ITEM 1. BUSINESS
Historical Development
On March 7, 1986, Hystar Aerospace Marketing Corporation of Nebraska (“Hystar”) was incorporated in Nebraska as a wholly-owned subsidiary of Nautilus Entertainment, Inc., a Nevada corporation. On February 10, 1999, Pinecrest Services, Inc. (“Pinecrest”) was incorporated in Nevada and Hystar completed a change of domicile merger with Pinecrest solely to change the domicile of Hystar from Nebraska to Nevada. We changed our name from Pinecrest Services, Inc. to Silvergraph International, Inc. (“Silvergraph International”) on June 23, 2006 in connection with the share exchange, described below.
Silvergraph LGT, LLC was formed on January 18, 2002 to develop and distribute wall art. Silvergraph LGT, LLC completed a change of domicile merger with New Era Studios, Inc., a Nevada corporation (“New Era”), now dissolved, on June 9, 2006. The purposes of this merger were to change the domicile of Silvergraph LGT, LLC, from Delaware to Nevada, and to change Silvergraph LGT, LLC, from a limited liability company to a corporation. The officers and directors of New Era were the sole members of each of the limited liability companies that served as managers of Silvergraph LGT, LLC. Until 2009, the business of New Era was the same as the business of the Company; in 2009, we became largely inactive.
On June 23, 2006, Silvergraph International and New Era, formerly a Nevada corporation and successor in interest by merger to Silvergraph LGT, LLC, a Delaware limited liability company, executed an Agreement and Plan of Share Exchange (the “Share Exchange”), pursuant to which the shareholders of New Era exchanged their issued and outstanding shares of New Era common stock for shares of restricted Silvergraph International common stock. Effective as of June 23, 2006 New Era, now dissolved, became our wholly-owned subsidiary. We treated this transaction as a recapitalization for accounting purposes, with New Era deemed the accounting acquirer and Silvergraph International the legal acquirer.
In accordance with the closing of the share exchange agreement on June 23, 2006, we issued 490,909 shares of our common stock to the former shareholders of New Era in exchange for all of the 224 issued and outstanding shares of New Era common stock. The management of Silvergraph International resigned and management connected with New Era was appointed to fill the vacancies.
We had 545,455 shares of common stock issued and outstanding as of June 26, 2006 as a result of the retirement of 227,273 shares of common stock held by VIP WorldNet, Inc., which resulted in a reduction of our issued and outstanding common stock, and the subsequent issuance of the 490,909 shares of our common stock to the former shareholders of New Era in connection with the share exchange. As a consequence of the retirement of our common stock and the issuance of shares in the share exchange, the former shareholders of New Era held approximately 90% of our issued and outstanding common stock. The share exchange is deemed to be a recapitalization for accounting purposes. We believe the share exchange agreement and the transactions contemplated under that agreement qualified as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code.
On September 14, 2006 we incorporated a wholly-owned subsidiary, TxTura, Inc. in the State of Nevada (“TxTura”). TxTura’s business purpose was to offer a compelling business opportunity to home-based businesses to represent and sell our patent-pending products. However, TxTura became inactive in October 2007 and was administratively dissolved thereafter.
On December 5, 2008, stockholders holding a majority of shares entitled to vote authorized by written consent a reverse stock split of the Company’s outstanding common stock in the range of from 1:30 to 1:66, as determined in the sole discretion of the Board of Directors. On February 24, 2009, the Board of Directors authorized by written consent to effect a 1-for-66 reverse split of the Company’s issued and outstanding shares. The reverse stock took effect at the open of business on March 24, 2009. As a result of the reverse stock split, the outstanding shares of common stock issued and outstanding were reduced to 1,067,440 shares. Except where the context indicates otherwise, all share figures in this Form 10-K give effect to the stock split.
Our Business
Since 2009, we have been relatively inactive, after deciding to wind up the business of our subsidiary, New Era. Up until 2009, through our operating subsidiary, New Era, we developed and distributed wall art to the U.S. mass wall art market.
In 2012, we dissolved New Era; however, we are continuing to pursue and evaluate strategies to enhance shareholder value including the merger with a private company in industries outside the art and printing industries. We continue to take steps to lower our operating costs in order to manage our working capital needs. However, we cannot guarantee that these actions will ensure our continued operations.
We plan to attempt to locate and negotiate with a business entity for the merger of that target company into our company. In certain instances, a target company may wish to become a subsidiary of our company or may wish to contribute assets to our company rather than merge. No assurances can be given that we will be successful in locating or negotiating with any target company. As a publicly-traded, reporting company under the Securities Exchange Act of 1934, as amended, we provide a method for a foreign or domestic private company to become a public, reporting company whose securities are qualified for trading in the United States secondary market.
The selection of a business opportunity in which to participate is complex, extremely risky and will be made by our management in the exercise of its business judgment. There is no assurance that we will be able to identify and acquire any business opportunity which will ultimately prove to be beneficial to our company and shareholders.
Because we have no specific business plan or expertise, our activities are subject to several significant risks. In particular, any business acquisition or participation we pursue will likely be based on the decision of management without the consent, vote, or approval of our shareholders.
Patents and Intellectual Property
We were prosecuting Application No. PCT/US2005/028501 filed with the U.S. Patent and Trademark Office on February 8, 2007 (“Application”). The Application describes and claims the mechanical deposit of ink to emulate hand painted original works of art. This application claims priority to U.S. Provisional Patent Application Serial No. 60/600,192 filed on August 10, 2004. The applications cover the process and technology used to mechanically deposit ink in a way that emulates hand-applied brushstrokes and other artistic techniques.
Given our limited resources, we do not intend to continue prosecuting the Application.
Employees
We currently have one part-time employee. We believe that our employee relations are good. We intend to continue to conduct business primarily using our employee and consultants. However, some consultants may become employees in the future. We have no union employees.
