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EX-32.1 - SECTION 906 - Bizzingo, Inc.ex32-1.htm
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EXCEL - IDEA: XBRL DOCUMENT - Bizzingo, Inc.Financial_Report.xls

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2012

 

[  ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____

 

Commission file Number: 000-52511

 

BIZZINGO, INC.

(Exact name of registrant as specified in its charter) 

 

 

Nevada

(State or other jurisdiction of incorporation or organization)

 

98-0471052

(I.R.S. Employer Identification Number)

 

63 Main Street, #202, Flemington, New Jersey 08822

(Address of principal executive offices)

 

(908) 968-0838

(Issuer’s telephone number)

 

Securities registered under Section 12(b) of the Exchange Act: None

 

Securities registered under Section 12(g) of the Exchange Act: Common Stock, Par Value $0.001

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [  ] Yes [X] No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [  ] Yes [X] No

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [  ] Yes [  ] No

(Does not currently apply to the Registrant)

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ]       Accelerated filer [  ]
Non–accelerated filer [  ]   (Do not check if a smaller reporting company)   Smaller reporting company [X]

  

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

 

At September 6, 2012, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the quoted price of $0.07 at which the common equity was sold was approximately $1,011,610. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

As of September 6, 2012, the number of shares outstanding of our common stock was 112,434,525 shares.

 

 

 

 
 

 

TABLE OF CONTENTS

 

    Pages
PART I    
Item 1. Business   3
Product Development   8
Item 1A. Risk Factors.   9
Item 1B. Unresolved Staff Comments.   19
Item 2. Properties.   19
Item 3. Legal Proceedings.   19
Item 4. Mine Safety Disclosure   19
PART II    
Item 5. Market for Registrant’s Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.   19
Item 6. Selected Financial Data.   22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.   22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.   28
Item 8. Financial Statements and Supplementary Data.   28
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.   29
Item 9A(T). Controls and Procedures.   29
Item 9B. Other Information.   31
PART III    
Item 10. Directors, Executive Officers and Corporate Governance.   32
Item 11. Executive Compensation.   37
Item 12. Security Ownership of Certain Beneficial owners and Management and Related Stockholder Matters.   38
Item 13. Certain Relationships and Related Transactions, and Director Independence.   39
Item 14. Principal Accounting Fees and Services.   40
PART IV    
Item 15. Exhibits and Financial Statement Schedules.   41

 

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PART I

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K of Bizzingo, Inc. contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to anticipated future events, future results of operations or future financial performance. These forward-looking statements include, but are not limited to, statements related to our ability to raise sufficient capital to finance our planned operations, our ability to develop or market our products, our ability to successfully compete in the marketplace, our ability to secure additional technologies and licenses relevant to our business, our ability to protect our intellectual property, and estimates of our cash expenditures for the next 12 to 36 months. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology.

 

These forward-looking statements are only predictions, are uncertain and involve substantial known and unknown risks, uncertainties and other factors which may cause our (or our industry’s) actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements. The “Risk Factors” section of this Form 10-K sets forth detailed risks, uncertainties and cautionary statements regarding our business and these forward-looking statements.

 

We cannot guarantee future results, levels of activity or performance. You should not place undue reliance on these forward-looking statements, which speak only as of the date that they were made. These cautionary statements should be considered with any written or oral forward-looking statements that we may issue in the future. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to reflect actual results, later events or circumstances or to reflect the occurrence of unanticipated events.

 

Item 1. Business

 

The following describes the business of Bizzingo, Inc. (formerly Phreadz, Inc.) Whenever the terms “our,” “we” “us” and the “Company” are used herein they refer to Bizzingo, Inc., a Nevada corporation, together with UDM USA, LLC (“UDM”) and Phreadz USA, LLC (“Phreadz”), our wholly-owned subsidiaries, unless the context otherwise provides.

 

Corporate Overview and History of Bizzingo, Inc.

 

Organization and Company History

 

Bizzingo, Inc., was incorporated in the State of Nevada on May 12, 2005.

 

On June 16, 2010, we filed an amendment to our certificate of incorporation with the Nevada Secretary of State to change our name to “Phreadz, Inc.” This amendment was unanimously approved by our board of directors and by a majority of our stockholders by written consent. An information statement on Form 14C notifying shareholders of action taken by written consent was mailed to shareholders (of record on April 28, 2010) on May 25, 2010.

 

On June 17, 2010, we received notice from FINRA/OTC Corporate Actions that the name change will take effect at the open of business on June 17, 2010. On July 6, 2010, we received notice that our common stock would trade under the symbol “PHDZ”.

 

On March 30, 2011, we filed a Certificate of Amendment with the Nevada Secretary of State to change our name to “Bizzingo, Inc.” The name change was effective on that same date. This amendment was unanimously approved by our board of directors and by a majority of our stockholders (52.6%) by written consent. An Information Statement filed on Schedule14C notifying shareholders of action taken by written consent was mailed to shareholders (of record on February 15, 2011) on March 10, 2011.

 

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On April 29, 2011, we received notice from FINRA/OTC Corporate Actions that our name change would be effective on the open of business on May 2, 2011 and our common stock will trade under the new symbol “BIZZ”.

 

Exploration Stage Activities

 

The Company was previously in the mineral exploration stage since its formation and had at no time since its formation realized any revenues from its planned operations. Prior to the Company’s acquisitions of Phreadz and UDM, the Company was primarily engaged in the acquisition and exploration of mining claims. Had it located a commercial minable reserve, the Company previously expected to prepare the site for extraction operations and enter a planned further development stage.

 

In June 2005, the Company acquired a 100% interest in the STEP mineral claim located in the Nicola Mining Division, British Columbia, and Canada for $5,000. The claim was registered in the name of the vendor (the “Trustee”), who had executed a trust agreement to hold the claim in trust on behalf of the Company.

 

At November 30, 2005, the Company recognized an impairment loss of $5,000 as it had not been determined whether there were proven or probable reserves on the property.

 

On December 4, 2008, the Trustee advised the Company that he had performed work on the claim costing $4,750 and that unless the Company notified him of its desire to maintain the claim and pay him $4,750 by December 8, 2008, he would either allow the claim to expire on December 9, 2008 or take control of the claim and apply the work to extend the expiry date of the claim. On December 9, 2008, the Trustee applied the work as assessment to extend the expiry date to December 9, 2009. On May 24, 2009, the Trustee acquired control over the claim, at which time we no longer had any interest in the claim or any operating business. As a result, we became a “shell” corporation and began to seek an attractive operating business with which to merge or otherwise acquire.

 

On April 27, 2010, pursuant to share purchase agreements (the “Purchase Agreements”), Bizzingo, Inc., (formerly Phreadz, Inc.) completed the acquisitions of Phreadz USA, LLC (“Phreadz”) and UDM USA, LLC (“UDM”). The acquisitions were accounted for as a recapitalization effected by a reverse merger, wherein Phreadz and UDM were considered the acquirer for accounting and financial reporting purposes. The pre-merger assets and liabilities of the acquired entities have been brought forward at their book value and no goodwill has been recognized. The consolidated accumulated deficit of Phreadz and UDM has been brought forward, and common stock and additional paid-in-capital of the combined Company have been retroactively restated to give effect to the exchange rates as set forth in the Purchase Agreements.

 

As set forth above, on April 27, 2010 and pursuant to the terms and conditions of the Purchase Agreements, we: (i) consummated the acquisitions of Phreadz and UDM, and (ii) each of Phreadz and UDM became our wholly owned subsidiary. More specifically, pursuant to and in connection with the Purchase Agreements:

 

·in exchange for 100% of the issued and outstanding membership interests of Phreadz, we issued to the holders of the Phreadz membership interests an aggregate of 21,659,200 shares of our common stock; and
   
·In exchange for 100% of the issued and outstanding membership interests of UDM, we issued to the holders of the UDM membership interests an aggregate of 21,659,200 shares of our common stock.
   
·In addition, pursuant to the terms of the Purchase Agreements, 32,712,176 shares of our issued and outstanding common stock previously held by certain stockholders were cancelled.

 

As a result of the Company’s acquisitions of Phreadz and UDM, we experienced a change in control and ceased to be a “shell” company as defined in Rule 12b-2 promulgated under the Exchange Act.

 

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Business Development Overview

 

Bizzingo, Inc. is a global social media company committed to the continued development of its validated social network for business. Free of all the clutter found in common social networks, the Bizzingo platform includes a suite of mobile and online applications focused on creating meaningful business connections. As the first true business-to-business social platform, Bizzingo is designed to allow businesses a way to find each other by keyword and view promotional information, as well as simultaneously communicate with their users. By establishing relationships with affiliate organizations and common interest groups, Bizzingo provides a trusted environment for members to interact and develop deeper business opportunities. The company’s profiling system will create one of the most detailed business databases in the world, delivering targeted search engine results and verified connections.

 

Social media is often misconstrued as a medium for business-to-consumer (B2C) engagement, and usually not seen as a viable communications network for those companies focused on business-to-business (B2B) engagement transactions. However, B2B, as in any other field, is impacted by online activity and should be seen as a viable opportunity to not only cultivate communities in social networks and other social channels, but also amplify awareness, increase lead generation, reduce sales cycles, and perhaps most importantly, learn and adapt to market dynamics in real-time. Bizzingo is a collection of product and service profiles for businesses, much like Facebook™ and Linkedn™ are a collection of personal profiles for individuals that will lend purpose to social media by facilitating a value proposition for each participant, and give businesses a social network marketing platform to reach their users and encourage transactions.

 

Each Bizzingo page includes information and functionality that includes product descriptions, social network interaction, video presentations, pictures, posting walls, links to additional information, and most importantly, the ability to transact a sale. Bizzingo’s goal is to provide the link that will lend purpose to social media by facilitating a value proposition for each participant, and give business enterprises a social network marketing platform to reach their users and encourage transactions.

 

The Bizzingo Concept

 

The development of Phreadz and UDM since our acquisition described in our Corporate History above has evolved into and culminated with www.bizzingo.com (“Bizzingo”). Bizzingo is a global social media company that has developed Bizzingo.com site as a unified business social network. We are a target-driven search and social network designed specifically for businesses. We function as an “internet hub” where social networking, e-commerce and marketing will converge within one domain. It is commonly accepted that B2B and B2C social media marketing will focus on three key areas: video, mobile and engagement. The Bizzingo network will allow member businesses to cost-efficiently introduce their products and services to a global network of qualified business users, leverage and expand their brand and image, and interact and cross- connect any and all of their contacts, while effectively communicating their marketing message to the most relevant audiences. Bizzingo was created to furnish businesses with a social network that will serve as a primary vehicle for marketing, connecting, and selling to a global business base easily and more effectively than ever before.

 

Bizzingo will provide a business a way to;

 

1.Cost effectively introduce their product and/or service to a global network of users;
2.Leverage and expand their brand and image;
3.Effectively communicate their marketing “message” to a targeted audience; and,
4.Sell their product or service.

 

Bizzingo is a collection of product and service profiles for member businesses, much like Facebook™ and Linkedn™ are a collection of personal profiles for individuals. Each Bizzingo page will include the following information and functionality;

 

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a product description links to additional information
a video introduction social network interaction
A picture and video library tools for marketing
A posting wall advertising

  

Bizzingo’s goal is to provide the missing link that will lend purpose to social media by facilitating a value proposition for each participant, and give businesses a social network marketing platform to reach their users and encourage transactions

 

For business’s, Bizzingo will offer direct communication and contact with consumers, without the hassle of distribution agreements, advertising expenses, and costly overhead. It is a market where dialogue between sellers and buyers is encouraged free of network clutter commonly found on site like Facebook.

 

For the larger established businesses, Bizzingo will be a medium for launching new product lines directly to buyers, doing away with the “middleman.”

 

Bizzingo will provide an environment where sellers are connected with a targeted audience. By nature, it eliminates the obstacles of geography, demographics, and socioeconomics. Although Facebook™ is attempting to make its user model monetizable by incorporating advertising and the Facebook™ marketplace into its site, Facebook™ remains an awkward sales tool as it was not initially designed for commerce and its infrastructure is not set up to grow in that direction within social networking.

 

By example, selling on Facebook™ is akin to interrupting a call between two friends who are talking about their vacation and offering to sell them cheap tickets. The “interruption” is an intrusion and does not represent a welcomed exchange. By contrast, Bizzingo will be a “place” for shoppers to go to when they want to buy - it is like a virtual trip to the mall. This simple distinction will revolutionize the ways in which retail is conducted on the web.

 

For the consumer, unlike the flagship e-Commerce platforms that are “flat” and impersonal, Bizzingo will provide a medium that is a dynamic, interactive visual experience, within a “safe” environment for retail transactions. Further, the experience may be shared through the Bizzingo posting wall, text capabilities, video sharing, etc.

 

The Platform

 

The platform’s target-driven search capabilities generate one of the most complete and relevant business systems, delivering VITAL opportunities to its members:

 

Validated — Member status is verified to ensure legitimacy.

Interest-based — Search results are based on common needs and interests.

Targeted — Connections are relevant and accurate.

Actionable — Businesses are connected to valuable opportunities.

Leveraged — A target-driven search engine delivers “clutter-free” results.

 

Bizzingo offers…

 

The ability to input “tags” to accurately identify a business.
Resources to promote a business within an affiliate group.
A cost effective method to engage a global business network.
The ability to leverage and expand a brand, product, or service.
Group purchasing power to secure discounts on goods and services.

 

Each Bizzingo page has information and functionality commonly associated with the existing personal social networks, such as Facebook and Linkedin, with two major differences: Bizzingo provides a channel to facilitate business, but it is devoid of the personal networking clutter normally experienced on other networks.

 

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As part of the platform, the Bizzingo user will be able to create multiple business networks within a user generated profile page. Although these pages will be standardized throughout the network, they will contain unique video, images, text, audio and links that are specific to the business user. The user will be able to invite everyone associated with his business into his network -- from suppliers and professionals, to the actual clients – connecting them all to current, relevant, and accurate information. Also within Bizzingo, companies can choose to limit their exposure to their specific industry networks or choose to include others from networks that may be complementary to their business.

 

Bizzingo is designed to allow businesses a way to find each other by keyword and to view information, as well as to provide communication channels to their users. Bizzingo’s profiling system, with the added input from our users, will create the most detailed business database in the world, delivering targeted search results without the irrelevant information presently delivered by the current open ended search engines.

 

What’s more, the user interface (UI) for the Bizzingo platform is familiar and simple, and its features are in a format that people are intuitively comfortable using. For example, conversations take place on a “wall” similar to the one that became so popular on Facebook. Building a profile is akin to the many sites that require data entry, with a guide that logically leads the user through the step-by-step process. Additionally, searching is as easy as it is on Google, with the added ability to input qualifying criteria. Bizzingo believes that ease of use is an important factor for user acceptance.

 

Bizzingo Applications

 

The Bizzingo social platform is based on several layers of data storage, processing and accessibility. At its core, the platform is a set of data storage repositories, and access to this data is controlled via a custom Application Programming Interface (API) that manages incoming and outgoing requests through a sophisticated security layer. 

 

The API provides universal access to the data behind Bizzingo. Utilizing an API layer allows for efficient deployment of user interfaces for multiple devices and platforms without the need to re-tool data connections. It also allows Bizzingo to build and deploy partner-specific functionality with case-specific access parameters. The Company’s first utilization of the API is for their mobile application, Bizzingo Connect.

 

Bizzingo Connect

 

Bizzingo Connect is a mobile platform that utilizes patent-pending technology to support a suite of business networking tools designed for people to engage in real time using their smartphones. Launched in June 2012, the Bizzingo Connect enables people to better connect and collaborate on a daily basis at meetings or conferences. By providing a direct connection between the host and audience, the application allows for two-way engagement (Q&A, feedback) and material distribution including sell sheets, PowerPoint presentations, among others. The growth potential for this application is tremendous, as every time a meeting or conference host utilizes the application, the Bizzingo database will be populated by the profiles of the audience members. Bizzingo Connect is comprised of three components, described below;

 

ØBizzingo Connect Conference.

Helps speakers connect and engage their audience (and vice versa) with real-time feedback, both during and after a presentation, without the rush of scribbling contact information and requesting a discussion.

 

ØBizzingo Connect Bizz Card.

Bizzingo Connect Bizz Card is an online business card profile which takes the existing paradigm of a business card and turns it into a vehicle for showcasing one’s portfolio, introducing potential business partners to each other and building a network of validated, trusted business contacts.

 

ØBizzingo Connect Meeting.

Meetings are all about sharing ideas and information, and sometimes that information should remain confidential. Bizzingo Connect Meeting saves valuable time by allowing meeting attendees to pre-sign documents and acknowledge safe harbor statements prior to viewing sensitive materials, all from their smartphones. A built-in checkpoint also allows only verified users into the meeting. All of this prevents time being wasted on legal procedures and helps participants get straight to business.

 

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The Company is currently developing several other tools for the Bizzingo Connect mobile application, including the ability for users to create virtual business (“Bizz”) cards and exchange them remotely through the application. Other future uses for the application include the “Meeting” tool, which enables users to organize and archive private meeting and will allow meeting hosts to virtually distribute documents, such as non-disclosure agreements and meeting terms and conditions; and for participants to sign these documents without the hassle and associated costs of printing. Bizzingo has a renowned marketing team that is aggressively pursuing opportunities to increase the number of revenue streams from the Bizzingo Connect application. 

 

Marketing

 

To market the Bizzingo platform, we have and/or will be: (1) hiring a sales team to solicit business leaders and offer packages and incentives to become anchor clients on Bizzingo; (2) developing programs for the anchors to drive their existing followers to Bizzingo; (3) advertising and marketing to existing networks; (4) launching a high energy public relations campaign that is “edgy” and exciting; (5) establishing strategic alliances with advertisers and marketers; (6) hosting events related to specific Zones using prepaid sponsorship fees from these advertisers and money raised from various corporate financing. The events are intended to draw audiences by way of; singing competitions within the Music Zone, a trick golf shot competitions within the Sport Zone, a dance competition within the Entertainment Zone. Cash prizes and media recognition will be the incentives for participants.

 

Competitive Edge

 

Bizzingo will improve the online distributed systems by leveraging the inherent trust built into social links. In particular, Bizzingo will augment the online marketplaces with social networking features that should improve the “trust” factor between transaction partners and improve user satisfaction. Customers on traditional online marketplaces such as eBay™ and Craigslist™ routinely transact with complete strangers, thus marking them vulnerable to malicious and predatory transactions. Despite their integration of reputation systems, studies show malicious users can artificially inflate their reputation values. In contrast, Bizzingo will integrate features of social networks into an online shopping community, allowing customers to seek out purchases from trusted merchants. In addition, the personalized format of the platform provides additional transparency about the business.

 

The Technology 

 

Bizzingo, Inc. will use a “Cloud” computing model for its domain Bizzingo.com. In this model of computing, all the servers, networks, applications and other elements related to data centres are made available to the end users via the Internet, in a way that allows Bizzingo to use only the type and amount of computing services that they need for its traffic, thus increasing efficiency. The cloud model differs from traditional server models in that Bizzingo doesn’t hand over its IT resources to be managed. Instead it plugs into the “cloud” for infrastructure services, platform (operating system) services, or software services (such as SaaS apps); treating the “cloud” much as it would an internal data center or computer providing the same functions.

 

Product Development

 

We are continually developing new products, as well as optimizing our existing platform and feature set in order to meet the expected evolving needs of our audience; consumers, businesses and advertisers.

 

We will, purchase technology and license intellectual property rights in the event that it is strategically important, operationally compatible, and economically advantageous to do so. We are not materially dependent upon licenses and other agreements with third parties relating to product development.

 

Our technology team consists of an outsourced development team from BPG Worldwide, Inc., located in Campbell, California. This team is responsible for feature enhancements to and general maintenance of the Bizzingo site.

 

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Intellectual Property

 

Our intellectual property includes our brands, products and services; copyrights in software and creative content; trade secrets; and other intellectual property rights and licenses of various kinds. We will seek to protect our intellectual property assets through copyright, trade secret, trademark and other laws of the U.S., and through contractual provisions.

 

We consider the Bizzingo trademark and our related trademarks to be valuable to Bizzingo and we will aggressively seek to protect them.

 

Competition

 

We operate in the internet products, services, and content markets, which are highly competitive and characterized by rapid change, converging technologies, and increasing competition. Our most significant competition for users, advertisers, business’s, and developers comes from other social networking sites, such as Facebook, Groupon, Linkedin, and Twitter. We also compete with these companies to distribute and promote our services to their users, advertisers and business’s.

