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EX-32 - EX. 32.1 SECTION 906 CEO/CFO CERTIFICATION - AGRITEK HOLDINGS, INC.comonline10q093009ex321.htm
EX-31 - EX. 31.1 SECTION 302 CEO/CFO CERTIFICATION - AGRITEK HOLDINGS, INC.comonline10q093009ex311.htm


U.S. Securities and Exchange Commission

Washington, D.C. 20549

___________________


FORM 10-Q

____________________


(Mark One)


 X . Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the quarterly period ended September 30, 2009.


     . Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act


For the transition period from N/A to N/A

____________________


Commission File No. 000-1321002

____________________


COMMERCE ONLINE, INC.

(Name of small business issuer in its charter)


Delaware

 

20-8484256

(State or other

 

(I.R.S. Employer

jurisdiction of incorporation)

 

identification No.)


100 Myer Creek Road, Ashland, OR 97520

(Address and Zip Code of Principal Executive Offices)


Registrant's Telephone Number: (310) 309-9080


Securities registered under Section 12(b) of the Exchange Act:

None


Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $0.01 par value per share

(Title of Class)


Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes  X . . No .     .


Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non–accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b–2 of the Exchange Act. (Check one):


Large accelerated filer

     .

Accelerated filer

     .

Non–Accelerated filer

     .

Small Business Issuer

 X .


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act). Yes      . No  X .

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class

 

Outstanding at November 10, 2009

Common stock, $0.01 par value

 

19,707,678




COMMERCE ONLINE INC.

 

Page

Part I. Financial Information

 

 

 

Item 1. Condensed Consolidated Financial Statements and Notes to Financial Statements

3

 

 

(a) Condensed Consolidated Balance Sheets as of September 30 , 2009 and December 31, 2008

3

 

 

(b) Condensed Consolidated Statements of Operations for the Three and Nine months Ended September 30 , 2009 and 2008 (unaudited)

4

 

 

(c) Condensed Consolidated Statements of Cash Flows for the Nine months Ended September 30 , 2009 and 2008 (unaudited)

5

 

 

(d) Notes to Condensed Consolidated Financial Statements (unaudited)

6

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

19

 

 

Item 4. Controls and Procedures

19

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

19

 

 

Item 1A. Risk Factors

19

 

 

Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities

22

 

 

Item 3. Defaults Upon Senior Securities

22

 

 

Item 4. Submission of Matters to a Vote of Security Holders

22

 

 

Item 5. Other Information

22

 

 

Item 6. Exhibits

23

 

 

Signatures

24




2



PART I – FINANCIAL STATEMENTS


COMMERCE ONLINE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

(Unaudited)

 

 

 

 

September 30,

2009

 

December 31,

2008

ASSETS

 

 

 

 

CURRENT ASSETS

 

 

 

 

Cash and cash equivalents

$

$

5,407

OTHER ASSETS

 

112,364

 

92,364

TOTAL ASSETS

$

112,364

$

97,771

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Accounts payable

$

57,668

$

57,668

Due to Related Party

 

100,221

 

66,517

Notes Payable

 

82,316

 

397,000

TOTAL LIABILITIES

 

240,205

 

521,185

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Common stock, $.01 par value; 250,000,000 shares authorized, 18,657,678 and 152,662 shares issued and outstanding at September 30 , 2009 and December 31, 2008

 

186,577

 

1,526

Additional paid-in capital

 

43,606

 

(418,039)

Accumulated deficit

 

(358,024)

 

50,767

Total stockholders' equity

 

(127,841)

 

(365,746)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

112,364

$

97,771


See accompanying notes to the unaudited Condensed Consolidated Financial Statements



3




COMMERCE ONLINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


 

 

Three

Months

Ended

September 30,

2009

 

Three

Months

Ended

September 30,

2008

 

Nine

months

Ended

September 30,

2009

 

Nine

months

Ended

September 30,

2008

 

 

 

 

 

 

 

 

 

SALES

$

$

$

$

96,575

COST OF SALES

 

 

 

 

GROSS PROFIT

 

 

 

 

96,575

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

377,785

 

42,049

 

408,791

 

102,665

INCOME FROM OPERATIONS

 

(377,785)

 

(42,049)

 

(408,791)

 

(6,090)

OTHER INCOME

 

 

 

--

 

 

 

 

INCOME BEFORE INCOME TAXES

 

(377,785)

 

(42,049)

 

(408,791)

 

(6,090)

INCOME TAX BENEFIT

 

 

 

 

NET INCOME

$

(377,785)

$

(42,049)

$

(408,791)

$

(6,090)

EARNINGS PER SHARE - BASIC AND DILUTED

$

(0.00)

$

(0.00)

$

(0.00)

$

(0.00)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED

 

16,757,678

 

227,052,892

 

11,222,672

 

227,052,924


See accompanying notes to the unaudited Condensed Consolidated Financial Statements



4




COMMERCE ONLINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine months

 

Nine months

 

 

Ended

 

Ended

 

 

September 30 ,

 

September 30 ,

 

 

2009

 

2008

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net loss

$

(408,791)

$

(6,090)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

Stock issued for compensation and consulting services

 

377,150

 

Changes in operating assets and liabilities:

 

 

 

 

Increase in:

 

 

 

 

Other Assets

 

(20,000)

 

(21,220)

Accounts payable and accrued expenses

 

 

(29,443)

Net Cash Used In Operating Activities

 

(51,641)

 

(56,753)

Cash Flows From Investing Activities

 

 

 

 

Fixed Assets Purchased

 

 

Net Cash Provided By Investing Activities

 

 

Cash Flows From Financing Activities

 

 

 

 

Proceeds from Related Party

 

33,704

 

Note Payable-Net of stock issued for conversion

 

(90,752)

 

Recapitalization per Agreement

 

 

56,753

Net Cash Provided by Financing Activities

 

(57,048)

 

56,753

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(5,407)

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

5,407

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

$

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

 

 

 

 


See accompanying notes to the unaudited Condensed Consolidated Financial Statements



5



COMMERCE ONLINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 — INTERIM FINANCIAL STATEMENTS


The accompanying unaudited condensed consolidated financial statements include the accounts of Commerce Online, Inc. (the “Company”), required to be consolidated in accordance with U.S. generally accepted accounting principles (GAAP). The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting policies described in the December 31, 2008 Form 10-K except for the accounting policy relating to accounting for uncertainty in income taxes, and should be read in conjunction with the consolidated financial statements and notes thereto.