Change of Control Transaction
On December 30, 2011, the holders of that certain (i) Silvergraph International, Inc. Convertible Promissory Note dated January 25, 2008, in the original principal amount of One Hundred Fifteen Thousand Dollars ($115,000.00) and identified as No. PN-39, as amended by a series of thirteen (13) amendments dated from November 2008 through November 10, 2011, (ii) Silvergraph International, Inc. Convertible Promissory Note dated February 1, 2008, in the original principal amount of Fifty Thousand Dollars ($50,000.00) and identified as No. PN-40, and (iii) a promissory note in the original principal amount of Twenty Five Thousand Dollars ($25,000.00) and issued to the Robert J. Neborsky, M.D., Inc. Retirement Trust (collectively, the “Notes”), sold their interest in the Notes to five (5) buyers for aggregate consideration of Two Hundred Forty Thousand Dollars ($240,000.00). The sellers were Antaeus Capital Partners, LLC, Robert Neborsky, and Thomas G. Schuster, as follows:
The purchasers were Matthew Balk, Jason Adelman, Chad Willis, MKM Opportunity Master Fund, Ltd., and the Robert J. Neborsky and Sandra S. Neborsky Living Trust, each paying an equal Forty Eight Thousand Dollars ($48,000.00).
The Notes are, by their terms, convertible into our common stock at a conversion price that is the lower of (i) $0.002, or (ii) the conversion price that would cause the majority holder of the Note to own upon conversion the number of shares of our common stock determined to be 59% of the outstanding common stock on a fully-diluted basis. As of December 30, 2011, the Notes were therefore convertible into a maximum of 182,035,500 shares of our common stock, which would represent over 98% of the then-issued and outstanding shares of our common stock. As a result we characterized this transaction as a change of control transaction.
ITEM 1A.
ITEM 1A. RISK FACTORS
The business, financial condition and operating results of Silvergraph International could be adversely affected by any of the following factors, in which event the value of the equity securities of Silvergraph International could decline, and investors could lose part or all of their investment. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to management, or that management currently thinks are immaterial, may also impair future business operations. For purposes of the discussion of the following risk factors, references to “we” and “our” shall include, unless otherwise indicated, Silvergraph International, Inc. as well as New Era Studios, Inc., our dissolved subsidiary (as statutory successor in interest to Silvergraph LGT, LLC), as it existed prior to the share exchange.
We have a history of losses, nominal historical operating results, and currently do not have any operations.
Silvergraph International, formerly known as Pinecrest Services, Inc., commenced operations as a shell in 1986, but has had no significant business prior to the Share Exchange discussed in Item 1 above. We have, from inception through December 31, 2013, incurred an accumulated deficit of $6,875,714. We have not been engaged in active business operations since 2009. It is unlikely we will generate positive cash flow in the future as a stand-alone company, although we may decide to re-start operations when business conditions, in our opinion, improve.
If we re-start operations, our results will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. We can give no assurance that we will operate on a profitable basis which may lead to the entire loss of an investment in our common stock.
Due to the nature of our business, an investment in our securities is highly speculative. We have not realized a profit from our historical operations and there is little likelihood that we will realize any profits in the short or medium term. In addition, our independent registered public accountants have raised substantial doubts in connection with their opinion related to our audited financial statements as to our ability to continue as a going concern.
We expect to continue to incur administrative and, should we re-start operations, operating costs. Consequently, we expect to incur operating losses and negative cash flows until we restart operations and are profitable, or, until we locate and enter into another business that operates profitably, of which there is no assurance.
We have had negative cash flows from operations since inception. We will require significant additional financing, the availability of which cannot be assured, and if we are unable to obtain such financing, our business may fail.
To date, we have had negative cash flows from operations and have depended on sales of our equity securities and debt financing to meet our cash requirements. Our ability to restart the business or enter into another business through merger or otherwise will be dependent upon our ability to raise significant additional financing. If we are unable to obtain such financing, we will not be able to fully develop our business. In addition, our independent registered public accountants have raised substantial doubts in connection with their opinion related to our audited financial statements as to our ability to continue as a going concern.
We may not be able to obtain additional equity or debt financing on acceptable terms as required. Even if financing is available, it may not be available on terms that are favorable to us or in sufficient amounts to satisfy our requirements. If we require, but are unable to obtain, additional financing in the future, we may be unable to implement our business plan and our growth strategies, respond to changing business or economic conditions, withstand adverse operating results and compete effectively.
We hold no patents on our proprietary technology.
On February 8, 2007, we filed Application No. PCT/US2005/028501 with the USPT (“Application”). We have since abandoned the Application because we had insufficient resources to continue prosecuting the Application. As such, there is substantial risk that a competitor may use our technology which could have a material adverse effect on our ability to re-start operations if so decided by the Board of Directors.
Our Board of Directors has not made a determination of fairness regarding related-party transactions.
Our Board of Directors has entered into loan transactions with certain persons who are now principal shareholders pursuant to amendments to the original loan transaction. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Convertible Promissory Notes). Our Board of Directors has not made a determination as to whether these related-party transactions were made on terms no less favorable than terms we could have obtained from unaffiliated third parties. Our Board of Directors has adopted a policy that any future transactions between us and our officers, directors or principal stockholders will require the approval of a majority of the disinterested directors and will be on terms no less favorable than we could obtain from an unaffiliated third party.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could lead to loss of investor confidence in our reported financial information.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting. If we cannot provide reliable financial reports or prevent fraud, then our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly. In order to achieve compliance with Section 404 of the Act within the prescribed period, we have engaged in a process to document and evaluate our internal control over financial reporting, which has been challenging.
If we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud.
Investors in our common stock may suffer future dilution from warrant exercises.
Future dilution to our shareholders may occur from warrant exercises. To date, total warrants to purchase 200,000 shares of our common stock remains outstanding. These warrants have a weighted average exercise price of $0.50 and have registration rights.
If we issue additional shares in the future, it will result in dilution for our existing shareholders.