 

Our principal considerations related to attracting and retaining online users include functionality, performance, ease of use, usefulness, accessibility, integration, and personalization of the online services that we offer, as well as the overall user experience and quality of support on Bizzingo properties. Our principal considerations related to attracting users, advertisers and businesses are the reach, effectiveness, and efficiency of our marketing and advertising services as well as the creativity of the marketing solutions that we offer. “Reach” refers to the audience and/or demographic that can be accessed through the Bizzingo platform. “Effectiveness” for advertisers refers to our ability to deliver against advertisers’ targets and to measure and optimize our achievements against those targets. “Effectiveness” for publishers refers to our advertising technology and the monetization opportunities we are able to offer through our technology and marketing services. Many large media companies have developed, or are developing, social networking or social media tools to reach their audiences online. As these companies develop such portal or community sites, we could lose a substantial portion of our expected user traffic.

 

Employees

 

As of June 30, 2012, we have one employee. Our future success is substantially dependent on the performance of our senior management and key technical personnel, and our continuing ability to attract and retain highly qualified technical and managerial personnel.

 

Government Regulation

 

In the United States, advertising and promotional information presented to visitors on our website and our other marketing activities are subject to federal and state consumer protection laws that regulate unfair and deceptive practices. There are a variety of state and federal restrictions on the marketing activities conducted by email, or over the Internet, including U.S. federal and state privacy laws and the CAN-SPAM Act of 2003. The rules and regulations are complex and may be subject to different interpretations by courts or other governmental authorities. We might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future. Any such developments (or developments stemming from enactment or modification of other laws) or the failure to anticipate accurately the application or interpretation of these laws could create liability to us, result in adverse publicity and negatively affect our businesses. See our risk factors found elsewhere in this report for further discussion of government regulations.

 

Item 1A. Risk Factors.

 

An investment in our common stock involves various risks. You should carefully consider the risk factors set forth below in conjunction with the other information contained in this report before purchasing our common stock. If any of the risks discussed in this report actually occur, our business, operating results, prospects and/or financial condition could be adversely impacted. This could cause the market price of our common stock to decline and could cause you to lose all or part of your investment.

 

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Risks Related to our Business and Our Industry

 

We have no operating history on which to evaluate our potential for future success.

 

Our Bizzingo platform has had no material operations to date. Consequently, evaluating an investment in us and predicting our future results based upon our past performance is not possible, particularly with respect to our ability to develop our products and services, to generate and sustain a revenue base sufficient to cover operating expenses or to achieve profitability. We face many of the risks and uncertainties encountered by early stage companies, and our future operating results may differ from what we expect due to many factors, including: (i) slower than expected growth, or a downturn in the “real-time” communications industry; (ii) the uncertain adoption by consumers of the services that we intend to provide; and (iii) potential competition from other service providers.

 

Based on our historical financials, there is uncertainty as to our ability to continue as a going concern.

 

In the event that we are unable to achieve or sustain profitability or are otherwise unable to secure additional external financing, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern. Any such inability to continue as a going concern may result in our security holders losing their entire investment. Our financial statements, which have been prepared in accordance with generally accepted accounting principles, contemplate that we will continue as a going concern and do not contain any adjustments that might result if we were unable to continue as a going concern. Notwithstanding the foregoing our cash flow deficiencies raise substantial doubt as to our ability to continue as a going concern. Also, changes in our operating plans, our existing and anticipated working capital needs, the acceleration or modification of our expansion plans, lower than anticipated revenues, increased expenses, potential acquisitions or other events may also affect our ability to continue as a going concern.

 

We anticipate incurring operating losses and negative cash flows in the foreseeable future resulting in uncertainty of future profitability and limitation on our operations.

 

We anticipate that the Company will incur operating losses and negative cash flows in the foreseeable future, and to accumulate increasing deficits as we increase our expenditures for (i) our website and database expansions, (ii) infrastructure, (iii) sales and marketing, (iv) research and development, (v) personnel, and (vi) general business enhancements. Any increases in our operating expenses will require us to achieve significant revenue before we can attain profitability. In the event that we are unable to achieve profitability or raise sufficient funding to cover our losses, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern.

 

We will need additional capital to pursue our marketing strategies, conduct our operations and develop our products, and our ability to obtain the necessary funding is uncertain.

 

We will require significant additional capital resources from outside sources including equity and/or debt financings, license arrangements, grants and/or collaborative research arrangements in order to execute on our marketing strategy, develop products and continue operations, and we intend to seek to raise such additional capital. In addition, we anticipate needing additional capital for our anticipated need to hire additional employees, increase our marketing budget, lease additional office space and increase our research and development investment. However, we do not know if such capital will be available to us on reasonably favorable terms, or at all. If we are able to raise such additional capital, our existing stockholders will experience dilution. If we fail to obtain additional capital as and when required, our business will not succeed.

 

10
 

 

Our business model depends on our ability to successfully develop and operate our networks and deploy new offerings and technology.

 

There can be no assurances that we will be able to successfully design or engineer our networks or that we will not experience problems with the reliability of our network if we are able to make it operational in the future. Any reliability problems that adversely affect our ability to operate our networks would likely reduce revenues and restrict the growth of our business. Our future success will also depend in part on other factors, including, but not limited to, our ability to:

 

Find secure hosting;
   
Enhance our offerings;
   
Address the needs of our prospective users;
   
Respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis; and
   
Develop, enhance and improve the responsiveness, functionality and features of our infrastructure services and networks.

 

If we are unable to integrate and capitalize on new technologies and standards effectively, our business could be adversely affected.

 

Our business model is new and unproven, and, therefore, we can provide no assurance that we will be successful in pursuing it.

 

Our Bizzingo operations represent new and untested business models, for which there are no assurances that we will succeed in building a profitable business. Our ability to generate advertising is highly dependent on market adoption of our services and products. If we are unable to attract revenues, our operations and financial condition will be adversely affected.

 

The departure of our Chairman, Chief Executive Officer and /or other key personnel could compromise our ability to execute our strategic plan and may result in additional severance costs to us.

Our success largely depends on the skills, experience and efforts of our key personnel, including Douglas Toth, our Chairman, CEO and CFO. The loss of these person(s), or our failure to retain other key personnel, would jeopardize our ability to execute our strategic plan and materially harm our business. We have currently entered into employment agreements with each of Messrs. Toth and Samson. In addition, we intend to enter into a written employment agreement with each of our other key executives that can be terminated at any time by us or the executives.

 

We will need to recruit and retain additional qualified personnel to successfully grow our business.

 

Our future success will depend in part on our ability to attract and retain qualified operations, marketing and sales personnel as well as engineers. Inability to attract and retain such personnel could adversely affect the growth of our business. We expect to face competition in the recruitment of qualified personnel, and we can provide no assurance that we will attract or retain such personnel.

 

We will rely on third parties for software and hardware development, manufacturing content and technology services.

 

We expect to rely on third party developers to provide software and hardware. If we experience problems with any of our third party technology or products, our customers’ satisfaction could be reduced, and our business could be adversely affected. In addition, we expect to rely on third parties to provide content through strategic relationships and other arrangements. If we experience difficulties in maintaining these relationships or developing new relationships on a timely basis and on terms favorable to us, our business and financial condition could be adversely affected.

 

11
 

 

Malfunctions of third party hosting services could adversely affect their business, which may impede our ability to attract and retain strategic partners and customers.

 

To the extent the number of users of networks utilizing our products suddenly increases, the technology platform and hosting services which will be required to accommodate a higher volume of traffic may result in slower response times or service interruptions. System interruptions or increases in response time could result in a loss of potential or existing users and, if sustained or repeated, could reduce the appeal of our networks to users. In addition, since users depend on real time communication, outages caused by increased traffic could result in delays and system failures. These types of occurrences could cause users to perceive that our solution does not function properly and could therefore adversely affect our ability to attract and retain licensees, strategic partners and customers.

 

There has been increased competition in the “real-time” communications industry. As more companies seek to provide products and services similar to our proposed products and services, and because larger and better-financed competitors may affect our ability to operate our business and achieve profitability, our business may fail.

 

Competition for securing IM and VoIP services is intense. We are aware of similar products and services that will compete directly with our proposed products and services, and some of the companies developing these similar products and services are larger, better-financed companies that may develop products superior to our proposed products. Many of our prospective competitors are larger and have greater financial resources, which could create significant competitive advantages for those companies. Our future success depends on our ability to compete effectively with our competitors. As a result, we may have difficulty competing with larger, established competitor companies. Generally, these competitors have:

 

substantially greater financial, technical and marketing resources;

 

larger customer bases;

 

better name recognition; and

 

Potentially more expansive product offerings.

 

These competitors are likely to command a larger market share, which may enable them to establish a stronger competitive position than we have, in part, through greater marketing opportunities. Further, our competitors may be able to respond more quickly than us to new or emerging technologies and changes in user preferences and to devote greater resources than us to developing and operating networks of affinity websites. These competitors may develop products or services that are comparable or superior. If we fail to address competitive developments quickly and effectively, we may not be able to remain a viable entity.

 

Growth of internal operations and business may strain our financial resources.

 

We will be significantly expanding the scope of our operating and financial systems in order to build out our business. Our growth rate may place a significant strain on our financial resources for a number of reasons, including, but not limited to, the following:

 

The need for continued development of the financial and information management systems;

 

The need to manage relationships with licensees, resellers, distributors and strategic partners;

 

Difficulties in hiring and retaining skilled management, technical and other personnel necessary to support and manage our business; and

 

The need to train and manage our growing employee base.

 

12
 

 

The addition of new infrastructure services, networks, vertical categories and affinity websites, as well as the attention they demand, may also strain our management resources. We cannot give you any assurance that we will adequately address these risks and, if we do not, our ability to successfully expand our business could be adversely affected.

 

If we do not successfully enhance existing products and services or fail to develop new products and services in a cost-effective manner to meet customer demand in the rapidly evolving market for Internet and IP-based communications services, our business may fail.

 

The market for communications services is characterized by rapidly changing technology, evolving industry standards, changes in customer needs and frequent new service and product introductions. We are currently focused on securing “real-time” communications. Our future success will depend, in part, on our ability to use new technologies effectively, to continue to develop our technical and marketing expertise, to enhance our existing services and to develop new services that meet changing customer needs on a timely and cost-effective basis. We may not be able to adapt quickly enough to changing technology, customer requirements and industry standards. If we fail to use new technologies effectively, to develop our technical expertise and new services, or to enhance existing services on a timely basis, either internally or through arrangements with third parties, our product and service offerings may fail to meet customer needs, which would adversely affect our revenues and prospects for growth.

 

Our services may have technological problems or may not be accepted by consumers. To the extent we pursue commercial agreements, acquisitions and/or strategic alliances to facilitate new product or service activities, the agreements, acquisitions and/or alliances may not be successful. If any of these events were to occur, they could damage our reputation, limit our growth, negatively affect our operating results and harm our business.

 

In addition, if we are unable, for technological, legal, financial or other reasons, to adapt in a timely manner to changing market conditions or customer requirements, we could lose customers, strategic alliances and market share. Sudden changes in user and customer requirements and preferences, the frequent introduction of new products and services embodying new technologies and the emergence of new industry standards and practices could render our existing products, services and systems obsolete. The emerging nature of products and services in the technology and communications industry and their rapid evolution will require that we continually improve the performance, features and reliability of our products and services. Our success will depend, in part, on our ability to:

 

Enhance our existing products and services;

 

Design, develop, launch and/or license new products, services and technologies that address the increasingly sophisticated and varied needs of our current and prospective customers; and

 

Respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

 

The development of additional products and services and other proprietary technology involves significant technological and business risks and requires substantial expenditures and lead time. We may be unable to use new technologies effectively. Updating our technology internally and licensing new technology from [strategic partners and other third parties may not occur, which could adversely affect our ability to develop and expand our business.]

 

If the market for our services does not develop as anticipated, our business would be adversely affected.

 

The success of our products and services depend on the growth of social network site (SNS) users, which in turn depends on wider public acceptance of our websites and offerings. Potential new users may view our offerings as unattractive relative to other traditional services for a number of reasons, including better perceived offerings or pricings than we currently offer. Potential users may also view more familiar services as sufficient for their SNS and music search needs. There is no assurance that our offerings will ever achieve broad public acceptance.

 

13
 

 

If our products do not gain market acceptance, we may not be able to fund future operations.

 

A number of factors may affect the market acceptance of our products or any other products we develop or acquire, including, among others:

 

the price of our products relative to other products that seek to secure “real-time” communication;

 

the perception by users of the effectiveness of our products;

 

our ability to fund our sales and marketing efforts; and

 

the effectiveness of our sales and marketing efforts.

  

If our products do not gain market acceptance, we may not be able to fund future operations, including the development of new products and/or our sales and marketing efforts for our current products, which inability would have a material adverse effect on our business, financial condition and operating results.

 

If we are not able to adequately protect our proprietary rights, our operations would be negatively impacted.

 

Our ability to compete partly depends on the superiority, uniqueness and value of our technology and intellectual property. To protect our proprietary rights, we rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. Despite these efforts, any of the following may reduce the value of our intellectual property:

 

Our applications for patents, trademarks and copyrights relating to our business may not be granted and, if granted, may be challenged or invalidated;

 

Issued trademarks, copyrights, or patents may not provide us with any competitive advantages;

 

Our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology; or

 

Our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we develop.

 

In addition, we may not be able to effectively protect our intellectual property rights in certain foreign countries where we may do business in the future or from which competitors may operate. While we have numerous pending international patents, obtaining such patents will not necessarily protect our technology or prevent our international competitors from developing similar products or technologies. Our inability to adequately protect our proprietary rights would have a negative impact on our operations.

 

If we are forced to litigate to defend our intellectual property rights, or to defend against claims by third parties against us relating to intellectual property rights, legal fees and court injunctions could adversely affect our financial condition or end our business.

 

Disputes regarding the ownership of technologies and intellectual property rights are common and likely to arise in the future. We may be forced to litigate against other competitors to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of other parties’ proprietary rights. Any such litigation could be very costly and could distract our management from focusing on operating our business. The existence and outcome of any such litigation could harm our business. Additionally, any such costs we incur to defend or protect our intellectual property rights could greatly impact our financial condition.

 

Further, we can give no assurances that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against us or that any such assertions or prosecutions will not materially adversely affect our business. Regardless of whether any such claims are valid or can be successfully asserted, defending against such claims could cause us to incur significant costs and could divert resources away from our other activities. In addition, assertion of infringement claims could result in injunctions that prevent us from distributing our products. 

 

14
 

 

We could be subject to liability for hacking or spam on our networks.

 

The nature and breadth of the content on our networks could result in liability in various areas, including claims relating to:

 

Defamation, libel, negligence, personal injury and other legal theories based on the nature and content of the material appearing on our networks;

 

Copyright or trademark infringement or other wrongful acts due to the actions of third parties; and

 

Identity theft, misuse of personal data or information.

 

Any such claims could likely result in the Company incurring substantial costs and would be a drain on our financial and other resources. In addition, such claims could disrupt our relationships with licensees, resellers, strategic partners and other third parties. This would negatively affect our user base and could reduce our revenues as a result.

 

The laws governing online secure communications are largely unsettled, and if we are or become subject to various government regulations, costs associated with those regulations may materially adversely affect our business.

 

The current regulatory environment for our services remains unclear. We can give no assurance that we will be in or have been in compliance with local, state and/or federal laws or other laws. Further, we can give no assurance that we will not unintentionally violate such laws or that such laws will not be modified, or that new laws will be enacted in the future which would cause us to be in violation of such laws.

 

It is possible that Congress and some state legislatures may seek to impose increased fees, regulations and administrative burdens on the services that we provide. Added consumer protection requirements and other obligations could be imposed. Such regulations could result in substantial costs depending on the technical changes required to accommodate the requirements, and any increased costs could erode our pricing advantage over competing forms of communication and may adversely affect our business.

 

In addition to regulations addressing our services, other regulatory issues relating to the Internet in general could affect our ability to provide services. Congress has adopted legislation that regulates certain aspects of the Internet, including online content, user privacy, taxation, liability for third-party activities and jurisdiction. In addition, a number of initiatives pending in Congress and state legislatures would prohibit or restrict advertising or sale of certain products and services on the Internet, which may have the effect of raising the cost of doing business on the Internet generally.

 

Telephone carriers have petitioned governmental agencies to enforce regulatory tariffs, which, if granted, would increase the cost of online communications, and such increase in cost may impede the growth of secure online communication and adversely affect our business.

 

The growing popularity and use of online secure communications has burdened the existing telecommunications infrastructures, and many high traffic areas have begun to experience interruptions in service. As a result, certain local telephone carriers have petitioned governmental agencies to enforce regulatory tariffs on IP telephony traffic that crosses over the traditional time division multiplexing (TDM) telephony networks. If any of these petitions or the relief that they seek is granted, the costs of communicating online could increase substantially, potentially adversely affecting the growth in the use of online networks and communications. Any of these developments could have an adverse effect on our business.

 

15
 

 

If there are large numbers of business failures and mergers in the communications industry, our ability to manage costs or increase our subscriber base may be adversely affected.

 

The intensity of competition in the communications industry has resulted in significant declines in pricing for communications services. The intensity of competition and its impact on communications pricing have caused some communications companies to experience financial difficulty. Our prospects for maintaining or further improving communications costs could be negatively affected if one or more key communications providers were to experience serious enough difficulties to impact service availability, if communications companies merge reducing the number of companies from which we purchase wholesale services, or if communications bankruptcies and mergers reduce the level of competition among database, SNS and other service providers.

 

If we expand into international markets, our inexperience outside the United States would increase the risk that our international expansion efforts will not be successful, which would in turn limit our prospects for growth.

 

We may explore expanding our business to other countries. Expansion into international markets requires significant management attention and financial resources. In addition, we may face the following risks associated with any expansion outside the United States:

 

challenges caused by distance, language and cultural differences;

 

legal, legislative and regulatory restrictions;

 

currency exchange rate fluctuations;

 

economic instability;

 

longer payment cycles in some countries;

 

credit risk and higher levels of payment fraud;

 

potentially adverse tax consequences; and

 

higher costs associated with doing business internationally.

 

These risks could harm our international expansion efforts, which could in turn harm our business prospects.

 

Climate change poses both regulatory and physical risks that could harm our operations or the way we expect to conduct business.

 

In addition to the possible direct economic impact that climate change could have on us, climate change mitigation programs and regulations could increase our costs. We see the potential for higher energy costs driven by climate change regulations. Our costs could increase if utility and communication companies pass on their costs, such as those associated with carbon taxes, emission cap and trade programs, or renewable portfolio standards. While we maintain business recovery plans that are intended to allow us to recover from natural disasters or other events that can be disruptive to our business, we cannot be sure that our plans will fully protect us from all such disasters or events.

 

We are subject to management risks.

 

New ventures have substantial inherent risks including, but not limited to, development, marketing, sales, distribution, human factors and the coordination of any and all of these activities. Notwithstanding our due diligence and any pre-planning, our products and services may encounter unexpected problems in connection with any of these activities that could not be foreseen or accurately predicted and which could have a material adverse effect on our business, financial condition and results of operations.

 

16
 

 

 We have agreed to indemnify our directors and officers

 

Our officers and directors are required to exercise good faith and high integrity in our management affairs. Our articles of incorporation, our bylaws and the Nevada Revised Statutes provide, however, that our officers and directors will have no liability to our stockholders for losses sustained or liabilities incurred which arise from any transaction in their respective managerial capacities unless they:

 

violated their duty of loyalty,
did not act in good faith,
engaged in intentional misconduct or knowingly violated the law,
approved an improper dividend or stock repurchase, or
Derived an improper benefit from the transaction.

 

Our articles of incorporation, our bylaws and the Nevada Revised Statutes also provide for the indemnification by us of our officers and directors against any losses or liabilities they may incur as a result of the manner in which they operate our business or conduct the internal affairs, provided that in connection with these activities they act in good faith and in a manner that they reasonably believe to be in, or not opposed to, our best interests, and their conduct does not constitute gross negligence, misconduct or breach of fiduciary obligations. We have also entered into indemnity agreements with our officers and directors. These indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and stockholders.

 

We have and will continue to incur increased costs as a result of being a public company, compared to the Company’s historical operations as a private company.

 

As a public company, we have and will continue to incur significant legal, accounting and other expenses that UDM and Phreadz did not incur as private companies. We expect the laws, rules and regulations governing public companies to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. Additionally, with the Acquisitions and the termination of our status as a shell company, we will incur additional costs associated with our public company reporting requirements.

 

Risks Related to our Stock

 

Trading in our common stock is limited and the price of our common stock may be subject to substantial volatility.

 

Our common stock is traded on the OTC Bulletin Board, and therefore the trading volume is more limited and sporadic than if our common stock were traded on a national stock exchange such as The Nasdaq Stock Market or the NYSE Amex. Additionally, the price of our common stock may be volatile as a result of a number of factors, including, but not limited to, the following:

 

quarterly variations in our operating results;

 

large purchases or sales of our common stock;

 

actual or anticipated announcements of new products or services by us or competitors;

 

general conditions in the markets in which we compete; and

 

economic and financial conditions.

