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[January 28, 2014]
SHADES HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements Our Management's Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature, uncertain and risky and include . These risks and uncertainties include, but are not limited to, international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Background From our inception on November 23, 2009 through June 30, 2013, we incurred a cumulative loss of $475,107 and have only generated limited revenues from our business operations. We previously offered and sold high quality, name brand sunglasses and watches to our customers through our wholly-owned subsidiary, Daily Shades, Inc. The high quality, name brand sunglasses were offered at discounts of up to 70% of the manufacturer's suggested retail price and were offered and sold through our website at www.dailyshades.com, and the high quality, name brand watches were offered at discounts of up to 75% of the manufacturer's suggested retail price and were offered and sold through our website at www.dailychrono.com. We offered a different pair of sunglasses and a different watch each day to our customers through our websites. We generally offered our sunglasses and watches for a limited period of time and presented the offer as a "daily deal" on our websites. We are also engaged in developing our business infrastructure and we are seeking capital to support the further development of our licensing agreements.
During our development stage, we have and will continue to incur significant expenditures for organizational costs and marketing, arising both internally and externally. Our organizational costs have made up the majority of our expenses to date. These expenditures are entirely predicated on the success of our financing efforts discussed in Liquidity and Capital Resources, below. We have had to pay for most of our organizational costs with cash and currently anticipate that we will be required to pay for our marketing efforts with cash.
However, to the extent that outside parties will entertain share-based payment arrangements, we will likely pursue negotiations on those lines. We have previously issued shares of our common stock as compensation to certain consultants, and our legal service provider. We will seek stock-based compensation arrangements in the future.
As previously reported, on September 7, 2012, the Company entered into a Share Exchange Agreement with Suncoast Real Estate Owned Holdings, Inc., ("Suncoast"), and the shareholder of Suncoast (the "Suncoast Shareholder"), pursuant to which the Suncoast Shareholder agreed to transfer all of the issued and outstanding capital stock of Suncoast (the "Suncoast Shares") to the Company in exchange for 15,500,000 shares of common stock of the Company (the "Suncoast Exchange Shares"). The parties contemplated that such exchange would result in Suncoast becoming a wholly-owned subsidiary of the Company and the Shareholder acquiring a controlling interest in the Company (the "Suncoast Exchange Transaction").
On November 27, 2012, the Company entered into an agreement with the Suncoast Shareholder, effective as of September 11, 2012 (the "Suncoast Effective Time"), pursuant to which the parties agreed that the Suncoast Shareholder failed to relinquish control of Suncoast to the Company and that the Suncoast Exchange Transaction was never effectively consummated. Accordingly, the Suncoast Shareholder returned the Suncoast Exchange Shares to the Company on November 27, 2012 and the parties agreed that the Suncoast Shares have remained under the ownership of the Suncoast Shareholder since the Suncoast Effective Time.
On June 19, 2013, the Company entered into a share exchange agreement (the "Exchange Agreement") with Shades of Fragrances, Inc. ("SOF") and Omniscent Corp. ("OMNI") (the sole shareholder of SOF). Pursuant to the Exchange Agreement, which closed on June 21, 2013, the Company issued 24,000,000 shares of common stock to OMNI, resulting in a change in control of the Company, in exchange for 1,000,000 shares of common stock of SOF, representing 100% of the issued and outstanding capital stock of SOF, and SOF thus became a wholly-owned subsidiary of the Company.
15 New Business Shades of Fragrances, Inc. ("SOF") is a fragrance branding company and a wholly owned subsidiary of the Company. SOF owns the federal registered trademark (Registration No. 277316) "Phantom" for perfumes and fragrances.
In connection with the acquisition the Company will become a luxury & lifestyle brand developer, through licensing agreements with emerging fashion designers and established celebrity brands, including our own proprietary trademarks. SOF applies analytical tools and models, which have been proven successful, to identify and leverage the brand's powerful characteristics. Additionally, on July 2, 2013 the Company appointed David H. Schwanz, formerly a Vice President of Sales at Elizabeth Arden, as President of Shades of Fragrances, Inc., effective immediately. David's primary focus will be building a sales team to lead the initiatives of SOF.
Results of Operations Three Months Ended June 30, 2013 and 2012 Revenues - We previously derived our revenues from the sale of tangible products primarily sunglasses. Our consolidated product sales of sunglasses were $122 and $669 for the three months ended June 30, 2013 and 2012, respectively.
