TECHS LOANSTAR, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Techs Loanstar, Inc. (Techs or the Company) was incorporated on April 7, 2006 in the State of Nevada. The fiscal year end of the Company is April 30. The Company was initially organized to provide the loan management service and software for the equity and payday loan industry.
SHARE EXCHANGE TRANSACTION WITH ZENZUU USA, INC.
Pursuant to an Agreement Concerning the Exchange of Securities dated February 10, 2010(the "Share Exchange Agreement"), by and between the Company and ZenZuu USA, Inc., a Nevada corporation ("ZZUSA"), the Company and ZZUSA entered into a share exchange whereby all of the issued and outstanding capital stock of ZZUSA, were exchanged for like securities of the Company, (the "Share Exchange"). On February 17, 2010, the company filed the Articles of Exchange with the Nevada Secretary of State (the "Articles of Exchange," and together with the Share Exchange Agreement, the "Plan of Exchange").
Immediately prior to the Share Exchange the Company had 40,400,000 shares of common stock outstanding. Upon closing the Company retired 28,000,000 shares of common stock. Immediately prior to the effective time of the Share Exchange, ZZUSA had 46,750 shares outstanding of its common stock ("ZZUSA Common Stock") and no shares of preferred stock. In accordance with the Plan of Exchange, all of the shares of ZZUSA Common Stock were acquired by the Company in exchange for 25,000,000 shares of company common stock, par value $.001 per share ("Common Stock"). Accordingly, after giving effect to the Share Exchange, the Company had 37,400,000 shares of Common Stock outstanding. As a result of the Share Exchange, the former ZZUSA shareholders immediately after the closing of the Share Exchange together held approximately 66.8% of the Companys outstanding voting power. Accordingly, the Share Exchange constituted a change of control of the Registrant.
Since there was a change in control of the Company after the Share Exchange, the transaction constituted a reverse acquisition for accounting purposes, as contemplated by ASC 805-40 and corresponding ASC-10-55-10, 12 and 13. Under these procedures the entity that issued the shares (Techs- the legal acquirer) is identified as the accounting acquire, and the entity whose shares are acquired (ZenZuu) is the accounting acquirer.
In addition, Techs was characterized as a non-operating public shell company, pursuant to SEC reporting rules. The SEC staff considers a reverse-acquisition with a public shell to be a capital transaction, in substance, rather than a business combination. The transaction is effectively a reverse recapitalization, equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation accompanied by a recapitalization. The accounting is similar to that resulting from a reverse acquisition, except that the transaction was consummated at book value and no goodwill or intangible assets were recognized.
For SEC reporting purposes, ZenZuu is treated as the continuing reporting entity that acquired Techs (the historic shell registrant). The reports filed after the transaction have been prepared as if ZenZuu (accounting acquirer) were the legal successor to Techss reporting obligation as of the date of the acquisition. Therefore, all financial statements filed subsequent to the transaction reflect the historical financial condition, results of operations and cash flows of ZenZuu, for all periods prior to the share exchange and consolidated with Techs from the date of the share Exchange. ZenZuu previously had a May 31 fiscal year end, but has now assumed the fiscal year end of Techs Loanstar, Inc., the legal acquirer. Accordingly, the financial statements presented herein are the unaudited financial statements for the three months ended July 31, 2011 and 2010 are of ZenZuu USA, Inc., consolidated with Techs Loanstar, Inc. All share and per share amounts of ZenZuu have been retroactively adjusted to reflect the legal capital structure of Techs pursuant to FASB ASC 805-40-45-1.