 

17
 

 

“Penny stock” regulations may impose certain restrictions on the marketability of our securities.

 

The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions (including the issuer of the securities having net tangible assets (i.e., total assets less intangible assets and liabilities) in excess of $2,000,000 or average revenue of at least $6,000,000 for the last three years). As a result, our common stock could be subject to these rules that impose additional sales practice requirements on broker-dealers who sell our securities to persons other than established customers and accredited investors (generally persons with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a “penny stock,” unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the “penny stock” market. The broker-dealer must also disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the “penny stock” held in the account and information on the limited market in “penny stocks.” Consequently, although the “penny stock” rules do not currently apply to our securities, if these rules do become applicable in the future, this may restrict the ability of broker-dealers to sell our securities.

 

Securities analysts may not cover our common stock and this may have a negative impact on our common stock’s market price.

 

The trading market for our common stock may depend on the research and reports that securities analysts publish about us or our business. We do not have any control over these analysts. There is no guarantee that securities analysts will cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect our common stock’s market price, if any. If we are covered by securities analysts, and our stock is downgraded, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to publish regularly reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

 

We may seek to raise additional funds, finance acquisitions or develop strategic relationships by issuing capital stock.

 

We have financed our operations, and we expect to continue to finance our operations, acquisitions and develop strategic relationships, by issuing equity or convertible debt securities, which could significantly reduce or dilute the percentage ownership of our existing stockholders. Furthermore, any newly issued securities could have rights, preferences and privileges senior to those of our existing stock. Moreover, any issuances by us of equity securities may be at or below the prevailing market price of our stock and in any event may have a dilutive impact on your ownership interest, which could cause the market price of stock to decline.

We may also raise additional funds through the incurrence of debt, and the holders of any debt we may issue would have rights superior to your rights in the event we are not successful and are forced to seek the protection of the bankruptcy laws.

 

We have no current intention of declaring or paying any cash dividends on our common stock.

 

We do not plan to declare or pay any cash dividends on our common stock. Our current policy is to retain all funds and any earnings for use in the operation and expansion of our business. 

 

18
 

   

Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

Our principal executive offices are located at 63 Main Street, Flemington, New Jersey 08858. Our monthly rental on our office space is $805.00 and our arrangement is on a month to month basis. The telephone number at this address is (908) 968-0838.

 

Item 3. Legal Proceedings.

 

We are not a party to any legal proceedings. Management is not aware of any legal proceedings proposed to be initiated against the Company. However, from time to time, the Company may become subject to claims and litigation generally associated with any business venture operating in the ordinary course.

 

Item 4. Mine Safety Disclosure.

 

Not applicable.

 

PART II

 

Item 5. Market for Registrant’s Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

The Company’s common stock is traded on the Over-the-Counter Bulletin Board. On June 18, 2010 we changed our Company name to Phreadz, Inc. and on July 6, 2010 our symbol changed from “AWDM” to “PHDZ”. On May 2, 201 in connection with our name change to Bizzingo, Inc., our symbol changed to “BIZZ”. All share prices have been adjusted to provide for the 7-1 forward stock split affected on September 28, 2009. We consider our stock to be “thinly traded” and any reported sale prices may not be a true market–based valuation of its stock. The following table sets forth, for the periods indicated, the high and low bid prices of a share of our common stock for the last two fiscal years.

 

   HIGH BID   LOW BID 
2012          
Quarter Ended August 2011  $0.98   $0.31 
Quarter Ended November 30, 2011  $0.43   $0.13 
Quarter Ended February 28, 2012  $0.28   $0.12 
Quarter Ended May 31, 2012  $0.59   $0.13 
2011          
Quarter Ended August 2010  $1.01   $0.58 
Quarter Ended November 30, 2010  $0.75   $0.60 
Quarter Ended February 28, 2011  $0.60   $0.51 
Quarter Ended May 31, 2011  $1.50   $0.65 
2010          
Quarter Ended August 31, 2009  $0.179   $0.146 
Quarter Ended November 30, 2009  $0.146   $0.021 
Quarter Ended February 28, 2010  $0.146   $0.146 
Quarter Ended May 31, 2010  $1.00   $0.146 

 

The above quotations are taken from information provided by OTCMarkets.com and may not represent actual transactions.

 

19
 

 

Common Stock

 

We are authorized to issue 525,000,000 shares of common stock, with a par value of $0.001. The closing price of our common stock on September 6, 2012, as quoted by the OTC was $0.07. There are 112,434,525 shares of common stock issued and outstanding as of September 6, 2012. All shares of common stock have one vote per share on all matters including election of directors, without provision for cumulative voting. The common stock is not redeemable and has no conversion or pre-emptive rights. The common stock currently outstanding is validly issued, fully paid and non- assessable. In the event of liquidation of the company, the holders of common stock will share equally in any balance of the Company’s assets available for distribution to them after satisfaction of creditors and preferred shareholders, if any. The holders of common stock of the company are entitled to equal dividends and distributions per share with respect to the common stock when, as and if, declared by the board of directors from funds legally available.

 

Record Holders

 

At September 6, 2012, the Company had 75 shareholders of record, and an unknown number of additional holders whose stock is held in “street form”. The transfer agent of our common stock is Direct Transfer LLC.

 

Recent Sales of Unregistered Securities

During the fourth quarter of fiscal year 2012, we effected the following transactions:

 

1.On March 2, 2012, 500,000 shares were issued at $0.20 for cash of $100,000
2.On March 2, 2012, 5,350,000 shares were issued at $0.10 for cash of $535,000
3.On March 2, 2012, 800,000 shares were issued for services
4.On March 6, 2012, 500,000 shares were issued at $0.10 for cash of $50,000
5.On March 6, 2012, 500,000 shares were issued for services
6.On March 6, 2012, 4,130,970 shares were issued to settle notes and accrued interest in the amounts of $385,000 and $28,075, respectively.
7.On April 12, 2012, 447,915 shares were issued under an anti-dilution clause of an existing agreement.
8.On April 12, 2012, 3,700,000 shares were issued for services
9.On May 3, 2012, 650,000 shares were issued for services
10.On May 3, 2012, 1,500,000 shares were issued at $0.10 for cash of $150,000

 

The transactions described above was exempt under Section 4(2) and 3(b) of the Securities Act of 1933, as amended, and the rules and regulations promulgated there under, including Regulations D, due to the facts that recipient of the shares was an accredited investor, had acquired the shares for investment purposes and not with a view for re-distribution, had access to sufficient information concerning the Company, and the certificate(s) representing such shares will bear a restrictive legend.

 

The following table provides information as of May 31, 2012 concerning shares of our common stock authorized for issuance under our existing equity compensation plans.

 

Equity Compensation Plan Information
Plan category  Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
   Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
   Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
 
Equity compensation plans approved by security holders   -0-    -0-    -0- 
Equity compensation plans not approved by security holders (1)   12,750,000   $0.247    250,000 
Total   12,750,000   $0.247    250,000 

 

20
 

 

On September 2, 2011, the Company’s Board of Directors approved the creation of the Company’s 2011 Stock Option Plan. A total of 13,000,000 shares of the Company’s common stock are subject to the plan terms.

 

During fiscal 2012, the Board of Directors approved the following stock option grants under the stated plan:

 

5,000,000 shares to the Company’s Chairman at an exercise price of $0.16 per share,
500,000 shares to each of the Company’s five Directors, of which four of the Directors have an exercise price of $0.31 per share and one Director has an exercise price of $0.20 per share, and
3,250,000 shares to four consultants of the Company, each at exercise prices of $0.31 per share.

 

Dividends

 

The Company has never paid a cash dividend on its common stock nor does it anticipate paying cash dividends on its common stock in the near future. It is the present policy of the Company not to pay cash dividends on the common stock but to retain earnings, if any, to fund growth and expansion. Any payment of cash dividends on the common stock in the future will be dependent upon the Company’s financial condition, results of operations, current and anticipated cash requirements, plans for expansion, as well as other factors the Board of Directors deems relevant.

 

Warrants

 

The fair value of the 10,479,488 Series A Warrants, with an exercise price of $0.30 per share, issued in connection with the Unit Purchase Agreements described herein during the period April 3, 2009 (Inception) to May 31, 2011 was estimated using the Black-Scholes option pricing model and based on the following assumptions:

 

Series A Warrants  2010 
Risk-free interest rate (based on US Treasury Note Yield (2 year)   1.35%
Dividend yield   0.00%
Expected stock price volatility (Cumulative)   91.71%
Weighted average expected warrants life   8 years 

 

The Company analyzed the beneficial nature of the conversion terms and determined that no material beneficial conversion feature exists.

 

The fair value of the 10,479,488 Series B Warrants, with an exercise price of $0.60 per share, issued in connection with the Unit Purchase Agreements described herein during the period April 3, 2009 (Inception) to May 31, 2011 was estimated using the Black-Scholes option pricing model and based upon the following assumptions:

 

Series B Warrants  2010 
Risk-free interest rate (based on US Treasury Note Yield (2 year)   1.35%
Dividend yield   0.00%
Expected stock price volatility (Cumulative)   91.71%
Weighted average expected warrants life   8 years 

 

The Company analyzed the beneficial nature of the conversion terms and determined that no material beneficial conversion feature exists.

 

21
 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

Item 6. Selected Financial Data.

 

We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required under this Item.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operation contains “forward looking statements.” Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual future results will not be materially different from the expectations expressed in this Annual Report. The following discussion should be read in conjunction with the audited Consolidated Financial Statements and related Notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K, with the Risk Factors section under Part I, Item 1A of this Annual Report on Form 10-K, and the Special Note regarding forward-looking statements included elsewhere in this Annual Report on Form 10-K.

 

Company Overview

 

We are a development stage company and since our acquisition of Phreadz and UDM we have evolved into Bizzingo. This development has culminated in www.bizzingo.com (“Bizzingo”) and is a social network designed for business and commerce. Bizzingo will take advantage of the present environment by differentiating itself from other social networks by addressing the many inadequacies currently existing within the system. Instead of creating another unavailing network of captive consumers, Bizzingo will launch a platform of businesses that will leverage the existing communities to market their products and services.

 

Bizzingo will provide the following benefits and solutions to the world of social networking:

 

1.The democratization of the Bizzingo social community, giving equal access to all who use it, thereby allowing smaller businesses the ability to compete with larger, established companies.

 

2.The ability for both the B2B and B2C users to monetization their interaction within social media.

 

3.The enhancement of privacy through its user interface structure and the targeted audience feature. By design, at the time a user signs up for an account he/she does not need to be “profiled” for targeted advertising. Instead, a user is assessed by the Zones he/she visits (i.e.: A user surfing the Travel Zone is more likely to rent a hotel room).

 

4.The consolidation of many networks, providing users a more efficient way to use their communities for commerce. In other words, Bizzingo allows the consolidation of most social networks under its single domain.

 

5.The function of selling back in the hands of the businesses, because a Bizzingo page is a business and product profile page, not a personal profile page. Bizzingo will attract sellers of products and services from around the world - Bizzingo is a true free market.

 

Results of Operations and Going Concern

 

The Company is in the development stage and consequently is subject to the risks associated with development stage companies, including the need for additional financing; the uncertainty of the Company’s technology and intellectual property resulting in successful commercial products or services as well as the marketing and customer acceptance of such products or services; competition from larger organizations; dependence on key personnel; and dependence on corporate partners and collaborators. To achieve successful operations, the Company will require additional capital to continue research and development and marketing efforts. No assurance can be given as to the timing or ultimate success of obtaining future funding.

 

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The processes of developing new approaches to social media are inherently highly complex, time-consuming, expensive and uncertain. The Company must make long-term investments and commit significant resources before knowing whether its development programs will result in products that will achieve market acceptance. Product candidates that may appear to be promising at all stages of development may not reach the market. For these reasons, the Company is unable to predict the period in which material net cash inflows from its products and services.

 

The following discussions are based on the consolidated operations of Bizzingo, Inc. and its subsidiaries, UDM and Phreadz and should be read in conjunction with our audited financial statements for the years ended May 31, 2012 and May 31, 2011. These financial statements are included in this report at Part II, Item 8, below.

 

We incurred a net loss of ($9,998,813) for the year ended May 31, 2012 and had a working capital deficit of ($2,690,673) as of May 31, 2012. We have incurred losses of ($27,557,862) since inception (April 3, 2009) and do not anticipate having positive net income in the immediate future. Net cash used by operations for the year ended May 31, 2012 was ($2,064,872). These conditions create an uncertainty as to our ability to continue as a going concern. As the Company has been in the development/organization stage and there has been no sales and marketing expenses. For the period from inception (April 3, 2009) to May 31, 2012, we have been in the development stage and therefore have not generated any revenues.

 

We anticipate that our existing cash and cash equivalents will not be sufficient to fund operations. The Company intends to seek additional financing to fund the Company’s continued operations. There can be no assurance that the Company will be successful in raising this additional financing on acceptable terms, if at all.

 

To obtain additional capital when needed, the Company will evaluate alternative financing sources, including, but not limited to, the issuance of equity or debt securities, corporate alliances, joint ventures and licensing agreements; however, there can be no assurance that funding will be available on favorable terms, if at all. The Company cannot assure you that it will successfully commercialize its products under development or that its products, if successfully developed, will generate revenues sufficient to enable it to earn a profit. If the Company is unable to obtain additional capital, management may be required to explore alternatives to reduce cash used by operating activities, including the termination of development efforts that may appear to be promising to the Company, the sale of certain assets, possibly including the Company’s IP property, and the reduction in overall operating activities.

 

The auditors’ report on the Company’s May 31, 2012 consolidated financial statements contains an explanatory paragraph that states that the Company has suffered losses and negative cash flows from operations that raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Impact of Inflation

 

Inflation has not had a significant effect on the Company’s operations during the periods from April 3, 2009 (date of inception) to May 31, 2012. However, there can be no assurance that future inflation would not have an adverse impact on our operating results and financial condition.

 

Results of Operations for the year ended May 31, 2012 and May 31, 2011

 

During the years ended May 31, 2012 and 2011, we did not experience revenues from operations.

 

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Operating expenses for the year ended May 31, 2012, was ($7,491,538), as compared to ($2,453,272) for the year ended May 31, 2011. The $5,038,266 increase is primarily attributable to an increase during the current year in stock based compensation of approximately $4,036,000 issued to officers, directors and outside consultants, an increase in legal and professional fees associated with being a public company of approximately $475,000 and an increase in outside consulting fees of approximately $540,000, offset by a decrease in miscellaneous expenses of approximately $10,000.

 

Cash Used in Operating Activities

 

Net cash used in operating activities for the year ended May 31, 2012 was ($2,064,872), and for the year ended May 31, 2011 was ($1,022,924). The Company expects net cash used in operating activities to increase going forward as the Company pursues its business plan, continues in its development and markets its services.

 

Cash Used in Investing Activities

 

Net cash used in investing activities for the year ended May 31, 2012 was ($75,000), and for the year ended May 31, 2011 was $0. Net cash used in financing activities consisted of cash used for the purchase of capital assets.

 

Cash Used in Financing Activities

 

Net cash provided by financing activities for the year ended May 31, 2012 was approximately $2,153,000, and from for the year ended May 31, 2011 was approximately $870,000. This consisted of net proceeds received from the issuance of notes payable and common shares issued for cash.

 

Liquidity and Capital Resources

 

As of May 31, 2012, we had a working capital deficit of ($2,690,673) compared to a working capital deficit of ($871,366) as of May 31, 2011. Cash and cash equivalents at May 31, 2012 was $17,104 compared to a balance of $4,101 as at May 31, 2011. Our current level of operations does not generate any cash to fund our working capital needs. Accordingly, we will have to raise capital to fund our short-term working capital needs. No assurance can be made that we will have access to the capital markets in future, or that financing will be available on acceptable terms to satisfy our future and on-going cash requirements that we need to implement its business strategies. Our inability to access the capital markets or obtain acceptable financing could have a material adverse affect on its results of operations and financial condition, and could severely threaten our ability to continue as a going concern.

 

Research and Development Expenses

 

Future Research and development costs will include expenses paid to outside development consultants and compensation related expenses for our technical staff. Research and development costs are expensed as incurred.

 

Additional Financing

 

From inception, we have financed operations through notes payable. We expect to finance future cash needs primarily through proceeds from equity financings, loans, and/or collaborative agreements with corporate partners. We have used net proceeds from the issuance of notes payable for general corporate purposes, which has been funding working capital needs.

 

Material Off-Balance Sheet Arrangements

 

None.

 

Critical Accounting Policies

 

Our discussion and analysis of the financial condition and results of operations are based upon Bizzingo, Inc.’s financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The Company is a development-stage entity and has disclosed inception-to-date information within these financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

 

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Basis of Presentation

 

The consolidated financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations. If we were not to continue as a going concern, we would likely not be able to realize on our assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the consolidated financial statements. There can be no assurances that we will be successful in generating additional cash from equity or other sources to be used for operations. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Development Stage Company

 

The Company’s financial statements are presented as those of a development stage enterprise. Activities during the development stage primarily include equity and debt based financing and further implementation of the business plan, including research and development.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.

 

Cash Equivalents

 

For purposes of the statement of cash flows cash equivalents usually consist of highly liquid investments which are readily convertible into cash with maturity of three months or less when purchased.

 

Concentration of Credit Risk

 

The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits.

 

Intangibles

 

Intangibles are comprised of acquired technologies. In accordance with ASC 350, intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually, or when events indicate that an impairment exists. The Company calculates impairment as the excess of the carrying value of its indefinite-lived assets over their estimated fair value. If the carrying value exceeds the estimate of fair value a write-down is recorded. The Company amortizes it’s intangibles with finite useful lives over their respective useful lives.

 

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Debt Issue Costs and Debt Discount

 

These items are amortized over the life of the debt to interest expense. If a conversion, extinguishment or repayment of the underlying debt occurs, a proportionate share of these amounts is immediately expensed.

 

Fair Value of Financial Instruments

 

The Company follows ASC 820-10 of the FASB Accounting Standards Codification to measure the fair value of its financial instruments and disclosures about fair value of its financial instruments. ASC 820-10 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined by ASC 820-10 are described below:

 

Level 1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
  
Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
  
Level 3: Pricing inputs that are generally unobservable inputs and not corroborated by market data.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate their fair values because of the short maturity of these instruments.

 

The Company’s note payable and convertible notes payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at May 31, 2012 and May 31, 2011.

 

The Company’s Level 3 financial liabilities consist of certain common stock warrants and embedded conversion features for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. The Company valued the warrant and conversion features using an option pricing model. These models incorporate transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.

 

Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.

 

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It is not, however, practical to determine the fair value of advances from stockholders due to their related party nature.

 

Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis

 

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative liability at every reporting period and recognizes gains or losses in the statements of operations that are attributable to the change in the fair value of the derivative liability.

 

Debt Issue Costs and Discount on Debt

 

Amortized over the life of the debt to interest expense. If a conversion, extinguishment or repayment of the underlying debt occurs, a proportionate share is expensed.

 

Beneficial Conversion Feature

 

For conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”) and related debt discount.

 

When the Company records a BCF, the relative fair value of the BCF would be recorded as a debt discount against the face amount of the respective debt instrument. The discount would be amortized to interest expense over the life of the debt.

 

Derivative Instruments

 

The Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-15. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

 

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

 

Share-based payments

 

Generally, all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expense resulting from share-based payments is recorded as general and administrative expense.

 

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Revenue

 

The Company records revenue on the accrual basis when all goods and services have been performed and delivered, the amounts are readily determinable, and collection is reasonably assured.

 

Advertising

 

The Company expenses advertising when incurred.

 

Income Taxes

 

Income taxes are provided in accordance with ASC No. 740, Accounting for Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities.

 

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of all of the deferred tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Net Loss per Share

 

Net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the applicable period. Diluted loss per share is determined in the same manner as basic loss per share, except that the number of shares is increased to include potentially dilutive securities using the treasury stock method. Since the Company incurred a net loss in all periods presented, all potentially dilutive securities were excluded from the computation of diluted loss per share since the effect of including them is anti-dilutive.

 

Subsequent Events

 

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements are issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.

 

Recent Accounting Pronouncements

 

There are no recent accounting pronouncements that are expected to have a material effect on the Company’s financial statements.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide information required under this Item.

 

Item 8. Financial Statements.

 

The financial statements of the Company and related schedules described under “Item 15. Financial Statements and Financial Statement Schedules” are included following the signature pages of this Form 10-K.

 

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None

 

Item 9A. Controls and Procedures.

 

The Company’s Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for the Company.

 

(a) Evaluation of Disclosure Controls and Procedures

 

Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are not effective to ensure that information required to be disclosed by us in report that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Management’s Report on Internal Control over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining internal control over financial reporting and disclosure controls. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

1.Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
2.Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
3.Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed by the Company under the Exchange is appropriately recorded, processed, summarized and reported within the specified time periods.