The unaudited condensed consolidated financial statements for the nine months ended September 30 , 2009 included herein have been prepared in accordance with the instructions for Form 10-Q under the Securities Exchange Act of 1934, as amended, and Article 10 of Regulation S-X under the Securities Act of 1933, as amended. Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements.


In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain only normal recurring adjustments necessary to present fairly the Company’s financial position as of September 30 , 2009, and the results of its operations and cash flows for the three months ended September 30 , 2009 and 2008. Certain prior year amounts have been restated or reclassified to conform to the current period presentation. Operating results for the nine months ended September 30 , 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2009.


NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


BASIS OF PRESENTATION


The condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). . All material intercompany balances and transactions have been eliminated


BUSINESS


Seraph Security Systems, Inc., (referred to hereafter as “SRHS,” or, the “Company”), was initially incorporated under the laws of the State of Delaware in February 1997 under the name Easy Street Online, Inc., as successor to each of Hobbes & Co., LLC ("Hobbes"), INET Communications Company, LLC ("INET") and Sara Girl & Co., LLC ("Sara Girl").


In August of 1997, the Company changed its name to Frontline Communications Corp. (“Frontline”) and operated as a regional Internet service provider ("ISP") providing Internet access, web hosting, website design, and related services to residential and small business customers throughout the Northeast United States and, through a network partnership agreement, Internet access to customers nationwide. Frontline traded on the American Stock Exchange under the symbol "FNT."


On April 3, 2003, Frontline acquired Proyecciones y Ventas Organizadas, S.A. de C.V. ("Provo Mexico") and in December 2003 changed its name to "Provo International Inc." (“Provo”). Provo was organized into three distinct divisions: (1) Provo International, which was responsible for overseeing mergers, acquisitions, financing transactions and regulatory compliance activities (2) Provo US, a division of Provo, was responsible for the continued management of the Internet service business, which was its core business prior to its acquisition of (3) Provo Mexico, a wholly owned subsidiary of Provo International, which distributed prepaid calling cards and cellular phone airtime in Mexico.


In September 2008, Provo changed its name to Ebenefits Direct, Inc., which, through its wholly-owned subsidiary, L.A. Marketing Plans, LLC, (“LAMP”), is a company currently engaged in the business of direct response marketing. LAMP markets and sells non-insurance healthcare programs designed to complement medical insurance products and to provide savings for those who cannot afford or qualify for traditional health insurance products.


On October 14, 2008, Ebenefits Direct, Inc. changed its name to Seraph Security, Inc. and continues to operate the LAMP business, and eCommerce a credit and debit card processing company.



6



COMMERCE ONLINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


On May 20, 2009, Seraph Security, Inc. changed its name to Commerce Online, Inc. to more accurately reflect its core business.


Binding Letter of Intent - Asset Purchase Agreement


On February 25, 2009, the Company entered into a Binding Letter of Intent (the “Agreement”) with Commerce Online Technologies, Inc., a company to be organized in Delaware with the principal business of providing eCommerce software solutions on online brands in the form of internet B2B eCommerce portals, mobile entertainment applications and wireless entertainment products (“Purchaser”). Purchaser will be controlled by Michael Friedman, who, as stated in the Agreement, will be appointed as one of the Company’s directors.


Pursuant the terms of the Agreement, the Company and Friedman intend to facilitate an asset acquisition, or other tax-free combinational transaction with the Company, with closing to occur on or before April 25, 2009. In consideration for 10 million shares of the Company’s stock, Friedman shall contribute assets and intellectual property of his eCommerce Solutions, proprietary software applications, all reseller agreements and client base, and waive first year salaries for each of its current and prospective officers (“Transaction”).


The Transaction is contemplated to be structured as a tax-free transaction under Section 351 of the Internal Revenue Code of 1986, and the regulations promulgated there under.


Financial Reporting


The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. Revenues and expenses are reported on the accrual basis, which means that income is recognized as it is earned and expenses are recognized as they are incurred.


USE OF ESTIMATES


The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.


CASH AND CASH EQUIVALENTS


The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.


CONCENTRATION OF CREDIT RISK


Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The Company maintains cash balances at one financial institution, which is insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insured institution insures up to $250,000 on account balances. The amounts that are not insured by FDIC limitations are held in short-term securities. The company has not experienced any losses in such accounts.


Accounts Receivable


The Company extends credit to its customers in the normal course of business. Further, the Company regularly reviews outstanding receivables, and provides estimated losses through an allowance for doubtful accounts. In evaluating the level of established loss reserves, the Company makes judgments regarding its customers’ ability to make required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. The Company also performs ongoing credit evaluations of customers’ financial condition. The Company maintains reserves for potential credit losses, and such losses traditionally have been within its expectations.



7



COMMERCE ONLINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF


The Company accounts for the impairment of long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS No. 144”).SFAS No. 144 requires write-downs to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount.


For purposes of evaluating the recoverability of long-lived assets to be held and used, a recoverability test was performed based on assumptions concerning the amount and timing of estimated future cash flows reflecting varying degrees of perceived risk. Impairments to long-lived assets to be disposed of are recorded based upon the fair value of the applicable assets. Since judgment is involved in determining the fair value and useful lives of long-lived assets, there is a risk that the carrying value of our long-lived assets may be overstated or understated. Management believes that a change in any material underlying assumptions would not by itself result in the need to impair an asset.


If the long-lived assets are identified as being planned for disposal or sale, they would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. As of September 30 , 2009 this does not apply.


GOODWILL AND OTHER INTANGIBLE ASSETS


In June 2001, the FASB issued Statement No. 142 Goodwill and Other Intangible Assets. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.


Goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives are amortized generally on a straight-line basis over the periods benefited, with a weighted average useful life of 15 years.