NOTE 1 NATURE OF OPERATIONS AND BASIS OF PRESENTATION (continued)
ZZUSA also had outstanding convertible debt securities (the Convertible Notes), the outstanding principal and accrued and unpaid interest of which, as amended, automatically convert on the six (6) month anniversary of the Share Exchange Agreement (the Automatic Conversion Date) into shares of Common Stock at a price per share equal to 65% of the ten (10) average closing price of Common Stock immediately preceding the Automatic Conversion Date. As a result of the Plan of Exchange, these convertible debt securities were exchanged for like convertible securities of the Company, whereby the outstanding principal and interest on such securities automatically convert into shares of Common Stock at a price per share equal to 65% of the ten (10) day average closing price of the Common Stock immediately preceding the Automatic Conversion Date. Additionally, the Convertible Notes are eligible for an early conversion date whereby the principal and accrued and unpaid interest are convertible into shares of Common Stock at a price per share equal to 55% of any consecutive five (5) day average closing price, within the first thirty (30) calendar days that the common stock is eligible to be traded. Accordingly on April 30, 2010, the Company issued 5,666,912 shares of common stock for the payment of $838,000 of Convertible Notes and accrued and unpaid interest of $108,741.30. The Convertible Notes and interest were converted at $0.1683 per share based upon the discount for the early conversion of the Convertible Notes.
On July 25, 2011, the Company entered into a securities exchange agreement (the Agreement) with Quture, Inc., a Nevada corporation (Quture). Pursuant to the Agreement, the Company agreed to acquire all of the outstanding capital stock of Quture in exchange (the Exchange) for a number of shares of the Registrants common stock, par value $0.001 per share (the Common Stock) equal to eighty-five percent (85%) of the issued and outstanding common stock of the Company following the Exchange. The closing of the Exchange will occur following the satisfaction of the conditions precedent set forth in the Agreement, including the completion of the schedules and exhibits, due diligence and audited financial statements. The Agreement contains customary representations, warranties and covenants of the Registrant and Quture for like transactions.
NOTE 2 GOING CONCERN
The ability of the Company to continue as a going concern is dependent on raising capital to fund its business plan and ultimately to attain profitable operations. Accordingly, these factors raise substantial doubt as to the Companys ability to continue as a going concern. ZenZuu and ZZPartners, Inc. (ZZP and the predecessor to ZenZuu) has funded its initial operations by way of issuing notes payable (including related parties) and convertible notes accumulating approximately $1,126,000 since its inception.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These financial statements are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States.
Use of Estimates and Assumptions
Preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Accordingly, actual results could differ from those estimates.
All significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practical the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.
Loss per Common Share
Basic earnings (loss) per share includes no dilution and is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Stock options, warrants and common stock underlying convertible promissory notes are not considered in the calculations for the periods ending July 31 2011 and 2010, as the impact of the potential common shares would be antidilutive and decrease loss per share. Therefore, diluted loss per share presented for the periods ended July 31, 2011 and 2010 is equal to basic loss per share.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising is expensed when incurred. There has been no advertising during the period.
The Company follows the asset and liability method of accounting for income taxes under ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances and tax loss carry-forwards. Deferred tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment.
The Company accounts for stock-based compensation issued to employees based on ASC Topic 718- Compensation- Stock Compensation, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. ASC Topic 718 primarily focuses on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This statement requires a public entity to expense the cost of employee services received in exchange for an award of equity instruments. These statements also provide guidance n valuing and expensing these awards, as well as disclosure requirements of these equity arrangements.
The Company evaluates the recoverability of intangible assets that are amortized whenever events indicate the carrying amount of any such asset may not be fully recoverable. Our evaluation is based upon, among other things, our assumptions about the estimated future cash flows that the asset are reasonably expected to generate. When that amount exceeds the carrying value of the asset, we will recognize an impairment loss to the extent the carrying value exceeds the fair value. We apply our best judgment in our determination. As of April 30, 2010 management determined that an impairment charge should be recorded for the remaining carrying value of its license and accordingly recorded an impairment charge of $808,333 for the period ending April 30, 2010.
Recent Accounting Pronouncements
Effective July 1, 2009, the Company adopted The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (ASC 105). This standard establishes only two levels of U.S. generally accepted accounting principles (GAAP), authoritative and nonauthoritative. The FASB Accounting Standards Codification (the Codification) became the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. As the Codification was not intended to change or alter existing GAAP, it did not have a material impact on the Companys financial statements.
Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 105-10, Generally Accepted Accounting Principles Overall (ASC 105-10). ASC 105-10 establishes the FASB Accounting Standards Codification (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 U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority.