Our articles of incorporation authorize the issuance of up to 100,000,000 shares of common stock. Our Board of Directors may choose to issue some or all of such shares to acquire one or more businesses or to provide additional financing in the future. The issuance of any such shares will result in a reduction of the book value and market price of the outstanding shares of our common stock. If we issue any such additional shares, such issuance will cause a reduction in the proportionate ownership and voting power of all current shareholders.
The Securities and Exchange Commission's penny stock regulations may restrict trading of our stock, which may limit a stockholder's ability to buy and sell our stock.
The Securities and Exchange Commission (the “SEC”) has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. The penny stock rules, which initially govern our securities, impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors". The term "accredited investor" refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual incomes for the last two years and anticipated incomes for this year exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. A broker-dealer must provide to a customer orally or in writing the bid and offer quotations, and the broker-dealer and salesperson compensation information prior to effecting the transaction. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
FINRA sales practice requirements may also limit a stockholder's ability to buy and sell our stock.
In addition to the penny stock rules, the Financial Industry Regulatory Authority (“FINRA,” formerly the NASD) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit an investor’s ability to buy and sell our stock and may have an adverse effect on the market for our shares.
Our common stock is illiquid and factors unrelated to our operations may negatively impact the price of our common stock.
Our common stock currently trades on a limited basis on the OTC Bulletin Board. Trading of our stock through the OTC Bulletin Board is frequently very thin and highly volatile. There can be no assurances that a sufficient market will develop in the stock, in which case it could be difficult for shareholders to sell their stock. The market price of our common stock could fluctuate substantially due to a variety of factors, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There have been no events which are required to be reported under this Item.
ITEM 2.
ITEM 2. PROPERTIES
We do not currently own or lease any properties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
No legal proceedings are threatened or pending against us or any of our officers or directors. Further, none of our officers, directors or affiliates are parties against us or have any material interests in actions that are adverse to the Company’s interests.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is currently listed on the OTC Bulletin Board under the symbol “SVGP.” The common stock is highly illiquid with only sporadic trading, at a current price of $0.17 per share.
The following table sets forth the high and low transaction price for each quarter within the fiscal years ended December 31, 2012 and 2013, as provided by the Nasdaq Stock Markets, Inc. The information reflects prices between dealers, and does not include retail markup, markdown, or commissions, and may not represent actual transactions.
Our shares are subject to Section 15(g) and Rule 15g-9 of the Securities and Exchange Act, commonly referred to as the “penny stock” rule. The rule defines penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. The rule provides that any equity security is considered to be a penny stock unless that security is:
- registered and traded on a national securities exchange meeting specified criteria set by the SEC;
- issued by a registered investment company;
- excluded from the definition on the basis of price (at least $5.00 per share) or the issuer’s net tangible assets. 
Trading in the penny stocks is subject to additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors. Accredited investors, in general, include certain institutional investors and individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse.
For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of our securities and must have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, the rules require the delivery, prior to the first transaction, of a risk disclosure document relating to the penny stock. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the security. Finally, monthly statements must be sent to the purchaser disclosing recent price information for the penny stocks. Consequently, these rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock and may affect the ability of shareholders to sell their shares.
Holders
As of March 24, 2014, there were approximately 150 shareholders of record holding 2,971,154 shares of common stock, including 1,703,586 shares issuable under contractual commitments. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock.
Dividends
We have not paid, nor declared, any dividends since our inception and do not intend to declare any such dividends in the foreseeable future. Our ability to pay dividends is subject to limitations imposed by Nevada law. Under Nevada law, dividends may be paid to the extent that a corporation’s assets exceed its liabilities and it is able to pay its debts as they become due in the usual course of business.
Securities Authorized Under Equity Compensation Plans
The following table lists the securities authorized for issuance under any equity compensation plans approved by our shareholders and any equity compensation plans not approved by our shareholders as of December 31, 2013. This chart also includes individual compensation agreements.
Stock Option Plan
Our Board of Directors approved a stock option plan on June 26, 2006. The purpose of the 2006 stock option plan is to promote our interests by attracting key employees and directors, providing each of our key employees and directors with an additional incentive to work to increase the value of our common stock and providing key employees and directors with a stake in our future, which corresponds to the stake of the stockholders. Our Board reserved for issuance a total of 15,152 shares of common stock under the 2006 stock option plan. We have not granted any options to date. Our Board, in approving the 2006 stock option plan, has recommended that the shareholders approve this 2006 stock option plan. The stock option plan has not been approved by the Company’s shareholders.
Each stock option granted under the 2006 stock option plan will entitle the holder to purchase the number of shares of common stock specified in the grant at the purchase price specified. The 2006 stock option plan authorizes the Compensation Committee to grant:
·
incentive stock options within the meaning of Section 422 of the Internal Revenue Code to key employees, and
·
non-qualified stock options under the Internal Revenue Code to key employees or non-employee directors.
If an option granted under the 2006 stock option plan expires, is cancelled or is exchanged for a new option before a holder exercises the option in full, the shares reserved for the unexercised portion of the option will become available again for use under the 2006 stock option plan. Shares underlying an option that a holder surrenders and shares used to satisfy an option price or withholding obligation will not again become available for use under the 2006 stock option plan.
Recent Sales of Unregistered Securities
In February, 2008, we entered into a loan transaction with certain accredited investors. Subsequently, we entered into multiple amendments. Pursuant to the 7th and up to the 13th amendments, which occurred between May 2009 and December 2011, we issued these investors a total of 1,627,986 shares of common stock, restricted in accordance with Rule 144. As of December 31, 2013, we had not yet issued these shares to the respective investors, although we expect to do so in 2014.
On April 1, 2011, we entered into an Acknowledgment and Release with Beach Freeman Lim & Cleland, a California limited liability partnership (“Beach”), under which we agreed to issue Beach 75,600 shares of our common stock, restricted in accordance with Rule 144, in exchange for Beach agreeing to accept the shares in full satisfaction of any and all amounts we owed Beach. At the date of the agreement, we owed Beach approximately $75,590 for past services they provided to us. We plan to issue these shares in 2014.