In performing this assessment, management uses the income approach and the similar transactions method of the market approach to develop the fair value of the acquisition in order to assess its potential impairment of goodwill. The income approach is based on a discounted cash flow model which relies on a number of factors, including operating results, business plans, economic projections and anticipated future cash flows. Rates used to discount future cash flows are dependent upon interest rates and the cost of capital at a point in time. The similar transactions method is a market approach methodology in which the fair value of a business is estimated by analyzing the prices at which companies similar to the subject, which are used as guidelines, have sold in controlling interest transactions (mergers and acquisitions). Target companies are compared to the subject company, and multiples paid in transactions are analyzed and applied to subject company data, resulting in value indications. Comparability can be affected by, among other things, the product or service produced or sold, geographic markets served, competitive position, profitability, growth expectations, size, risk perception, and capital structure. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.

 

The Company has reviewed the value of the intangible assets of goodwill as of December 31, 2008 and has determined as of the filing to impair the value of goodwill at this time. Based on the operating losses for 2008 and projected losses in 2009 and breakeven not projected until 2010 the Company has decided to impair the entire balance of $10.4 million as of year ended December 31, 2008.


REVENUE RECOGNITION


The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” (“SAB No. 104”). SAB 104 clarifies application of generally accepted accounting principles related to revenue transactions. The Company also follows the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF Issue No. 00-21"), in arrangements with multiple deliverables.



8



COMMERCE ONLINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured.


The Company receives revenue for consulting services, video streaming services, equipment sales and leasing, installation, content licensing, and maintenance agreements. Sales and leasing agreement terms generally are for one year, and are renewable year to year thereafter. Revenue for consulting services is recognized as the services are provided to customers. For upfront payments and licensing fees related to contract research or technology, the Company determines if these payments and fees represent the culmination of a separate earnings process or if they should be deferred and recognized as revenue as earned over the life of the related agreement. Milestone payments are recognized as revenue upon achievement of contract-specified events and when there are no remaining performance obligations. Revenues from monthly video streaming agreements, as well as equipment maintenance, are recorded when earned. Operating equipment lease revenues are recorded as they become due from customers. Revenues from equipment sales and installation are recognized when equipment delivery and installation have occurred, and when collectability is reasonably assured.


In certain cases, the Company enters into agreements with customers that involve the delivery of more than one product or service. Revenue for such arrangements is allocated to the separate units of accounting using the relative fair value method in accordance with EITF Issue No. 00-21. The delivered item(s) is considered a separate unit of accounting if all of the following criteria are met: (1) the delivered item(s) has value to the customer on a standalone basis, (2) there is objective and reliable evidence of the fair value of the undelivered item(s) and (3) if the arrangement includes a general right of return, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the vendor. If all the conditions above are met and there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on their relative fair values.


Explicit return rights are not offered to customers; however, the Company may accept returns in limited circumstances. There have been no returns. Therefore, a sales return allowance has not been established since management believes returns will be insignificant.


PROPERTY AND EQUIPMENT


Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Expenditures for major betterments and additions are capitalized, while replacement, maintenance and repairs, which do not extend the lives of the respective assets are charged to expense currently. Any gain or loss on disposition of assets is recognized currently in the statement of operations.


FAIR VALUE OF FINANCIAL INSTRUMENTS


The Company’s financial instruments consist primarily of cash, cash equivalents, and marketable securities. account receivable, accounts payable, accrued expenses, and debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and/or approximate market interest rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.

 

The Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard provides a consistent definition of fair value which focuses on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.



9



COMMERCE ONLINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


The three-level hierarchy for fair value measurements is defined as follows:

 

·

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

·

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable or the asset or liability other than quoted prices, either directly or indirectly including inputs in markets that are not considered to be active;

·

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement

 

INCOME TAXES


The Company accounts for income taxes using SFAS No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax liabilities and assets for expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded for deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized.


The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that the Company determine whether the benefits of the Company’s tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. The provisions of FIN 48 also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure. The Company did not have any unrecognized tax benefits and there was no effect on the financial condition or results of operations as a result of implementing FIN 48. The Company does not have any interest and penalties in the statement of operations for the periods ended September 30 , 2009 and December 31, 2008.


In May 2008, the FASB issued FASB Staff Position No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (“the FSP”). The FSP provides guidance about how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Under the FSP, a tax position could be effectively settled on completion of examination by a taxing authority if the entity does not intend to appeal or litigate the result and it is remote that the taxing authority would examine or re-examine the tax position. The Company does not expect that this interpretation will have a material impact on its financial position, results of operations, or cash flows.

 

EARNINGS (LOSS) PER SHARE

 

Earnings (loss) per share is computed in accordance with SFAS No. 128, "Earnings per Share". Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. The outstanding warrants at September 30 , 2009 and 2008, respectively are anti-dilutive and therefore are not included in earnings (loss) per share. 


ACCOUNTING FOR STOCK-BASED COMPENSATION 

 

The Company adopted SFAS No. 123R, "Accounting for Stock-Based Compensation". This statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service.



10



COMMERCE ONLINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


In addition, a public entity is required to measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value. The fair value of that award has been remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period.


For the quarter ended September 30, 2009, the Company did not grant any stock options.


NON-EMPLOYEE STOCK BASED COMPENSATION


The cost of stock-based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in Emerging Issues Task Force Issue (“EITF”) 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”).


COMMON STOCK PURCHASE WARRANTS


The Company accounts for common stock purchase warrants in accordance with the provisions of Emerging Issues Tack Force Issue (“EITF”) issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). Based on the provisions of EITF 00-19, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement, or (ii) gives the company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the company), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).


NOTE 3 — RECENT ACCOUNTING PRONOUNCEMENTS


On January 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 141R, Business Combinations (“FAS 141R”), FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”), Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“FSP 160”), Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“FAS 161”), EITF Issue No. 08-6, Equity Method Investment Accounting Considerations (“EITF 08-6”), EITF Issue No. 08-7, Accounting for Defensive Intangible Assets (“EITF 08-7”), FASB Staff Position EITF 03-6-1 , Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”) and FASB Staff Position APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)(“APB 14-1”).