The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASUs). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) (ASU 2009-05). ASU 2009-05 provided amendments to ASC 820-10, Fair Value Measurements and Disclosures Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not
required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material impact on the Companys results of operations or financial condition.
Effective June 30, 2009, the Company adopted three accounting standard updates which were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional guidelines for estimating fair value in accordance with fair value accounting.
The first update, as codified in ASC 820-10-65, provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC 320-10-65, changes accounting requirements for
other-than-temporary-impairment (OTTI) for debt securities by replacing the current requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and it will not be required to sell the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC 825-10-65, increases the frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended after June 15, 2009. The adoption of these accounting updates did not have a material impact on the Companys financial statements.
Effective June 30, 2009, the Company adopted a new accounting standard for subsequent events, as codified in ASC 855-10. The update modifies the names of the two types of subsequent events either as recognized subsequent events (previously referred to in practice as Type I subsequent events) or non-recognized subsequent events (previously referred to in practice as Type II subsequent events). In addition, the standard modifies the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for public entities) or available to be issued (for nonpublic entities). It also requires the disclosure of the date through which subsequent events have been evaluated. The update did not result in significant changes in the practice of subsequent event disclosures, and therefore the adoption did not have a material impact on the Companys financial statements.
In March 2010, the FASB issued ASU No. 2010-11, "Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives," ("ASU 2010-11") (codified within ASC 815 - Derivatives and Hedging). ASU 2010-11 improves disclosures originally required under FAS No. 161. ASU 2010-11 is effective for interim and annual periods beginning after June 15, 2010. The adoption of ASU 2010-11 is not expected to have any material impact on the Company's financial position, results of operations or cash flows.
In March 2010, the FASB issued ASU No. 2010-17, "Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition," ("ASU 2010-17"), which provides guidance related to revenue recognition that applies to arrangements with milestones relating to research or development deliverables. This guidance provides criteria that must be met to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. ASU 2010-17 is effective for interim and annual periods beginning after June 15, 2010. Early adoption is permitted. The adoption of ASU 2010-17 is not expected to have any material impact on the Company's financial position, results of operations or cash flows.
NOTE 4 - LICENSING AGREEMENT
On May 21, 2008, ZZP signed a license agreement with ZenZuu, Inc. (ZZI), a Nevada corporation, whereby the Company acquired the exclusive United States rights to ZZIs online social database and advertising revenue-share model. This license agreement includes the rights to use all applicable copyrights, trademarks and related technology obtained or in connection with the online social network database and advertising revenue-sharing model. As consideration for this license, the Company is required to pay a total aggregate license fee of $1,000,000 and a monthly royalty of 25% of our net local advertising revenue received. The term of the license is for 10 years, and is automatically renewable for successive ten year terms under the same terms and conditions. As of July 31, 2010 and April 30, 2010, the Company owes $550,000 (included in accrued liabilities, related parties) and ZZI has agreed to accept future payments from the Company remitting twenty percent (20%) of month end cash available from operations.
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Determination of Fair Value
At July 31, 2011 and April 30, 2011, the Company calculated the fair value of its assets and liabilities per ASC 820 for disclosure purposes as described below.
The carrying value of cash and cash equivalents, employee advances, prepaid expenses, accounts payable and accrued liabilities approximate their fair value due to the short period to maturity of these instruments pursuant to ASC 825.
ASC 820 establishes a three-level valuation hierarchy for the use of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date:
Level 1. Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 assets and liabilities include debt and equity securities and derivative financial instruments actively traded on exchanges, as well as U.S. Treasury securities and U.S. Government and agency mortgage-backed securities that are actively traded in highly liquid over the counter markets.
Level 2. Observable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs that are observable or can be corroborated, either directly or indirectly, for substantially the full term of the financial instrument.
Level 2 assets and liabilities include debt instruments that are traded less frequently than exchange traded securities and derivative instruments whose model inputs are observable in the market or can be corroborated by market observable data. Examples in this category are certain variable and fixed rate non-agency mortgage-backed securities, corporate debt securities and derivative contracts.