For the transactions described above, we relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(a)(2) of the Securities Act.
Issuer Purchase of Securities
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Executive Overview
In 2007, we experienced significant challenges due to the unexpected contraction of our business with our largest client. In response, we attempted to accelerate the development of our in-house sales channel to home furnishings and accessory retailers. To that end, in July 2007 we hired an art sales, marketing and design company based in Seattle, Washington, which brought to us an existing client base. To service and grow the Seattle group’s client base, we needed to raise capital which we were unable to accomplish on terms acceptable to us. Accordingly, we terminated our contract with the Seattle group in December 2007. Separately, without sufficient resources we were forced to cease our investment in the development of TxTura, our wholly-owned subsidiary, which is now dissolved. Given the challenges we were experiencing in developing sales channels and the unexpected contraction of our largest client, in December 2007, the Board of Directors determined that we should seek to merge with a larger art company with established sales channels which could benefit from our technology.
In 2008, we evaluated various strategies to best enhance value for our shareholders including the sale to or merger with a larger art or printing organization that would benefit from our technology. To that end, we entered into discussions with multiple potential targets but were unable to reach definitive agreement with any such targets. Our largest client, Home Interior & Gifts, representing over 47% of our sales in 2007, declared bankruptcy in 2008 and, as a result, we have not expected material future revenue from the customer. In the second half of 2008, we began to wind down our subsidiary New Era Studios, Inc. (“New Era”), now dissolved, and to sell its assets, to pay down its debts and to provide working capital for the Company. All sales were at arm’s length and to non-affiliated entities. We also raised $190,000 in interim bridge capital to support our operations and took steps to significantly lower our cost of operations.
Since 2009 we have been largely inactive except for efforts to sell assets and to seek a possible business combination.
In 2012 we dissolved New Era; however, we are continuing to pursue and evaluate strategies to enhance shareholder value including the merger with a private company in industries outside the art and printing industries. We continue to take steps to lower our operating costs and manage our working capital needs. However, we cannot guarantee that these actions will ensure our continued existence.
Liquidity and Capital Resources
We derived our primary source of funds during the twelve months ended December 31, 2013 from the sale of additional debt securities. Working capital as of December 31, 2013 was negative $10,074 as compared to negative working capital of $7,507 as of December 31, 2012. The cash balance at December 31, 2013 was $2,636 compared to $2,377 at December 31, 2012.
Net cash used in operating activities was $29,241 for the twelve months ended December 31, 2013, as compared to $36,745 for the twelve months ended December 31, 2012. During each period presented, we used net cash principally to fund our net losses.
Net cash provided by financing activities was $29,500 during the twelve months ended December 31, 2013, as compared to net cash provided by financing activities of $34,541 for the twelve months ended December 31, 2012. Net cash provided by financing activities during 2013 was principally related to the issuance of promissory notes.
We have suffered recurring losses from operations and have an accumulated deficit of approximately $6,875,714 at December 31, 2013. Additionally, as of December 31, 2013, we had cash and cash equivalents of $2,636. Primarily as a result of our recurring losses and our lack of liquidity, we have received a report from our independent registered public accountants for our financial statements for the year ended December 31, 2013 that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern. To continue our operations and to grow our current operations and to make acquisitions, if any, under our current business model during the next twelve months, we will need to secure additional working capital, by way of equity or debt financing, or otherwise. After this twelve month period, we may need additional financing for working capital, and in the case of acquisitions for payment of seller notes and future earned cash to sellers of acquired companies. There can be no assurance that we will be able to secure sufficient financing or on terms acceptable to us. If adequate funds are not available on acceptable terms, we would need to delay, limit or eliminate some or all of our proposed operations, and we may be unable to successfully promote our products or develop new or enhanced products or prosecute acquisitions, any of which could lower our revenues and net income, if we achieve profitability in the future. If we raise additional funds through the issuance of convertible debt or equity securities, the percentage ownership of our current stockholders is likely to be diluted, unless some of our current stockholders were to invest in subsequent convertible debt or equity financings, and some of the newly issued securities may also have rights superior to those of the common stock. Additionally, if we issue or incur debt to raise funds, we may be subject to limitations on our operations.
Convertible Promissory Notes
In February 2008 we issued 7% convertible promissory notes (the “Notes”) in the aggregate principal amount of $150,000 pursuant to a subscription agreement, dated January 25, 2008, as amended, between Silvergraph and certain accredited investors. Subsequent to its issuance, the Notes were amended several times between February 2008 and December 20, 2011. As a result of these amendments, we received additional proceeds of approximately $112,000 and agreed to issue a total of 1,627,986 shares of common stock to these note holders with a fair value at $152,953. As of December 31, 2011, the total outstanding balance of the Notes and accrued interest amounted to $312,024, secured, due on demand and is convertible to 6,933,867 shares of common stock or $0.045/share.
In August 2012, we and all the existing note holders agreed to consolidate the Notes with an aggregate principal balance of $277,888 and unpaid interest of $72,712. As a result, the Notes were cancelled and we issued a new note (the “Consolidated Note”) amounting to $350,600. We considered the cancellation of the Note as an extinguishment for accounting purposes.
The Consolidated Note is secured by our assets, bears interest of 7% per annum, will mature on December 31, 2014, as amended, and is convertible at $0.004/share. As the market price on the date of the issuance of the Consolidated Note was $0.20 per share, we calculated a beneficial conversion feature up to the face value of the note of $350,600 representing the difference between the market price and the exercise price on the date of issuance. The beneficial conversion feature was recorded as a valuation discount and was amortized in full to interest expense over the original term of the note, which matured on December 31, 2012.