FAS 141R expands the scope of acquisition accounting to all transactions under which control of a business is obtained. This standard requires an acquirer to recognize the assets acquired and liabilities assumed at the acquisition date fair values with limited exceptions. Additionally, FAS 141R requires that contingent consideration as well as contingent assets and liabilities be recorded at fair value on the acquisition date, that acquired in-process research and development be capitalized and recorded as intangible assets at the acquisition date, and also requires transaction costs and costs to restructure the acquired company be expensed. Transactions are now being accounted for under this standard. On April 1, 2009, the FASB issued Staff Position FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which is effective January 1, 2009, and amends the guidance in FAS 141R to require that assets acquired and liabilities assumed in a business combination that arise fromcontingencies be recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability would be recognized in accordance with FASB Statement No. 5, Accounting for Contingencies (“FAS 5”) , and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss. If the fair value is not determinable and the FAS 5 criteria are not met, no asset or liability would be recognized.


FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). The objective of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), and other principles of GAAP. This FSP applies to all intangible assets, whether acquired in a business combination or otherwise. The adoption of this standard in 2009 has not had a significant impact on the determination or reporting of our financial results.



11



COMMERCE ONLINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)


FAS 160 provides guidance for the accounting, reporting and disclosure of noncontrolling interests and requires, among other things, that noncontrolling interests be recorded as equity in the consolidated financial statements. The adoption of FAS 160 did not affect the Company’s consolidated financial position or consolidated results of operations.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires entities that use derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. SFAS 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS 133 have been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows. The Company does not currently hold derivative instruments and was not impacted by the adoption of SFAS 161.

 

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP 157-4), and FSP FASB 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP 107-1). These two staff positions relate to fair value measurements and related disclosures. The FASB also issued a third FSP relating to the accounting for impaired debt securities titled FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP 115-2). These standards are effective for interim and annual periods ending after September 15, 2009. The Company has determined that FSP 157-4 and FSP 115-2 do not currently apply to its activities and has adopted the disclosure requirements of FSP 107-1.


In May 2009, the FASB issued Statement No. 165, “Subsequent Events” (“SFAS 165”), which establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted the provisions of SFAS 165 for the quarter ended September 30, 2009. The adoption of these provisions did not have a material effect on the Company’s consolidated financial statements.

 

The Company evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q on August 14, 2009.


EITF 08-6, which is effective January 1, 2009, clarifies the accounting for certain transactions and impairment considerations involving equity method investments and is applied on a prospective basis to future transactions.


EITF 08-7, which is effective January 1, 2009, clarifies that a defensive intangible asset (an intangible asset that the entity does not intend to actively use, but intends to hold to prevent others from obtaining access to the asset) should be accounted for as a separate unit of accounting and should be assigned a useful life that reflects the entity’s consumption of the expected benefits related to the asset. EITF 08-7 is applied on a prospective basis to future transactions.


FSP EITF 03-6-1 clarifies that share-based payment awards that entitle holders to receive nonforfeitable dividends before they vest will be considered participating securities and included in the earnings per share calculation pursuant to the two class method. The effect of adoption of FSP EITF 03-6-1 was not material to the Company’s consolidated results of operations.


APB 14-1 requires the issuer to separately account for the liability and equity components of convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The guidance will result in companies recognizing higher interest expense in the statement of operations due to amortization of the discount that results from separating the liability and equity components. APB 14-1 was adopted on January 1, 2009, and did not affect the Company’s consolidated financial position or consolidated results of operations.

 

In September 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140 (SFAS 166). SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company will adopt SFAS 166 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.



12



COMMERCE ONLINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - RECENT ACCOUNTING PRONOUCEMENTS (CONTINUED)

 

In September 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS 167 is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. The Company will adopt SFAS 167 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.

 

In September 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168). SFAS 168 replaces FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes the FASB Accounting Standards Codification TM (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP). SFAS 168 is effective for interim and annual periods ending after September 15, 2009.


In September 2009, Accounting Standards Codification (“ASC”) became the source of authoritative U.S. GAAP recognized by the Financial Accounting Standards Board (“FASB”) for nongovernmental entities, except for certain FASB Statements not yet incorporated into ASC. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative U.S. GAAP for registrants. The discussion below includes the applicable ASC reference.


The Company adopted ASC Topic 810-10 Consolidation (formerly SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51) effective January 2, 2009. Topic 810-10 changes the manner of presentation and related disclosures for the noncontrolling interest in a subsidiary (formerly referred to as a minority interest) and for the deconsolidation of a subsidiary. The presentation changes are reflected retrospectively in the Company’s unaudited condensed consolidated financial statements.


ASC Topic 815-10 Derivatives and Hedging (formerly SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities) was adopted by the Company effective January 2, 2009. The guidance under Topic 815-10 changes the manner of presentation and related disclosures of the fair values of derivative instruments and their gains and losses.


The Company adopted ASC Topic 825-10 Financial Instruments (formerly, FASB Staff Position No. SFAS 107-1 and APB No. 28-1, Disclosures about the Fair Value of Financial Instruments), which requires quarterly disclosure of information about the fair value of financial instruments within the scope of Topic 825-10. The Company adopted this pronouncement effective April 1, 2009.


In April 2009, the Company adopted ASC Topic 820-10-65 Fair Value Measurements and Disclosures (formerly FASB Staff Position No. SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly). The standard provides additional guidance for estimating fair value in accordance with Topic 820-10-65 when the volume and level of activity for the asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate if a transaction is not orderly. The Company adopted this pronouncement effective April 1, 2009 with no impact on its consolidated financial statements.


The Company adopted, ASC Topic 855-10 Subsequent Events (formerly SFAS 165, Subsequent Events) effective April 1, 2009. This pronouncement changes the general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.


In June 2009, the FASB finalized SFAS No. 167, Amending FASB interpretation No. 46(R), which was included in ASC Topic 810. The provisions of ASC 810 amend the definition of the primary beneficiary of a variable interest entity and will require the Company to make an assessment each reporting period of its variable interests. The provisions of this pronouncement are effective January 1, 2010. The Company is evaluating the impact of the statement on its consolidated financial statements.

 

In July 2009, the FASB issued SFAS No. 168, The Hierarchy of Generally Accepted Accounting Principles. SFAS 168 codified all previously issued accounting pronouncements, eliminating the prior hierarchy of accounting literature, in a single source for authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168, now ASC Topic 105-10 Generally Accepted Accounting Principles, is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this pronouncement did not have an effect on the consolidated financial statements.



13



COMMERCE ONLINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)


In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Measuring Liabilities at Fair Value, which clarifies, among other things, that when a quoted price in an active market for the identical liability is not available, an entity must measure fair value using one or more specified techniques. The Company adopted the pronouncement effective July 1, 2009 with no impact on its consolidated financial statements.


