Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[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 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period to __________
Commission File Number: 000-26383
ZEALOUS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 000-26383 88-0325940
------------------------------------------------------------
(State or other (Commission File (IRS Employer
Jurisdiction Number) I.D. No.)
of Incorporation
or organization)
9550 Warner Avenue, Suite 250
Fountain Valley, CA 92705
---------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 471-0123
15641 Red Hill Avenue, Suite 200
Tustin, CA 92780
----------------------------------------------------
(Former name or former address, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed 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 issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
[ ] Large accelerated filer Accelerated filer
[ ] Non-accelerated filer
[X] Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 632,662,856 shares as of
November 21, 2009.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1: Financial Statements F1 - F4
Item 2: Management's Discussion and Analysis of F18
Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures F24
About Market Risk
Item 4T: Controls and Procedures F24
PART II - OTHER INFORMATION
Item 1: Legal Proceedings F25
Item 1A: Risk Factors F31
Item 2: Unregistered Sales of Equity Securities F31
and Use of Proceeds
Item 3: Defaults Upon Senior Securities F32
Item 4: Submission of Matters to a Vote of Security Holders F32
Item 5: Other Information F32
Item 6: Exhibits F32
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZEALOUS, INC. AND SUBSIDIARIES
(FORMERLY, ADULT ENTERTAINMENT CAPITAL, INC.)
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
Condensed Consolidated Statements of Financial Condition F-1
as of September 30, 2009 (unaudited) and December 31, 2008
(audited)
Condensed Consolidated Statements of Operations for the three F-2
and nine months ended September 30, 2009 and 2008 (unaudited)
Condensed Consolidated Statement of Stockholders' Deficit for
the nine months ended September 30, 2009 (unaudited) F-3
Condensed Consolidated Statements of Cash Flows for the nine F-4
months ended September 30, 2009 and 2008 (unaudited)
Notes to Condensed Consolidated Financial Statements as of
September 30, 2009 (unaudited) F-5
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZEALOUS, INC. AND SUBSIDIARIES
(FORMERLY, ADULT ENTERTAINMENT CAPITAL, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
2009 2008
(Unaudited) (Audited)
---------- ----------
Assets
Cash $ - $ 4,217
Restricted cash - 268,399
Receivables 4,408 -
Investment in equity securities
of affiliated entity 4,667 6,680
Inventory - at cost 12,475 -
Deposit with clearing broker 25,953 104,730
Prepaid expenses 26,968 11,602
---------- ----------
Total current assets 74,471 395,628
---------- ----------
Property and equipment, net 229,525 293,779
Deposits, net 25,002 25,002
---------- ----------
Total assets $ 328,998 $ 714,409
========== ==========
Liabilities and Stockholders' Deficit
Liabilities:
Bank overdraft $ 24,668 $ -
Payable clearing broker 8,637 9,853
Accounts payable and accrued liabilities 3,424,123 2,479,820
Non-convertible notes payable - current 4,061,156 3,627,557
Lines of credit 998,416 998,416
Convertible debt 547,500 3,661,991
Liability to issue stock 305,844 305,844
---------- ----------
Total current liabilities 9,370,344 11,083,481
---------- ----------
Non-convertible notes payable 480,000 480,000
---------- ----------
Total liabilities 9,850,344 11,563,481
---------- ----------
Stockholders' Deficit:
Preferred stock, par value $0.01,
10,000,000 shares authorized,
199,607 shares Series A Convertible
preferred shares issued and
outstanding on September 30, 2009 and
December 31, 2008 1,996 1,996
Common stock, par value $0.001,
1,500,000,000 shares authorized,
631,032,856 and 410,621,523 shares
issued and outstanding on
September 30, 2009 and December 31, 2008,
Respectively 631,033 410,622
Additional paid-in capital 9,595,950 6,554,490
Accumulated deficit (19,750,325) (17,816,180)
----------- -----------
Total stockholders' deficit (9,521,346) (10,849,072)
----------- -----------
Total liabilities and
stockholders' deficit $ 328,998 $ 714,409
============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
F-1
ZEALOUS, INC. AND SUBSIDIARIES
(FORMERLY, ADULT ENTERTAINMENT CAPITAL, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2009 2008 2009 2008
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
REVENUES
Sales of health and wellness products $ 3,128 $ - $ 63,841 $ -
Commissions - financial services - 325,445 - 682,933
Interest income - 576 - 11,286
------------ ------------ ------------ ------------
Total revenues 3,128 326,021 63,841 694,219
------------ ------------ ------------ ------------
EXPENSES
Cost of sales - health and wellness products 730 - 11,588 -
General and administrative 72,560 321,563 307,899 979,977
Salaries and benefits 145,549 326,235 421,981 1,422,554
Professional fees 37,612 102,212 202,080 298,102
Rent 25,334 82,328 360,820 361,574
Depreciation and amortization 21,445 25,198 64,255 75,912
Realized losses, net - 352,709 - 379,738
------------ ------------ ------------ ------------
Total expenses 303,230 1,210,245 1,368,623 3,517,857
------------ ------------ ------------ ------------
Net loss from operations (300,102) (884,224) (1,304,782) (2,823,638)
------------ ------------ ------------ ------------
OTHER EXPENSES (INCOME):
Interest expense 257,449 2,022,559 674,428 3,671,148
Realized losses (gains), net (50,603) - (50,603) -
Other (income)/expense, net 6,597 43,277 5,538 14,434
------------ ------------ ------------ ------------
Total other expenses 213,443 2,065,836 629,363 3,685,582
------------ ------------ ------------ ------------
Net loss $ (513,545) $ (2,950,060) $ (1,934,145) $ (6,509,220)
------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding 631,032,856 348,270,561 574,708,117 393,478,317
Net loss per share - basic $ (0.001) $ (0.008) $ (0.003) $ (0.016)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
F-2
ZEALOUS, INC. AND SUBSIDIARIES
(FORMERLY, ADULT ENTERTAINMENT CAPITAL, INC.)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTMBER 30, 2009 (UNAUDITED)
ADDITIONAL
COMMON STOCK PREFERRED STOCK PAID IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- -------- ------- ------ ----------- ------------ ------------
Balance, December 31, 2008 410,621,523 $410,622 199,607 $1,996 $ 6,554,490 $(17,816,180) $(10,849,072)
Shares issued for repayment
of debt 167,724,550 167,724 - - 2,956,766 - 3,124,490
Shares issued for payment of
accrued interest 10,586,783 10,587 - - 84,694 - 95,281
Shares issued in lieu of
payroll 42,100,000 42,100 - - - - 42,100
Net loss - - - - - (1,934,145) (1,934,145)
----------- -------- ------- ------ ----------- ------------ ------------
Balance, September 30, 2009
(unaudited) 631,032,856 $631,033 199,607 $1,996 $ 9,595,950 $(19,750,325) $ (9,521,346)
=========== ======== ======= ====== =========== ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-3
ZEALOUS, INC. AND SUBSIDIARIES
(FORMERLY, ADULT ENTERTAINMENT CAPITAL, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTMBER 30, 2009 (UNAUDITED)
Nine months ended Nine months ended
September 30, 2009 September 30, 2008
(unaudited) (unaudited)
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,934,145) $ (6,509,220)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation expense 64,254 75,912
Investment write down 41,878
Amortization of debt discount - 1,988,309
Amortization of deferred financing cost - 1,193,438
Unrealized (gains)/losses 2,013 290,369
Stock based compensation expense - 224,860
Penalties accrued to note payable 346,885 -
Changes in operating assets and liabilities:
Deposits 78,777 (529,449)
Inventory (12,475) -
Receivables (4,408) 595,235
Restricted cash 268,399 -
Prepaid expenses (15,366) (119,876)
Increase in bank overdraft 24,668 46,536
Accounts payables and accrued liabilities 1,080,468 1,463,723
------------------ ------------------
Net cash used in operating activities (100,930) (1,238,285)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of net liabilities on merger - (793,086)
Purchase of property and equipment (17,242)
Deposit on asset acquisition - (50,000)
Sale of financial instruments, net - 522,937
------------------ ------------------
Net cash used in provided by investing activities - (337,391)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 96,713 1,389,150
Sale of stock - 170,000
------------------ ------------------
Net cash provided by financing activities 96,713 1,559,150
------------------ ------------------
Net change in cash (4,217) (16,526)
Cash, beginning of year 4,217 16,526
------------------ ------------------
Cash, end of year $ - $ -
================== ==================
Supplemental disclosure of non-cash investing
and financing activities:
Stock issued for conversion of debt $ 3,124,490 $ 1,285,918
================== ==================
Stock issued for payment of accrued interest $ 95,281 $ 129,887
================== ==================
Stock issued in lieu of payroll $ 42,100 $ -
================== ==================
Supplemental disclosure of cash flow information:
Cash interest paid $ - $ 15,963
================== ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-4
ZEALOUS, INC. AND SUBSIDIARIES
(FORMERLY, ADULT ENTERTAINMENT CAPITAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2009
NOTE 1. INCORPORATION, NATURE AND CONTINUANCE OF OPERATIONS
INCORPORATION AND NATURE OF OPERATIONS
Zealous, Inc., is a holding company previously known as Adult Entertainment
Capital, Inc. and Zealous Trading Group, Inc. Zealous, Inc. ("the Company"),
conducts business through its various subsidiaries and was originally
incorporated under the laws of the state of Nevada on September 25, 1978.