Level 3. Inputs to the valuation methodology are unobservable but significant to the fair value measurement. Examples in this category include interests in certain securitized financial assets, certain private equity investments, and derivative contracts that are highly structured or long-dated.
Application of Valuation Hierarchy
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodology used to measure fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Convertible notes payable, net of debt discount. Market prices are not available for the Company's convertible notes payable, nor are market prices of similar convertible notes available. The Company assessed that the fair value of this liability approximates its carrying value due to its nature, the stated interest rate of the notes and the embedded conversion features as calculated.
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The method described above may produce a current fair value calculation that may not be indicative of net realizable value or reflective of future fair values. If readily determined market values became available or if actual performance were to vary appreciably from assumptions used, assumptions may need to be adjusted, which could result in material differences from the recorded carrying amounts. The Company believes its method of determining fair value is appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain financial instruments could result in a different estimate of fair value.
In accordance with the requirements of SFAS No. 107, the Company has determined the estimated fair value of financial instruments using available market information and appropriate valuation methodologies. The fair value of financial instruments classified as current assets or liabilities approximate their carrying value due to the short-term maturity of the instruments.
NOTE 6 CONVERTIBLE AND PROMISSORY NOTES PAYABLE
In June 2008, the ZZP, through a Private Placement Memorandum (the Offering), to accredited investors on a best efforts began offering a basis of up to a maximum of $2,000,000 in unsecured convertible promissory notes (the Notes), together with two warrants for each dollar of note purchased (i) one 2-year warrant to purchase a share of the Companys common stock at an exercise price of $2.50 per share; and (ii) one 2-year warrant to purchase a share of the Companys common stock at an exercise price of $5.00 per share (the Warrants). The conversion of the Notes and the exercisability of the Warrants are contingent upon the Companys entry into a merger transaction with a public reporting company (the Merger). The Company sold $928,000 in Notes and the Notes will mature on the two-year anniversary of the Notes and carry a per annum interest rate of 8%.
The original terms of the Notes included that the Notes would automatically convert (the Automatic Conversion Date) on the 61st calendar day following a merger into shares of the Companys common stock at a conversion price equal to a 25% discount to the lowest average closing bid price of the Companys common stock over 10 consecutive trading days on or between the 31st and 60th calendar day after a merger, with a minimum conversion price of $1.00 and maximum conversion price of $3.00 (the Conversion Price).
The Company can call and redeem the Warrants upon 10 days prior written notice as long as the closing bid price of the common stock exceeds 165% of the exercise price of the ten consecutive days and the resale of the common stock issuable upon exercise of the Warrants has been included in an effective Registration Statement.
Due to the delay in completing the Share Exchange (See Note 1), the Company has agreed to remove the minimum conversion price of $1.00 and increase the discount from 25% to 35%. The Company also changed the Automatic Conversion Date to be the six (6) month anniversary of the closing of the Share Exchange and the new discount is based upon the ten (10) average closing bid prices for the ten (10) days immediately preceding the revised Automatic Conversion Date. Additionally, the Company offered an accelerated conversion feature, whereby the Notes are convertible within the first thirty (30) days of trading beginning after the closing of the Share Exchange, at a forty five percent (45%) discount to the lowest five (5) consecutive day average within the first thirty (30) days. Accordingly on April 30, 2010, the Company issued 5,666,912 shares of common stock for the payment of $838,000 of Convertible Notes and accrued and unpaid interest of $108,741.30. The Convertible Notes and interest were converted at $0.1683 per share based upon the discount for the early conversion of the Convertible Notes. At July 31, 2011 there remains $150,000 in Convertible Notes outstanding.
In August and October 2010, the Company entered into two separate note agreements with an institutional investor for the issuance of two convertible promissory notes in the amounts of $35,000 (the August Note) and $40,000 (the October Note), respectively, for a total of $75,000 in principal (together the 2010 Convertible Notes). Among other terms, each of the Convertible Notes are due nine months from their issuance dates, bears interest at 8% per annum, payable in cash or shares at the Conversion Price as defined herewith, and are convertible at a conversion price (the Conversion Price) for each share of common stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements) per share of the Companys common stock for the ten trading days immediately preceding the date of conversion. Upon the occurrence of an event of default, as defined in the 2010 Convertible Notes, the Company is required to pay interest at 22% per annum and the holders may at their option declare the 2010 Convertible Notes, together with accrued and unpaid interest, to be immediately due and payable. In addition, the 2010 Convertible Notes provide for adjustments for dividends payable other than is shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company. The Company may at its own option prepay the October Note and must maintain sufficient authorized shares reserved for issuance under the 2010 Convertible Notes.