 

Management has conducted an evaluation of the effectiveness of our internal control over financial reporting as of May 31, 2011 based on the framework established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

Based on this assessment, management concluded that as of May 31, 2012 the Company had material weaknesses in its internal control procedures.

 

A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.

 

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We have concluded that our internal control over financial reporting was ineffective as of May 31, 2012.

 

The Company’s assessment identified certain material weaknesses which are set forth below:

 

Financial Statement Close Process

 

1.There are insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.

 

2.There is insufficient supervision and review by our corporate management, particularly relating to complex transactions requiring analysis of equity and debt instruments.

 

3.There is a lack of formal processes and timelines for closing the books and records at the end of each reporting period.

 

4.The Company currently has an insufficient level of monitoring and oversight controls for review and recording of stock issuances, agreements and contracts, including insufficient documentation and review of the selection and application of US GAAP to significant non-routine transactions. In addition this has resulted in a lack of controls over the issuance of the Company’s stock which resulted in names of holders being spelt incorrectly.

 

These weaknesses restrict the Company’s ability to timely gather, analyze and report information relative to the financial statements.

 

Entity Level Controls

 

1.There are insufficient corporate governance policies. Our corporate governance activities and processes are not always formally documented. While we have adopted specific corporate governance policies (see Form 8-K filed on March 28, 2011) we do not yet have a sufficient number of independent directors.

 

2.The Company currently has insufficient resources and an insufficient level of monitoring and oversight, which may restrict the Company’s ability to gather, analyze and report information relative to the financial statements in a timely manner, including insufficient documentation and review of the selection and application of US GAAP to significant non-routine transactions. In addition, the limited size of the accounting department makes it impractical to achieve an optimum segregation of duties.

 

3.There are limited processes and limited or no documentation in place for the identification and assessment of internal and external risks that would influence the success or failure of the achievement of entity-wide and activity-level objectives.

 

Functional Controls and Segregation of Duties

 

1.There is an inadequate segregation of duties consistent with control objectives. The Company’s management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. In order to remedy this situation we would need to hire additional staff to provide greater segregation of duties. Currently, it is not feasible to hire additional staff to obtain optimal segregation of duties. Management will reassess this matter in the following year to determine whether improvement in segregation of duties is feasible.

 

2.There is a lack of top level reviews in place to review targets, product development, joint ventures or financing. All major business decisions are carried out by the Company’s officers with Board of Directors approval when needed.

 

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Accordingly, as the result of identifying the above material weaknesses, we have concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.

 

Management believes that the material weaknesses set forth above were the result of the scale of our operations and are intrinsic to our small size. Management believes these weaknesses did not have a material effect on our financial results and intends to take remedial actions upon receiving appropriate funding for the Company’s business operations.

 

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report herein.

 

Plan of Remediation

 

We are committed to improving our financial organization. Management believes that preparing and implementing sufficient written policies and checklists will remedy the material weaknesses pertaining to insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements. Further, management believes that the hiring of additional personnel who have the technical expertise and knowledge will result in proper segregation of duties and provide more checks and balances within the department. These personnel will provide the depth of knowledge and time commitment to provide a greater level of review for corporate activities. The appointment of additional outside directors with industry expertise will greatly decrease any control and procedure issues the company may encounter in the future.

 

We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies, including:

 

1)We will revise processes to provide for a greater role of independent board members in the oversight and review until such time that we are adequately capitalized to permit hiring additional personnel to address segregation of duties issues, ineffective controls and insufficient supervision and review by our corporate management.
  
2)We will continue to update the documentation of our internal control processes, including formal risk assessment of our financial reporting processes
  
3)Commence the development of internal controls and procedures surrounding the financial reporting process, primarily through the use of account reconciliations, and supervision.

 

Item 9B. Other Information.

 

None

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

The following table sets forth the names, ages, and positions of our executive officers and directors as of May 31, 2012. Executive officers are appointed annually by our Board of Directors. Each executive officer holds his office until he resigns, is removed by the Board, or his successor is elected and qualified. Directors are elected annually by our stockholders at the annual meeting. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal.

 

Name   Age   Position(s)
Douglas Toth   50   Chairman, CEO & CFO
Gilbert Davila   48   Director
Kim Cranston   __   Director
David Shamouelian   34   Director
Elliot (Skip) Stein   63   Director
Ephraim Lindenbaum   43   Director

 

Mr. Douglas Toth, Chairman & CEO, Director

 

Mr. Toth became Chairman of the Company on October 4, 2010. He has been working as an independent management consultant where he identified, evaluated opportunities and assisted companies and individuals within a variety of industries including: manufacturing, retail and distribution, media, advertising and technology. In addition he managed special projects for financial, compliance, operations and information systems of the companies for which he consulted. He worked closely with external auditors and legal council to ensure professional propriety and business compliance for the publicly traded companies he represented.

 

Mr. Toth’s depth of experience in developing and growing companies, as well as his expertise in the area of technology, led to the conclusion he should serve as a director of the Company.

 

Mr. Gilbert Davila, Director

 

Mr. Davila became a director of the Company on February 7, 2011. He is a former Disney executive and also serves on the board of the Association of National Advertisers, where he is a founding member and current chairman of the ANA Multicultural Marketing and Diversity Committee.

 

Mr. Davila has been a featured speaker at Harvard University program entitled “Beyond the Niche Market”. Mr. Davila has also written numerous articles that have appeared in several publications, including The Wall Street Journal, The Advertiser, Advertising Age and The Los Angeles Times. Gilbert also heads the Board of Advisors of the National Hispanic Media Coalition.

 

Mr. Davila’s extensive background and broad experience serving in senior marketing roles, and his relationships with business communities, led to the conclusion he should serve as a director of the Company.

 

Mr. Kim Cranston, Director

 

Mr. Cranston is C.E.O. and Chair of the Board of Transparent Democracy, Chair of the Board of the Global Security Institute, and a member of the Boards of The Climate Response Fund and of the Los Altos Community Foundation. Mr. Cranston graduated from the University of California Santa Cruz with a B.A. in Environmental Studies and from Hastings College of the Law. Mr. Cranston previously held positions as director of Corporate Social Responsibility and the Transparent Commerce Initiative for One Cosmos Network, a new media company; as President of the Social Venture Network, a network of socially conscious business and social entrepreneurs and investors; as a consultant to the State of the World Forum; as Chief of Staff to California Lieutenant Governor Leo T. McCarthy; as Vice President of Business Affairs for Platypus Productions, Inc., a cable television production company; and as a lawyer with Gibson, Dunn & Crutcher.

 

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Mr. Cranston’s extensive background and broad experience serving in senior management and legal roles led to the conclusion he should serve as a director of the Company.

 

Mr. David Shamouelian, Director

 

Mr. Shamouelian became a director of the Company on November 2, 2011. He has over 20 years experience in the fashion industry. His passion began under his father’s tutelage in a business that was spawned three generations before him. Two decades later, Mr. Shamouelian enjoys a reputation as one of the most respected names in the fashion industry. He is currently a principal in Romeo and Juliet Couture, a highly successful clothing line recently featured on Warner Bros.’s Gossip Girls. The clothing line was established in 1999 and has grown to become one of the top fashion lines in contemporary ladies sportswear. Mr. Shamouelian is the former CEO of the Paris based fashion label, Sharagano, a $40 million label featured in high end retail stores such as Saks Fifth Avenue, Bloomingdales, and Macys. Sharagano maintained worldwide distribution in Asia, Europe and South America and included 12 freestanding stores in the US, Korea and Mexico. Sharagano’s lace insert jeans, designed by David Shamouelian, were the threads of choice for many celebrities, including Madonna and Jennifer Lopez. Currently, Mr. Shamouelian is one of the major principals and shareholders of The Toon Studio of Beverly Hills, a studio that licenses characters worldwide.

 

Mr. Shamouelian extensive background and broad experience serving in senior marketing roles, and his relationships with business communities, led to the conclusion he should serve as a director of the Company.

 

Mr. Elliot (Skip) Stein, Director

 

Mr. Stein became a director of the Company on April 3, 2012. He has over 35 years experience in finance and other industries. Since 2004, he has been a Director of Apollo Investment Corporation, a business development company under the Investment Company Act of 1940, as amended (NASDAQ: AINV) presently serving as its lead independent director. Since 2011, Mr. Stein also has been a director of Global Cornerstone Holdings Limited and Apollo Senior Floating Rate Fund Inc., a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (NYSE:AFT). He is a Managing Director of Commonwealth Capital Partners and has served as Chairman of Caribbean International News Corporation since 1985. Mr. Stein also is a board member of various private companies including Multi-Pak Holdings, LLC., Cohere Communications, and Assay Healthcare Solutions. Mr. Stein is a Trustee of Claremont Graduate University and the New School University. He is a member of the Council on Foreign Relations. He formerly served as a Director of VTG Holdings, Bargain Shop Holdings, Inc. and various other private companies.

 

Mr. Stein’s extensive background and broad experience serving as an officer and director of various companies, and his expertise in corporate finance, led to the conclusion he should serve as a director of the Company.

 

Mr. Ephraim Lindenbaum, Director

 

Mr. Lindenbaum became a director of the Company on May 29, 2012. He is the founder, managing director and majority owner of Advance Ventures, a Silicon Valley-based venture investment fund and venture development advisory firm that participates in seed and early-stage cleantech, communications/mobility, digital media and information technology start-ups. Since 1999, Advance Ventures has consistently achieved meaningful exits with its portfolio companies across its core market sectors. Prior to founding Advance Ventures, Mr. Lindenbaum was the co-founder of interactive media pioneer Broadcast Production Group and served as CEO until its acquisition in 1999 by Parago, a leading global engagement management company. Under his leadership, Broadcast Production Group was listed as a Top 15 fastest growing private company in Silicon Valley and a Top 100 fastest growing private company in the US. Mr. Lindenbaum has been nationally recognized in cover and feature stories by CNN Future Watch, New Media News, AV Video ~ Multimedia Producer Magazine, Wired, MicroPublishing News and Silicon Valley Business Journal.

 

33
 

 

Mr. Lindenbaum’s extensive background and broad experience in Silocon Valley, and his expertise in tech oriented companies, led to the conclusion he should serve as a director of the Company.

 

Indemnity Agreements

 

The Company entered into Indemnity Agreements with certain of its directors or officers in connection with the consummation of the acquisitions of Phreadz and UDM, pursuant to which, among other things, the Company will indemnify such directors and officers to the fullest extent permitted by applicable law, and provide for advancement of legal expenses under certain circumstances.

 

Board Composition and Committees

 

Presently, our Board of Directors consist of at least four seek persons who are “independent” within the meaning of the rules and regulations of The NASDAQ Stock Market. Because of our current stage of development, we do not have any standing audit, nominating or compensation committees, or any committees performing similar functions. The Board will meet periodically throughout the year as necessity dictates. No current director has any arrangement or understanding whereby they are or will be selected as a director or nominee.

 

Audit Committee Financial Expert

 

The Company’s Board of Directors does not have an independent “audit committee financial expert,” within the meaning of such phrase under applicable regulations of the SEC, serving on its audit committee. The Company does not have a separately designated audit committee. The entire Board of Directors serves as the audit committee. The Board of Directors believes that all members of its audit committee are financially literate and experienced in business matters, and that one or more members of the audit committee are capable of (i) understanding generally accepted accounting principles (“GAAP”) and financial statements, (ii) assessing the general application of GAAP principles in connection with our accounting for estimates, accruals and reserves, (iii) analyzing and evaluating our financial statements, (iv) understanding our internal controls and procedures for financial reporting; and (v) understanding audit committee functions, all of which are attributes of an audit committee financial expert. Like many small companies, however, it is difficult for the Company to attract and retain independent Board members who qualify as “audit committee financial experts,” and competition for these individuals is significant. The Board believes that its current audit committee is able to fulfill its role under SEC regulations despite not having a designated independent “audit committee financial expert.”

 

Indebtedness of Directors and Executive Officer

 

None of our directors or our executive officers or their respective associates or affiliates are indebted to us.

 

Compensation Committee

 

The Company does not maintain a standing compensation committee. Due to the Company’s small size at this point in time, the Board of Directors has not established a separate compensation committee. All members of the Board of Directors (with the exception of any member about whom a particular compensation decision is being made) participate in the compensation award process.

 

The Company understands that in order to attract executive management talent, it will need to offer competitive market salaries to senior management and Board members.

 

Nominating Committee

 

The Company does not maintain a standing Nominating Committee and does not have a Nominating Committee charter. Due to the Company’s small size at this point in time, the Board has not established a separate nominating committee and feels that all directors should have input into nomination decisions. As such, all members of the Board generally participate in the director nomination process. Under the rules promulgated by the SEC, the Board of Directors is, therefore, treated as a “nominating committee.”

 

34
 

 

With respect to the nominations process, the Board does not operate under a written charter, but under resolutions adopted by the Board of Directors. The Board is responsible for reviewing and interviewing qualified candidates to serve on the Board, for making recommendations for nominations to fill vacancies on the Board, and for selecting the nominees for selection by the Company’s shareholders at each annual meeting. The Board has not established specific minimum age, education, experience or skill requirements for potential directors. The Board takes into account all factors they consider appropriate in fulfilling their responsibilities to identify and recommend individuals as director nominees. Those factors may include, without limitation, the following:

 

1.an individual’s business or professional experience, accomplishments, education, judgment, understanding of the business and the industry in which the Company operates, specific skills and talents, independence, time commitments, reputation, general business acumen and personal and professional integrity or character;

 

2.the size and composition of the Board of Directors and the interaction of its members, in each case with respect to the needs of the Company and its shareholders; and

 

regarding any individual who has served as a director of the Company, his or her past preparation for, attendance at, and participation in meetings and other activities of the Board of Directors or its committees and his or her overall contributions to the Board and the Company.

 

The Board may use multiple sources for identifying and evaluating nominees for directors, including referrals from the Company’s current directors and management as well as input from third parties, including executive search firms retained by the Board. The Board will obtain background information about candidates, which may include information from directors’ and officers’ questionnaires and background and reference checks, and will then interview qualified candidates. The Board will then determine, based on the background information and the information obtained in the interviews, whether to recommend that a candidate be nominated to the Board of Directors. We strongly encourage and, from time to time actively survey, our shareholders to recommend potential director candidates.

 

Family Relationships

 

There are no family relationships among the directors or executive officers of the Company.

 

Conflicts of Interest

 

Certain potential conflicts of interest are inherent in the relationships between our officers and directors, and us.

 

From time to time, one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated to the type of business that we own and operate. These persons expect to continue to form, hold an ownership interest in and/or manage additional other businesses which may compete with ours with respect to operations, including financing and marketing, management time and services and potential customers. These activities may give rise to conflicts between or among the interests of us and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from undertaking such activities, and neither we nor our shareholders will have any right to require participation in such other activities.

 

Further, because we intend to transact business with some of our officers, directors and affiliates, as well as with firms in which some of our officers, directors or affiliates have a material interest, potential conflicts may arise between the respective interests of us and these related persons or entities. We believe that such transactions will be effected on terms at least as favorable to us as those available from unrelated third parties.

 

With respect to transactions involving real or apparent conflicts of interest, we will adopt policies and procedures which require that: (i) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval, (ii) the transaction be approved by a majority of our disinterested outside directors, and (iii) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.

 

35
 

 

Term of Office

 

Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.

 

All officers and directors listed above will remain in office until the next annual meeting of our stockholders, and until their successors have been duly elected and qualified. There are no agreements with respect to the election of directors. We have not compensated our directors for service on our board of directors, any committee thereof, or reimbursed for expenses incurred for attendance at meetings of our board of directors and/or any committee of our board of directors. Officers are appointed annually by our board of directors and each executive officer serves at the discretion of our board of directors. We do not have any standing committees. Our board of directors may in the future determine to pay directors’ fees and reimburse directors for expenses related to their activities.

 

Involvement in Certain Legal Proceedings

 

Except as stated herein, none of our directors or executive officers has, during the past ten years, been:

 

1)the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
  
2)convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
  
3)subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
  
4)found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law.

 

On August 9, 2006, a NASD Hearing Panel found that in August of 2003 Mr. Toth violated Membership Rule IM-1000-1 and Conduct Rule 2110. The Panel concluded that Mr. Toth, by his inaction, wilfully caused a Form U-4 to be filed by a broker-dealer which contained a misrepresentation of a material fact. The Hearing Panel suspended Mr. Toth from all NASD capacities for a period of one year. Mr. Toth appealed the decision to both the NASD’s National Adjudicatory Council and Securities and Exchange Commission on July 27, 2007 and August 1, 2008 respectively; both agencies upheld the original NASD finding.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file with the Securities and Exchange Commission (the “SEC”) initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company.

 

Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.

 

To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company and representations that no other reports were required during the year ended May 31, 2010, and except as disclosed elsewhere in this document, the Company’s officers, directors and greater than ten percent beneficial owners have complied with all Section 16(a) filing requirements in a timely manner through May 31, 2010.

 

36
 

 

Code of Ethics

 

The Company has adopted and filed a written code of ethics (see Form 8-K dated February 28, 2011).

 

Item 11. Executive Compensation.

 

The following summary compensation table shows certain compensation information for services rendered in all capacities for the fiscal years ended May 31, 2012 and 2011, respectively. Other than as set forth herein, no executive officer’s cash salary and bonus exceeded $100,000 in any of the applicable years. The following information includes the dollar value of base salaries, bonus awards, the value of restricted shares issued in lieu of cash compensation and certain other compensation, if any, whether paid or deferred:

 

Name &
Principal Position
  Year   Salary
($)
   Bonus
($)
   Stock
Awards
   Option
Awards
($)
   Non-Equity Incentive
Plan Compensation
($)
   Nonqualified
Deferred
Compensation
Earnings ($)
   All Other
Compensation
($)
  Total
($)
Douglas Toth, Chairman, CEO & CFO (1)   2012    240,000                                 
    2011    120,000                                 
                                           
Gordon Samson, Former CFO   2012    55,000                           
    2011    100,000                           
                                           
Georges Daou, Former Chairman   2012    -0-                           
    2011    75,000                           
                                           
Christina Domecq, Former CEO   2012    -0-                           
    2011    20,000                           
                                           
Jacques Krischer, Former President   2012    -0-                           
    2011    125,000                           
                                           
Jonathan Kossmann, Former President   2012    -0-                           
    2011    20,000                           

 

(1) In November 2011, the Company and Mr. Toth entered into an employment agreement which amended and restated a Consulting Agreement previously entered into by the parties on June 1, 2011. The new employment agreement was effective as of June 1, 2011 and expired on May 31, 2012. The new employment agreement provides, among other terms, that Mr. Toth is to receive a an annual salary of at least $240,000, a stock grant of 2,000,000 shares of common stock, and stock options under the Company’s 2011 Stock Option Plan of 5,000,000 common shares, of which 50% vested on June 1, 2011 and the remainder vested on May 31, 2012. The parties are negotiating the terms of a new employment agreement, however a formal agreement has not been finalized.

 

Outstanding Equity Awards at Fiscal Year-End

 

There have been no stock option grants, Stock Appreciation Rights (SARs) grants, options/SAR exercises, Long Term Incentive Plans (LTIPs) or any other equity awards granted to the named executive officers during the prior two fiscal years.

 

Director Compensation

 

No compensation has been paid to Directors for their capacity as a Director. However, each director has received stock options as stated herein under the Company’s 2011 Stock Option Plan which was created on September 2, 2011 as stated herein

 

During fiscal 2012, the Board of Directors approved the following stock option grants under the stated plan: 

 

5,000,000 shares to the Company’s Chairman at an exercise price of $0.16 per share, and
500,000 shares to each of the Company’s five Directors, of which four of the Directors have an exercise price of $0.31 per share and one Director has an exercise price of $0.20 per share.

 

Defined Benefit or Actuarial Plan

 

The Company does not have a defined benefit or actuarial plan in place.

 

37
 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table provides information as of May 31, 2012 concerning shares of our common stock authorized for issuance under our existing equity compensation plans.

 

Equity Compensation Plan Information
Plan category  Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
   Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
   Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
 
Equity compensation plans approved by security holders   -0-    -0-    -0- 
Equity compensation plans not approved by security holders (1)   12,750,000   $0.247    250,000 
Total   12,750,000   $0.247    250,000 

 

On September 2, 2011, the Company’s Board of Directors approved the creation of the Company’s 2011 Stock Option Plan. A total of 13,000,000 shares of the Company’s common stock are subject to the plan terms.

 

During fiscal 2012, the Board of Directors approved the following stock option grants under the stated plan: 

 

5,000,000 shares to the Company’s Chairman at an exercise price of $0.16 per share,
500,000 shares to each of the Company’s five Directors, of which four of the Directors have an exercise price of $0.31 per share and one Director has an exercise price of $0.20 per share, and
3,250,000 shares collectively to four consultants of the Company, each at exercise prices of $0.31 per share.

