
10.8
Employment Agreement Brook Lang (filed as Exhibit 10.8 to our Annual Report on Form 10K filed with the SEC on April 15, 2010, and incorporated herein by reference).
31.1
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
32.1
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley*
* Exhibit filed herewith.
SIGNATURES
In accordance with 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: April 15, 2011
MONTAVO, INC.
By: /s/ Brook W. Lang
Chief Executive Officer, Chief Financial Officer,
and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
April 15, 2011
By: /s/ Brook W. Lang
Name:
Brook Lang
Title:
Chief Executive Officer and Director
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.
As of the date of filing of this Annual Report on Form 10-K, we have not provided any annual report with respect to our last fiscal year or any proxy materials to our shareholders. We intend to provide proxy materials to our shareholders with respect to our next annual meeting, and if we do so, we shall concurrently furnish such materials to the Securities and Exchange Commission.