Through the years the Company has gone through various name changes as a result
of its different business plans.
Zealous Holdings Inc., a subsidiary of the Company, is a holding company whose
subsidiaries were engaged in various financial services businesses including
investment banking, trading services, and asset management services. Zealous
Holdings Inc. raised capital for small and microcap public companies and select
private issuers and was also involved in the development of its Zealous
Alternative Trading System ("ZATS"). During the fourth quarter of 2008 as the
economic conditions and uncertain investment climate worsened, the Company was
no longer able to obtain the necessary financing to continue to fund its
financial services operations and maintain the capital requirement of Zealous
Capital Markets, LLC, its broker-dealer subsidiary. These conditions caused the
Company to shut down the operations of Zealous Capital Markets, LLC in January
2009. On April 2, 2009, the Board of Directors of the Company agreed to cease
the business activities of, close down and dissolve its wholly owned subsidiary
Zealous Real Estate Consulting, LLC., a consumer mortgage negotiations company,
effective May 31, 2009. During the nine months ended September 30, 2009, the
Company established Health and Wellness Partners, Inc. which is engaged in
distribution of all natural herbal products that improve the body, mind and
spirit of consumers. These health and wellness products which include Liquid
Ice (an energy drink) and Rock Hard Weekend (a male performance pill) and
Surge, a line of sexual performance supplements for both men and women. The
Company also established Zealous Interactive, Inc. which operates a multiple
media related business, including a print publication and Internet URLs.
GOING CONCERN
At September 30, 2009, the Company had not achieved profitable operations, had
insufficient working capital to fund ongoing operations and expects to incur
further losses. These circumstances raise a substantial doubt about the
Company's ability to continue as a going concern. The Company's ability to
continue as a going concern is dependent upon its ability to generate future
profitable operations and to obtain the necessary financing to meet its
obligations and repay its liabilities arising from normal business operations.
Management believes that the Company may not be able to obtain additional funds
from debt or equity financing due to current economic conditions.
Page F-5
After evaluating the current economic circumstances and investment climate,
management believes that it is in the best interest of the Company to exit the
financial
services business. Management plans to generate revenue through sale of health
and wellness products and a multiple media related business, including a print
publication and Internet URLs.
These interim condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable to a going
concern, which assumes that the Company will be able to meet its obligations
and continue its operations. Realization values may be substantially different
from carrying values as shown. These interim condensed consolidated financial
statements do not give effect to adjustments that would be necessary to the
carrying values and classification of assets and liabilities should the Company
be unable to continue as a going concern.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These interim consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Zealous Holdings, Inc., Zealous
Capital Markets, LLC, Zealous Asset Management, LLC, Zealous Real Estate
Consulting, LLC, Zealous ATS, LLC, Health and Wellness Partners, Inc. and
Zealous Interactive, Inc. All intercompany balances and transactions have been
eliminated in consolidation.
BASIS OF PRESENTATION
While the information presented in the accompanying interim consolidated
financial statements is unaudited, it includes all adjustments, which are, in
the opinion of management, necessary to present fairly the financial position,
results of operations and cash flows for the interim periods presented in
accordance with accounting principles generally accepted in the United States
of America. These interim financial statements follow the same accounting
policies and methods of their application as the Company's December 31, 2008
audited annual financial statements. All adjustments are of a normal recurring
nature. It is suggested that these interim financial statements be read in
conjunction with the Company's December 31, 2008 annual financial statements
filed on Form 10-K with the Securities and Exchange Commission on May 18, 2009.
Operating results for the three and nine months ended September 30, 2009 are
not necessarily indicative of the results that can be expected for the year
ending on December 31, 2009.
Page F-6
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenditures during the reporting period. A precise determination of many
assets and liabilities is dependent upon future events. Actual results may vary
from these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less.
BASIC AND DILUTED NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings Per Share". SFAS No. 128 requires presentation of both basic and
diluted earnings per share ("EPS") on the face of the statements of operations.
Basic EPS is computed by dividing net loss available to common shareholders by
the weighted average number of common shares outstanding during the year.
Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period including stock options and warrants, using the treasury
stock method and convertible debt using the if-converted method. Common stock
equivalents were not included in the calculation of diluted loss per share as
their effect would be anti-dilutive.
REVENUE RECOGNITION
The Company recognizes sales of health and wellness products as they are
shipped. Shipping and delivery costs are included in cost of sales. Real estate
consulting fees are recognized when earned. All commission expense, if any,
associated with revenues are recorded in general and administrative expenses.
INCOME TAXES
The Company adopted the SFAS No. 109, "Accounting for Income Taxes". Pursuant
to SFAS No. 109, deferred income tax assets and liabilities are computed for
differences between the financial statement carrying amounts and the respective
tax bases. Deferred tax assets and liabilities are measured using enacted or
substantially enacted tax rates expected to apply to the taxable income in the
periods in which those differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred income
tax assets to the amount expected to be realized. Potential benefits of net
operating losses have not been recognized in the financial statements because
the Company cannot be assured it is more likely than not it will utilize the
net operating losses carried forward in future years.
Page F-7
On January 1, 2007, the Company adopted FIN 48, "Accounting for Uncertainties
in Income Taxes". FIN 48 clarifies the requirements of SFAS No. 109, Accounting
for Income Taxes, relating to the recognition of income tax benefits. FIN 48
provides a two
step approach to recognizing and measuring tax benefits when the benefits'
realization is uncertain. The first step is to determine whether the benefit is
to be recognized, the second step is to determine the amount to be recognized.
Income tax benefits should be recognized when, based on technical merits of a
tax position, the company believes that if a dispute arose with the taxing
authority and were taken to a court of last resort, it is more likely than not
that the tax position would be sustained as filed; and if the position is
determined to be more likely than not of being sustained, the reporting company
should recognize the largest amount of tax benefit that is greater than 50
percent likely of being realized upon ultimate settlement with the taxing
authority.
The Company's adoption of FIN 48 did not have any impact on its financial
statements.
INVENTORIES
Inventories consist primarily of cases of Liquid Ice energy drink and packets
of Rock Hard Weekend pills. Inventories are valued at lower of cost or market,
determined using the first-in first-out method.
RECENT ACCOUNTING PRONOUNCEMENTS
The following Recent Accounting Pronouncements are disclosed as they may be
applicable to the Company's operations and could have an impact on the
Company's financial statements.
In September 2009, the FASB Emerging Issues Task Force, or EITF, reached a
consensus on ASC Update 2009-13 (Topic 605), Multiple-Deliverable Revenue
Arrangements, or ASC Update 2009-13. ASC Update 2009-13 applies to multiple-
deliverable revenue arrangements that are currently within the scope of ASC
605-25. ASC Update 2009-13 provides principles and application guidance on
whether multiple deliverables exist and how the arrangement should be separated
and the consideration allocated. ASC Update 2009-13 requires an entity to
allocate revenue in an arrangement using estimated selling prices of
deliverables, if a vendor does not have vendor-specific objective evidence or
third-party evidence of selling price. The update eliminates the use of the
residual method and requires an entity to allocate revenue using the relative
selling price method and also significantly expands the disclosure requirements
for multiple-deliverable revenue arrangements. ASC Update 2009-13 should be
applied on a prospective basis for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with
earlier application permitted. As a result, ASC Update 2009-13 will be
effective for the Company no later than the first quarter of fiscal 2011. The
adoption
Page F-8
of ASC Update 2009-13 will not have a material impact on the Company's
financial position or results of operations for future collaborations
arrangements.
In June 2009, the FASB issued Statement of Financial Accounting Standards No.
165, "Subsequent Events," ("SFAS No. 165"). SFAS 165 establishes 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. SFAS 165 applies to both interim financial statements and annual
financial statements. SFAS 165 is effective for interim or annual financial
periods ending after June 15, 2009. SFAS 165 does not have a material impact on
our financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards
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. The
Company does not expect that the adoption of SFAS 166 will have a material
impact on the financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards 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. The Company does not expect that the adoption of
SFAS 167 will have a material impact on the financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards 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 ("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.
The Company will begin to use the new Codification when referring to GAAP in
its annual report on Form 10-K for the fiscal year ending December 31, 2009.
This will not have an impact on the results of the Company.