 

Item 12. Security Ownership of Certain Beneficial owners and Management and Related Stockholder Matters.

 

The following table contains information about the beneficial ownership of our common stock, as of September 6, 2012 (based on 112,434,525 shares of common stock issued and outstanding on such date), for:

 

(i)each person who beneficially owns more than five percent of our common stock;

 

(ii)each of our directors;

 

(iii)the named executive officers; and

 

(iv)all directors and executive officers as a group.

 

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Name and Address of
Beneficial Owner
  Title of Class  Number of Shares
Beneficially Owned(1)
   Percent of
Class(1) (2)
 
             
5% or Greater Stockholders:             
              
Michael Kessler   Common Stock   23,409,895    20.4%
112 S. Robertson Blvd, Suite 18             
Los Angeles, CA 90035(2)             
              
Creative Processing, Inc.
112 S. Robertson Blvd, Suite 18
Los Angeles, CA 90035(3)
  Common Stock   9,800,000    8.5%
              
SB Acquisition Corp
112 S. Robertson Blvd, Suite 18
Los Angeles, CA 90035(4)
  Common Stock   12,609,895    11.2%
              
Orions Digital Technology, Inc.
48 Rosemead Court
Danville, CA 94506 (5)
  Common Stock   12,704,014    11.3%
              
Directors and Named Executive Officers:             
              
Douglas Toth (6)   Common Stock   7,000,00    8.5%
              
Gilbert Davila (7)   Common Stock   500,000    * 
              
Kim Cranston (8)   Common Stock   500,000    * 
              
David Shamouelian (9)   Common Stock   8,201,918    7.3%
              
Elliot (Skip) Stein (10)   Common Stock   500,000    * 
              
Ephraim Lindenbaum (11)   Common Stock   700,000    * 
              
All directors and executive officers as a group (6 persons):   Common Stock   20,501,918    17.1%

 


 

*Less than 1%
(1)Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. The indication herein that shares are beneficially owned is not an admission on the part of the listed stockholder that he, she or it is or will be a direct or indirect beneficial owner of those shares.
(2)Amount represents 1,000,000 shares held by the reporting person,7,400,000 shares of common stock and stock warrants to acquire 2,400,000 shares of common stock held by Creative Processing, Inc. and 12,609,895 shares of common stock held by SB Acquisition Corp. Mr. Kessler is the principal officer and equity holder of both entities.
(3)Amount represents 7,400,000 shares of common stock and stock warrants to acquire 2,400,000 shares of common stock. Michael Kessler is the principal officer and equity holder of this reporting person and as such has the power to direct the vote and disposition of these shares.
(4)Michael Kessler is the principal officer and equity holder of this reporting person and as such has the power to direct the vote and disposition of these shares.
(5)Leo John Kennedy is the principal officer of this shareholder and as such has the power to direct the vote and disposition of these shares.
(6)Amount represents 5,000,000 shares of common stock held individually and 5,000,000 stock options acquired under the Company’s 2011 Stock Option Plan.
(7)Amount represents 500,000 stock options acquired under the Company’s 2011 Stock Option Plan.
(8)Amount represents 500,000 stock options acquired under the Company’s 2011 Stock Option Plan.
(9)Amount represents 4,700,000 shares of common stock held individually, 180,000 shares of common stock held jointly with a third party, 2,621,918 shares of common stock held by Sharvit Defined Benefit Plan, which is owned or controlled by the reporting person, 500,000 stock options acquired under the Company’s 2011 Stock Option Plan, and a common stock warrant to acquire 200,000 shares of common stock.
(10)Amount represents 500,000 stock options acquired under the Company’s 2011 Stock Option Plan.
(11)Amount includes 200,000 shares of common stock held by Advance Ventures, an entity owned by the reporting person and 5,000,000 stock options acquired under the Company’s 2011 Stock Option Plan.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

On June 1, 2011 we entered into a consulting agreement with Mr. Douglas Toth. On November 11, 2011, the Company and Douglas Toth amended and superseded the June 1, 2011 consulting agreement with an Employment Agreement in which Douglas Toth will serve as Chairman and Chief Executive Officer of the Company. The term of the Agreement ends May 31, 2012. Compensation under the plan will remain at $240,000 per annum with a right to earn incentive compensation. In addition, Mr. Toth will receive a stock award of 2,000,000 shares of common stock on or after January 1, 2012. Further, Mr. Toth was granted 5,000,000 options to purchase company stock. The options vested as follows: 50% vested on June 30, 2011, and the remaining 50% vested pro-rata monthly from June 2011 through May 2012.

 

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On October 7, 2011, the Company entered into a two year agreement with David Shamouelian, a Director of the Company, to provide marketing services. Mr. Shamouelian is one of the most respected names in the fashion industry. He is to be compensated for his services with 3,200,000 shares of Company common stock, to be issued over a 18 month period.

 

On October 7, 2011, the Company entered into a secured promissory note for $250,000 with an entity controlled by Mr. Shamouelian. On April 2, 2012, the holder of the note entered into a subscription agreement which provided for the conversion of the principal and accrued interest on the note into 2,621,918 shares of common stock. As of May 31, 2012 the Company had not yet issued the shares.

 

On May 23, 2012, Mr. Shamouelian loaned the Company $50,000 and received a convertible note in the principal amount of $50,000, and warrants to purchase 200,000 shares of common stock with an exercise price of $0.30 per share. The convertible note has a term of twelve months and accrues interest at 10% per annum. In addition, on the maturity date, the Company will pay the holder the sum of $1,000 as additional interest. Mr. Shamouelian has the right from and after the issuance thereof until such time as the convertible note is fully paid, to convert any outstanding and unpaid principal portion thereof into shares of common stock at a conversion price of $0.05 per share.

 

On December 1, 2011, the Company engaged Advance Ventures, LLC (“Advance”), based in Silicon Valley, to provide venture development services, including guidance on recruitment, business development and enhancing strategic relationships in Silicon Valley. The Company will compensate Advance $10,000 per month relating to this agreement. In addition, the parties amended the agreement in March 2012 and May 2012, wherein the Company agreed to issue 100,000 shares of common stock to Advance as per the March amendment and an additional 100,000 shares of common stock as per the May amendment. Mr. Ephraim Lindenbaum, a Director of the Company, is the principal of Advance.

 

On September 21, 2011, the Company entered into a two year agreement with Creative Processing, Inc. (“CP”) to provide advertising and marketing services. CP is to be compensated for its services with 2,400,000 shares of Company common stock, to be issued over a one year period. In addition the Company will issue CP 2,400,000 stock purchase warrants with an exercise price of $0.20 per share. The parties amended the agreement in March 2012 to include monthly compensation to CP of $5,000 per month, starting March 1, 2012 and ending February 1, 2013. On March 2, 2012, CP entered into a stock purchase agreement with the Company pursuant to which the Company received $500,000 and the Company issued 5,000,000. In addition, on February 5, 2012 the Company entered into a two year agreement with SB Acquisition #1 (“SB”) to provide advertising and marketing services. SB is to be compensated for its services with 1,550,000 shares of Company common stock, to be issued over a one year period. Mr. Michael Kessler is the principal officer and shareholder of both CP and SB.

 

Item 14. Principal Accounting Fees and Services.

 

The following table sets forth the fees billed to the Company for professional services rendered by the Company’s principal accountant for fiscal years ended May 31, 2011 and May 31, 2012

 

Services  2011   2012 
Audit fees   40,000    40,000 
Audit related fees   -    - 
Tax fees   -    - 
All other fees   -    - 
           
Total fees   40,000    40,000 

 

Audit Fees. Consist of fees billed for professional services rendered for the audits of our financial statements, reviews of our interim consolidated financial statements included in quarterly reports, services performed in connection with filings with the SEC and related comfort letters and other services that are normally provided by DeLeon & Company, P.A. in connection with statutory and regulatory filings or engagements.

 

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Tax Fees. Consist of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.

 

Board of Directors Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

 

The Board of Directors is to pre-approve all audit and non-audit services provided by the Company’s independent auditors. These services may include audit services, audit-related services, tax services and other services as allowed by law or regulation. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specifically approved amount. The independent auditors and management are required to periodically report to the Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval and the fees incurred to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.

 

The Board of Directors pre-approved 100% of the Company’s 2012 audit fees, audit-related fees, tax fees, and all other fees to the extent the services occurred after May 31 2012, the effective date of the Securities and Exchange Commission’s final pre-approval rules.

 

PART IV

 

Item 15. Exhibits and Financial Statement Schedules.

 

The following documents are filed herewith or have been included as exhibits to previous filings with the SEC and are incorporated herein by this reference:

 

(a) Financial Statements and Schedules

 

See the Company’s financial statements and notes thereto included in this Annual Report on Form 8-K under “Item 8. Financial Statements and Supplementary Data.”

 

(b) Exhibits

 

Exhibit

No.

  Exhibit
2.1   Securities Purchase Agreement dated as of April 21, 2010 by and among the Company, Phreadz USA LLC  and the members of Phreadz USA, LLC. (1)
     
2.2   Securities Purchase Agreement dated as of April 21, 2010 by and among the Company, Universal Database of Music USA LLC  and the members of Universal Database of Music USA, LLC. (1)
     
3.1(a)   Articles of Incorporation. (2)
3.1(b)   Certificate of Amendment to Articles of Incorporation. (3)
3.1(c)   Certificate of Amendment to Articles of Incorporation. (4)
3.1(d)   Certificate of Amendment to Articles of Incorporation. (5)
3.2   Bylaws. (2)
     
3.4   Articles of Organization of Phreadz USA, LLC. (1)
     
3.5   Articles of Organization of Universal Database of Music USA, LLC. (1)
     
3.6   Amended and Restated Operating Agreement of Phreadz USA, LLC. (1)
     
3.7   Amended and Restated Operating Agreement of Universal Database of Music USA, LLC. (1)
     
4.1   Form of Note. (1)
     
4.2   Secured Convertible Note dated March 23, 2010 issued by Universal Database of Music USA LLC and Phreadz USA LLC. (1)

 

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4.3   Form of Corporate Loan Agreement dated April 9, 2010. (1)
     
10.1   Asset Purchase Agreement dated May 28, 2009 between Universal Database of Music USA LLC, UDM, Ltd. and  Jacques Krischer. (1)
     
10.2   Consulting Agreement dated May 2009 between Phreadz USA LLC and Jonathan Kossmann. (1)
     
10.3   Subscription Agreement dated March 23, 2010. (1)
     
10.4   Security Agreement dated March 23, 2010. (1)
     
10.5   Intellectual Property Security Agreement dated March 23, 2010. (1)
     
10.6   Employment Agreement between the Company and Georges Daou. (1)
     
10.7   Employment Agreement between the Company and Jonathan Kossmann. (1)
     
10.8   Employment Agreement between the Company and Jacques Krischer.(1)
     
10.9   Restricted Stock Agreement between the Company and Jacques Krischer. (1)
     
10.10   Restricted Stock Agreement between the Company and GJD Holdings. (1)
     
10.11   Form of Indemnity Agreement. (1)
     
10.12   Form of Unit Purchase Agreement. (6)
     
10.13   Form of Registration Rights Agreement.(6)
     
10.14   Form of Warrant. (6)
     
10.15   Consulting Agreement dated October 7, 2011 between the Company and David Shamouelian. (7)
     
10.16   Joint Venture Agreement dated February 9, 2012 by and between Bizzingo, Inc. and Sun Enterprises Group, Ltd. (8)
10.17   Employment Agreement between the Company and Douglas Toth(9).
     
10.18   Celebrity Endorsement Agreement dated March 14, 2012 by and between Bizzingo, Inc. and Joseph Theismann(10)
     
10.19   Asset Purchase Agreement dated February 27, 2012 by and among Bizzingo, Inc., Introme, Inc., and the  Shareholders of IntroMe, Inc. (11).

 

(1)Incorporated by reference from the Company’s Current Report on Form 8-K, filed with the SEC on April 27, 2010.
(2)Incorporated by reference from the Company’s Registration Statement on Form SB-2, No. 333-35336, filed with the SEC on June 8, 2006.
(3)Incorporated by reference from Appendix A to the Company’s Definitive Information Statement on Schedule 14C, filed with the SEC on May 24, 2010.
(4)Incorporated by reference from the Company’s Current Definitive Information Statement on Schedule 14C, filed with the SEC on March 9, 2011.
(5)Incorporated by reference from the Company’s Current Report on Form 8-K, filed with the SEC on September 15, 2011.
(6)Incorporated by reference from the Company’s Current Report on Form 8-K, filed with the SEC on May 26, 2010.
(7)Incorporated by reference from the Company’s Current Report on Form 8-K, filed with the SEC on November 7, 2011.
(8)Incorporated by reference from the Company’s Current Report on Form 8-K, filed with the SEC on February 13, 2012.
(9)Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the period ending November 30, 2011, filed with the SEC on January 17, 2012.
(10)Incorporated by reference from the Company’s Current Report on Form 8-K, filed with the SEC on March 22, 2012.
(11)Incorporated by reference from the Company’s Current Report on Form 8-K, filed with the SEC on May 7, 2012.

 

42
 

 

Exhibit No.   Exhibit
31.1   Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2   Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1   Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2   Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

  


 

* Filed herewith.

 

43
 

 

SIGNATURES

 

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

 

  BIZZINGO, INC.
   
Date: September 13, 2012 By:  /s/ Douglas Toth
    Douglas Toth, Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Douglas Toth   Chief Executive Officer and Chief Financial Officer    September 13, 2012
Douglas Toth   (Principal Executive Officer and Financial Officer)    
         
/s/ David Shamouelian   Director   September 13, 2012
David Shamouelian        
         
/s/ Gilbert Davila   Director    September 13, 2012
Gilbert Davila        
         
/s/ Kim Cranston   Director   September 13, 2012
Kim Cranston        
         
/s/ Elliot (Skip) Stein   Director   September 13, 2012
Elliot (Skip) Stein        
         
/s/ Ephraim Lindenbaum   Director   September 13, 2012
Ephraim Lindenbaum        

 

44
 

   

BIZZINGO, INC.

(A Development Stage Company)

 

Financial Statements

(Expressed in U.S. Dollars)

 

May 31, 2012

 

Index   Page Number
     
Report of Independent Registered Public Accounting Firm   F-1
     
Consolidated Balance Sheets   F-2
     
Consolidated Statements of Operations   F-3
     
Consolidated Statements of Stockholders’ Deficit   F-4-5
     
Consolidated Statements of Cash Flows   F-6
     
Notes to Consolidated Financial Statements   F-7-27

 

45
 

    

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and
Stockholders of Bizzingo, Inc. & Subsidiaries

 

We have audited the accompanying consolidated balance sheets of Bizzingo, Inc. & Subsidiaries as of May 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended May 31, 2012 and 2011, and for the period from April 3, 2009 (inception) to May 31, 2012. Bizzingo, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bizzingo, Inc. & Subsidiaries as of May 31, 2011 and 2012, and the results of its operations and its cash flows for the years ended May 31, 2011 and 2012,and for the period from April 3, 2009 (inception) to May 31, 2012 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, net capital deficiencies, and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plan in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

De Leon & Company, P.A.

 

Pembroke Pines, Florida

 

September 10, 2012

 

 APPENDIX 9A-1

 

F-1
 

  

Bizzingo, Inc.
(A Development Stage Company)
Consolidated Balance Sheets

 

   May 31, 2012   May 31, 2011 
         
Assets          
           
Assets:          
Cash  $17,104   $4,101 
Prepaids   17,000    10,000 
Total Current Assets   34,104    14,101 
           
Total Assets  $34,104   $14,101 
           
Liabilities and Stockholders’ Deficit          
           
Liabilities:          
Accounts payable and accrued expenses  $589,818   $483,180 
Interest payable   219,111    139,241 
Memberholder loan   2,046    2,046 
Convertible notes payable - net   82,945    - 
Stock issuance liabilty   1,507,191    - 
Notes payable   150,000    261,000 
Derivative liability -convertible notes payable   173,666    - 
Total Current Liabilities   2,724,777    885,467 
           
Derivative liability -warrants   159,470    - 
Total Long-Term Liabilities   159,470    - 
           
Total Liabilities   2,884,247    885,467 
           
Stockholders’ Deficit          
Preferred stock, $0.001 par value, 100,000,000 shares authorized,   none issued and outstanding   -    - 
Common stock, $0.001 par value, 525,000,000 shares authorized,  91,714,692 and 73,241,376 shares issued and outstanding, respectively   91,715   73,241 
Additional paid in capital   24,616,004    16,614,442 
Deficit accumulated during development stage   (27,557,862)   (17,559,049)
Total Stockholders’ Deficit   (2,850,143)   (871,366)
           
Total Liabilities and Stockholders’ Deficit  $34,104   $14,101 

 

F-2
 

 

Bizzingo, Inc
(A Development Stage Company)
Consolidated Statements of Operations

 

           From April 3, 2009 
   For the Year Ended May 31,   (Inception) 
   2012   2011   to May 31, 2012 
             
Revenue  $-   $-   $- 
                
General and administrative expenses   7,491,538    2,453,272    12,589,948 
                
Operating loss   (7,491,538)   (2,453,272)   (12,589,948)
                
Other Income (Expenses)               
    Impairment of IP music database and Computer code   (1,565,989)   (1,875,000)   (8,440,989)
    Interest expense   (613,007)   (125,629)   (955,489)
    Derivative expense   (340,437)   -    (340,437)
    Change in fair value of derivative liabilities   155,454    -    155,454 
    Gain on forgiveness of debt   66,624    72,497    360,630 
    Gain (loss) on settlement of debt   (209,920)   -    (5,747,083)
                
         Total Other Income (Expenses) - Net   (2,507,275)   (1,928,132)   (14,967,914)
                
Net Loss  $(9,998,813)  $(4,381,404)  $(27,557,862)
                
Net Loss per Common Share - Basic and Diluted  $(0.13)  $(0.06)     
                
Weighted average number of common shares outstanding - basic and diluted   74,587,090    68,676,503      

 

F-3
 

 

Bizzingo, Inc.
(A Development Stage Company)
Statements of Stockholders’ Equity (Deficit)
For the period April 3, 2009 (Inception) to May 31, 2012

 

   Shares   Amount   Additional Paid-in Capital   Subscription Receivable   Deficit Accumulated During the Development Stage   Total Stockholders’ Equity 
                         
Shares issued for cash April 3, 2009   1,920,000   $1,920   $4,998,092   $(90)  $-   $4,999,922 
                               
Shares issued for cash May 28, 2009   12,480,000    12,480    (12,390)   -    -    90 
                               
Loss for the period from April 3, 2009 to May 31, 2009                       (186,902)   (186,902)
Balance May 31, 2009   14,400,000    14,400    4,985,702    (90)   (186,902)   4,813,110 
                               
Shares issued for cash August 25, 2009   26,969,600    26,970    (26,633)   (337)   -    (0)
                               
Shares cancelled on November 13, 2009   (3,833,600)   (3,834)   3,834    -    -    - 
                               
Shares issued for cash March 10, 2010   5,782,400    5,782    (5,938)   -    -    (156)
                               
Subscription receivable   -    -    -    427    -    427 
                               
Recapitalization due to reverse merger   42,700,000    42,700    (83,243)   -    -    (40,543)
                               
Shares cancelled due to reverse merger   (32,712,176)   (32,712)   32,712    -    -    - 
                               
Shares issued for cash on May 20, 2010  @$0.15   1,933,333    1,933    288,067    -    -    290,000 
                               
Issuance of common stock in settlement                              
of notes payable (May 31, 2010)   6,514,310    6,515    6,507,796    -    -    6,514,311 
                               
Net loss for the period September 1, 2009 to May 31, 2010   -    -    -    -    (12,990,743)   (12,990,743)
Balance May 31, 2010   61,753,867    61,754    11,702,297    -    (13,177,645)   (1,413,594)
                               
Shares issued for cash on June 8, 2010   1,333,333    1,333    198,667    -    -    200,000 
                               
Exchange Agreement issuance June 22, 2010   1,334,176    1,334    999,298    -    -    1,000,632 
                               
Shares issued for cash on July 16, 2010   2,520,000    2,520    375,480    -    -    378,000 
                               
Net loss for the period, June 1, 2010 to August 31, 2010                       (617,663)   (617,663)
Balance August 31, 2010   66,941,376    66,941    13,275,742   $-    (13,795,308)   (452,625)
                               
Shares issued for cash on November 1, 2010   1,080,000    1,080    160,920    -    -    162,000 
                               
Net loss for the period, Sept 1, 2010 to Nov 30, 2010                       (196,438)   (196,438)
Balance November 30, 2010   68,021,376    68,021    13,436,662         (13,991,745)   (487,062)
                               
Shares issued for cash on December 3, 2010   720,000    720    107,280    -    -    108,000 
                               
Shares issued for Services January 31, 2011   2,000,000    2,000    1,198,000              1,200,000 
                               