As of December 31, 2013, total outstanding balance of the Consolidated Note amounted to $350,600 and accrued interest of $28,245 for a total of $378,845.
Promissory Notes
On April 26, 2012, we issued an up to $33,000 unsecured Promissory Note (the “Note”) to private investors (“Investors”) for which we had received $33,000 as of December 31, 2012. The Note is due on April 26, 2014 and has an interest rate of 5% per annum where interest accrues and is payable in cash upon maturity. As of December 31, 2013, the amount due under the promissory note totaled $67,600 including accrued interest of $5,100.
Results of Operations for Years ended December 31, 2013 and 2012
Revenues. We had no revenues during the years ended December 31, 2013 and 2012. We continue to explore new opportunities that will generate revenue and enhance shareholder value.
Gross profit. We had no revenues and therefore no costs of revenues for the years December 31, 2013 and 2012, respectively.
Operating expenses. Operating expenses consist mainly of legal and accounting expenses. Operating expenses decreased by $13,447 to $32,067 for the year ended December 31, 2013 versus $45,513 for the year ended December 31, 2012. The decrease in operating expenses was principally due to services provided related to the dissolution of our subsidiary and services provided relating to the issuance of a debt instrument incurred for the year ended December 31, 2012 of which no similar expense was incurred for the year ended December 31, 2013.
Other expense. Other expense principally consists of interest and financing expense related to outstanding debt and shares issuances. We had interest expense of $27,400 for the year ended December 31, 2013, compared to interest expense of $393,580 for the year ended December 31, 2012. The change in balance or decrease in interest expense of $366,180 related primarily to non-cash financing costs of $350,600 amortization of discount associated with a beneficial conversion feature on the convertible notes. No similar expense was incurred for the year ended December 31, 2013.
Gain on dissolution of subsidiary. During the year ended December 31, 2012, we dissolved our subsidiary, New Era, leading to the removal of old trade payables of $102,210. In addition, included in the Company's December 31, 2011 balance sheets was approximately $41,716 of debt that was reflected in the balance sheet upon the Company's reverse merger transaction with Lee Graphics that was consummated in October 2004. The Company wrote off the balance of $41,716 balance in Gain on Dissolution of Subsidiary in the accompanying Consolidated Statement of Operations for the year ended December 31, 2012. No similar event occurred for the year ended December 31, 2011.
Net Loss. Our net loss for the year ended December 31, 2013 was $59,467 compared to loss of $295,167 for the year ended December 31, 2012. The difference was attributable to the aforementioned lack of revenue, increased operating expense, increase interest expense and the gain on dissolution of our subsidiary discussed above.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of the Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below. On a regular basis, we review the accounting policies we use in reporting our financial results.
A critical accounting policy is one that is both material to the presentation of our combined financial statements and requires us to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes:
- we have to make assumptions about matters that are highly uncertain at the time of the estimate; and
- different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.
We cannot make estimates and assumptions about future events or determine their effects with certainty. We base our estimates on historical experience and on various other assumptions that we believe to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as we obtain additional information and as our operating environment changes. These changes have historically been minor and we have included them in the combined financial statements as soon as they became known. In addition, we periodically face uncertainties, the outcomes of which are not within our control and we will not know for prolonged periods of time. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our combined financial statements are fairly stated in accordance with accounting principles generally accepted in the United States of America, and present a meaningful presentation of our financial condition and results of operations.
We believe that the following are our critical accounting policies:
Revenue Recognition
We recognize revenue from gross product sales, including freight charges, and revenues from the license of products, in compliance with Staff Accounting Bulletin No. 101 and No. 104 which require that:
- title and risk of loss have passed to the customer;
- there is persuasive evidence of an arrangement;
- delivery has occurred or services have been rendered;
- the sales price is fixed and determinable;
- collectability is reasonably assured; and
- customer acceptance criteria, if any, have been successfully demonstrated.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements appear at the end of this report beginning with the Index to Financial Statements on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have not had a change in, or disagreement with, our independent registered public accounting firm for the past two fiscal years.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange act of 1934 Rules 13a-15(f), for the period ended December 31, 2013. Based on this evaluation, our Chief Executive Officer concluded that our disclosure controls and procedures were effective as of December 31, 2013.
Management’s Annual Report on Internal Control over Financial Reporting
Our Chief Executive Officer and Chief Financial Officer are responsible to design or supervise a process to be effected by our Board of Directors that provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The policies and procedures include:
- maintenance of records in reasonable detail to accurately and fairly reflect the transactions and dispositions of 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 receipts and expenditures are being made only in accordance with authorizations of management and directors, and
- provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
For the year ended December 31, 2013, management has relied on the framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), to evaluate the effectiveness of our internal control over financial reporting and based upon that framework, management has determined that our internal control over financial reporting is effective. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Our management determined that there were no changes made in our internal controls over financial reporting during the fourth quarter of 2013 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
This annual report does not include, and is not required to include, an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the our registered public accounting firm pursuant to rules of the SEC that permit the company to provide only management’s report in this annual report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following table sets forth the name, age, position and office term of each of our executive officers and directors. The number of directors is currently fixed at five. The initial terms of office of our directors will expire upon the election and qualification of directors at our next annual meeting of stockholders. All directors serve until the next annual stockholders meeting or until their successors are duly elected and qualified. All officers serve at the discretion of the Board of Directors.
Set forth below is certain biographical information regarding each of our executive officers and directors:
James R. Simpson became the chief executive officer, secretary and a director of Silvergraph International in June 2006. Mr. Simpson has also served as the chief executive officer and a director of New Era since its inception in June 2006. As one of the founding members of Silvergraph LGT LLC, Mr. Simpson formulated our strategic direction, namely gallery quality prints at decor prices. Prior to founding Silvergraph LGT LLC, where his wholly-owned entity served as one of the Silvergraph LTG LLC managers from April 2005 until Silvergraph LGT LLC’s merger into New Era, Mr. Simpson was a founding member of Brown Simpson Asset Management, LLC, a $450 million New York-based private equity investment organization. During his 6-year tenure through 2001, he was responsible for over $250 million in private investment in domestic technology companies. From 1999 to 2001, Mr. Simpson served as a director of Pointconnect, Inc., a technology services company targeting the financial services industry. Mr. Simpson has over 12 years of investment banking, private equity, legal and senior corporate management experience. Mr. Simpson received a B.A. from the University of Colorado, Boulder and a J.D. from California Western School of Law in San Diego, California where he served as managing director of the law review.