In August 2009, the FASB updated the fair value measurement guidance to clarify
how an entity should measure liabilities at fair value. The update reaffirms
fair value is based on an orderly transaction between market participants, even
though liabilities are
Page F-9
infrequently transferred due to contractual or other legal restrictions.
However, identical liabilities traded in the active market should be used when
available. When quoted prices are not available, the quoted price of the
identical liability traded as an asset, quoted prices for similar liabilities
or similar liabilities traded as an asset, or another valuation approach should
be used. This update also clarifies that restrictions preventing the transfer
of a liability should not be considered as a separate input or adjustment in
the measurement of fair value. We will adopt the provisions of this update for
fair value measurements of liabilities effective October 1, 2009, which we do
not expect to have a material impact on consolidated financial statements.
RECLASSIFICATIONS
Certain comparative figures have been reclassified to conform to the current
period's presentation.
NOTE 3. STOCKHOLDERS' DEFICIT
Equity issuances
During the nine months ended September 30, 2009, the Company issued 166,311,335
shares of its common stock for conversion of $3,114,491 of its convertible debt
and $95,281 of accrued interest on convertible debt into equity. The Company
also issued 12,000,000 shares of its common stock to one of its shareholders
for repayment of debt in the amount of $10,000. During the nine months ended
September 30, 2009, the Company issued 42,100,000 shares towards payroll
payable valued at $42,100.
NOTE 4. DEPOSIT WITH CLEARING BROKER
The Company was a party to Clearing Agreements with Wedbush Morgan Securities,
Inc. and Legent Securities on a fully disclosed basis to provide custodial and
clearing services for the Company's financial services business. These
custodial and clearing services included custody of customer securities and
funds, providing written statements, confirmation of trades, account and
security transfers, monitoring of compliance with Federal Reserve regulations,
clearance and settlements of transactions hypothecation and lending of
securities as well as standard clearing firm and custodial services. The
Clearing Agreements were cancelled during the nine months ended September 30,
2009. The Company had $25,953 and $104,730 of funds with these clearing brokers
as of September 30, 2009 and December 31, 2008, respectively.
Page F-10
NOTE 5. NON-CONVERTIBLE NOTES PAYABLE
Non-convertible notes payable at September 30, 2009 and December 31, 2008 are
comprised of the following:
September 30, December 31,
2009 2008
------------ -----------
Short-Term Borrowings:
Notes Payable - Stockholders (1) $ 2,460,825 $ 2,056,039
Notes Payable - Related Parties (2) 1,600,331 1,571,518
------------ -----------
Total Short-Term Borrowings 4,061,156 3,627,557
------------ -----------
Long-Term Borrowings:
Note Payable - Stockholders (1) 480,000 480,000
------------ -----------
Total Long-Term Borrowings 480,000 480,000
------------ -----------
Total Notes Payable $ 4,541,156 $ 4,107,557
------------ -----------
(1)The Company has notes payable to stockholders that are unsecured,
interest bearing, notes having interest rates ranging from 7% to 24%.
All except for $480,000 of these notes payable are in default as of
September 30, 2009. These notes mature at various times between June
2006 and December 2015.
(2)The Company had notes payable to related parties that are interest
bearing, demand notes having interest rates ranging from 5% to 12%. All
notes payable to related parties are in default as of September 30,
2009. One of the notes payable to a related party grants the holder a
senior security interest in all of the assets, proceeds of those assets
and equity of the Company.
NOTE 6. LINE OF CREDIT
The Company has two revolving lines of credit for $500,000 each, from Citibank
and First Tennessee Bank. The line of credit from Citibank was established by
individuals affiliated to a stockholder and assigned to the Company on July 24,
2006. The line of credit from First Tennessee Bank was established by the same
individuals and later assigned to the Company on July 7, 2007. The interest
rates on the Citibank and First Tennessee lines of credit are at Prime Rate and
Prime Rate plus 1%, respectively. The balances on the lines of credit were
$998,416 and $998,416 as of September 30, 2009 and December 31, 2008,
respectively. These lines are in default as of September 30, 2009.
NOTE 7. CONVERTIBLE DEBT
The Company has various convertible notes payable amounting to $547,500. These
convertible notes were issued in 2007 by the public shell into which the
Company was merged during 2008. The notes whose face value aggregated
$5,122,500 at issuance were
Page F-11
to mature at various dates through October 2008, they had interest rates
ranging from 5% to 15% and included an option to convert into common stock at a
conversion price of $0.02 per share. During the nine months ended September 30,
2009, the company issued 166,311,335 shares of its common stock for conversion
of $3,114,491 of this convertible debt into equity. The remaining balance of
$547,500 was therefore in default as a result of the Company's inability to pay
by September 30, 2009.
In connection with the issuance of convertible notes, the company issued a
total of 119,992,500 warrants convertible at $0.02, $0.03 and $0.05 per share
with terms of three to five years. Additionally, the Company issued 5,406,249
warrants convertible at $0.03 per share within five years, exercisable one year
from the issuance of the note as long as the holder did not demand payment or
exercise the option under the note prior to the maturity date of the note.
In connection with securing the original financing pursuant to these notes, the
Company paid $299,250 in cash and issued 24,275,000 warrants. These amounts
were recorded as deferred financing costs and have been completely amortized
over the terms of the notes.
The following table shows the amount of convertible notes payable and secured
convertible debentures as on September 30, 2009:
Convertible notes payable $ 442,500
Secured convertible debentures 105,000
-----------
Total as on September 30, 2009 $ 547,500
-----------
These convertible notes are in default as on September 30, 2009.
NOTE 8. WARRANTS
In March 2008, the Company had issued 2,125,000 warrants in connection with the
sale of 4,250,000 shares of its common stock. These warrants have a life of 5
years from the date of issuance.
In connection with the notes issued in 2007 as discussed in Note 6 above, the
Company issued warrants to purchase 125,398,749 shares of common stock at $0.02
to $0.05 per share over five years. The Company also issued 24,275,000 warrants
as financing costs related to these notes.
Page F-12
The following table summarizes information on stock warrants outstanding at
September 30, 2009:
Number Number
Outstanding at Exercisable at
September 30, Expiration Exercise September 30,
Description 2009 Dates Price 2009
----------- -------------- ---------- -------- --------------
Issued on 15% convertible notes 8,109,375 September $ 0.02 8,109,375
through
October
2012
Additional warrants on 15% convertible notes - 5,406,249 September 0.03 5,406,249
exercisable after 1 year through
October
2012
Issued on 5% secured convertible debentures 106,875,000 October 2012 0.03 106,875,000
Issued on 12% convertible promissory note 5,000,000 October 2012 0.03 5,000,000
Issued upon sale of 4,250,000 shares of common stock 2,125,000 March 2013 0.05 2,125,000
Issued on non convertible debt 13,325 September 0.03 to 13,325
through 0.05
November
2010
Issued to consultants 24,275,000 October 2012 $ 0.03 24,275,000
through
January
2013
============== ==============
151,803,949 151,803,949
============== ==============
NOTE 9. STOCK OPTIONS
On October 19, 2007, the Board of Directors of Zealous Holdings adopted the
2007 Equity Incentive Plan (the "2007 Plan") which reserved a total of
4,000,000 shares of common stock for issuance. If an incentive award granted
under the 2007 Plan expired, terminated, was unexercised or was forfeited, such
award and related surrendered shares would become available for future awards
under the 2007 Plan.
In 2008, in connection with the merger with the public shell, the public shell
issued 1,600,000 stock options from its Stock Incentive Plan to holders of
options of the Zealous Holdings, Inc. 2007 Plan at an exercise price of $1.00
and a term of 10 years.
The Company uses the Fair Value Method in accordance with SFAS 123R for
accounting of stock based compensation. The fair value of these stock options
was determined using the Company's historical stock prices and the Black-
Scholes option-pricing model with the following assumptions:
Risk free rate 4%
Dividend yield 0%
Weighted average expected volatility 123.41%
Weighted average expected option life 10 yrs
Page F-13
The following table shows the total number of options outstanding as on
September 30, 2009:
Shares
------
Total options outstanding as on December 31, 2008 1,600,000
Add: Options issued in 2009 -
---------
Total Options outstanding as on September 30, 2009 1,600,000
=========
Total number of options exercisable as on September 30, 2009 817,500
=========
Weighted Average exercise price of options outstanding as on September 30, 2009
is $1.00 per share.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Legal matters
The Company is subject to litigation from time to time in the normal course of
business.
During the year ended December 31, 2008, the Company was served as a co-
defendant with a complaint by a former director and stockholder. The complaint
seeks damages in the amount of $600,000 plus interest and attorney fees. In
July 2008, the Company entered a settlement agreement for $350,000. The Company
has currently been served with a complaint as a co-defendant to enforce the
settlement agreement and is pursuing settlement discussions. The other co-
defendants in this case have agreed to assume any and all damages arising from
this settlement and therefore the company has not accrued this judgment as of
September 30, 2009.