In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, which revises the existing multiple-element revenue arrangements guidance and changes the determination of when the individual deliverables included in a multiple-element revenue arrangement may be treated as separate units of accounting, modifies the manner in which the transaction consideration is allocated across the separately identified deliverables and expands the disclosures required for multiple-element revenue arrangements. The pronouncement is effective for financial statements issued after December 31, 2010. The Company does not expect the pronouncement to have a material effect on its consolidated financial statements.


Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.


NOTE 4 RECLASSIFICATIONS


Certain prior periods' balances have been reclassified to conform to the current period's financial statement presentation. These reclassifications had no impact on previously reported results of operations or stockholders' equity.


In assessing the amount of deferred tax asset to be recognized, management considers whether it is more likely than not that some of the losses will be used in the future. Management expects that they will not have benefit in the future. Accordingly, a full valuation allowance has been established.


NOTE 5 – NOTE PAYABLE


The Company at September 30, 2009 has a convertible note payable outstanding of $82,316. The note is held by Piedmont Properties, Inc. and had a balance of $414,937 up to September 2009. The balance included principle and accrued interest. Effective September 21, 2009 Piedmont converted $332,621 of the balance outstanding for 430,000 shares of common stock.


The note payable has been amended and restated to reflect an adjusted conversion rate from $.002 per share to a rate of 75% of the stock closing price.


NOTE 6  COMMON STOCK


The Company’s board of directors believed it was in the best interest of the corporation to issue on September 2, 2008, Mr. Friedman and Phillip Johnston 8,000,000 and 1,000,000, respectively in consideration for eCommerce services to be performed on behalf of the Company, and on February 3, 2009, to issue Kyle Gotshalk and Cherish Adams 2,500,000 and 2,500,000 shares of the Company’s common stock, respectively, in consideration for eCommerce services to be performed on behalf of the Company, and for management services.


Prior to these issuances, there was 872,678 shares of common stock outstanding held by 306 shareholders. Subsequent to these issuances, the common stock of the Company is now 14,872,678 held by 310 shareholders as of September 13, 2008.



14



COMMERCE ONLINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6  COMMON STOCK (CONTINUED)


The Company issued the following shares of Common Stock during the nine months ended September 30, 2009:


PATRICK OLOUGHIN Consultant

07/13/2009

 

50,000

CHERISH A. ADAMS In Lieu of Salary

07/30/2009

 

75,000

KYLE L. GOTSHALK In Lieu of Salary

07/30/2009

 

75,000

MICHAEL B. FRIEDMAN In Lieu of Salary

07/30/2009

 

75,000

HAROLD RUSTIGIAN In Lieu of Salary

07/30/2009

 

200,000

CARRY BARTLETT In Lieu of Salary

07/30/2009

 

100,000

JOE RAIO In Lieu of Salary

07/30/2009

 

100,000

ALPHATRADE.COM Advertisement

07/30/2009

 

60,000

Piedmont Note Conversion

09/21/2009

 

430,000

CHERISH A. ADAMS In Lieu of Salary

09/11/2009

 

75,000

KYLE L. GOTSHALK In Lieu of Salary

09/11/2009

 

75,000

MICHAEL B. FRIEDMAN In Lieu of Salary

09/11/2009

 

75,000

HAROLD RUSTIGIAN In Lieu of Salary

09/11/2009

 

75,000

CLINTON HALL, LLC Consultant

09/11/2009

 

250,000

RESORT MARKETING PROFESSIONALS Consultant

09/11/2009

 

250,000

FIRST CAPITAL PARTNERS, LLC Consultant

09/29/2009

 

450,000

 

 

 

 

TOTAL SHARES ISSUED YEAR TO DATE 9/30/09

 

 

2,415,000


NOTE 7 — INCOME TAXES


As of September 30, 2009 the Company had approximately $200,000 of U.S. federal and state net operating loss carry forwards available to offset future taxable income which begin expiring in 2026, if not utilized. Deferred income taxes reflect the net tax effects of operating loss and tax credit carry forwards and temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Due to the uncertainty of the Company’s ability to realize the benefit of the deferred tax assets, the deferred tax assets are fully offset by a valuation allowance at September 30 , 2009.


The table below summarizes the differences between the Company’s effective tax rate and the statutory federal rate as follows:


 

 

 

Tax benefit computed at “expected” statutory rate

$

(285,000)

State income taxes, net of benefit

 

(25,000)

Other permanent differences

 

-0-

Increase in valuation allowance

 

310,000

Net income tax benefit

$

-


In assessing the amount of deferred tax asset to be recognized, management considers whether it is more likely than not that some of the losses will be used in the future. Management expects that they will not have benefit in the future. Accordingly, a full valuation allowance has been established.


NOTE 8 — EMPLOYEE BENEFIT PLAN


The Company does not have a deferred profit-sharing or retirement plan. The company does not maintain an incentive compensation plan.



15



COMMERCE ONLINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9 — CONTINGENCIES AND COMMITMENTS


The Company is not aware of any legal proceedings against it as of September 30, 2009. No contingencies have been provided in the financial statements.


Employment Contracts


The Company has employment agreements with certain executive officers. These agreements may obligate the Company to a severance amount equal to one year’s compensation should an executive leave the Company under certain terms of the agreement. The company will issue common stock in lieu of cash during year one of these agreements.


NOTE 10 — DEPARTURE OF DIRECTOR OR OFFICERS AND ELECTION OF DIRECTORS OR PRINCIPAL OFFICERS


On May 29, 2008, the Company accepted the resignation of Stephen Goldberg as its sole director, Chief Executive Officer and President of the Company. On this same day, to fill the vacancy created by the resignation of Mr. Goldberg as the Company’s sole director and officer, the Company appointed Cherish Adams as Chief Executive Officer, President and a director and Mary Radomsky as Treasurer, Secretary and a Director of the Company.


On January 2, 2009, the Company’s board of directors appointed Kyle L. Gotshalk as a director and Chief Executive Officer of the Company.


On January 2, 2009, Cherish Adams resigned as Chief Executive Officer. To fill the vacancy created by the resignation of Cherish Adams as the Company’s Chief Executive Office, the Company appointed Kyle Gotshalk as its Chief Executive Officer. The Company also on this same day appointed Mr. Gotshalk as its Vice President. Cherish Adams continues to serve the Company in the capacity as its President and as a Director.