NOTE 6 CONVERTIBLE AND PROMISSORY NOTES PAYABLE (continued)
We received net proceeds of $70,000 after debt issuance costs of $5,000 paid for lender legal fees. These debt issuance costs were amortized over the terms of the 2010 Convertible Notes, and accordingly $1,065 has been expensed as debt issuance costs (included in interest expense) during the three months ended July 31, 2011.
We determined that the conversion feature of the 2010 Convertible Notes represents an embedded derivative since the 2010 Convertible Notes are convertible into a variable number of shares upon conversion. Accordingly, the 2010 Convertible Notes are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments have been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the 2010 Convertible Notes. Such discount will be accreted from the date of issuance to the maturity dates of the 2010 Convertible Notes. The change in the fair value of the liability for derivative contracts will be recorded to other income or expenses in the consolidated statement of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The beneficial conversion feature included in the 2010 Convertible Notes resulted in an initial debt discount of $75,000 and an initial loss on the valuation of derivative liabilities of $64,937 for a derivative liability initial balance of $139,936. At April 30, 2011, the Company revalued the derivative liability based on the face value of the balance of $63,500 of the 2010 Convertible Notes. For the period from their issuance to April 30, 2011, the Company increased the derivative liability of $75,000 by $40,455 resulting in a derivative liability balance of $115,455 at April 30, 2011. During the three months ended July 31, 2011 the remaining principal balance of $63,500 and accrued and unpaid interest of $2,100 were converted to 41,957,460 shares of common stock, at an average price of approximately $0.00156 per share.
In July 2011 the Company issued a new convertible note (the July 2011 Convertible Note) to the same investor under terms identical to the 2010 Convertible Notes. We received net proceeds of $62,000 after debt issuance costs of $3,000 paid for lender legal fees. These debt issuance costs will be amortized over the terms of the 2011 Convertible Note, and accordingly $245 has been expensed as debt issuance costs (included in interest expense) during the three months ended July 31, 2011. The beneficial conversion feature included in the 2011 Convertible Note resulted in an initial debt discount of $65,000 and an initial loss on the valuation of derivative liabilities of $66,468 for a derivative liability initial balance of $131,468. At July 31, 2011, the Company revalued the derivative liability based on the face value of the balance of $65,000 of the 2011 Convertible Note. For the period from their issuance to July 31, 2011, the Company increased the derivative liability of $131,468 by $85,199 resulting in a derivative liability balance of $216,667 at July 31, 2011.
The fair value of the 2011 Convertible Note was calculated at issue date utilizing the following assumptions:
Assumed Conversion Price
Market Price on Grant Date
The fair value of the 2011 Convertible Notes was calculated at July 31, 2011 utilizing the following assumptions:
NOTE 7 STOCKHOLDERS EQUITY
During the three months ended July 31, 2011 the remaining principal balance of $63,500 and accrued and unpaid interest of $2,100 were converted to 41,957,460 shares of common stock, at an average price of approximately $0.00156 per share.
During the three months ended July 31, 2011 the Company issued 19,456,751 shares of common stock in settlement of $63,000 of notes payable. The shares were issued at $0.0032 per share.
During the three months ended July 31, 2011 the Company issued 38,091,276 shares of common stock in settlement of $58,593 of accounts payable and accrued liabilities. The shares were issued at $.0015 per share.
During the three months ended July 31, 2011 the Company issued 30,000,000 shares of common stock each to Mr. Fong and Mr. Hollander for settlement of $38,250, representing a portion of accrued fees they were each owed. The shares were issued at $.001275 per share.