Company was served as a co-defendant with a complaint by a former director and
stockholder. The complaint seeks recovery of $1,500,000, relating to prior
equity and unsecured debt investments, plus attorneys fees and costs. The
complaint alleges violations of federal and state securities laws. The Company
cannot determine the merit of the case at this time.
The Company was served as a co-defendant with a verified complaint by a
creditor for Unlawful Detainer. The Company has filed an answer asserting
affirmative defenses on December 8, 2008. Plaintiff issued discovery requests
to the Company on December 23, 2008. Subsequent to further negotiations, the
Plaintiff refunded a security deposit of $262,500 plus accrued interest to the
Company in January, 2009. The Company is in the process of propounding and
responding to discovery and is also engaged in settlement discussions.
Page F-14
Professional Offshore Opportunities Fund Limited, a secured creditor, filed a
complaint against the Company on July 23, 2008. Professional Offshore
Opportunities Fund Limited's causes of action against the Company include
negligent misrepresentation, breach of the duty of good faith and fair dealing,
and breach of the debenture. On January 30, 2009, the New York Court entered
Judgment against Defendant in favor of Plaintiff. On February 3, 2009,
Plaintiff filed a Restraining Notice against the Company to prevent the sale of
certain property. On February 23, 2009, Plaintiff filed with the Court a Notice
of Entry of Default, dated January 16, 2009, against Defendants for the
principal amount of $200,000, plus interest, costs and disbursements. The
Company is pursuing settlement negotiations and drafting a Motion to Set Aside
Default.
Kent G. Wyatt, Sr., former CEO and Chairman of the board of the public shell
(pre-merger) filed a Complaint against the Company on October 24, 2008 for
alleged breach of promissory note, breach of consulting agreement, unpaid loans
and NSF checks, declaratory relief, breach of implied covenant of good faith
and fair dealing, intentional misrepresentation, negligent misrepresentation,
accounting, and conversion. On December 26, 2008, the Court entered Default
Judgment against all Defendants for the principal plus interests totaling
$270,259.15. Defendants engaged in a settlement
NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal matters (continued)
conference with Plaintiff on March 30, 2009 and are continuing to pursue
settlement discussions.
On February 6, 2009, a shareholder filed a Complaint with the Company as co-
defendant alleging negligent misrepresentation, breach of fiduciary duty,
breach of 6 contracts, breach of implied covenant of good faith and fair
dealing of six contracts and violations of Corporate Code 25400, 25401,
25500, 25501 25504, fraud, unjust enrichment on two contracts, equitable
indemnity, constructive trust, and unfair business practices. The Company is
engaged in settlement discussion, preparing responsive pleadings, and
completing discovery responses.
On August 12, 2009, Alpha Capital Anstalt Hedge Fund et al ("Plaintiff") has
filed a suit against Milton ("Todd") Ault III ("Defendant") in the New York
State Supreme Court. The case number for this litigation is 602444/09.
Plaintiff is seeking $4.2M plus damages. Defendant has answered, and is in the
process of selecting Counsel to handle litigation. No dates have been set by
the Court. Defendant maintains that Plaintiff has received over $1M in
repayment and that all allegations are baseless while the Plaintiff has
impugned the reputation of Mr. Ault in the press. Plaintiffs maintain
investment was to support ZATS which never worked or was completed. Defendant
has proof that many of the Plaintiffs actually conducted business on ZATS in
2008 and the Company received earned commissions from these transactions.
Defendants deny all allegations of the Plaintiffs.
Page F-15
The Company was served as a co-defendant with a verified complaint by a
creditor on February 4, 2009. The Plaintiff alleges that Defendants failed to
repay Plaintiff in accordance with an executed Promissory Note, and Defendants
failed to pay a Guarantee as executed between Plaintiff and Defendants.
Plaintiff is alleging damages in an amount of $500,000.00, pre and post-
judgment interest and attorneys' fees and costs. Defendants are preparing
responsive pleadings bringing affirmative defenses. In April 2009, Defendants
also began settlement discussions with Plaintiffs.
On November 7, 2007, the Company entered into a Letter of Agreement with The
Investor Relations Group, Inc. ("IRG") in which IRG is to provide a
comprehensive corporate communications program. The term of the agreement is
one (1) year unless sooner terminated and the Company shall pay on a monthly
basis $13,500. The Company was served as a defendant with a complaint by IRG.
The complaint seeks damages in the amount of $40,000 plus interest and costs.
On November 14, 2008, the New York Supreme Court entered default against
Defendant for failure to answer the Complaint. The Company is evaluating the
merits of the case and researching the advantages to filing a Motion to Set
Aside Default. The Company is also discussing settlement possibilities with the
Plaintiff.
A former employee of the Company filed a claim for non-payment of wages against
the Company with the Labor Commissioner, State of California alleging that the
Company owes him $4,000 in wages. The Company terminated his at-will employment
and believes that he is not owed any wages since he had been paid in full
through his termination date. The Company is drafting responsive pleadings and
will oppose the claim at any future hearings.
A former employee of the Company filed a claim for non-payment of wages against
the Company with the Labor Commissioner, State of California alleging that the
Company owes him $4,500 in wages. The Company terminated his at-will employment
and believes that he is not owed any wages since he had been paid in full
through his termination date. The Company is pursuing settlement discussions.
The Company is also drafting responsive pleadings and will oppose the claim at
any future hearings.
NOTE 11. RELATED PARTY TRANSACTIONS
The Company engages in various transactions and financing activities with
related parties which include amongst others stockholders of the Company and
other related businesses and acquaintances of stockholders, prior officers and
the Company's Chief Executive Officer. (See note 5 Non-convertible notes
payable)
NOTE 12. INCOME TAXES
Effective January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes". The
Interpretation provides clarification on accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with
FASB No. 109, "Accounting for Income Taxes." The Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be
Page F-16
taken in a tax return, and also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. As a result of the Company's evaluation of the
implementation of FIN 48, no significant income tax uncertainties were
identified. Therefore, the Company recognized no adjustment for unrecognized
income tax benefits for the three months ended September 30, 2009 and 2008. The
tax years subject to examination by the taxing authorities are the years ended
December 31, 2008, 2007, 2006 and 2005.
In May 2007, the FASB issued FASB Staff Position ("FSP") FIN 48-1 "Definition
of Settlement in FASB Interpretation No. 48" (FSP FIN 48-1). FSP FIN 48-1
provides guidance on how to determine whether a tax position is effectively
settled for purpose of recognizing previously unrecognized tax benefits. FSP
FIN 48-1 is effective retroactively to January 1, 2007. The implementation of
this standard did not have a material impact on our consolidated financial
position or results of operation.
On September 30, 2009, the Company will have federal net operating loss
carryforward of approximately $19.7 million. Current federal tax law limits the
amount of loss available to offset future taxable income when a substantial
change in ownership occurs. Therefore the amount available to offset future
taxable income may be limited. The federal net operating losses expire by 2029.
NOTE 13. OTHER INCOME
During the quarter ended September 30, 2009, the Company sold 75,797 shares of
Patient Safety Technologies, Inc. ("PST") for a gain of $50,603. The Company
had previously held warrants from PST that were attributed no value. On July
29, 2009, the Company entered into an Exchange Agreement with PST in which all
warrants held were converted into shares of PST common stock. These shares
were subsequently sold on September 1, 2009 and September 21, 2009 as noted
above.
NOTE 14. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through November 23, 2009, the date
which the financial statements were available to be issued.
On November 9, 2009 Zealous Inc. and its subsidiaries relocated their offices
after attempts to renegotiate the lease failed. The company no longer requires
as large an office since it has been consistently reducing its staff size
throughout 2009. The Company has a new address and phone number.
Page F-17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements, other than purely historical information, including
estimates, projections, statements relating to our business plans, objectives,
and expected operating results, and the assumptions upon which those statements
are based, are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These forward-
looking statements generally are identified by the words "believes," "project,"
"expects," "anticipates," "estimates," "intends," "strategy," "plan," "may,"
"will," "would," "will be," "will continue," "will likely result," and similar
expressions. We intend such forward-looking statements to be covered by the
safe-harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and are including this statement for
purposes of complying with those safe-harbor provisions. Forward-looking
statements are based on current expectations and assumptions that are subject
to risks and uncertainties which may cause actual results to differ materially
from the forward-looking statements. Our ability to predict results or the
actual effect of future plans or strategies is inherently uncertain. Factors
which could have a material adverse affect on our operations and future
prospects on a consolidated basis include, but are not limited to: changes in
economic conditions, legislative/regulatory changes, availability of capital,
interest rates, competition, and generally accepted accounting principles.
These risks and uncertainties should also be considered in evaluating forward-
looking statements and undue reliance should not be placed on such statements.
We undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Further information concerning our business, including additional factors that
could materially affect our financial results, is included herein and in our
other filings with the SEC.
RESULTS OF OPERATION:
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
We generated $3,128 in operating revenues for the three months ended September
30, 2009 compared to $326,021 in operating revenues for the three months ended
September 30, 2008. This is because of lesser brokerage commissions generated
during the three months ended September 30, 2009 compared to three months ended
September 30, 2008. During the three months ended September 30, 2009 and
September 30, 2008, we incurred operating expenses of $303,230 and $1,210,245,
respectively, a decrease of $907,015 because of decreased operating activities.
We incurred $257,449 in interest expense during the three months ended
September 30, 2009 compared to $2,022,559 in interest expense during the three
months ended September 30, 2008 because of interest expense on the reduced
liabilities as on September 30, 2009. Interest expense of $257,449 included a
non-cash component attributable to increase in principle amount of a note
Page F18
payable to a shareholder as penalty. The net operating loss figures for the
three months ended September 30, 2009 and 2008 were $513,545 and $2,950,060,
respectively.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
We generated $63,841 in operating revenues for the nine months ended September
30, 2009 compared to $694,219 in operating revenues for the nine months ended
September 30, 2008. This is because of lesser brokerage commissions generated
during the nine months ended September 30, 2009 compared to nine months ended
September 30, 2008. During the nine months ended September 30, 2009 and
September 30, 2008, we incurred operating expenses of $1,368,623 and
$3,517,857, respectively, a decrease of $2,149,234 because of decreased
operating activities. We incurred $674,428 in interest expense during the nine
months ended September 30, 2009 compared to $3,671,148 in interest expense
during the nine months ended September 30, 2008 because of interest expense on
the reduced liabilities as on September 30, 2009. Interest expense of $674,428
included a non-cash component attributable to increase in principle amount of a
note payable to a shareholder as penalty. The net operating loss figures for
the nine months ended September 30, 2009 and 2008 were $1,934,145 and
$6,509,220, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We had a bank overdraft of $24,668 and a cash balance of $4,217 as on September
30, 2009 and December 31, 2008, respectively. We had $0 in restricted cash as
on September 30, 2009 and $268,399 in restricted cash on December 31, 2008.
Payable to clearing broker and managed funds were $8,637 on September 30, 2009
as compared to $9,853 on December 31, 2008. Investments in affiliated entities
on September 30, 2009 stood at $4,667 as compared to $6,680 on December 31,
2008. The company is party to Clearing Agreements with Wedbush Morgan
Securities, Inc. and Legent Securities on a fully disclosed basis to provide
custodial and clearing services for the Company. These custodial and clearing
services include custody of customer securities and funds, providing written
statements, confirmation of trades, account and security transfers, monitoring
of compliance with Federal Reserve regulations, clearance and settlements of
transactions hypothecation and lending of securities as well as standard
clearing firm and custodial services. The Clearing Agreements can be cancelled
at any time for cause or upon 31 days written notice. The Company was required
to maintain a minimum deposit of $100,000 with its clearing broker, the
remaining balance of which is included in deposit with clearing broker in the
accompanying statement of financial condition. Deposit with clearing brokers as
on September 30, 2009 was $25,953 as compared to $104,730 as on December 31,
2008. Loans and receivables as on September 30, 2009 were $4,408 as compared to
$0 as on December 31, 2008. Net investment in fixed assets as on September 30
2009 was $229,525 as compared to $293,779 as on December 31, 2008. Accounts
payables and accrued liabilities as on September 30, 2009 were $3,424,123 as
compared to $2,479,820 on December 31, 2008.
Non-convertible notes payable as on September 30, 2009 were $4,541,156 compared
to $4,107,557 as on December 31, 2008. Lines of credit as on September 30, 2009
were $998,416 compared to $998,416 as on December 31, 2008. In 2008, we issued
various
Page F19
convertible notes payable amounting to $5,122,500. These convertible notes
mature at various times within one year from date of issuance, have an interest
rate ranging from 5% to 15% and include an option to convert the notes to
common stock at a conversion price of $0.02 per share. The balance on these
convertible notes payable as on September 30, 2009 was $547,500. Convertible
notes payable as on December 31, 2008 were $3,661,991.
During the nine months ended September 30, 2009, we issued 166,311,335 shares
of our common stock to convert the principle balance of $3,114,491 of our
convertible notes and related accrued interest of $95,281 into stock of the
company. All notes, except for $749,000 non-convertible notes, are in default
as on September 30, 2009. We are currently negotiating with various secured and
unsecured creditors to settle the notes in default by refinancing and/or
renegotiating the terms of repayment of such notes.
In connection with these convertible notes, we issued a total of 119,992,500
warrants convertible at $0.02, $0.03 and $0.05 per share with terms of three to
five years. Additionally, the Company issued 5,406,249 warrants convertible at
$0.03 per share within five years, exercisable one year from the issuance of
the note as long as the holder did not demand payment or exercise the option
under the note prior to the maturity date of the note.
We accounted for the convertible notes payable in accordance with Emerging
Issues Task Force Issue 98-5, Accounting for Convertible Securities with a
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios
("EITF 98-5"), and recognized an imbedded beneficial conversion feature present
in the convertible note. We recognized and measured an aggregate of $5,122,500
of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital with a discount
against the convertible note. The debt discount attributed to the beneficial
conversion feature has been amortized over the maturity period as non-cash
interest expense.
In connection with securing the financing pursuant to these notes, we paid
$299,250 in cash and issued 24,275,000 warrants. These amounts were recorded as
deferred financing costs and have been amortized over the terms of the notes.
The following table shows the amount of convertible notes payable and secured
convertible debentures as on September 30, 2009:
Convertible notes payable $ 442,500
Secured convertible debentures 105,000
----------
Total as on September 30, 2009 $ 547,500
==========
STOCK OPTIONS
The Company's Board of Directors and stockholders adopted the 2007 Equity
Incentive Plan, or the 2007 Plan, on October 19, 2007 which reserves a total of
4,000,000 shares of Common Stock for issuance under the 2007 Plan. If an
incentive award granted under the
Page F20
2007 Plan expires, terminates, is unexercised or is forfeited, or if any shares
are surrendered to us in connection with an incentive award, the shares subject
to such award and the surrendered shares will become available for further
awards under the 2007 Plan.
During 2008, in connection with the Merger, the Company issued 1,600,000 stock
options pursuant to its Stock Incentive Plan to holders of options from Zealous
Holdings that were previously issued at an exercise price of $1.00 and a term
of 10 years as follows:
Number of Options Vesting Schedule Grant Date
----------------- ----------------------- ----------
467,500 2 years from Grant Date 02/11/08
427,500 Vested 02/11/08
75,000 2 years from Grant Date 12/01/07
25,000 2 years from Grant Date 12/12/07
50,000 Vested 02/11/08
40,000 Vested 01/22/08
100,000 Vested 12/01/07
100,000 Vested 12/12/07
40,000 4 year from Grant Date 02/11/08
50,000 Vested 05/09/08
225,000 *See Below 02/11/08
*50,000 vests upon registration statement becoming effective; 50,000 vests upon
one full year from September 3, 2008 of Company not receiving an "E"; and
125,000 upon Company being listed on a national stock exchange.
The Company uses the Fair Value Method in accordance with SFAS 123R for
accounting of stock based compensation. The fair value of these stock options
was determined using the Company's historical stock prices and the Black-
Scholes option-pricing model with the following assumptions:
Risk free rate 4%
Dividend yield 0%
Weighted average expected volatility 123.41%
Weighted average expected option life 10 yrs
We do not foresee any forfeiture of options.
The following table shows the total number of options outstanding as on
September 30, 2009:
Shares
---------
Total options outstanding as on December 31, 2008 1,600,000
Add: Options issued in 2009 -
=========
Total Options outstanding as on September 30, 2009 1,600,000
---------
Total number of options exercisable as on September 30, 2009 817,500
---------
Page F21
Weighted Average exercise price of options outstanding as on September 30, 2009
is $1.00 per share.
SUBSEQUENT EVENTS
On October 5, 2009 Health and Wellness Partners, Inc. received its first
unsolicited purchase on its new website, www.FeeltheSurge.com.
On October 14, 2009 Health and Wellness Partners, Inc. placed an additional
order of 600,000 capsules of Surge for Women and launched the next day, October
15, 2009 the website, www.FeeltheSurge.com. Over 203 news outlets covered this
launch.
On October 21 a representative of the FDA visited Health and Wellness Partners,
Inc. investigating the efficacy of RockHard Weekend. It was recommended that
Health and Wellness Partners, Inc. cease distributing the product due to
potential harm to the public and the fact the product included an undisclosed
pharmaceutical analog which could be harmful to the public. Subsequently on
November 9, 2009 RockHard Labs issued a voluntary recall of its product and
distribution was curtailed nationwide. The Company is returning all of its
remaining inventory for a full refund plus costs. Further negotations with
RockHard Labs as the manufacturer originally misrepresented itself at the time
the exclusive contract was signed and product was purchased for distribution.