On August 24, 2009 the board of directors voted to remove Mary Radomsky as Treasurer, Secretary and member of the Company’s board of directors. The duties of Secretary and Treasurer were appointed to Cherish Adams. The board of director position vacated has not been filled as of the filing date.


On October 1, 2009 the board of directors of the Company appointed Harold Rustigan as a board member.


Kyle Gotshalk, 34, was elected on January 2, 2009 to serve as an Officer and a Director and on January 3, 2009 to serve as CEO and Vice President of Commerce Online, Inc. Contemporaneous with Commerce Online Inc., Mr. Gotshalk serves as an Officer and Director of VSUS Technologies, Inc. Beginning February 2005 through January 2009, Mr. Gotshalk was the President of Exit Only, Inc. an internet car sales company. Prior to this Mr. Gotshalk served as President of PSPP Holdings Inc. a credit card processing company, President of Top Flight Consulting LLC, an up and coming consulting firm, and as a Manager and Fitness Director at Sports Center Fitness.  Mr. Gotshalk graduated with honors in Public Relations/Communication Studies from University of Montana in 1997. Mr. Gotshalk holds a Real Estate License in California and on May 2006 was awarded the Top Producing Agent award for most sales in first year of Real Estate by his Century 21 office.


Cherish Adams, 33, formerly our CEO, was elected on May 29, 2008 to serve as our President and Director of Commerce Online, Inc. Contemporaneous with Commerce Online Inc., beginning September 2005 through present, Mrs. Adams has served as an Officer and Director of Exit Only, Inc., an internet car sales company. From May of 2001 through February 2005 Mr. Adams serves as the Chief Financial Officer and Controller of Piedmont Properties, a company in the business of securities and real estate investments. Mrs. Adams received her Bachelor of Science Degree in Business Administration with a Concentration in Hotel, Restaurant, Resort Management from the University of Southern Oregon, in Ashland, Oregon in 1997.


Harold Rustigan, was elected on October 1, 2009 to service as a member of the Company’s board of directors. Mr. Rustigan is currently Vice President of Music Licensing with Instant Media Network, the world's largest provider of music content and services to the lodging industry. In addition he is a long-time record executive who was President of both UNI Records, and 20th Century Records Regan also worked at Motown among other companies. He started with Berry Gordy at Motown and promoted many legendary artists including Marvin Gaye, Stevie Wonder, The Supremes and Smokey Robinson


The Company and Kyle Gotshalk, Cherish Adams have entered into an employment agreement. Kyle Gotshalk and Cherish Adams have not been named to any committees of the Company’s Board of Directors and any committees of the Company’s Board of Directors to which Kyle Gotshalk and Cherish Adams may be named have not been determined as of the filing of this report



16



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Management's Discussion and Analysis contains various "forward looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-Q, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to "anticipates", "believes", "plans", "expects", "future" and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company's business, including but not limited to, reliance on customers and competition in its markets, market demand, product performance, maintenance of relationships with key suppliers, difficulties of contracting or retaining independent contractors and any changes in current accounting rules, all of which may be beyond the control of the Company. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.


Management's Discussion and Analysis of Results of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the condensed consolidated financial statements included herein. Further, this quarterly report on Form 10-Q should be read in conjunction with the Company's Financial Statements and Notes to Financial Statements included in Report on Form 10-K for the year ended December 31, 2008.


Overview


BUSINESS


Seraph Security Systems, Inc., (referred to hereafter as “SRHS,” or, the “Company”), was initially incorporated under the laws of the State of Delaware in February 1997 under the name Easy Street Online, Inc., as successor to each of Hobbes & Co., LLC ("Hobbes"), INET Communications Company, LLC ("INET") and Sara Girl & Co., LLC ("Sara Girl").


In August of 1997, the Company changed its name to Frontline Communications Corp. (“Frontline”) and operated as a regional Internet service provider ("ISP") providing Internet access, web hosting, website design, and related services to residential and small business customers throughout the Northeast United States and, through a network partnership agreement, Internet access to customers nationwide. Frontline traded on the American Stock Exchange under the symbol "FNT."


On April 3, 2003, Frontline acquired Proyecciones y Ventas Organizadas, S.A. de C.V. ("Provo Mexico") and in December 2003 changed its name to "Provo International Inc." (“Provo”). Provo was organized into three distinct divisions: (1) Provo International, which was responsible for overseeing mergers, acquisitions, financing transactions and regulatory compliance activities (2) Provo US, a division of Provo, was responsible for the continued management of the Internet service business, which was its core business prior to its acquisition of (3) Provo Mexico, a wholly owned subsidiary of Provo International, which distributed prepaid calling cards and cellular phone airtime in Mexico.


In September 2008, Provo changed its name to Ebenefits Direct, Inc., which, through its wholly-owned subsidiary, L.A. Marketing Plans, LLC, (“LAMP”), is a company currently engaged in the business of direct response marketing. LAMP markets and sells non-insurance healthcare programs designed to complement medical insurance products and to provide savings for those who cannot afford or qualify for traditional health insurance products.


On October 14, 2008, Ebenefits Direct, Inc. changed its name to Seraph Security, Inc. and continues to operate the LAMP business, and eCommerce a credit and debit card processing company.


On May 20, 2009, Seraph Security, Inc. changed its name to Commerce Online, Inc. to more accurately reflect its core business.


Binding Letter of Intent - Asset Purchase Agreement


On February 25, 2009, the Company entered into a Binding Letter of Intent (the “Agreement”) with Commerce Online Technologies, Inc., a company to be organized in Delaware with the principal business of providing eCommerce software solutions on online brands in the form of internet B2B eCommerce portals, mobile entertainment applications and wireless entertainment products (“Purchaser”). Purchaser will be controlled by Michael Friedman, who, as stated in the Agreement, will be appointed as one of the Company’s directors.



17



Pursuant the terms of the Agreement, the Company and Friedman intend to facilitate an asset acquisition, or other tax-free combinational transaction with the Company, with closing to occur on or before April 25, 2009. In consideration for 10 million shares of the Company’s stock, Friedman shall contribute assets and intellectual property of his eCommerce Solutions, proprietary software applications, all reseller agreements and client base, and waive first year salaries for each of its current and prospective officers (“Transaction”).