Michael S. Abrams was appointed to our Board of Directors on December 30, 2011 in connection with the change of control transaction that occurred that day. He has extensive experience as a finance professional and has served as a senior-level advisor to numerous public companies during his career. Mr. Abrams is currently a Managing Director of Burnham Hill Advisors LLC, a New York-based investment and merchant banking firm he joined in August of 2003. He is also the Interim Chief Financial Officer of Bond Laboratories, Inc., a public company subject to the reporting requirements of the Securities Exchange Act of 1934. Mr. Abrams holds a Master of Business Administration with Honors from the Booth School of Business at the University of Chicago.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
During the most recent fiscal year, to the Company’s knowledge, the following delinquencies occurred:
Name
No. of Late Reports
No. of Transactions
Reported Late
No. of
Failures to File
James R. Simpson
Michael S. Abrams
Code of Ethics
We adopted a Code of Ethics for the Chief Executive Officer, the President and Financial Executives in June 2006. Upon written request we will provide a copy of the Code of Ethics to any person without charge. Address your request to:
Shareholder Communications
Silvergraph International, Inc.
1875 Century Park East, Ste. 1460
Los Angeles, California 90067
Committees
In June 2006 our Board of Directors considered establishing an audit, nominating and compensation committee; however, the Board decided to delay such action until the Company seeks listing on the Nasdaq Stock Market and/or these committees are required by regulation. Therefore, we do not currently have an audit committee; accordingly, we do not have an audit committee financial expert serving on an audit committee.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Executive Officers and Directors
The following tables set forth certain information about compensation paid, earned or accrued for services by (i) the Company’s Chief Executive Officer and (ii) all other executive officers who earned in excess of $100,000 in the years ended December 31, 2013, 2012, and 2011 (“Named Executive Officers”):
Employment Contracts
We currently do not have written employment agreements with our executive officers. On April 11, 2008, William W. Lee and James R. Simpson terminated their employment agreements with New Era. The Termination Agreement provided that each executive’s unpaid salary as of the date of the agreement would remain an outstanding obligation on the books and records of the Company until the salary was paid or Silvergraph International merged with a separate company unaffiliated with any of the executives. In the case of a merger each executive’s unpaid salary would be converted into common stock at $5.28 per share.
Director Compensation
We do not have any standard arrangement for compensation of our directors for any services provided as director, including services for committee participation or for special assignments. The following table sets forth director compensation as of and for 2013:
Name
Fees
Earned or
Paid in
Cash
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
James R. Simpson
Michael S. Abrams
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information concerning outstanding stock awards held by the Named Executive Officers on December 31, 2013:
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Beneficial Ownership
The following table sets forth as of March 24, 2014, the name and the number of shares of our common stock, par value, $0.001 per share, held of record or beneficially by each person who held of record, or was known by the Company to own beneficially more than 5% of the 1,267,568 issued and outstanding shares of our common stock, and the name and shareholdings of each director and of all officers and directors as a group.
(*) Officer and/or director. 22541 Parkfield, Mission Viejo, CA
(1)
Based on 1,267,568 shares outstanding as of March 24, 2014. Except as set forth in these footnotes, shares of common stock issuable under contractual commitments or subject to options or warrants currently exercisable or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for the purposes of computing the percentage of any other person.
(2)
As the sole member of Hock-Simpson, James R. Simpson has the sole voting and investment power of the shares of common stock held by Hock-Simpson. Thus, Mr. Simpson is deemed to be the beneficial owner of the 122,728 shares of common stock held by Hock-Simpson.
(3)
Includes 1,136,964 shares received between May 2009 and December 2011 pursuant to amendments to the Company’s 7th through 13th amendments to a convertible promissory note initially issued in February 2008. These shares have not yet been issued, although the Company plans to issue them in 2014. These shares are considered issued and outstanding for purposes of determining this shareholder’s ownership interest.
(4)
Includes 200,000 warrants to purchase common stock that may be exercised within the next 60 days at an exercise price of $0.50 per share.
(5)
Includes 75,600 share of common stock the Company is obligated to disclose pursuant to an Acknowledgment and Release entered into with Beach Freeman Lim & Cleland on April 1, 2011. These shares have not yet been issued, although the Company plans to issue them in 2014. These shares are considered issued and outstanding for purposes of determining this shareholder’s ownership interest.
(6)
Includes 491,022 shares received between May 2009 and December 2011 pursuant to amendments to the Company’s 7th through 13th amendments to a convertible promissory note initially issued in February 2008. These shares have not yet been issued, although the Company plans to issue them in 2014. These shares are considered issued and outstanding for purposes of determining this shareholder’s ownership interest.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Transactions
In February 2008, we entered into a loan transaction with certain accredited investors. Subsequently, we have entered into multiple amendments with such investors with the result that such investors are now principal shareholders of the Company. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation -- Convertible Promissory Notes).
Director Independence
We do not have any independent directors serving on our Board of Directors.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fee
The aggregate fees billed for each of the last two fiscal years for professional services rendered by the independent registered public accounting firm for the audit of Silvergraph International’s annual financial statement and review of financial statements included in our periodic reports and services normally provided by the accounting firm in connection with statutory and regulatory filings or engagements were $15,594 for fiscal year ended 2013 and $20,454 for fiscal year ended 2012.
Audit-Related Fees
We did not have fees for other audit related services for fiscal years ended 2013 and 2012.