During the month of October and November 2009 Health and Wellness Partners,
Inc. received many testimonials from consumers recommending the product and
attesting to its effectiveness. The Company has posted 8 of these testimonials
on the website, www.FeeltheSurge.com and will continue to do so.
On November 5, 2009 Health and Wellness Partners received its first shipment of
140,000 capsules of Surge for Women.
On November 12, 2009 Zealous Interactive, Inc. re-launched its Beta1 version of
TheAdultSpot.com, its adult portal and social network improving its Alexa
rating by over 1,000% within its first 10 days.
RISK FACTORS
We expect significant operating expenditures during the next 12 months for
working capital requirements. We have insufficient funds to conduct our
operations and to fully realize our operating goals for the next twelve months.
We will therefore be required to seek additional financing. There can be no
assurance that additional financing will be available in amounts or on terms
acceptable to us, if at all.
By adjusting our operations to the level of capitalization, we believe we have
insufficient capital resources to meet projected cash flow deficits. If during
that period or thereafter, we are not successful in generating sufficient
liquidity from operations or in raising sufficient capital resources, on terms
acceptable to us, this could have a material adverse effect on our business,
results of operations, liquidity and financial condition.
Page F22
We presently do not have any available credit, bank financing or other external
sources of liquidity. Due to our brief history and historical operating losses,
our operations have not been a source of liquidity. We will need to obtain
additional capital in order to expand operations and become profitable. In
order to obtain capital, we may need to sell additional shares of our common
stock or borrow funds from private lenders. There can be no assurance that we
will be successful in obtaining additional funding.
Zealous, Inc. prior to December 31, 2008 was operated by a series of partners
with Milton C. Ault III. Subsequent to the world economic downturn and the
collapse of the U.S. Stock Market in October 2008, Mr. Ault continued to manage
the Company and its non-financial oriented subsidiaries. Stephen Bodnar, a
partner prior to 2008, filed a lawsuit subsequent to the Company's name change
to Adult Entertainment Capital. Mr. Ault's long time partners of many years,
Ms. Melanie Glazer and Dr. Louis Glazer resigned and filed lawsuits against the
Company and Mr. Ault. This set of litigation has proven to be financially
debilitating and exhaustive. The Company has entered negotiations with these
partners, however, these efforts may proof unsuccessful. If unsuccessful, the
Company may seek relief in U.S. Bankruptcy Court to restructure the Company.
We will still need additional investments in order to continue operations until
we are able to achieve positive operating cash flow. Additional investments are
being sought, but we cannot guarantee that we will be able to obtain such
investments. Financing transactions may include the issuance of equity or debt
securities, obtaining credit facilities, or other financing mechanisms.
However, the trading price of our common stock and a downturn in the U.S. stock
and debt markets could make it more difficult to obtain financing through the
issuance of equity or debt securities. Even if we are able to raise the funds
required, it is possible that we could incur unexpected costs and expenses,
fail to collect significant amounts owed to us, or experience unexpected cash
requirements that would force us to seek alternative financing. Further, if we
issue additional equity or debt securities, stockholders may experience
additional dilution or the new equity securities may have rights, preferences
or privileges senior to those of existing holders of our common stock. If
additional financing is not available or is not available on acceptable terms,
we will have to curtail our operations.
To date, we have generated minimal revenues and have incurred operating losses
in every quarter. These factors among others may raise substantial doubt about
our ability to continue as a going concern.
OFF BALANCE SHEET ARRANGEMENTS
As of September 30, 2009, there were no off balance sheet arrangements.
Page F23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A smaller reporting company is not required to provide the information required
by this Item.
ITEM 4T. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer, (i) are responsible
for establishing and maintaining adequate internal control over financial
reporting of the Company and (ii) have evaluated the effectiveness of our
internal control over financial reporting (as defined in Rules 13a-15(f) or
15d-15(f) under the 1934 Act as of the end of the period covered by this
Quarterly Report ("Evaluation Date"). Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as the
Evaluation Date, our disclosure controls and procedures are not effective in
alerting them on a timely basis to material information relating to us required
to be included in our reports filed or submitted under the 1934 Act, except as
discussed below.
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting, as required by Sarbanes-
Oxley (SOX) Section 404 A. The Company's internal control over financial
reporting is a process designed under the supervision of the Company's Chief
Executive Officer and Chief Financial Officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company's financial statements for external purposes in accordance with U.S.
generally accepted accounting principles (GAAP)
As of September 30, 2009, management assessed the effectiveness of the
Company's internal control over financial reporting based on the criteria for
effective internal control over financial reporting established in Internal
Control-- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO) and SEC guidance on conducting
such assessments. Based on that evaluation, they concluded that, during the
period covered by this report, such internal controls and procedures were not
effective to detect the inappropriate application of US GAAP rules as more
fully described below. This was due to deficiencies that existed in the design
or operation of our internal control over financial reporting that adversely
affected our internal controls and that may be considered to be material
weaknesses.
The matters involving internal controls and procedures that the Company's
management considered to be material weaknesses under the standards of the
Public Company Accounting Oversight Board were : (1) lack of a functioning
audit committee and lack of majority of outside directors on the Company's
board of directors, resulting in ineffective oversight in the establishment and
monitoring of required internal controls and procedures, and, (2) inadequate
segregation of duties consistent with control objectives. The aforementioned
material weaknesses were identified by the Company's Chief Financial Officer in
connection with the review of our financial statements as of September 30, 2009
and communicated to our management.
Page F24
Management believes that the material weaknesses set forth in items (1) and (2)
above did not have an affect on the Company's financial results. However,
management believes that the lack of a functioning audit committee and lack of
a majority of outside directors on the Company's board of directors could
result in ineffective oversight in the establishment and monitoring of required
internal controls and procedures. Management's goals are to have a functional
audit committee and a majority of outside directors on the Company's board of
directors when funds are available.
This report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this report.
(b) CHANGES IN INTERNAL CONTROLS.
In addition, no change in our internal control over financial reporting (as
defined in Rules 13a-15 or 15d-15 under the 1934 Act) occurred during the
quarter ended September 30, 2009, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Detailed below are our ongoing legal proceedings.
I. BODNAR CAPITAL MANAGEMENT, LLC V. AULT GLAZER CAPITAL PARTNERS, LLC, ET
AL.
United States District Court, CONNECTICUT CASE No: 3:08CV199 (JBA)
On February 6, 2008, Bodnar Capital Management, LLC ("Plaintiff") filed a
Complaint against Ault Glazer Capital Partners, LLC, Zealous Asset Management
LLC, and Milton Ault, III ("Defendants") in the United States District Court,
District of Connecticut under the case number 3:08CV199 (JBA). On June 27,
2008, all parties entered into a confidential settlement agreement. On August
7, 2008, the Court granted Plaintiff's motion to enforce the settlement
agreement and entered judgment in Plaintiff's favor in the amount of $350,000,
plus interest to run from June 27, 2008, against Ault Glazer Capital Partners
LLC, Zealous Asset Management, LLC and Milton "Todd" Ault, III, jointly and
severally. On September 23, 2008, the Court granted the motion for amendment
of judgment to include reasonable attorney fees of $6,160.00. Plaintiffs
sought to enforce the judgment in California and on April 28, 2009, Defendant
Milton Ault, III was deposed in a debtor's examination at the United States
District Court, Central District in California. Defendants are asserting the
automatic stay with regard to Zealous Holdings and entities in lieu of the
Chapter 11 bankruptcy filing. The Company has not received any correspondence
regarding the matter since that time.
Page F25
II. BODNAR CAPITAL MANAGEMENT, LLC V. MILTON AULT, III, ET AL.
United States District Court, District of Connecticut Case No.:
3:08CV1601 (AWT)
On October 20, 2008, Bodnar Capital Management, LLC ("Plaintiff") filed a
Complaint against Milton Ault, III, William B. Horne, Lynne Silverstein,
Melanie Glazer, Sothi Thillairajah, Scott Livingston, Zealous Holdings, Inc.,
Ault Glazer Bodnar Investment Management, LLC, Ault Glazer & Co., LLC, and
Adult Entertainment Capital, Inc. ("Defendants") for fraud, breach of fiduciary
duty, and breach of contract. Plaintiff alleges that Defendants violated the
Company's Private Placement Memorandum, the Subscription Agreement, and other
documents related to investing in the Company, and consequently, Plantiff is
seeking $1,523,103.60 in damages. Plaintiff filed this case under the United
States District Court, District of Connecticut, under case number 3:08CV1601
(AWT). On February 23, 2009, Plaintiff filed a Motion for a Joint and Several
Judgment against Milton Ault, III. Defendants are asserting the automatic stay
with regard to Zealous Holdings and entities in lieu of the Chapter 11
bankruptcy filing. The Company is awaiting correspondence regarding the Motion
to Set Aside Default and/or a change of venue per the signed Partnership
Agreement.