On January 29, 2010 the Board of Directors of the Company authorized the 2010 Employee Incentive Stock Option Plan (the Esop). Under the terms of the Esop, 16,500,000 shares of common stock of the Company were reserved for issuance. On June 25, 2010 the Company granted options to purchase 10,500,000 shares of common stock of the Company under the 2010 ESOP. The options have an exercise price of $0.0367 per share and expire on June 25, 2013. Included in the grants, Mr. Fong, the CEO of the Company received warrants to purchase 3,387,096 shares of common stock, and Mr. Hollander, the CFO received warrants to purchase 2,258,064 shares of common stock. The Company valued all of the options at approximately $0.0117 per share, based upon the Black Scholes formula, and accordingly has included $122,500 as stock compensation expense for the three months ended July 31, 2010.
On April 30, 2010 the Board of Directors of the Company approved the 2010 SIP. Under the terms of the 2010 SIP 9,000,000 shares of common stock were reserved for issuance. During the year ended April 30, 2011 3,000,000 shares of common stock were issued for a six month extension of a marketing agreement (see above common stock paragraph in this footnote). As of April 30, 2011 there are no outstanding issuances under the 2010 SIP and there are 6 million shares of common stock reserved for future issuance under the 2010 SIP.
All options outstanding at July 31, 2011 are fully vested and exercisable. All amounts in the table below have been adjusted for the stock dividend effective July 19, 2010. A summary of outstanding option balances under the EIP at May 1, 2011 and July 31, 2011 are as follows:
Weighted-average exercise price
Weighted-average remaining contractual life (years)
Outstanding and exercisable at May 1, 2011
Outstanding and exercisable at July 31, 2011
A summary of the activity of the Companys outstanding warrants at May 1, 2011 and July 31, 2011 is as follows:
Weighted-average exercise price
Weighted-average grant date fair value
Outstanding and exercisable at May 1, 2011
Outstanding and exercisable at July 31, 2011
The following table sets forth the exercise price range, number of shares, weighted average exercise price and remaining contractual lives of the warrants by groups as of July 31, 2011:
Exercise price range
Number of options outstanding
Weighted-average exercise price
Weighted-average remaining life
$0.056 to $0.1122
NOTE 8 RELATED PARTY TRANSACTIONS
During the three months ended July 31, 2011, the Company received advances from Officers, Directors and Companies that they are affiliated with in the amount of $9.500. As of July 31, 2011 the Company owed a balance of $106,679 to related parties. These loans bear interest at 8% per annum and are repayable on demand.
NOTE 9 - PROPERTY AND EQUIPMENT
The company owns no property nor leases office space. The office space is shared with other companies that the President and Chief Financial Officer are affiliated with.
NOTE 10 INCOME TAXES
As of July 31, 2011, the Company had net operating loss carry forwards of approximately $2,690,000 that may be available to reduce future years taxable income and will expire commencing in 2027. Availability of loss usage is subject to change of ownership limitations under Internal Revenue Code 382. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and, accordingly, the Company has recorded a full valuation allowance for the deferred tax asset relating to these tax loss carryforwards.
NOTE 11 SUBSEQUENT EVENT
On August 9, 2011, the Company entered into and consummated the First Amendment to the Agreement Concerning that Exchange of Securities (the Agreement) Quture and the shareholders of Quture. Quture is a healthcare knowledge solution company that provides performance measurement tools to the healthcare industry.
Pursuant to the Agreement, the Company agreed to acquire all of the outstanding capital stock of Quture in exchange (the Exchange) for the issuance of an aggregate of 1,938,543,110 shares (the Exchange Shares) of the Registrants common stock, par value $0.001 per share (the Common Stock). Further in accordance with the Agreement, 400,000,000 Exchange Shares will initially be issued to the shareholders of Quture and following an amendment of the Companys articles of incorporation, the remaining Exchange Shares will be issued to Quture shareholders of on a pro rata basis, on the basis of the shares held by such security holders of Quture at the time of the Exchange. As a result of the Exchange, Quture became a wholly-owned subsidiary of the Company. Following the consummation of the Exchange, the shareholders of Quture will beneficially own approximately eighty-five percent (85%) of the issued and outstanding Common Stock of the Company. The Agreement also provides that as soon as practicable following the Closing and the Amendment, the Company shall issue the remaining 1,538,543,110 Exchange Shares to the Quture shareholders. The parties have taken the actions necessary to provide that the Exchange is treated as a tax free exchange under Section 368 of the Internal Revenue Code of 1986, as amended. The Agreement contains customary representations, warranties and covenants of the Company and Quture for like transactions. The foregoing descriptions of the above referenced agreements do not purport to be complete. For an understanding of their terms and provisions, reference should be made to the Agreement attached as Exhibits 10.1 to the Current Report on Form 8-K filed August 12, 2011.