Net loss for the period Dec 1, 2010 to Feb 28, 2011                       (1,468,290)   (1,468,290)
Balance February 28, 2011   70,741,376    70,741    14,741,942         (15,460,035)   (647,352)
                               
Shares issued for asset acquisition March 15, 2011   2,500,000    2,500    1,872,500    -    -    1,875,000 
                               
Net loss or the period March 1, 2011 to May 31, 2011                       (2,099,013)   (2,099,013)
Balance May 31, 2011   73,241,376    73,241    16,614,442    -    (17,559,049)   (871,366)
                               
Shares cancelled  GLD Holdings July 27, 2011   (6,460,800)   (6,461)   6,461    -    -    0 
                               
Net loss for the period June 1, 2011 to August 31, 2011                       (519,726)   (519,726)
Balance August 31, 2011   66,780,576    66,780    16,620,903    -    (18,078,775)   (1,391,092)
                               
Shares issued to settle accounts payable   611,512    612    207,303    -    -    207,915 
                               
Stock options issued for services   -    -    720,349    -    -    720,349 
                               
Warrants issued for services   -    -    502    -    -    502 
                               
Net loss for the period September 1, 2011 to November 30, 2011   -    -    -    -    (1,532,360)   (1,532,360)
Balance November 30, 2011   67,392,088    67,392    17,549,057    -    (19,611,135)   (1,994,686)

 

F-4
 

 

Bizzingo, Inc.
(A Development Stage Company)
Statements of Stockholders’ Equity (Deficit)
For the period April 3, 2009 (Inception) to May 31, 2012 - Continued

 

                   Deficit     
                   Accumulated     
           Additional     During the    Total 
           Paid-in   Subscription   Development   Stockholders’ 
   Shares   Amount   Capital   Receivable   Stage   Equity 
                        
Shares issued for cash on December 7, 2011   2,500,000   $2,500   $247,500   $-   $-   $250,000 
                               
Shares issued for services December 7, 2011   800,000    800    95,200    -    -    96,000 
                               
Issuance of common stock in settlement                              
of notes payable (December 7, 2011)   1,643,719    1,644    195,602    -    -    197,246 
                               
Shares issued for note extension  December 7, 2011   50,000    50    5,950    -    -    6,000 
                               
Shares issued for cash on February 1, 2012   1,250,000    1,250    123,750    -    -    125,000 
                               
Stock options issued for services   -    -    450,078    -    -    450,078 
                               
Warrants issued for services   -    -    882,838    -    -    882,838 
                               
Stock issuance costs   -    -    (19,300)   -    -    (19,300)
                               
Net loss for the period December 1, 2011 to February 29, 2012   -    -    -    -    (2,776,504)   (2,776,504)
Balance February 29, 2012   73,635,807    73,636    19,530,675    -    (22,387,639)   (2,783,328)
                               
Shares issued for cash on March 2, 2012   5,850,000    5,850    629,150    -    -    635,000 
                               
Shares issued for services March 2, 2012   800,000    800    119,200    -    -    120,000 
                               
Shares issued for cash on March 6, 2012   500,000    500    49,500    -    -    50,000 
                               
Shares issued for services March 6, 2012   500,000    500    74,500    -    -    75,000 
                               
Issuance of common stock in settlement                              
of notes payable (March 6, 2012)   4,130,970    4,131    615,514    -    -    619,645 
                               
Shares issued - anti-dilution clause  April 12, 2012   447,915    448    (448)   -    -    - 
                               
Shares issued for services April 12, 2012   3,700,000    3,700    904,300    -    -    908,000 
                               
Shares issued for services May 3, 2012   650,000    650    174,200    -    -    174,850 
                               
Shares issued for cash on May 3, 2012   1,500,000    1,500    148,500    -    -    150,000 
                               
Stock options issued for services   -    -    572,522    -    -    572,522 
                               
Warrants issued for services   -    -    1,771,564    -    -    1,771,564 
                               
Beneficial Conversion Feature   -    -    63,652    -    -    63,652 
                               
Stock issuance costs   -    -    (36,825)   -    -    (36,825)
                               
Net loss for the period March 1, 2012 to May 31, 2012   -    -    -    -    (5,170,223)   (5,170,223)
Balance May 31, 2012   91,714,692   $91,715   $24,616,004   $-   $(27,557,862)  $(2,850,143)

 

F-5
 

 

Bizzingo, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows

 

   From April 3, 2009 
   For the Year Ended May 31,   (Inception) 
   2012   2011   to May 31, 2012 
                
CASH FLOWS FROM OPERATING ACTIVITIES:               
Net loss  $(9,998,813)  $(4,381,404)  $(27,557,862)
Adjustments to reconcile net loss to net cash used in operating activities:               
Impairment of IP music database and computer code   1,565,989    1,875,000    8,440,989 
Loss on business acquisition   -    -    (44,361)
Loss on settlement of debt   209,920    -    5,747,083 
Gain on forgiveness of debt   (66,624)   (72,497)   (360,630)
Stock based compensation   5,236,298    1,200,000    6,436,298 
Accretion of debt discount   453,692    -    1,827,314 
Derivative expense   340,437    -    340,437 
Change in fair value of derivative liabilities   (155,454)   -    (155,454)
Changes in operating assets and liabilities:               
(Increase) Decrease in:               
Prepaid expenses & other assets   (7,000)   15,000    (17,000)
Increase (Decrease) in:               
Accounts payable and accrued expenses   214,988    216,400    589,818 
Capitalized interest   -    -    121,145 
Accrued interest payable - other   141,695    124,577    231,304 
Net Cash Used in Operating Activities   (2,064,872)   (1,022,924)   (4,400,919)
                
CASH FLOWS FROM INVESTING ACTIVITIES:               
Purchase of capital assets   (75,000)   -    (75,000)
Net Cash Used in Investing Activities   (75,000)   -    (75,000)
                
CASH FLOWS FROM FINANCING ACTIVITIES:               
Proceeds from issuance of notes   815,000    20,000    2,230,000 
Proceeds from issuance of convertible notes   200,000    -    200,000 
Repayment of notes   (66,000)   -    (281,000)
Proceeds from memberholder loan   -    -    2,046 
Shares issued (subscribed) for cash   1,260,000    848,000    2,398,102 
Stock issuance costs   (56,125)   -    (56,125)
Net Cash Provided By Financing Activities   2,152,875    868,000    4,493,023 
                
Net Increase (Decrease) in Cash   13,003    (154,924)   17,104 
                
Cash - Beginning of Period   4,101    159,025    - 
                
Cash - End of Period  $17,104   $4,101   $17,104 
                
SUPPLEMENTARY CASH FLOW INFORMATION:               
Cash Paid During the Period for:               
Income taxes  $-   $-   $- 
Interest  $17,503   $-   $17,503 
                
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:               
Conversion of debt into stock issuance liability  $262,192   $-   $262,192 
Conversion of debt into common stock  $610,000   $-   $610,000 
Conversion of payable into common stock  $91,727   $-   $91,727 
Conversion of interest payable into common stock  $49,632   $-   $49,632 
Beneficial conversion feature recorded  $63,652   $-   $63,652 

  

F-6
 

  

Note 1.Organization and Summary of Significant Accounting Policies

 

On April 27, 2010, pursuant to share purchase agreements (the “Purchase Agreements”), Phreadz, Inc. completed the acquisitions of Phreadz USA, LLC (“Phreadz LLC”) and Universal Database of Music USA, LLC (“UDM”).The acquisitions were accounted for as a recapitalization effected by a reverse merger, wherein Phreadz and UDM were considered the acquirer for accounting and financial reporting purposes.  The pre-merger assets and liabilities of the acquired entities have been brought forward at their book value and no goodwill has been recognized.  The consolidated accumulated deficit of Phreadz LLC and UDM has been brought forward, and common stock and additional paid-in-capital of the combined Company have been retroactively restated to give effect to the exchange rates as set forth in the Purchase Agreements.

 

As set forth above, on April 27, 2010 (the “Closing Date”) and pursuant to the terms and conditions of the Purchase Agreements, we: (i) consummated the acquisitions of Phreadz LLC and UDM, and (ii) each of Phreadz LLC and UDM became our wholly owned subsidiary. More specifically, pursuant to and in connection with the Purchase Agreements:

 

in exchange for 100% of the issued and outstanding membership interests of Phreadz LLC, we issued to the holders of the Phreadz LLC membership interests an aggregate of 21,659,200 shares of our common stock; and

 

in exchange for 100% of the issued and outstanding membership interests of UDM, we issued to the holders of the UDM membership interests an aggregate of 21,659,200 shares of our common stock.

 

in addition, pursuant to the terms of the Purchase Agreements, 32,712,176 shares of our issued and outstanding common stock previously held by certain stockholders were cancelled..

 

As a result of the acquisitions of Phreadz LLC and UDM, we experienced a change in control and ceased to be a “shell” company as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”).

 

Phreadz LLC was organized as a limited liability company in the State of Nevada in April 2009. Since its inception, Phreadz LLC has not undertaken any material business activities.

 

UDM was organized as a limited liability company in the State of Nevada in April 2009. On May 29, 2009, UDM consummated an asset purchase agreement with Jacques Krischer and UDM, Ltd., pursuant to which it acquired a music database and search tools. Since its inception, UDM has not undertaken any material business activities.

 

Nature of Operations and Going Concern

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate the Company’s continuation as a going concern. Since April 3, 2009 (inception), the Company has reported net losses of ($27,557,862), operating activities have used cash of ($4,400,919) and the Company has a stockholders’ deficit of ($2,850,143) as of May 31, 2012. These factors raise substantial doubt about the Company’s ability to continue as a going concern.  

 

The Company is actively involved in discussions and negotiations with investors. We do not believe we have sufficient working capital to operate without additional funding.  Assuming we raise the necessary capital through the sale of equity or equity equivalents, we expect that we will have adequate working capital through 2012. However, any equity financing may be very dilutive to our existing shareholders.

 

There is no assurance that continued financing proceeds will be obtained in sufficient amounts necessary to meet the Company’s needs. In view of these matters, continuation as a going concern is dependent upon the Company’s ability to meet its financing requirements, raise additional capital, and the future success of its operations.  The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

F-7
 

   

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Phreadz LLC and UDM. All intercompany accounts and transactions have been eliminated in consolidation.

 

Note 2.Significant Accounting Policies

(a) Development Stage Company

 

The Company’s financial statements are presented as those of a development stage enterprise. Activities during the development stage primarily include equity and debt based financing and further implementation of the business plan, including research and development.

 

(b)Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.

 

(c)Cash Equivalents

 

For purposes of the statement of cash flows cash equivalents usually consist of highly liquid investments which are readily convertible into cash with maturity of three months or less when purchased.

 

(d)Concentration of Credit Risk

 

The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits.

 

(e)Intangibles

 

Intangibles are comprised of acquired technologies. In accordance with ASC 350, intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually, or when events indicate that an impairment exists. The Company calculates impairment as the excess of the carrying value of its indefinite-lived assets over their estimated fair value. If the carrying value exceeds the estimate of fair value a write-down is recorded. The Company amortizes it’s intangibles with finite useful lives over their respective useful lives. For the years ended May 31, 2012 and 2011, the Company recorded impairments related to intangible assets of $1,565,989 and $1,875,000, respectively.

 

(f)Debt Issue Costs and Debt Discount

 

These items are amortized over the life of the debt to interest expense. If a conversion, extinguishment or repayment of the underlying debt occurs, a proportionate share of these amounts is immediately expensed.

 

F-8
 

  

(g)Fair Value of Financial Instruments

 

The Company follows ASC 820-10 of the FASB Accounting Standards Codification to measure the fair value of its financial instruments and disclosures about fair value of its financial instruments. ASC 820-10 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined by ASC 820-10 are described below:

 

 

Level 1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.

 

 

Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

 

 

Level 3: Pricing inputs that are generally unobservable inputs and not corroborated by market data.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate their fair values because of the short maturity of these instruments.

 

The Company’s note payable and convertible notes payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at May 31, 2012 and May 31, 2011.

 

The Company’s Level 3 financial liabilities consist of certain common stock warrants and embedded conversion features for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. The Company valued the warrant and conversion features using an option pricing model. These models incorporate transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.

 

Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.

 

F-9
 

  

It is not, however, practical to determine the fair value of advances from stockholders due to their related party nature.

 

(h)Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis

 

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative liability at every reporting period and recognizes gains or losses in the statements of operations that are attributable to the change in the fair value of the derivative liability.

 

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as follows:

 

      Fair Value Measurement Using 
 May 31, 2012  Carrying Value   Level 1   Level 2   Level 3   Total 
Derivative conversion features and warrant liabilities  $333,136   $-   $-   $333,136   $333,136 

  

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the year ended May 31, 2012:

 

   Fair Value Measurement Using Level 3 Inputs 
   Derivative
conversion
features
   Total 
Balance, May 31, 2011  $-   $- 
Purchases, issuances and settlements   488,590    488,590 
Total gains or losses (realized/unrealized) included in net loss   (155,454)   (155,454)
Balance, May 31, 2012  $333,136   $333,136 

 

(i)Debt Issue Costs and Discount on Debt

 

Amortized over the life of the debt to interest expense.  If a conversion, extinguishment or repayment of the underlying debt occurs, a proportionate share is expensed.

 

(j)Beneficial Conversion Feature

 

For conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”) and related debt discount.

 

When the Company records a BCF, the relative fair value of the BCF would be recorded as a debt discount against the face amount of the respective debt instrument. The discount would be amortized to interest expense over the life of the debt.

 

(k)Derivative Instruments

 

The Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-15. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

 

F-10
 

  

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

 

(l)Share-based payments

 

Generally, all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expense resulting from share-based payments is recorded as general and administrative expense. Stock based compensation expense for the years ended May 31, 2012 and 2011 amounted to $5,236,298 and $1,200,000, respectively.

 

(m)Revenue

 

The Company records revenue on the accrual basis when all goods and services have been performed and delivered, the amounts are readily determinable, and collection is reasonably assured. The Company currently is in the development stage and has not generated any revenue since its inception.

 

(n)Advertising

 

The Company expenses advertising when incurred. Advertising expense for the years ended May 31, 2012 and 2011 was $0 and $0, respectively.

 

(o)Income Taxes

 

Income taxes are provided in accordance with ASC No. 740, Accounting for Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities.

 

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of all of the deferred tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

(p)Net Loss per Share

 

Net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the applicable period. Diluted loss per share is determined in the same manner as basic loss per share, except that the number of shares is increased to include potentially dilutive securities using the treasury stock method. Since the Company incurred a net loss in all periods presented, all potentially dilutive securities were excluded from the computation of diluted loss per share since the effect of including them is anti-dilutive.

 

F-11
 

  

(q)Subsequent Events

 

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements are issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.

 

Recent accounting pronouncements

 

There are no recent accounting pronouncements that are expected to have a material effect on the Company’s financial statements.

  

Note 3.Intangible

 

The Company has valuation reports from CethialBossche Content Network (Montreal, Canada) dated January 22, 2007 and Copiliot Partners (France) dated January 19, 2007. The two firms have placed a valuation of between €9.5 and €17 million Euros and €12 million Euros, respectively, on the assets described as UDM music databases and related tools. Based on the above and other comparables, a pro forma five year cash flow analysis, the Company determined that a fair deemed value of $5,000,000 was appropriate with that deemed value attributable to the music database at April 3, 2009 (Inception). As the Company did not obtain a third party valuation report at the end of the fiscal period ended February 28, 2010, we fully impaired the $5,000,000 carrying value of this intellectual property as of that date.

 

In April 2012, the Company acquired certain shortcode technology of IntroMe, Inc which will allow Bizzingo to extend its B2B platform to mobile devices. As consideration for the acquisition of the technology, the Company paid IntroMe Inc., the sum of $75,000, issued a convertible note in the principal amount of $75,000 bearing interest at 8% per annum and a common stock purchase warrant to acquire 4.08 million shares of common stock. (See Note 4) As the Company did not obtain a third party valuation report at the end of the fiscal year ended May 31, 2012, we fully impaired the $1,565,989 carrying value of this intellectual property as of that date.

 

Amortization expense related to the Shortcode technology for the years ended May 31, 2012 and 2011 was $0 and $0, respectively.

 

Note 4.Asset Acquisition

 

On April 30, 2012, the Company entered into an Asset Purchase Agreement with IntroMe, Inc (the “Seller”), and all the shareholders of the Seller (the “Shareholders”); setting forth the acquisition certain technology of IntroMe, Inc.

 

Pursuant to the terms of the Purchase Agreement, the Company acquired certain technology of the Seller in exchange for the sum of $75,000, the issuance of a promissory note, convertible into shares of our common stock, $0.001 par value at a per share conversion price of the closing price of the Company’s common stock on the conversion date, subject to certain adjustments, in the amount of $75,000,and common stock purchase warrants of the Company which shall enable Seller to acquire 4,080,000 shares of common stock, $0.001 par value, of the Company at $0.34 per share exercise price.

 

Total price paid for the Seller’s assets in the acquisition was $1,565,989.

 

F-12
 

   

The following sets forth the components of the purchase price:

 

Purchase Price:      

 

Convertible notes issued to seller  $75,000 
Cash paid   75,000 
Fair value of common stock warrants   1,367,837 
Fair value conversion option   48,152 
Total purchase price   1,565,989 
Assets acquired     
Acquired technology   1,565,989 
Total assets acquired   1,565,989 
Excess purchase price  $- 

 

The intangible assets acquired were deemed fully impaired by the Company at May 31, 2012.

 

Note 5.Income Taxes

 

As of May 31, 2012, the Company had a net operating loss carry-forward for income tax reporting purposes of approximately ($27.5 Million) that may be offset against future taxable income through 2031. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited. No tax benefit has been reported in the financial statements, because the Company believes there is a 50% or greater chance the carry-forwards will expire unused. Accordingly, the potential tax benefits of the loss carry-forwards are offset by a valuation allowance of the same amount.

 

   2012   2011 
Operating loss carry forward  $27,557,862   $17,559,049 
Statutory rates   34%   34%
Deferred income tax asset   9,369,673    5,970,076 
Less: valuation allowance   (9,369,673)   (5,970,076)
   $-   $- 

 

Note 6.Notes Payable

 

A member of the Company loaned $200,000 to the Company pursuant to a Note(s) Payable Agreement dated August 10, 2009. The loan terms include a $16,000 interest bonus and accrues simple interest at a rate of 8% per annum. The note matured on December 31, 2009 and by agreement was extended to March 31, 2010. Interest accrued at the rate of 8% annually and was $13,776.64 for the period April 3, 2009 (inception) to May 31, 2010. On October 17, 2011 the note was paid in full along with outstanding accrued interest.

 

On February 21, 2011, the Company entered in a promissory note for $110,000.00 The note terms are for 1 year and carry an interest rate of 10% per annum. On February 15, 2012, the holder of the note entered into a subscription agreement which provided for the conversion of the principal and accrued interest on the note. On March 6, 2012 the note was settled with 1,203,972 shares of our common stock.

 

On April 7, 2011, the Company entered in a promissory note for $50,000.00. The note terms are for 1 year and carry an interest rate of 10% per annum. On February 15, 2012, the holder of the note entered into a subscription agreement which provided for the conversion of the principal and accrued interest on the note. On March 6, 2012 the note was settled with 542,191 shares of our common stock.

 

F-13
 

   

On May 3, 2011, the Company entered in a promissory note for $75,000.00 with a related party. The note terms are for 1 year and carry an interest rate of 10% per annum. On September 16, 2011, an additional $10,000 was advanced on this note. The note and accrued interest was assigned by the holder on December 7, 2011 and settled with 682,276 shares of our common stock.

 

On June 6, 2011, the Company entered in a promissory note for $50,000.00 with a related party. The note terms are for 1 year and carry an interest rate of 10% per annum. The note and accrued interest was assigned by the holder on December 7, 2011 and settled with 344,840 shares of our common stock.

 

On June 16, 2011, the Company entered in a promissory note for $40,000.00 with a related party. The note terms are for 1 year and carry an interest rate of 10% per annum. The note and accrued interest was assigned by the holder on December 7, 2011 and settled with 274,411 shares of our common stock.

 

On July 5, 2011, the Company entered in a promissory note for $50,000.00 with a related party. The note terms are for 1 year and carry an interest rate of 10% per annum. The note and accrued interest was assigned by the holder on December 7, 2011 and settled with 342,192 shares of our common stock.

 

On July 5, 2011, the Company entered in a promissory note for $125,000.00. The note terms are for 1 year and carry an interest rate of 10% per annum. On February 15, 2012, the holder of the note entered into a subscription agreement which provided for the conversion of the principal and accrued interest on the note. On March 6, 2012 the note was settled with 1,327,054 shares of our common stock.