III. MOTIVATED MINDS, LLC V. AULT GLAZER CAPITAL PARTNERS, LLC, ET AL.
Superior Court of Arizona Case No.: CV2009-003478.
Motivated Minds, LLC ("Plaintiff") filed a Complaint against Ault Glazer
Capital Partners, LLC and Ault Glazer Asset Management, LLC (collectively
referred as "Defendants"). On February 4, 2009, Plaintiff filed a Complaint
against Defendants in the Superior Court of Arizona for Breach of Contract. The
case number is CV2009-003478. Plaintiff alleges that Defendants failed to
repay Plaintiff in accordance with an executed Promissory Note, and Defendants
failed to pay a Guarantee as executed between Plaintiff and Defendants.
Plaintiff is alleging damages in an amount of $500,000.00, pre and post-
judgment interest and attorneys' fees and costs. Defendants are preparing
responsive pleadings bringing affirmative defenses. In April 2009, Defendants
also began settlement discussions with Plaintiffs. The Company has not
received any correspondence regarding the matter since that time.
IV. INVESTOR RELATIONS GROUP, INC. V. ZEALOUS TRADING GROUP, INC.
New York State Supreme Court Case No.: 602014108.
The Investor Relations Group, Inc. ("Plaintiff") filed a complaint against
Zealous Trading Group, Inc. ("Defendant") on July 2, 2008, in the Supreme Court
of the State of New York, under case number 602014108. In their Complaint,
Plaintiff alleges breach of contract, quantum meruit, and account states.
Plaintiff alleges that Defendants failed to pay Plaintiff for services
performed in accordance with the investor relations services contract between
Plaintiff and Defendants. Plaintiff is seeking compensatory damages in an
amount of $41,457.14 and the accrued interest. On November 14, 2008, the New
York Supreme Court entered default against Defendant in an amount of $41,457.14
for failure to answer the Complaint. Additionally, Defendant is pursuing
settlement possibilities with Plaintiff. The Company is awaiting
correspondence regarding the Motion to Stay in the State of Connecticut and/or
a change of venue per the signed Partnership Agreement. The Company has not
received any correspondence regarding the matter since that time.
Page F26
V. MOTIVATED MINDS, LLC V. GLOBAL AUTHENTICATIONS HOLDINGS, INC., ET AL.
Orange County Superior Court Case No.: 30-2008 00234518.
Motivated Minds, LLC ("Plaintiff") filed a Complaint against Global
Authentication Holdings, Inc. and Ault Glazer Capital Partners, LLC
(collectively referred as "Defendants"), on December 30, 2008. Plaintiff filed
a Limited Civil Complaint against Defendants in the Superior Court of
California, in Orange County for breach of promissory note and money lent. The
case number is 30-2008 00234518. Plaintiff alleges damages in an amount of
$25,000.00, pre and post-judgment interest and attorneys' fees and costs.
Defendants asserted the automatic stay of the chapter 11 bankruptcy.
Defendants are also engaging in settlement discussions with Plaintiffs.
On September 1, 2009, Plaintiff requested the Orange County Superior Court to
enter default against Defendant.
VI. CALIFORNIA STATE TEACHERS' RETIREMENT SYSTEM V. ZEALOUS TRADING GROUP,
INC., ET AL.
Los Angeles County Superior Court Case No.: SC100669
California State Teachers' Retirement System ("Plaintiff") filed a Verified
Complaint against Zealous Trading Group, Inc., Initiative Legal Group, LLP,
Younesi & Yoss, LLC and REM ("Defendants") for Unlawful Detainer. Plaintiff
filed their Complaint on November 20, 2008 in the Superior Court of California
in Los Angeles County under case number SC100669. Plaintiff alleges that
Defendant permitted an improper sublease and although the improper subtenant
has vacated, Plaintiff wants to complete the unlawful detainer. Plaintiff is
seeking damages in an amount of $1,166.89 per day from November 18, 2008.
Defendants filed an answer asserting affirmative defenses on December 8, 2008.
Plaintiff issued discovery requests to Defendants on December 23, 2008.
Defendants are in the process of propounding and responding to discovery.
Defendants are also engaged in settlement discussions with Plaintiff.
Subsequent to further negotiations, the Plaintiff released the Company's
security deposit of $262,500 and accrued interest on the deposit of $5,899 from
escrow to the Company in January 2009. Defendants are also engaged in
settlement discussions with Plaintiff.
VII. SECTOR 33 CREATIVE V. ADULT ENTERTAINMENT CAPITAL, INC., ET AL.
Burbank Small Claims Court Case No.: BUR 08S00608
Sector 33 Creative ("Plaintiff") filed a small claims case against Adult
Entertainment Capital, Inc. dba Rock Candy Entertainment, under case number
BUR08S00608 in California North Central District Court on October 6, 2008.
Plaintiff alleges Defendant failed to pay Plaintiff for services rendered in
the development of websites, and Plaintiff is seeking $5,000.00 in compensatory
damages. Judgment was entered against Defendants on December 5, 2008.
Defendants are pursuing settlement negotiations and drafting a Motion to Set
Aside Default.
Page F27
VIII. PROFESSIONAL OFFSHORE OPPORTUNITIES FUND LIMITED V. ZEALOUS TRADING
GROUP, INC.
New York State Supreme Court Case No.: 650260
Professional Offshore Opportunities Fund Limited ("Plaintiff") filed a
Complaint against Zealous Trading Group, Inc. ("Defendant") in the Supreme
Court of the State of New York on July 23, 2008. The case number for this
litigation is 650260. Plaintiff's causes of action against Defendant include
negligent misrepresentation, breach of the duty of good faith and fair dealing,
and breach of the debenture. Plaintiff alleges that Defendants misled
Plaintiff as to the nature of their convertible debentures, Defendant
incorrectly told Plaintiff that the shares were eligible for Rule 144
treatment, and Defendants failed to abide by the default provision of the
debenture. Plaintiff is seeking $53,171.60 plus pre-judgment interests for
Defendants' trading breach and $206,972.22 plus default interests for
Defendants' breach of the executed debenture. On January 30, 2009, the New
York Court entered Judgment against Defendant in favor of Plaintiff. On
February 3, 2009, Plaintiff filed a Restraining Notice against Plaintiff to
prevent the sale of certain property. On February 23, 2009, Plaintiff filed
with the Court a Notice of Entry of Default, dated January 16, 2009, against
Defendants for the principal amount of $200,000.00, plus interest at the rate
of five (5) percent from October 17, 2007 to June 24, 2008, plus interest at a
rate of 18 percent from June 24, 2008 to the date of entry of judgment (January
16, 2009), plus the amount of $53,171.60, with interest at the statutory rate
from July 23, 2008 to the date of the entry of judgment (January 16, 2009),
costs and disbursements. Defendant has advised Plaintiff of the Chapter 11
automatic stay. The Company has not received any correspondence regarding the
matter since that time.
IX. IN RE: ZEALOUS HOLDINGS, INC.
Central District of California Bankruptcy Court, Case No. 09-11425-ES
On February 20, 2009, Zealous Holdings ("Holdings"), a wholly owned subsidiary
of Zealous, Inc., filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
Central District of California Santa Ana Division (the "Bankruptcy Court"),
Case No. 09-11425 ES. On May 1, 2009, the Bankruptcy Court, on its own
initiative, filed a motion to convert the bankruptcy to a Chapter 7 bankruptcy.
Holdings was notified of this change on May 8, 2009, via PACER.
Holdings believes that it is now in a position to start settling and paying its
debts. Therefore, Holdings would like to dismiss the bankruptcy action.
Pursuant to this desire, Holdings filed an Emergency Hearing to Dismiss the
Bankruptcy on May 11, 2009. That request was denied. Therefore, on May 12,
2009 Holdings filed a motion requesting that the Bankruptcy Court schedule a
Hearing on the Motion to Dismiss the Voluntary Bankruptcy Petition for June 11,
2009. A judgment on the company's Voluntary Bankruptcy petition is yet to be
reached and the company is seeking dismissal of its Voluntary Bankruptcy
petition.
A continued 341 meeting of creditors was set for October 14, 2009, with Revised
schedules are to be filed. The 341 meeting is continued to November 23, 2009.
Page F28
X. KENT G. WYATT, SR. V. ADULT ENTERTAINMENT CAPITAL, INC., ET AL.
Eighth Judicial District of Nevada Case No.: A574309
Kent G. Wyatt, Sr. ("Plaintiff") filed a Complaint against Adult Entertainment
Capital, Inc. and Zealous Trading Group, Inc. ("Defendants") in the Eighth
Judicial District of Nevada under case number A574309 on October 24, 2008.