Tax Fees
We did not have fees for tax compliance, tax advice and tax planning for the fiscal years 2013 and 2012.
All Other Fees
There were no other aggregate fees billed in either of the last two fiscal years for products and services provided by the independent registered public accounting firm, other than the services reported above.
Pre-approval Policies
We do not have a standing audit committee currently serving and as a result our Board of Directors performs the duties of an audit committee. Our Board of Directors evaluates and approves, in advance, the scope and cost of the engagement of an accounting firm before the accounting firm renders audit and non-audit services. We do not rely on pre-approval policies and procedures.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
For a list of financial statements and supplementary data filed as part of this Annual Report, see the Index to Financial Statements beginning at page of this Annual Report.
(a)(2) Financial Statement Schedules
We do not have any financial statement schedules required to be supplied under this Item.
(a)(3) Exhibits
Refer to (b) below.
(b) Exhibits
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SILVERGRAPH INTERNATIONAL, INC.
Date: April 14, 2014
/s/ James R. Simpson
James R. Simpson, Chief Executive Officer,
Chief Financial Officer, Secretary and Director
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.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Silvergraph International, Inc.
We have audited the consolidated balance sheets of Silvergraph International, Inc. and Subsidiary as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company 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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Silvergraph International, Inc. and Subsidiary as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses and negative cash flows from operating activities, which have resulted in a negative working capital and a stockholders' deficit. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Weinberg & Company, P.A.
Los Angeles, California
April 11, 2014
SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements
SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements
SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
YEARS ENDED DECEMBER 31, 2013 AND 2012
The accompanying notes are an integral part of these consolidated financial statements
SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements
SILVERGRAPH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
NOTE 1-THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Through 2009, Silvergraph International, Inc. ("Silvergraph" or the “Company”) was a designer, manufacturer, marketer and branded retailer of fine-art reproductions, art-based home decorative accessories, collectibles and gift products. In 2007, we experienced significant challenges due to the unexpected contraction of our business with our largest client which caused us in 2008 to evaluate various strategies to best enhance value for our shareholders including the sale to or merger with a larger art or printing organization that would benefit from our technology. In the second half of 2008, we began to wind down our subsidiary New Era Studios, Inc. (“New Era”), and to sell its assets, to pay down its debts and to provide working capital for the Company. We also raised $248,000 in interim bridge capital to support our operations and took steps to significantly lower our cost of operations. We are continuing to pursue and evaluate strategies to enhance shareholder value including the merger with a private company in industries outside the art and printing industries. We continue to take steps to lower our operating costs and help fund our working capital needs. However, we cannot guarantee that these actions will ensure our continued operations.
Basis of Consolidation
The consolidated financial statements include the accounts of Silvergraph and our now dissolved, wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from its operations since its inception and has an accumulated deficit of $6,875,714 and stockholders’ deficit of $456,519 at December 31, 2013. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence. The recovery of the Company’s assets is dependent upon continued operations of the Company. In addition, the Company's recovery is dependent upon future events, the outcome of which is undetermined. The Company intends to continue to attempt to raise additional capital, but there can be no certainty that such efforts will be successful.
To continue our operations and to grow our current operations and to make acquisitions, if any, under our current business model during the next twelve months, we will need to secure additional working capital, by way of equity or debt financing, or otherwise. After this twelve month period, we may need additional financing for working capital, and in the case of acquisitions for payment of seller notes and future earned cash to sellers of acquired companies. There can be no assurance that we will be able to secure sufficient financing or on terms acceptable to us. If adequate funds are not available on acceptable terms, we would need to delay, limit or eliminate some or all of our proposed operations, and we may be unable to successfully promote our products or develop new or enhanced products or prosecute acquisitions, any of which could lower our revenues and net income, if we achieve profitability in the future. If we raise additional funds through the issuance of convertible debt or equity securities, the percentage ownership of our current stockholders is likely to be diluted, unless some of our current stockholders were to invest in subsequent convertible debt or equity financings, and some of the newly issued securities may also have rights superior to those of the common stock. Additionally, if we issue or incur debt to raise funds, we may be subject to limitations on our operations.
Revenue Recognition
The Company plans to recognize revenue from gross product sales, including freight charges, and revenues from the license of products, in compliance with current guidance from Financial Accounting Standards Board which require that title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed and determinable, collectability is reasonably assured, and customer acceptance criteria, if any, have been successfully demonstrated.
Stock-Based Compensation
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
The fair value of the Company's stock options and warrants grant is estimated using the Black-Scholes option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used in the accounting for potential liabilities and valuing equity instruments. Actual results could differ from those estimates.
Loss per share
Basic net loss per share amount is computed by dividing the net loss by the weighted average number of common shares outstanding. In computing diluted earnings per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities, such as stock options and warrants. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. At December 31, 2013 and 2012, common stock equivalents were comprised of warrants to purchase 200,000 shares of the Company’s common shares respectively, and potential common shares to be issued upon conversion of convertible promissory note of 94,711,250 and 87,649,883 common shares respectively.
Fair Value of Financial Instruments
The carrying amounts of our financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities, approximate fair value because of their generally short maturities.
The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Financial assets recorded at fair value in the consolidated balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. Authoritative guidance provided by the FASB defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:
●
Level 1 - quoted prices in active markets for identical investments
●
Level 2 - other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.)