The Transaction is contemplated to be structured as a tax-free transaction under Section 351 of the Internal Revenue Code of 1986, and the regulations promulgated there under.


On May 29, 2008, the Company accepted the resignation of Stephen Goldberg as its sole director, Chief Executive Officer and President of the Company. On this same day, to fill the vacancy created by the resignation of Mr. Goldberg as the Company’s sole director and officer, the Company appointed Cherish Adams as Chief Executive Officer, President and a director and Mary Radomsky as Treasurer, Secretary and a Director of the Company.


On January 2, 2009, the Company’s board of directors appointed Kyle L. Gotshalk as a director and Chief Executive Officer of the Company.


On January 2, 2009, Cherish Adams resigned as Chief Executive Officer. To fill the vacancy created by the resignation of Cherish Adams as the Company’s Chief Executive Office, the Company appointed Kyle Gotshalk as its Chief Executive Officer. The Company also on this same day appointed Mr. Gotshalk as its Vice President. Cherish Adams continues to serve the Company in the capacity as its President and as a Director.


On August 24, 2009 the board of directors voted to remove Mary Radomsky as Treasurer, Secretary and member of the Company’s board of directors. The duties of Secretary and Treasurer were appointed to Cherish Adams. The board of directors position vacated has not been filed as of the filing date.


On October 1, 2009 the board of directors of the Company appointed Harold Rustigan as a board member.


Kyle Gotshalk, 34, was elected on January 2, 2009 to serve as an Officer and a Director and on January 3, 2009 to serve as CEO and Vice President of Commerce Online, Inc. Contemporaneous with Commerce Online Inc., Mr. Gotshalk serves as an Officer and Director of VSUS Technologies, Inc. Beginning February 2005 through January 2009, Mr. Gotshalk was the President of Exit Only, Inc. an internet car sales company. Prior to this Mr. Gotshalk served as President of PSPP Holdings Inc. a credit card processing company, President of Top Flight Consulting LLC, an up and coming consulting firm, and as a Manager and Fitness Director at Sports Center Fitness.  Mr. Gotshalk graduated with honors in Public Relations/Communication Studies from University of Montana in 1997. Mr. Gotshalk holds a Real Estate License in California and on May 2006 was awarded the Top Producing Agent award for most sales in first year of Real Estate by his Century 21 office.


Cherish Adams, 33, formerly our CEO, was elected on May 29, 2008 to serve as our President and Director of Commerce Online, Inc. Contemporaneous with Commerce Online Inc., beginning September 2005 through present, Mrs. Adams has served as an Officer and Director of Exit Only, Inc., an internet car sales company. From May of 2001 through February 2005 Mr. Adams serves as the Chief Financial Officer and Controller of Piedmont Properties, a company in the business of securities and real estate investments. Mrs. Adams received her Bachelor of Science Degree in Business Administration with a Concentration in Hotel, Restaurant, Resort Management from the University of Southern Oregon, in Ashland, Oregon in 1997.


Harold Rustigan, was elected on October 1, 2009 to service as a member of the Company’s board of directors. Mr. Rustigan is currently Vice President of Music Licensing with Instant Media Network, the world's largest provider of music content and services to the lodging industry. In addition he is a long-time record executive who was President of both UNI Records, and 20th Century Records Regan also worked at Motown among other companies. He started with Berry Gordy at Motown and promoted many legendary artists including Marvin Gaye, Stevie Wonder, The Supremes and Smokey Robinson


The Company and Kyle Gotshalk, Cherish Adams have entered into an employment agreement. Kyle Gotshalk and Cherish Adams have not been named to any committees of the Company’s Board of Directors and any committees of the Company’s Board of Directors to which Kyle Gotshalk and Cherish Adams may be named have not been determined as of the filing of this report.




18



THREE MONTHS ENDED SEPTEMBER 30 , 2009

COMPARED TO THREE MONTHS ENDED SEPTEMBER 30 , 2008


Sales for the three month period ended September 30, 2008 and 2009 were $-0-.


Selling, general and administrative expenses decreased from $42,049 for the three month period ended September 30 , 2008 to $377,785 for the three month period ended September 30, 2009 due to costs associated with stock issued in lieu of salary and consulting expenses for $377,150..


Net income (loss) increased to a loss $377,785 for the three month period ended September 30 , 2009 from net (loss) of $(42,049) for the three month period ended September 30 , 2009, due to the above analysis of Income and Expenses.


NINE MONTHS ENDED SEPTEMBER 30 , 2009

COMPARED TO THREE MONTHS ENDED SEPTEMBER 30 , 2008


Sales decreased from $96,575 for the nine month period ended September 30 , 2008 to $-0-for the three month period ended September 30 , 2009, primarily as a result of revenue from its LA Marketing subsidiary.


Selling, general and administrative expenses increased from $102,665 for the nine month period ended September 30, 2008 to $408,791 for the nine month period ended September 30 , 2009 due to costs associated with the issuance of stock for salaries and consulting expenses.


Net income (loss) decreased to $408,791 for the nine month period ended September 30 , 2009 from net (loss) of $(6,090) for the nine month period ended September 30 , 2009, due to the above analysis of Income and Expenses.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


We do not hold any derivative instruments and do not engage in any hedging activities.


ITEM 4. CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation our Chief Executive Officer and Chief Financial Officer concluded that, at September 30 2009, our disclosure controls and procedures are ineffective. However as of the date of the filing of the Form 10Q/A management has implemented changes that it has determined will make it financial reporting process effective as of the date of this filing.

 

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS


The Company is not a party to any litigation and, to its knowledge, no action, suit or proceeding has been threatened against the Company.


ITEM 1A - RISK FACTORS

 

POSSIBLE “PENNY STOCK” REGULATION

 

Any trading of our common stock in the Pink Sheets or on the OTC Bulletin Board may be subject to certain provisions of the Securities Exchange Act of 1934, commonly referred to as the “penny stock” rule.

 

Our common stock is deemed to be “penny stock” as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are stock:

 

·

With a price of less than $5.00 per share;

·

That are not traded on a “recognized” national exchange;



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·

Whose prices are not quoted on the Nasdaq automated quotation system (Nasdaq listed stock must still have a price of not less than $5.00 per share); or

·

In issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $5.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years.