 

On July 14, 2011, the Company entered in a promissory note for $100,000.00. The note terms are for 1 year and carry an interest rate of 10% per annum. On February 15, 2012, the holder of the note entered into a subscription agreement which provided for the conversion of the principal and accrued interest on the note. On March 6, 2012 the note was settled with 1,057,753 shares of our common stock.

 

On August 2, 2011, the Company entered in a promissory note for $150,000.00. The note terms are for 1 year and carry an interest rate of 10% per annum. Interest expense was $1,191.78 for the period ending August 31, 2011. The Holder was also granted 900,000 Series A Warrants, with an exercise price of $0.30 per share, expiring July 31, 2020.

 

On October 7, 2011, the Company entered into a secured promissory note for $250,000 with a related party. The note terms are for 6 months and carry an interest rate of 10% per annum. On April 02, 2012, the holder of the note entered into a subscription agreement which provided for the conversion of the principal and accrued interest on the note. As of May 31, 2012 the Company had not yet issued the shares.

 

A member of the Company loaned $2,046 to the Company on no terms.

 

Note 7.Convertible Notes Payable

 

7-a

On April 27, 2012, in connection with an asset acquisition, the Company issued a convertible note to IntroMe, Inc. in the principal amount of $75,000, which is convertible into shares of the Company’s common stock, and warrants to purchase 4,080,000 shares of common stock with an exercise price of $0.34 per share of $75,000 to IntroMe, Inc. (See Note 4)

 

The convertible note has a term of eleven months and accrues interest at 8% per annum. The Company is required to make ten equal, consecutive monthly payments of $7,500 on the first day of each month commencing with June 1, 2012. The holder of the convertible note has the right from and after the issuance thereof until such time as the convertible note is fully paid, to convert any outstanding and unpaid principal portion thereof into shares of common stock at a per share conversion price of the closing price of the Company’s common stock on the conversion date. The conversion price and number and kind of shares to be issued upon conversion of the convertible notes are subject to adjustment from time to time as more fully described in the convertible notes.

 

F-14
 

   

Conversion Feature

 

Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC No. 815,due to the potential for settlement in a variable quantity of shares. The convertible notes have been measured at fair value using anoption pricing model at period end with gains and losses from the change in fair value of derivative liabilities recognized on the statements of operations.

 

The convertible notes, when issued, gave rise to a derivative liability which was recorded as a discount to the notes of $48,152.

 

The embedded derivative of the convertible notes was re-measured at May 31, 2012 yielding a gain on change in fair value of the derivatives of $2,095 for the period ended May 31, 2012. The derivative value of the convertible notes at May 31, 2012 yielded a derivative liability at fair value of $46,058.

 

As of May 31, 2012, accrued and unpaid interest under the Note was $559.

 

Warrants

 

Each of the warrants issued to the Introme Inc. has a term of six years from April 27, 2012 and were fully vested on the date of issuance. The warrants are exercisable at $0.34 per share.

 

The warrants, when issued, gave rise to the allocation of $1,367,837 fair value into the asset purchase price. (See Note 4)

 

As of May 31, 2012 warrants to purchase 4,080,000 shares of Company common stock remain outstanding.

 

7-b

On May 10, 2012, the Company issued a convertible note to Telperion Holdings LTD. (the “Holder”) in the principal amount of $100,000, which is convertible into shares of the Company’s common stock, and warrants to purchase 1,000,000 shares of common stock with an exercise price of $0.10 per share.

 

The convertible note has a term of twelve months and accrues interest at 8% per annum. The holder of the convertible note has the right from and after the issuance thereof until such time as the convertible note is fully paid, to convert any outstanding and unpaid principal portion thereof into shares of common stock at a conversion price of $0.10 per share. The conversion price and number and kind of shares to be issued upon conversion of the convertible notes are subject to adjustment from time to time as more fully described in the convertible notes.

 

Conversion Feature

 

Due to the fact that these convertible notes have full reset adjustments based upon the issuance of equity securities by the Company in the future, they are subject to derivative liability treatment under ASC No. 815. The convertible notes have been measured at fair value using anoption pricing model at period end with gains and losses from the change in fair value of derivative liabilities recognized on the statements of operations.

 

The convertible notes, when issued, gave rise to a derivative liability which was recorded as a discount to the notes of $100,000 and interest expense of 102,557.

 

The embedded derivative of the convertible notes was re-measured at May 31, 2012 yielding a gain on change in fair value of the derivatives of $74,949 for the period ended May 31, 2012. The derivative value of the convertible notes at May 31, 2012 yielded a derivative liability at fair value of $127,608.

 

As of May 31, 2012, accrued and unpaid interest under the Note was $460.

 

F-15
 

   

Derivative Warrants

 

Each of the warrants issued to the Holder has a term of three years from May 10, 2012 and was fully vested on the date of issuance. The warrants are exercisable at $0.10 per share. The number of shares of common stock underlying each warrant and the exercise price are subject to certain adjustments as more particularly described in the warrants.

 

The warrants, when issued, gave rise to a derivative liability of which was recorded as interest expense of $237,880. The embedded derivative of the warrants was re-measured at May 31, 2012 yielding a gain on change in fair value of the derivative of $78,411 for the period ended May 31, 2012. The derivative value of these warrants at May 31, 2012 yielded a derivative liability at fair value of $159,469.

 

As of May 31, 2012 warrants to purchase 1,000,000 shares of Company common stock remain outstanding.

 

7-c

On May 23, 2012, the Company issued a convertible note to Robin Smith (the “Holder”) in the principal amount of $50,000, which is convertible into shares of the Company’s common stock,and warrants to purchase 200,000 shares of common stock with an exercise price of $0.30 per share.

 

The convertible note has a term of twelve months and accrues interest at 10% per annum. In addition, on the maturity date, the Company will pay the Holder the sum of $1,000 as additional interest. The Holder of the convertible note has the right from and after the issuance thereof until such time as the convertible note is fully paid, to convert any outstanding and unpaid principal portion thereof into shares of common stock at a conversion price of $0.10 per share.

 

Beneficial Conversion Feature

 

The intrinsic value of the convertible note, when issued, gave rise to a beneficial conversion feature which was recorded as a discount to the notes of $24,623 to be amortized over the term of the note.

 

As of May 31, 2012, accrued and unpaid interest under the Note was $132.

 

Warrants

 

Each of the warrants issued to the Holder have a term of five years from May 23, 2012 and were fully vested on the date of issuance. The warrants are exercisable at $0.30 per share.

 

The fair value of the warrants, when issued, were recorded as a discount to the notes of $25,377 to be amortized over the term of the note.

 

As of May 31, 2012 warrants to purchase 200,000 shares of Company common stock remain outstanding.

 

7-d

On May 23, 2012, the Company issued a convertible note to David Shamouelian, a Director of the Company (the “Holder”), in the principal amount of $50,000, which is convertible into shares of the Company’s common stock,and warrants to purchase 200,000 shares of common stock with an exercise price of $0.30 per share.

 

The convertible note has a term of twelve months and accrues interest at 10% per annum. In addition, on the maturity date, the Company will pay the holder the sum of $1,000 as additional interest. The Holder of the convertible note has the right from and after the issuance thereof until such time as the convertible note is fully paid, to convert any outstanding and unpaid principal portion thereof into shares of common stock at a conversion price of $0.05 per share.

 

Beneficial Conversion Feature

 

The intrinsic value of the convertible note, when issued, gave rise to a beneficial conversion feature which was recorded as a discount to the notes of $39,030 to be amortized over the term of the note.

 

F-16
 

   

As of May 31, 2012, accrued and unpaid interest under the Note was $132.

 

Warrants

 

Each of the warrants issued to the Holder have a term of five years from May 23, 2012 and were fully vested on the date of issuance. The warrants are exercisable at $0.30 per share.

 

The fair value of the warrants, when issued, were recorded as a discount to the notes of $10,970 to be amortized over the term of the note.

 

As of May 31, 2012 warrants to purchase 200,000 shares of Company common stock remain outstanding.

 

Convertible notes payable consisted of the following at May 31, 2012 and May 31, 2011:

 

   May 31, 2012   August 31, 2011 
Convertible note payable, entered into on April 27, 2012 for a term of 11 months maturing on March 1, 2013, 10 monthly payments of $7,500 starting June 1, 2012, with interest at 8% per annum due each payment date.  $75,000   $- 
           
Discount on note payable   -    - 
           
Accumulated amortization of discount   -    - 
           
Convertible note payable, entered into on May 10, 2012 for a term of 12 months maturing on May 10, 2013, with interest at 8% per annum due at maturity.   100,000    - 
           
Discount on note payable   (100,000)   - 
           
Accumulated amortization of discount   5,753    - 
           
Convertible notes payable, entered into on May 23, 2012 for a term of 12 months maturing on May 23, 2013, with interest at 10% per annum due at maturity. Additional interest of $2,000 to be paid at maturity.   100,000    - 
           
Discount on note payable   (100,000)   - 
           
Accumulated amortization of discount   2,192    - 
           
   $82,945   $- 

 

The Company recorded $7,945 amortization of the discount to the notes for the year ended May 31, 2012. The Company recorded $1,283 interest expense on the convertible notes for the year ended May 31, 2012.

 

F-17
 

   

Note 8.Commitments

 

Employment Agreements

 

On June 1, 2011 we entered into consulting agreements with each of Mr. Douglas Toth and Mr. Gordon Samson, our CEO and CFO, pursuant to which each has agreed to terms with the Company. Both Mr. Toth and Mr. Samson previously provided services to the Company with no agreement. These agreements provide for a base salary of no less than $240,000 and 180,000 per annum respectively.

 

Both agreements provide that Mr. Toth and Mr. Samson are eligible for an annual, performance-based bonus if and when the Company implements an applicable annual incentive plan. The Agreements specified that the Compensation Committee of the Board of Directors would establish such a plan.

 

As an inducement to enter into these Agreements, Mr. Toth and Mr. Samson will be awarded not less than 1,000,000 shares of our common stock under an S-8 plan to be filed. Additionally on the origination of a company stock option plan they are each to be awarded stock options, with a seven year term, in respect of 3,000,000 shares of the Company’s common stock. The exercise price for these stock option’s will be the market price at time of grant or such other amount as established by a plan. The options are scheduled to vest in two equal annual installments. If Mr. Toth or Mr. Samson were to terminate their agreements voluntarily without good reason as defined in the agreement, they would forfeit any unvested shares related to this option grant.

 

Additionally, the termination provisions of these agreements, define “Termination for Cause” and “Termination for Good Reason”. Included in the Termination for Good Reason clauses is a triggering event provision pursuant to a “change of control”. A triggering event is defined to include a termination of the agreement by the participant following a reduction in position, pay or other “constructive termination,” or a failure by a new control group to assume or continue any plan awards.

 

The termination benefit provided to Mr. Toth and Mr. Samson upon an involuntary termination by the Company without cause, or a termination by either Mr. Toth or Mr. Samson for good reason, is a cash severance payment in an amount equal to the sum of (a) the then current base salary and (b) the average of the annual bonuses payable (including in such average a zero for any year for which no such bonus is payable) to him with respect to each of the last three completed fiscal years of the Company for which the amount of such bonus has been determined at the date of such termination.

 

To qualify for the cash severance benefit, any applicable bonus amounts and opportunity to vest in unvested equity awards available under a stock option plan following an involuntary termination by the Company without cause, or a termination for good reason, Mr. Toth and/or Mr. Samson must execute a release in favor of the Company and agree to provide the Company with certain consulting services for a period of six months after termination. Additionally, during the period of these consulting services, Mr. Toth and/or Mr. Samson, must also agree not to provide any services to entities that compete with any of the Company’s business.

 

These agreements became effective June 1, 2011 and have stated terms through May 31, 2012.

 

On November 11, 2011, the Company and Douglas Toth amended and superseded the June 1, 2011 consulting agreement with an Employment Agreement in which Douglas Toth will serve as Chairman and Chief Executive Officer of the Company. The term of the Agreement ends May 31, 2012. Compensation under the plan will remain at $240,000 per annum with a right to earn incentive compensation. In addition Mr. Toth will receive a stock award of 2,000,000 shares of common stock on or after January 1, 2012. Further, Mr. Toth will be granted 5,000,000 options to purchase company stock. The options will vest as follows:50% shall vest on June 30, 2011, and the remaining 50% shall vest pro-rata monthly from June 2011 through May 2012.

 

On August 19, 2011, Gordon Samson resigned as Director and CFO of the Company.

 

F-18
 

   

Joint Venture Agreement

 

On February 9, 2012, the Company entered into Joint Venture Agreement with Sun Enterprises Group, Ltd., a Cayman company. The parties have agreed to establish a Hong Kong joint venture entity, wherein each participant will have an equal equity ownership and ownership rights. The joint venture entity may establish a wholly owned operating company domiciled in the Peoples Republic of China.

 

The purpose of the joint venture is to provide SaaS (Software as a service) products to Chinese businesses by delivering collaborative intranet abilities and connectivity to international businesses through the Bizzingo B2B social networking platform. This operation will be developed in the PRC through the PRC subsidiary.

 

The Company, in addition to other contributions, has agreed to issue a royalty free license to the joint venture for the technology surrounding its B2B social networking platform on an exclusive basis for the territory of PRC, Hong Kong, Macau Special Administrative Zone, and Taiwan. In addition, the joint venture entity may act as non-exclusive agent to market, sell and distribute the Bizzingo technology outside the described territory.

 

Sun Enterprises, among other contributions, has agreed to provide to the joint venture, a management team and the marketing expertise, as well as communications support, and media relationships along established sales channels.

 

Consulting Agreements

 

On December 01, 2010, we entered into a consulting agreement with Groupmark Financial Services Ltd., providing for $10,000 per month for services rendered each month.

 

The Company has a consulting agreement with an accounting firm to provide accounting and financial reporting services for $7,000 per month

 

On September 21, 2011, the Company entered into a two year agreement with Creative Processing, Inc (“CP”) to provide advertising and marketing services. CP is to be compensated for its services with 2,400,000 shares of Company common stock, to be issued over a one year period. In addition the Company will issue CP 2,400,000 stock purchase warrants with an exercise price of $0.20 per share. The parties amended the agreement in March 2012 to include monthly compensation to CP of $5,000 per month, starting March 1, 2012 and ending February 1, 2013.

 

On September 23, 2011, the Company entered into a two year agreement with Wall & Madison, LLC (“Wall”) to provide business development and marketing services. The Company will compensate Wall $10,000 per month relating to this agreement.

 

On October 7, 2011, the Company entered into a two year agreement with David Shamouelian, a Director of the Company, to provide marketing services. Mr. Shamouelian is one of the most respected names in the fashion industry. He is to be compensated for his services with 3,200,000 shares of Company common stock, to be issued over a 18 month period.

 

On October 17, 2011, the Company entered into a services agreement with BPG Worldwide, an award-winning Internet software development firm. BPG will provide technology services to further develop and launch Bizzingo’s B2B search and social media platform. The Company will be billed monthly for these services on a time and material basis.

 

On December 1, 2011, the Company engaged Advance Ventures, LLC (“Advance”), based in Silicon Valley, to provide venture development services, including guidance on recruitment, business development and enhancing strategic relationships in Silicon Valley. The Company will compensate Advance $10,000 per month relating to this agreement. In addition, the parties amended the agreement in March 2012 and May 2012, wherein the Company agreed to issue 100,000 shares of common stock to Advance as per the March amendment and an additional 100,000 shares of common stock as per the May amendment.

 

F-19
 

   

On February 5, 2012 the Company entered into a two year agreement with SB Acquisiton #1 (“SB”) to provide advertising and marketing services. SB is to be compensated for its services with 1,550,000 shares of Company common stock, to be issued over a one year period.

 

On March 28, 2012 the Company entered into a two year agreement with Var Growth (“VG”) to provide business development and marketing services. VG is to be compensated for its services with 3,600,000 shares of Company common stock, to be issued immediately.

 

On May 25, 2012 the Company entered into a one year agreement with JobyCapital, LLC (“Joby”) to provide business development and marketing services. Joby is to be compensated for its services with 1,000,000 shares of Company common stock.

 

On May 31, 2012 the Company entered into a one year agreement with MidAtlantic Capital Associates SL (“MidAtlantic”) to provide general business consulting services and business development in Europe. MidAtlantic is to be compensated for its services with up to 3,000,000 stock purchase warrants with an exercise price of $0.17 per share. 500,000 warrants will be earned immediately and the remaining warrants shall be earned upon MidAtlantic attaining certain benchmarks as stipulated in the consulting agreement.

 

In addition, the Company will pay MidAtlantic a finder’s fee equal to eight percent on all cashed received by the Company from the sale of its equity securities to investors that were directly introduced to the Company by MidAtlantic, and five percent on cashed received by the Company from the sale of its debt securities to investors that were directly introduced to the Company by MidAtlantic, provided that each such investor will not be a “US Person” as that term is defined under Rule 902 of Regulation S promulgated under the Securities Act of 1933, as amended.

 

Advisory Board Agreement

 

In April and May 2012, the Company entered into Advisory Board agreements with Mark Waxman and Ranjith Kumaran (the “Advisors”), respectively. The term of the agreements is for a period of between one to three years unless either party provides a 30-day advance written notice of termination. As compensation for their services, each Advisor shall receive stock options to acquire 100,000 shares of common stock of the Company. As of May 31, 2012, the options have not been issued.

 

Celebrity Endorsement Agreement

 

On March 14, 2012, the Company entered into Celebrity Endorsement Agreement with Joseph Theismann. Mr. Theismann is a Hall of Fame, National Football League quarterback.

 

The term of the agreement is for a period of one year, during which the Company is authorized to utilize Mr. Theismann’s name and likeness in the promotion of its B2B Network. In addition, Mr. Theismann has agreed to make himself available for a number of photo sessions and promotional appearances. Mr. Theismann will receive certain stock purchase warrants in the Company in exchange for the rights granted and services provided to the Company.

 

On March 15, 2012 the Company entered into a Finder’s Fee Agreement which provides for payment of a finder’s fee equal to 10% of the consideration paid under the above referenced Celebrity Endorsement Agreement.

 

Placement Agent and Advisory Services

 

On September 15, 2011 the Company entered into a one year agreement with Ocean Business Solutions Group, LLC (“Ocean”) and Ocean Cross Capital Markets, LLC (“OCCM”) to provide business consulting and capital placement services. The Company will pay Ocean a monthly management fee of $3,000 starting on October 1st 2011 for a period of twelve months. In addition the Company issued 275,000 stock purchase warrants to Ocean at the execution of the agreement. The Company will pay OCCM ten percent (10%) of any gross proceeds received by the Company in connection with the portion of any Financing placed by OCCM in which securities are issued by the Company.

 

On May 2, 2012, the Company terminated its agreement with OCCM.

 

F-20
 

   

On February 10, 2012 the Company entered into a one year agreement with Brean Murray, Carret & Co., a FINRA registered broker-dealer (“BMC”),as its exclusive corporate finance advisor and investment banker. Upon execution of the agreement, the Company is to issue BMC a non-refundable retainer consisting of 650,000 shares of Company Common Stock. to provide business consulting and capital placement services. The Company shall also pay BMC seven percent (7%) of any gross proceeds received by the Company in connection with a public or private offering of equity including convertible debt and convertible preferred equity. In the event of a private offering of debt BMC’s fee will be based on a percentage of the gross proceeds raised or commitments provided as follows: three percent (3%) with respect to senior debt and five percent (5%) with respect to nonconvertible subordinated debt. BMC will receive three percent (3%) of the consideration received or paid in a sale or merger transaction involving the Company. In addition BMC will receive a warrant allowing it to purchase, at its options, identical securities to those purchased by and/or issued or granted to investors in such transactions, in an amount equal to 7% of equity offerings and 5% of subordinated debt.

 

On February 29, 2012 the Company entered into an agreement with Monarch Bay Associates, LLC.,a FINRA registered broker-dealer (“MBA”),as its non-exclusive placement agent, on a non-exclusive basis, with respect to finding investors. The Company shall compensate MBA nine percent (9%) of gross proceeds received by the Company in connection with a public or private offering of equity including convertible debt and convertible preferred equity (the “Financing”). In addition MBA will receive a warrant allowing it to purchase nine percent (9%) of the total number of shares of common stock issued and issuable by the Company to investors under and in connection with the Financing. In addition the Company will issue 200,000 stock purchase warrants at the successful completion of a financing at $0.15 per share.

 

Note 9.Options

 

During the year ended May 31, 2012, the Company issued Directors, Officers and Consultants a total of 12,750,000 stock options under the 2011 Stock Option Plan. The Company valued the options utilizing an option pricing model and are expensing the options over the vesting periods. The exercise price of the options were issued at fair market value on the date of grant and range from $0.16 to $0.33. All options have a term of 10 years. The Company recorded an expense of $1,742,949 during the year ended May 31, 2012.