Plaintiff's complaint alleges breach of promissory note, breach of consulting
agreement, unpaid loans and NSF checks, declaratory relief, breach of implied
covenant of good and fair dealing, intentional misrepresentation, negligent
misrepresentation, accounting, and conversion. Plaintiff then took a default
judgment against both Defendants. Plaintiff alleges that Defendants failed to
repay Plaintiff in accordance with the promissory notes, failed to pay
Plaintiff in accordance with the consulting agreement, failed to pay back
loans, and failed to abide by their fiduciary duty to pay Plaintiff the money
owed. On December 26, 2008, the Court entered Default Judgment against all
Defendants for the principal plus interests totaling $270,036.65, plus costs of
$222.50 for a total of $270,259.15. Defendants engaged in a settlement
conference with Plaintiff on March 30, 2009 and are continuing to pursue
settlement discussions. While Defendants have reached a tentative settlement
of the entire litigation, Plaintiff continues to pursue collection efforts.
XI. LOUIS GLAZER, ET AL. V. MILTON AULT III, ET AL.
Los Angeles County Superior Court Case No.: BC 407274
On February 6, 2009, Louis Glazer and Melanie Glazer, Plaintiffs, filed a
Complaint in Los Angeles County Superior Court against Milton Charles Ault III,
Kristine Larsen Ault, Adult Glazer & Co., Zealous Holdings, Inc., Zealous Inc,
Zealous Asset Management LLC, and Zealous Capital Markets LLC. The case number
is Los Angeles County Superior Court case number BC 407274. Plaintiffs'
complaint alleges negligent misrepresentation, breach of fiduciary duty, breach
of 6 contracts, breach of implied covenant of good faith and fair dealing of 6
contracts, violations of Corp Code (section) (section) 25400, 25401, 25500,
25501, 25504, fraud, unjust enrichment on 2 contracts, equitable indemnity,
constructive trust, and unfair business practices. Plaintiffs allege that
Defendants, individually and/or separately, fraudulently induced Plaintiffs to
invest in the Defendant companies, failed to repay in accordance with
promissory note, failed to pay management fees and violated Corporations Codes
in certain mergers. Plaintiffs are seeking damages according to proof at trial
and equitable relief that the Court deems just and proper. A Trial Date of
February 2, 2010 has been set by the Court.
Defendants are engaged in settlement discussion with Plaintiffs, who seek $1.6M
in damages, preparing responsive pleadings and completing discovery responses.
Defendants have responded to Plaintiffs' Requests for Admissions and are in the
process of completing additional discovery. Defaults of Kristy Ault and
Zealous Inc., and Ault, Glazer& Co, Inc, will be set aside and answers filed.
Defendants will also assert the Arbitration Clause in the signed Partnership
Agreement.
Page F29
XII. ALPHA CAPITAL ANSTALT. V MILTON `TODD' AULT III
New York State Supreme Court Case No.: 602444/09
On August 12, 2009, Alpha Capital Anstalt Hedge Fund ("Plaintiff") has filed a
suit against Milton ("Todd") Ault III ("Defendant") in the New York State
Supreme Court. The case number for this litigation is 602444/09. Plaintiff is
seeking $4.2M plus damages. Defendant has answered, and is in the process of
selecting Counsel to handle litigation. No dates have been set by the Court.
Defendant maintains that Plaintiff has received over $1M in repayment and that
all allegations are baseless while the Plaintiff has impugned the reputation of
Mr. Ault in the press. Plaintiffs maintain investment was to support ZATS which
never worked or was completed. Defendant has proof that many of the Plaintiffs
actually conducted business on ZATS in 2008 and the Company received earned
commissions from these transactions. Defendants deny all allegations of the
Plaintiffs.
CALIFORNIA LABOR COMMISSIONER CASES:
I. HEE KWON V. ADULT ENTERTAINMENT CAPITAL/ZEALOUS INC.
Labor Commissioner Case No.: 18-75589 KV
Hee Kwon, Plaintiff, filed a claim for non-payment of wages against Adult
Entertainment Capital, Inc. with the Labor Commissioner, State of California.
The case number is 18-75589 KV. Plaintiff alleges that defendants owe him
$4,000.00 in wages. Defendants terminated Plaintiff's at-will employment and
allege that they do not owe him any wages because they have paid him in full
through his terminated date. The case was dismissed.
II. NANDITA KUMARASWAMY V. AULT GLAZER & CO., INC.
Labor Commissioner Case No.: 18-76139 KV
Nandita Kumaraswamy, Plaintiff, filed a claim for non-payment of wages against
Ault Glazer & Co., Inc. with the Labor Commissioner, State of California. The
case number is 18-76139 KV. Plaintiff alleges that defendants owe her
$9,388.88 in wages. Defendants terminated Plaintiff's at-will employment and
allege that they do not owe her any wages because they have paid her in full
through her termination date. A hearing was set for October 19, 2009.
Subsequently, the case was dismissed.
III. JEANNIE LO BUE V. ZEALOUS, INC.
Labor Commissioner Case No.: -76295 KV
Jeannie Lo Bue, Plaintiff, filed a claim for non-payment of wages against
Zealous, Inc. with the Labor Commissioner, State of California. The case
number is 76295 KV. Plaintiff alleges that defendants owe her $1,434.79.00 in
wages. Defendants terminated Plaintiff's at-will employment and allege that
they do not owe her any wages because they have paid her in full through her
termination date. A hearing was set for October 19, 2009. Subsequently, the
case was dismissed.
Page F30
IV. LEONARD KIM V. ADULT ENTERTAINMENT CAPITAL/ZEALOUS INC
Labor Commissioner Case No.: 18-75590 KV
Leonard Kim, Plaintiff, filed a claim for non-payment of wages against Adult
Entertainment Capital, Inc. with the Labor Commissioner, State of California.
The case number is 18-75590 KV. Plaintiff's alleges that defendants owe him
$4,500.00 in wages. Defendants terminated Plaintiff's at-will employment and
allege that they do not owe him any wages because they have paid him in full
through his termination date. A hearing was set for October 19, 2009.
Subsequently, the case was dismissed.
V. STEVE RAFALORICH V. AULT GLAZER & CO., INC.
Labor Commissioner Case No.: 18-76138 KV
Steve Rafalorich, Plaintiff, filed a claim for non-payment of wages against
Ault Glazer & Co., Inc. with the Labor Commissioner, State of California. The
case number is 18-76138 KV. Plaintiff alleges that defendants owe him
$30,708.63 in wages. Defendants terminated Plaintiff's at-will employment and
allege that they do not owe him any wages because they have paid him in full
through his termination date. A hearing was set for October 19, 2009.
Subsequently, the case was dismissed.
VI. ROGER COE V. ZEALOUS CAPITAL, INC.
Docket Number.: 525988
Roger Coe, Plaintiff, filed a claim for non-payment of wages against Zealous
Capital with the Massachusetts Department of Workforce, in appeal of ruling
regarding an earlier start date. The docket number for this case is 525988.
The Company has not received any correspondence regarding the matter since that
time.
VII. GREG FIERROS V. ZEALOUS CAPITAL MARKETS
Labor Commissioner Case No.: 18-75462 KV
Greg Fierros, Plaintiff, filed a claim for non-payment of wages against Capital
Markets with the Labor Commissioner, State of California. The case number is
18-75462 KV. Plaintiff alleges that defendants owe him $2,000.00 in wages. .
Defendants terminated Plaintiff's at-will employment and allege that they do
not owe him any wages because they have paid him in full through his
termination date. A hearing occurred on July 13, 2009. The Company has not
received any correspondence regarding the matter since that time.
ITEM 1A: RISK FACTORS
A smaller reporting company is not required to provide the information required
by this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
No activity during the three month period ended September 30, 2009.
Page F31
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On October 15, the Company issued 166,311,335 shares of common stock to its
former secured note holders as part of a forced conversion of their outstanding
debt of $3,114,491 and interest accrued thereon of $95,281 under the terms of
their agreement. Following a period of negotiation with these note holders in
which no agreement was reached, the company issued the share certificates on
February 26, 2009. The former secured note holders continue to dispute the
propriety of the conversion of their outstanding debt to equity and thus the
matter remains open.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to our security holders for a vote, through the
solicitation of proxies or otherwise, during the quarterly period ended
September 30, 2009.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
EXHIBIT DESCRIPTION OF EXHIBIT
NUMBER
31.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Page F32
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZEALOUS, INC.
Date: November 23, 2009
By: /s/Milton C. Ault, III
--------------------------
Milton C. Ault, III
Title: CHIEF EXECUTIVE OFFICER AND DIRECTOR
Date: November 23, 2009
By: /s/Gary Gottlieb
--------------------
Gary Gottlieb
Title: CHIEF FINANCIAL OFFICE