On August 10, 2011, as a covenant to the Agreement, a majority of the Companys shareholders voted to amend the Companys Articles of Incorporation to increase the number of its authorized shares of capital stock from 900,000,000 shares to 2,510,000,000 par value $0.001 shares (the Amendment) of which (a) 2,500,000,000 shares were designated as Common Stock and (b) 10,000,000 shares were designated as blank check preferred stock.
At the effective time of the Exchange, our board of directors and officers was reconstituted by the resignation of Henry Fong as Director, President and Chief Executive Officer of the Company and the appointment of G. Landon Feazell as a member of the Companys Board of Directors, Chief Executive Officer and President, and Geoffrey L. Feazell as Treasurer and Secretary of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report.
This interim report contains forward looking statements relating to our Company's future economic performance, plans and objectives of management for future operations, projections of revenue mix and other financial items that are based on the beliefs of, as well as assumptions made by and information currently known to, our management. The words "expects", "intends", "believes", "anticipates", "may", "could", "should" and similar expressions and variations thereof are intended to identify forward-looking statements. The cautionary statements set forth in this section are intended to emphasize that actual results may differ materially from those contained in any forward looking statement.
Our auditor's report on our April 30, 2011 financial statements expresses an opinion that substantial doubt exists as to whether we can continue as an ongoing business. If our officers and directors are unwilling or unable to loan or advance us additional capital, we believe that if we do not raise additional capital over the next 12 months, we may be required to suspend or cease the implementation of our business plans. See "April 30, 2011 Audited Financial Statements - Auditors Report."
As of July 31, 2011, we had $4,161 cash on hand and in the bank. Management believes this amount will not satisfy our cash requirements for the next twelve months or until such time that additional proceeds are raised. We plan to satisfy our future cash requirements - primarily the working capital required for the continuing development of our website and marketing campaign and to offset legal and accounting fees - by additional equity financing, or debt financing. This may be in the form of private placements of common stock, or issuance of convertible notes, either of which will cause dilution to our existing shareholders.
Management believes that if subsequent private placements are successful, which in turn may enable us to increase our membership, which may generate sales revenue within the following twelve months thereafter. However, additional equity or debt financing may not be available to us on acceptable terms or at all, and thus we could fail to satisfy our future cash requirements.
If we are unsuccessful in raising the additional proceeds through a private placement or debt offering we will then have to seek capital from other sources, which may not even be available to the Company. However, if such financing were available, we would likely have to pay additional costs associated with high risk loans and be subject to an above market interest rate. At such time these funds are required, management will evaluate the terms of such debt financing and determine whether the business could sustain operations and growth and manage the debt load. If we cannot raise additional proceeds via a private placement of our common stock or secure debt financing we would be required to cease business operations. As a result, investors in Techs Loanstar's common stock could lose all of their investment.
The Company did not generate any revenue during the three months ended July 31, 2011 and 2010 and has generated only nominal revenue since inception. Total operating expenses for the three months ending July 31, 2011 and 2010 were $156,259 and $266,218 respectively. Total other expenses for the three months ended July 31, 2011 and 2010 were $158,289 and $5,789 respectively, resulting in a net loss for the three months ended July 31, 2011 and 2010 of $314,548 and $272,007 respectively.
Revenues from inception have been $5,374. Total operating expenses since inception of $2,661,813 and other expenses of $689,662 have resulted in losses since inception of $3,346,101.