 

Note 10.Warrants

 

The value of the warrants have been calculated using an option pricing model as of the date of grant based on the following assumptions: a risk free rate (range .21%-2.96%);a dividend yield of 0.00%; a volatility factor of (range 90%-200%); and an expected life (range 2-10 years).

 

On May 20, 2010, we entered into a Unit Purchase Agreement with a single accredited investor (the May 20th Purchaser) pursuant to which the May 20th Purchaser purchased 10.74074 Units (“Units”) at a purchase price of $27,000 per Unit, for an aggregate purchase price of $290,000. Each Unit purchased consisted of: (a) one hundred eighty thousand (180,000) shares of the Company’s common stock; (b) a Series A Warrant to purchase ninety thousand (90,000) shares of common stock at an exercise price of $0.30 per share; and (c) a Series B Warrant to purchase ninety thousand (90,000) shares of common stock at an exercise price of $0.60 per share. Accordingly, the May 20th Purchaser received 1,933,333 shares of common stock; a Series A Warrant to purchase 966,667 shares of common stock; and a Series B Warrant to purchase 966,666 shares of common stock.

 

On May 31, 2010, we entered into Unit Purchase Agreements with nine (9) accredited investors (the May 31st Purchasers) pursuant to which the May 31st Purchasers purchased 33.0425 Units at a purchase price of $27,000 per Unit, for an aggregate purchase price of $892,147.34.  The purchase price for the Units were paid via assignment of certain outstanding promissory notes originally issued by our subsidiaries UDM and Phreadz. In addition, one May 31st Purchaser also received the “right” with their note to receive the equivalent amount of the face amount of such note in Units with the consideration of the original note. Each Unit purchased consisted of: (a) one hundred eighty thousand (180,000) shares of the Company’s common stock; (b) a Series A Warrant to purchase ninety thousand (90,000) shares of common stock at an exercise price of $0.30 per share; and (c) a Series B Warrant to purchase ninety thousand (90,000) shares of common stock at an exercise price of $0.60 per share. Accordingly, in total, the May 31st Purchasers received 6,514,310 shares of common stock; a Series A Warrant to purchase 3,257,154 shares of common stock; and a Series B Warrant to purchase 3,257,154 shares of common stock.

 

F-21
 

   

On June 8, 2010, we entered into a Unit Purchase Agreement with a single accredited investor pursuant to which the Purchaser purchased 7.4074 Units at a Purchase Price of $27,000 per Unit for an aggregate purchase price of $200,000.  Each Unit purchased consisted of (a) one hundred eighty thousand (180,000) shares of the Company’s common stock, par value $0.001 per share (“Common Stock”); (b) a Series A Warrant  (the “Series A Warrants”) to purchase ninety thousand (90,000) shares of Common Stock at an exercise price of $0.30 per share; and (c) a Series B Warrant (the “Series B Warrants”, together with the Series A Warrants, the “Warrants”) to purchase ninety thousand (90,000) shares of Common Stock at an exercise price of $0.60 per share.  Accordingly, Purchaser received 1,333,333 shares of Common Stock (the “Shares”); a Series A Warrant to purchase 666,666 shares of Common Stock and a Series B Warrant to purchase 666,667 shares of Common Stock.

 

On July 16, 2010, we entered into a Unit Purchase Agreements with 13 accredited investors pursuant to which the Purchasers purchased 14 Units at a Purchase Price of $27,000 per Unit for an aggregate purchase price of $378,000. Each Unit purchased consisted of (a) one hundred eighty thousand (180,000) shares of the Company’s common stock, par value $0.001 per share (“Common Stock”); (b) a Series A Warrant  (the “Series A Warrants”) to purchase ninety thousand (90,000) shares of Common Stock at an exercise price of $0.30 per share; and (c) a Series B Warrant (the “Series B Warrants”, together with the Series A Warrants, the “Warrants”) to purchase ninety thousand (90,000) shares of Common Stock at an exercise price of $0.60 per share.  Accordingly, in total, purchasers received 2,520,000 shares of Common Stock (the “Shares”); a Series A Warrant to purchase 1,260,000 shares of Common Stock and a Series B Warrant to purchase 1,260,000 shares of Common Stock

 

Southridge Investment Group LLC. an SEC Registered Broker/Dealer, Member FINRA/SIPC (“Southridge”) acted as placement agent in connection with the sale of the 13 Units referred to above in the preceding paragraph.  Southridge received $22,140 in commissions and expenses and 54,000 Series A Warrants and 54,000 Series B Warrants.  We also paid $3,500 in escrow fees.  The net proceeds of the offering after payments of the commissions and expenses and escrow fees were approximately $352,360.

 

In April 2010,the Company entered into an Exchange Agreement with Professional Capital Partners, Ltd.(“PCP”), pursuant to which the Company and PCP agreed to exchange 5,325,824 shares of the Company’s common stock (the “Original Shares”) for $1,000,000 worth of Units in its next financing. The Company has offered and sold Units in a financing, with each Unit consisting of: (i) 180,000 shares of the Company’s common stock; (ii) a Series A Warrant to purchase 90,000 shares of common stock at an exercise price of $0.30 per share; and (iii) a Series B Warrant to purchase 90,000 shares of common stock at an exercise price of $0.60 per share. On June 22, 2010, PCP exercised this Exchange Agreement and exchanged its Original Shares for 37 Units. As a result, PCP received 6,660,000 shares of common stock; a Series A Warrant to purchase 3,330,000 shares of common stock; and a Series B Warrant to purchase 3,330,000 shares of common stock in exchange of 5,325,824 and net of shares of common stock of the company. A financing expense of $1,000,632 was recorded as of May 31, 2010 as a stock issuance liability with the exercise of the exchange agreement on June 22, 2010 as this cost became known. The financing cost was determined using the last price of $0.75 as reported on OTCBB.com on June 11, 2010 prior to the June 22, 2010 exercise date, on the additional 1,334,176 shares of common stock issued to PCP pursuant to the Exchange Agreement.

 

The Company analyzed the beneficial nature of the 10,479,488 Series A Warrants and 10,479,488 Series B Warrants based on the conversion terms described above and determined that no material beneficial conversion feature exists.

 

On August 5, 2011, 900,000 Series A warrants were granted to the Holder of a note.

 

For certain of the Purchasers described above the Unit Purchase Agreement granted Registration Rights which contained certain rights which included Liquidated Damages. “The Company will be obligated to pay investor a fee equal to 1.0% (which will increase to 2.0% after the first 30 days)  of such investor’s purchase price for each 30 day period (pro-rated for partial periods); provided that such damages shall be capped at 12% of such investor’s total purchase price. If the Company fails to pay any partial liquidated damages pursuant to paragraph 2) b) & c) of the Registration Rights Agreement in full within 7 days after the date payable, the Company will pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. We have not yet filed a Registration Statement, we have a certain number of the Purchaser’s who are entitled to Liquidated Damages as described herein. Accordingly, we have accrued an interest expense as Liquidated Damages for those Purchaser’s that this applies to. We expect to file a Registration Statement in the near term.

 

F-22
 

   

On August 01, 2011, the Company issued a public relations firm 150,000 stock purchase warrants with a 5 year term and a strike price of $0.65. The Company valued the warrants using an option pricing model and is expensing the $51,779 fair value over the vesting term of the warrant.

 

On September 21, 2011, the Company issued a public relations firm 2,400,000 stock purchase warrants with a 2 year term and a strike price of $0.20. The Company valued the warrants using an option pricing model and is expensing the $407,778 fair value over the vesting term of the warrant.

 

On October 29, 2011, the Company issued a consulting firm 275,000 stock purchase warrants with a 5 year term and a strike price of $0.33. The Company valued the warrants using an option pricing model and is expensing the $33,805 fair value over the vesting term of the warrant.

 

On March 14, 2012, as per the terms of a celebrity endorsement agreement the Company issued 1,000,000 stock purchase warrants with a 5 year term and a strike price of $0.15. The Company valued the warrants using an option pricing model and is expensing the $228,474 fair value over the vesting term of the warrant.

 

On March 14, 2012, as per the terms of a finders fee agreement the Company issued 100,000 stock purchase warrants with a 5 year term and a strike price of $0.15. The Company valued the warrants using an option pricing model and is expensing the $22,847 fair value over the vesting term of the warrant.

 

On May 31, 2012, the Company issued a consulting firm 500,000 stock purchase warrants with a 3 year term and a strike price of $0.17. The Company valued the warrants using an option pricing model and is expensing the $66,292 fair value over the vesting term of the warrant.

 

Note 11.Common Stock

 

The acquisition of Phreadz LLC and UDM by the Company on April 27, 2010 was accounted for as a recapitalization by the Company. The recapitalization was the merger of two private LLCs into a non-operating public shell corporation (the Company) with nominal net assets and as such is treated as a capital transaction, rather than a business combination. The transaction is the equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation. The pre-acquisition consolidated financial statements of Phreadz LLC and UDM are treated as the historical financial statements of the consolidated Company. Therefore the capital structure of the consolidated enterprise, being the capital structure of the legal parent, is different from that appearing in the financial statements of Phreadz LLC and UDM in earlier periods due to the recapitalization.

 

1.       On April 3, 2009, 1,920,000 shares were issued for property.
2.On May 28, 2009, 12,480,000 shares were issued for cash.
3.On August 25, 2009, 23,136,000 shares were issued for cash.
4.On March 10, 2010, 5,782,400 shares were issued for cash.
5.On April 27, 2010, 42,700,000 were issued and 32,712,176 shares were cancelled upon recapitalization due to the reverse merger.
6.On May 20, 2010 1,933,333 shares were issued at $0.15 for cash of $290,000
7.On May 31, 2010, 6,514,310 shares were issued in settlement of $892,147.34 in notes assigned to the Company with one note-holder also receiving the “right” with their settled note to receive the equivalent amount of the face amount of their note in consideration of their note.
8.On June 8, 2010 1,333,333 shares were issued at $0.15 for cash of $200,00
9.On June 22, 2010 1,334,176 net shares were issued on account of an April 27, 2010 Exchange Agreement
10.On July 16, 2010 2,520,000 shares were issued at $0.15 for cash of $378,000
11.On November 1, 2010 1,080,000 shares were issued at $0.15 for cash of $162,000.

 

F-23
 

  

12.On December 3, 2010 720,000 shares were issued at $0.15 for cash of $108,000.
13.On January 31, 2010 by resolution the Board caused 2,000,000 shares to be issued for services
14.On March 15, 2011 2,500,000 shares were issued for an asset acquisition (Zonein2 code)
15.On July 27, 2011 6,460,800 shares were surrendered to the Company by a former CEO and cancelled.
 16.On September 7, 2011, the Company issued 611,512 shares to a vendor to settle an accounts payable in the amount of $91,726.85.

17.On December 7, 2011 2,500,000 shares were issued at $0.10 for cash of $250,000
18.On December 7, 2011 800,000 shares were issued for services
19.On December 7, 2011 1,643,719 shares were issued to settle notes and accrued interest in the amounts of $225,000 and $21,558, respectively.
20.On December 7, 2011 50,000 shares were issued in connection with a note extension
21.On February 1, 2012 1,250,000 shares were issued at $0.10 for cash of $125,000
22.On March 2, 2012 500,000 shares were issued at $0.20 for cash of $100,000
23.On March 2, 2012 5,350,000 shares were issued at $0.10 for cash of $535,000
24.On March 2, 2012 800,000 shares were issued for services
25.On March 6, 2012 500,000 shares were issued at $0.10 for cash of $50,000
26.On March 6, 2012 500,000 shares were issued for services
27.On March 6, 2012 4,130,970 shares were issued to settle notes and accrued interest in the amounts of $385,000 and $28,075, respectively.
28.On April 12, 2012 447,915 shares were issued under an anti-dilution clause
29.On April 12, 2012 3,700,000 shares were issued for services
30.On May 3, 2012 650,000 shares were issued for services
31.On May 3, 2012 1,500,000 shares were issued at $0.10 for cash of $150,000

 

Note 12.Preferred Stock

 

On July 14, 2011, we amended our Articles of Incorporation to authorize 100,000,000 shares of preferred stock, $0.001 par value. The amendment was approved by a majority of our shareholders. The preferred stock can be created in one or more classes having such designations, preferences, and relative, participating, optional, or other rights (including preferential voting rights), and qualifications, limitations, and/or restrictions thereof, all as may be determined by from time to time by the Board of Directors of the Corporation (the “Charter Amendment”). This type of preferred stock is known as “blank check” preferred.

 

Note 13.Contingencies

 

There is currently a dispute that arose approximately August 14, 2010, between former Phreadz-division President Jonathan Kossmann and Phreadz, regarding certain intellectual property and confidential information of the Company. Mr. Kossmann has claimed that $30,000 is owed to him pursuant to his 2009-2010 Consulting Agreement with the Company. The Company has conducted an investigation into Mr. Kossmann’s claim with the assistance of counsel and does not believe any money is due to him. Management believes it is unlikely that the outcome of this matter will have an adverse impact on its result of operations and financial condition.

 

Note 14.Subsequent Events

 

The Company has evaluated all events that occurred after the balance sheet date through the date when the consolidated financial statements were issued to determine if they must be reported. The Management of the Company determined that there were certain reportable subsequent events to be disclosed as follow.

 

Common Stock Issuances

 

On July 18, 2012, the Company issued 5,150,000 shares of common stock to consultants under previously existing consulting agreements.

 

F-24
 

   

On July 18, 2012, the Company issued 1,000,000 shares of common stock to a consultant under an amendment to a previously existing consulting agreement.

 

On July 18, 2012, 2,621,918 shares were issued to settle notes and accrued interest in the amounts of $250,000 and $12,192, respectively.

 

On July 18, 2012, 1,000,000 shares were issued to settle a note in the amount of $50,000. The conversion price of the note was reduced from $0.10 to $0.05 per share on the conversion date and accrued interest on the note was forgiven.

 

On July 18, 2012, 2,000,000 shares were issued to settle notes in the amount of $100,000.

 

On July 18, 2012, 347,915 shares were issued under an anti-dilution clause.

 

On July 18, 2012, the Company issued 2,500,000 shares of common stock to a consultant under a consulting agreement entered into on July 15, 2012.

 

On July 18, 2012, the Company issued 100,000 shares of common stock to an attorney for professional services.

 

On August 3, 2012, the Company entered into a stock purchase agreement with an investor for 400,000 shares of common stock at $0.05 for cash proceeds of $20,000.

 

On August 5, 2012, the Company entered into a stock purchase agreement with an investor for 1,000,000 shares of common stock at $0.05 for cash proceeds of $50,000.

 

On August 14, 2012, the Company entered into a stock purchase agreement with an investor for 400,000 shares of common stock at $0.05 for cash proceeds of $20,000.

 

On August 21, 2012, the Company issued 2,000,000 shares of common stock to a Douglas Toth under a previously existing employment agreement.

 

On August 21, 2012, the Company issued 1,000,000 shares of common stock to a consultant under a previously existing consulting agreement.

 

Entry Into a Material Definitive Agreement

 

Convertible Promissory Notes

 

On June 07, 2012, the Company issued a convertible note to an investor (the “Holder”) in the principal amount of $50,000, which is convertible into shares of the Company’s common stock, and warrants to purchase 250,000 shares of common stock with an exercise price of $0.30 per share.

 

The convertible note has a term of twelve months and accrues interest at 10% per annum. The Holder of the convertible note has the right from and after the issuance thereof until such time as the convertible note is fully paid, to convert any outstanding and unpaid principal portion thereof into shares of common stock at a conversion price of $0.05 per share. The conversion price and number and kind of shares to be issued upon conversion of the convertible notes are subject to adjustment from time to time as more fully described in the convertible notes.

 

On June 07, 2012, the Company issued a convertible note to an investor (the “Holder”) in the principal amount of $50,000, which is convertible into shares of the Company’s common stock.

 

The convertible note has a term of twelve months and accrues interest at 10% per annum. The Holder of the convertible note has the right from and after the issuance thereof until such time as the convertible note is fully paid, to convert any outstanding and unpaid principal portion thereof into shares of common stock at a conversion price of $0.05 per share. The conversion price and number and kind of shares to be issued upon conversion of the convertible notes are subject to adjustment from time to time as more fully described in the convertible notes.

 

F-25
 

   

On June 21, 2012, the Company issued a convertible note to Telperion Holdings Ltd (the “Holder”) in the principal amount of $13,000, which is convertible into shares of the Company’s common stock, and warrants to purchase 1,000,000 shares of common stock with an exercise price of $0.10 per share.

 

The convertible note has a term of twelve months and accrues interest at 8% per annum. The Holder of the convertible note has the right from and after the issuance thereof until such time as the convertible note is fully paid, to convert any outstanding and unpaid principal portion thereof into shares of common stock at a conversion price of $0.10 per share. The conversion price and number and kind of shares to be issued upon conversion of the convertible notes are subject to adjustment from time to time as more fully described in the convertible notes.

 

On July 23, 2012, the Company issued a convertible note to Douglas Toth (the “Holder”) in the principal amount of $32,000, which is convertible into shares of the Company’s common stock, and warrants to purchase 200,000 shares of common stock with an exercise price of $0.30 per share.

 

The convertible note has a term of twelve months and accrues interest at 10% per annum. In addition, on the maturity date, the Company will pay the Holder the sum of $1,000 as additional interest. The Holder of the convertible note has the right from and after the issuance thereof until such time as the convertible note is fully paid, to convert any outstanding and unpaid principal portion thereof into shares of common stock at a conversion price of $0.05 per share. The conversion price and number and kind of shares to be issued upon conversion of the convertible notes are subject to adjustment from time to time as more fully described in the convertible notes.

 

Consulting Agreements

 

On June 01, 2012, the Company engaged Ron Bouganim (“RB”) to facilitate applications for approval of shortcode technologies. The term of the agreement is for four months. The Company will compensate RB on an hourly basis at $125/hour based on a 16 hour workweek. In addition RB shall be reimbursed for all pre-approved business expenditures incurred in connection with services provided.

 

On July 15, 2012, the Company engaged Mark J. Iacono (“MJI”) to provide national and large market media consulting services. The term of the agreement is for a period of one year. MJI is to be compensated for his services with 2,500,000 shares of Company common stock. In addition the Company will issue MJI 2,500,000 stock options with an exercise price of $0.50 per share.

 

On July 27, 2012, the Company engaged Paramount Advisors, LLC (“Paramount”) to provide corporate consulting services relating to corporate financial services, corporate finance and mergers and acquisitions with respect to the Company and assist the Company in its efforts to enhance its visibility in the financial community. The term of the agreement is for a period of one year. The Company will compensate Paramount $49,500 to be paid in monthly installments over the term of the agreement. In addition the Company will issue 800,000 shares of common stock to Paramount, 400,000 shares on the execution of the agreement and 400,000 shares on or before January 15, 2013 and the Company will issue Paramount 800,000 stock purchase warrants with an exercise price of $0.30 per share.

 

On August 3, 2012, the Company amended its consulting agreement with David Shamouelian, a Director of the Company, to increase his compensation for his services through the issuance of an additional 1,000,000 shares of Company common stock.

 

On August 13, 2012, the Company engaged Piedmontir, LLC (“Piedmontir”) to provide public and investor relations services. The term of the agreement is for a period of six months. The Company will compensate Paramount $6,000 per month. In addition the Company will issue 300,000 shares of common stock to Piedmontir, 150,000 shares on the execution of the agreement and 150,000 shares on the ninety first day of the agreement.

 

In September 2012, the Company engaged Real Media Group (“RMG”) to provide Open Adstream Service (the “Service”) consisting of the delivery and management of digital advertisements. The term of the agreement is for a period of three years starting October 01, 2012. Initially the Company will compensate RMG a one time training and setup fee of $3,000. Thereafter the fees for the service are based on monthly impressions (Advertisements) at a rate of $0.07 per thousand on the 100 hundred million Impressions and $0.05 per thousand on all monthly impressions beyond the first 100 hundred million. Minimum monthly service fees are $500 through April 2013, then $1,000 monthly for the remainder of the term.

 

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Placement Agent and Advisory Services

 

On July 11, 2012 the Company entered into an agreement with Garden State Securities, Inc. (“GSS”)as its selling/placement agent. GSS will also assist the Company in financial planning and proposed mergers and acquisitions. Upon execution of the agreement, the Company is to issue GSS an advisory fee of 500,000 shares of Company Common Stock. The Company shall also pay GSS ten percent (10%) of any gross proceeds received by the Company in connection any equity of debt financing, convertible debt financing, debt conversion or any instrument convertible into the Company’s common stock (“the Securities Financing”). In addition GSS will receive warrants (the “Warrants”) with “piggy back” registration rights, equal to ten percent (10%) of the stock issued in the Securities Financing at an exercise price equal to the investor’s warrant exercise price of the Securities Financing or the price of the Securities Financing if no warrants are issued to investors. The Company will also pay, at closing, the expense of GSS’s legal counsel pursuant to the Securities Financing equal to $25,000.

 

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