 

Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.


BECAUSE WE ARE QUOTED ON THE OTCBB INSTEAD OF AN EXCHANGE OR NATIONAL QUOTATION SYSTEM, OUR INVESTORS MAY HAVE A TOUGHER TIME SELLING THEIR STOCK OR EXPERIENCE NEGATIVE VOLATILITY ON THE MARKET PRICE OF OUR STOCK.

 

Our common stock is traded on the OTCBB. The OTCBB is often highly illiquid, in part because it does not have a national quotation system by which potential investors can follow the market price of shares except through information received and generated by a limited number of broker-dealers that make markets in particular stocks. There is a greater chance of volatility for securities that trade on the OTCBB as compared to a national exchange or quotation system. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volume, and market conditions. Investors in our common stock may experience high fluctuations in the market price and volume of the trading market for our securities. These fluctuations, when they occur, have a negative effect on the market price for our securities. Accordingly, our stockholders may not be able to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of time until the market for our common stock improves.


RISKS RELATING TO OWNERSHIP OF OUR COMMON STOCK

 

Although there is presently a market for our common stock, the price of our common stack may be extremely volatile and investors may not be able to sell their shares at or above their purchase price, or at all. We anticipate that the market may be potentially highly volatile and may fluctuate substantially because of:


·

Actual or anticipated fluctuations in our future business and operating results;

·

Changes in or failure to meet market expectations;

·

Fluctuations in stock market price and volume

 

WE DO NOT INTEND TO PAY DIVIDENDS

 

We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future, and, if dividends are rapid, there is no assurance with respect to the amount of any such dividend.


FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS.


It may be time consuming, difficult and costly for us to develop and implement the additional internal controls, processes and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal auditing and other finance staff in order to develop and implement appropriate additional internal controls, processes and reporting procedures. If we are unable to comply with these requirements of the Sarbanes-Oxley Act, we may not be able to obtain the independent accountant certifications that the Sarbanes-Oxley Act requires of publicly traded companies.


If we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting or to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.



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Pursuant to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, beginning with our annual report on Form 10-K for our fiscal period ending December 31, 2008, we will be required to prepare assessments regarding internal controls over financial reporting and beginning with our annual report on Form 10-K for our fiscal period ending December 31, 2008, furnish a report by our management on our internal control over financial reporting. We have begun the process of documenting and testing our internal control procedures in order to satisfy these requirements, which is likely to result in increased general and administrative expenses and may shift management time and attention from revenue-generating activities to compliance activities. While our management is expending significant resources in an effort to complete this important project, there can be no assurance that we will be able to achieve our objective on a timely basis. There also can be no assurance that our auditors will be able to issue an unqualified opinion on management's assessment of the effectiveness of our internal control over financial reporting. Failure to achieve and maintain an effective internal control environment or complete our Section 404 certifications could have a material adverse effect on our stock price.


In addition, in connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we may discover “material weaknesses” in our internal controls as defined in standards established by the Public Company Accounting Oversight Board, or the PCAOB. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The PCAOB defines “significant deficiency” as a deficiency that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected.


In the event that a material weakness is identified, we will employ qualified personnel and adopt and implement policies and procedures to address any material weaknesses that we identify. However, the process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures we will take will remediate any material weaknesses that we may identify or that we will implement and maintain adequate controls over our financial process and reporting in the future.


Any failure to complete our assessment of our internal control over financial reporting, to remediate any material weaknesses that we may identify or to implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.


THE MARKET PRICE FOR OUR COMMON SHARES IS PARTICULARLY VOLATILE GIVEN OUR STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY TRADED PUBLIC FLOAT, LIMITED OPERATING HISTORY AND LACK OF PROFITS WHICH COULD LEAD TO WIDE FLUCTUATIONS IN OUR SHARE PRICE.

 

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.




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Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.


VOLATILITY IN OUR COMMON SHARE PRICE MAY SUBJECT US TO SECURITIES LITIGATION, THEREBY DIVERTING OUR RESOURCES THAT MAY HAVE A MATERIAL EFFECT ON OUR PROFITABILITY AND RESULTS OF OPERATIONS.

 

As discussed in the preceding risk factors, the market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.

 

OUR BUSINESS PLAN CALLS FOR EXTENSIVE AMOUNTS OF FUNDING AND WE MAY NOT BE ABLE TO OBTAIN SUCH FUNDING WHICH COULD ADVERSELY AFFECT OUR BUSINESS, OPERATIONS AND FINANCIAL CONDITION.

 

We will be relying on additional financing and funding. We are currently in discussions with potential sources of financing but no definitive agreements are in place. If we cannot achieve the requisite financing or complete the projects as anticipated, this could adversely affect our business, the results of our operations, prospects and financial condition.


SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.

 

ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES


On February 25, 2009, the Company entered into a Binding Letter of Intent (the “Agreement”) with Commerce Online Technologies, Inc., a company to be organized in Delaware with the principal business of providing eCommerce software solutions on online brands in the form of internet B2B eCommerce portals, mobile entertainment applications and wireless entertainment products (“Purchaser”). Purchaser will be controlled by Michael Friedman, who, as stated in the Agreement, will be appointed as one of the Company’s directors.


Pursuant the terms of the Agreement, the Company and Friedman intend to facilitate an asset acquisition, or other tax-free combinational transaction with the Company, with closing to occur on or before April 25, 2009. In consideration for 10 million shares of the Company’s stock, Friedman shall contribute assets and intellectual property of his eCommerce Solutions, proprietary software applications, all reseller agreements and client base, and waive first year salaries for each of its current and prospective officers (“Transaction”).


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

There were no defaults upon senior securities during the period ended September 30 , 2009.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


There were no matters submitted to the vote of securities holders during the period ended September 30, 2009.

 

ITEM 5. OTHER INFORMATION


None.

 



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ITEM 6. EXHIBITS


Exhibits:


31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.


32.1

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.



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SIGNATURES


Pursuant to the requirements of Section 13 or 15(b) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

COMMERCE ONLINE, INC.

 

 

Date: November 11, 2009

By:/s/ Kyle Gotshalk      

 

Kyle Gotshalk

 

Chief Executive Officer




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