Operating expenses for the three months ended July 31, 2011 and 2010 are comprised of:
Stock compensation expense
Amortization of license
General and administrative costs
Professional fees and consulting
The Company has month-to-month arrangements with Henry Fong and Barry Hollander for their management services, whereby it pays Mr. Fong $10,000 in consideration of his services to the Company as President and Mr. Hollander $10,000 a month in consideration of his services as Chief Financial Officer. The amounts are paid when the Company has available funds, and in the absence of such funds the Company accrues the monthly fee.
We have signed a license agreement with ZZI whereby we acquired, for a license fee of $1,000,000, an exclusive 10-year license to use ZZIs social network database and advertising revenue-sharing model in the United States. Initially, the Company was amortizing the license over its 10 year life. Since the Company has not been able to generate any significant revenue, the Company evaluated the recoverability of the cost of license. Our evaluation was based upon, among other things, our assumptions about the estimated future cash flows that the asset are reasonably expected to generate. When that amount exceeds the carrying value of the asset, we will recognize an impairment loss to the extent the carrying value exceeds the fair value. We apply our best judgment in our determination. As of April 30, 2010 management determined that an impairment charge should be recorded for the remaining carrying value of its license and accordingly has included in operating expenses an impairment charge of $808,333 for the period ending April 30, 2010.
We anticipate that our current cash and cash equivalents and cash generated from financing activities will be insufficient to satisfy our liquidity requirements for the next 12 months. We expect to incur development, marketing, professional and administrative expenses as well expenses associated with maintaining our SEC filings. We will require additional funds during this time and will seek to raise the necessary additional capital. If we are unable to obtain additional financing, we may be required to reduce the scope of our business development activities, which could harm our business plans, financial condition and operating results. Additional funding may not be available on favorable terms, if at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Act of 1934 and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of July 31, 2011. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that the Company's disclosure controls and procedures were not effective at July 31, 2011, due to the fact that the material weaknesses in the Company's internal control over financial reporting described in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2011, had not been remediated as of July 31, 2011.
These weaknesses are continuing. Management and the Board of Directors are aware of these weaknesses that result because of limited resources and staff. Efforts to design and implement controls and processes have been put on hold due to limited resources. Due to our limited financial and managerial resources, we cannot assure when we will be able to implement effective internal controls over financial reporting.
There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Item 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Act of 1934 and are not required to provide the information under this item.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended July 31, 2011 the remaining principal balance convertible promissory notes of $63,500 and accrued and unpaid interest of $2,100 were converted to 41,957,460 shares of common stock.
During the three months ended July 31, 2011 the Company issued 19,456,751 shares of common stock in settlement of $63,000 of notes payable.
During the three months ended July 31, 2011 the Company issued 38,091,276 shares of common stock in settlement of $58,593 of accounts payable and accrued liabilities.
During the three months ended July 31, 2011 the Company issued 30,000,000 shares of common stock each to Mr. Fong and Mr. Hollander for settlement of $38,250, representing a portion of accrued fees they were each owed.
The sales of the securities identified above were made pursuant to privately negotiated transactions that did not involve a public offering of securities and, accordingly, we believe that these transactions were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D. The agreements executed in connection with this sale contain representations to support the Companys reasonable belief that the Investor had access to information concerning the Companys operations and financial condition, the Investor acquired the securities for their own account and not with a view to the distribution thereof in the absence of an effective registration statement or an applicable exemption from registration, and that the Investor are sophisticated within the meaning of Section 4(2) of the Securities Act and are accredited investors (as defined by Rule 501 under the Securities Act). In addition, the issuances did not involve any public offering; the Company made no solicitation in connection with the sale other than communications with the Investor; the Company obtained representations from the Investor regarding their investment intent, experience and sophistication; and the Investor either received or had access to adequate information about the Company in order to make an informed investment decision. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit index
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.
Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K. During the fiscal quarter ended July 31, 2011, the Company filed a Current Report on Form 8-K, on July 29, 2011.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: September 14, 2011
TECHS LOANSTAR, INC.
By: /s/ G. Landon Feazell
G. Landon Feazell
President, Secretary Treasurer, Director
(Principal Executive Officer)