●
Level 3 - significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)
As of December 31, 2013, the Company’s financial assets subject to measurement included only Level 1 items of cash and short term investments. The fair value of these financial assets was equal to their recorded value. There were no unrealized gains or losses included in earnings resulting from long-term investments associated with Level 2 or 3 financial assets during the year ended December 31, 2013.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-04. This update clarifies how entities measure obligations resulting from joint and several liability arrangements. This update is effective for fiscal years beginning after December 15, 2013. This update is not expected to have a material impact on the Company’s consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11 which provides guidance relating to the financial statement presentation of unrecognized tax benefits. The new update provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. This update does not require any new recurring disclosures and is effective for public entities for fiscal years beginning after December 15, 2013. This update is not expected to have a material impact on the Company’s consolidated financial statements.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
NOTE 2-CONVERTIBLE PROMISSORY NOTE
In February 2008 the Company issued 7% convertible promissory notes (the “Former Notes”) for $150,000. Between 2008 and 2011, the Former Notes were amended several times and the Company received additional proceeds, and agreed to issue a total of 1,627,986 shares of common stock to these note holders (see Note 5). In August, 2012, the Former Notes had an aggregate principal balance and accrued interest of $354,045.
In August 2012, the Company and the note holders agreed to consolidate the Former Notes, and as a result, the Former Notes were cancelled and the Company issued a new note (the “Consolidated Note”) for $350,600. The Consolidated Note is secured by all of the Company’s assets, bears interest at a rate of 7% per annum and matures on December 31, 2014. At December 31, 2013 and 2012, total outstanding balance of principal and accrued interest was $378,845 and $354,045, respectively. At December 31, 2013, the Consolidated Note was convertible at a rate of $0.004 per share into 94,711,250 shares of the Company’s common stock.
The Company considered the cancellation of the Former Notes as an extinguishment for accounting purposes. There was no change in the cash flow or fair value of the Former Notes when compared to the cash flow and fair value of the new Consolidated Note and there was no unamortized note discount on the Former Notes. Accordingly, there was no gain or loss upon extinguishment of the Former Notes. As the trading price of the Company’s common stock was $0.20 per share on the date of issuance, the Company recognized a beneficial conversion feature of $350,600, the face value of the Consolidated Note. The beneficial conversion feature was recorded as a valuation discount and was amortized in full to interest expense over the original maturity date of the note of December 31, 2012.
NOTE 3 - PROMISSORY NOTE
On April 26, 2012, the Company issued its unsecured Promissory Note (the “Note”) to private investors for $33,000. The Note is unsecured, due on April 26, 2014 and accrues interest of 5% per annum payable upon maturity. During 2013, the Company received an additional $29,500 of proceeds under the Note. At December 31, 2012, the amount due under the promissory note totaled $67,600 and $35,500 including accrued interest of $5,100 and $2,500, respectively.
NOTE 4 - GAIN ON DISSOLUTION OF SUBSIDIARY
In June 2006, the Company completed a reverse merger with New Era. In 2008 the Company decided to wind down the operations of New Era and at December 31, 2012, liabilities and various payables incurred or assumed by New Era in prior years totaled $143,926. In December 2012, the Company dissolved New Era. As a result of the dissolution and absence of any contract agreement or guaranty, the Company determined that it was no longer obligated to pay these liabilities. As such, it recognized a gain of $143,926 due to the write-off of these liabilities.
NOTE 5 - EQUITY
Common shares issuable
Pursuant to the 7th and up to the 13th amendments of the Company’s convertible promissory notes from May 2009 up to December 2011, the Company granted these note holders a total of 1,627,986 shares of common stock. The shares were issued to the note holders concurrent with the receipt of proceeds pursuant to the amended convertible notes (see Note 2). The Company accounted for these shares at fair value and was recorded as part of interest expense at the respective date of grant. As of December 31, 2013, the Company has not yet issued these shares to the respective note holders. The Company expects to issue these shares in 2014.
On April 1, 2011, the Company entered into an Acknowledgment and Release with Beach Freeman Lim & Cleland, a California limited liability partnership (“Beach”), under which the Company agreed to issue Beach 75,600 shares of common stock in exchange for Beach agreeing to accept the shares in full satisfaction of any and all amounts owe Beach amounting to $75,590. The Company accounted these shares at fair value upon issuance in April 2011. The Company expects to issue these shares in 2014.
Warrants Outstanding
A summary of warrant activity and changes for the year ended December 31, 2013 and 2012 is presented below:
Additional information regarding warrants outstanding as of December 31, 2013 is as follows:
NOTE 6 - INCOME TAXES
The Company did not provide for any Federal or state income tax expense during the year ended December 31, 2013 and 2012 as a result of the availability of net operating loss carryforwards. As of December 31, 2013, the Company had provided a 100% valuation allowance with respect to such Federal and state net operating loss carryforwards, as it cannot determine that it is more likely than not that it will be able to realize such deferred tax assets. This valuation allowance represents the difference in the Company’s effective income tax of 0% and the Federal statutory income tax rate of 34% for the year ended December 31, 2013.
As of December 31, 2013, for Federal and state income tax purposes, the Company had approximately $2,000,000 in net operating loss carryforwards expiring through 2016. Internal Revenue Code Section 382 substantially restricts the ability of a corporation to utilize existing net operating losses in the event of a defined "ownership change". The Company has determined that there will likely be significant limitations on its ability to utilize its net operating loss carryforwards in future periods for Federal income tax purposes due to such ownership changes.
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board that addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. This guidance also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as December 31, 2013 and 2012, the Company does not have a liability for unrecognized tax benefits.
The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company is subject to U.S. federal or state income tax examinations by tax authorities for five years after 2013. During the periods open to examination, the Company has net operating loss and tax credit carry forwards for U.S. federal and state tax purposes that have attributes from closed periods. Since these NOLs and tax credit carry forwards may be utilized in future periods, they remain subject to examination.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2013, the Company has no accrued interest or penalties related to uncertain tax positions.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in various legal proceedings arising from the normal course of its business activities. Any adverse outcome from these matters is currently not expected to have a material adverse impact on the results of operations, cash flows or financial position of the Company, either individually or in the aggregate.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company’s office facility has been provided without charge by Mr. James Simpson, Chief Executive Officer. Such cost was not material to the financial statements and accordingly, have not been reflected therein.
In view of the Company’s limited operations and resources, Mr. Simpson did not receive any compensation from the Company for the years ended December 31, 2013 and 2012.