Cost of Product Sales - Our cost of product sales were $20 and $327 for the three months ended June 30, 2013 and 2012, respectively. Our cost of product sales is a direct result of our sales activity. Costs of products sold included unexpected emergency shipping costs and product pricing costs.
Selling General and Administrative Expenses - Operating expenses consisted of advertising expense, accounting and professional expenses, compensation costs, amortization and general administrative expenses. Our analysis of the material components of changes in operating expenses are as follows: Advertising and Promotion - Advertising and promotion expense were $0 and $55 for the three months ended June 30, 2013 and 2012, respectively. Due to limited operating activity our advertising expense was set at minimum levels. Much of our advertising was done by management through social media sites such as Facebook.
Legal and Professional Expense - Legal and consulting professional expenses (including expenses associated with our filings with the regulatory agencies) were $7,593 and $22,985 for the three months ended June 30, 2013 and 2012, respectively. These costs include fees relating to professional consulting for information technology services and accounting services and external audit related expenses. Our fees for these services will continue as these services support our operations.
Compensation Costs - Compensation related costs consist of salaries and payroll taxes. These costs were $0 and $1,664 for the three months ended June 30, 2013 and 2012, respectively. Our compensation costs are for our Chief Executive Officer. Our Chief Executive Officer Sean Lyons forgave his accrued salary.
Amortization - Our amortization of intangible assets was $250 and $250 for the three months ended June 30, 2013 and 2012, respectively. The expense is related to the amortization of our website over its useful life.
Other General and Administrative - These costs and expenses include general office expenses. Our general and administrative costs were $859 and $1,123 for the three months ended June 30, 2013 and 2012, respectively. These costs reflect normal operating expenses and other administrative expenses, including, travel and entertainment expenses.
Gain from Extinguishment of accounts payable - These extraordinary gains were from the negotiation of legal and professional fees from previous periods that were written down or written off. Our gain from extinguishment of accounts payable was $44,038 and $0 for the three months ended June 30, 2013 and 2012, respectively.
Derivative expense - The Company has derivative expense related to 1,100,000 warrants issued to an accredited investor in connection with a note and from the fair value of the conversion feature associated with the $100,000 note issued to previous shareholders; the Derivative expense for the three month period ended June 30, 2011 was $86,905 compared to $0 for the three month period ended June 30, 2012. Our derivative income represents a change in the fair value of our derivative warrants. Since derivative financial instruments are initially and subsequently carried at fair values, our derivative income/expense will reflect the volatility in these estimates and assumption changes. See Note 9 Derivative Liabilities of the consolidated financial statements for additional disclosure data.
Net Loss - We have reported net loss of $53,162 and $25,735 during the three months ended June 30, 2013 and 2012, respectively. This net loss is a result of the items discussed in the preceding discussion.
15 Liquidity and Capital Resources The preparation of financial statements in accordance with generally accepted accounting principles contemplates that operations will be sustained for a reasonable period. However, we have incurred operating losses of $53,162 during the three months ended June 30, 2013 and $475,107 from inception (November 23, 2009) through June 30, 2013. In addition, we used cash of $37,613 in support of our operating activities during the six months ended June 30, 2013. As of June 30, 2013, we had cash on hand of $109,329 and a working capital deficit of $313,356. A substantial portion of our working capital is used for accounts payable which is related to professional services consisting mostly of legal and accounting. Since our inception, we have been substantially dependent upon funds raised through the sales of our stock in private placements to sustain our operating activities. Our operating plan will require substantially all available liquid resources and additional financing sources, which we may not be able to achieve, to continue our business operations. These conditions raise substantial doubt about our ability to continue as a going concern.
Our preferred method of raising this necessary capital will be to sell shares through stock offerings. Our Registration Statement on Form S-1 (File No.
333-168139), relating to our initial public offering, was declared effective by the SEC on October 25, 2010. Under the registration statement, the Company sold 95,000 shares of common stock at a price of $0.25 per share resulting in cash proceeds of $23,750 during the year ended December 31, 2011. On June 3, 2011, the Company closed the offering under the registration statement. The Company's focus has been on addressing the regulatory requirements associated with becoming a public company rather than actively offering its shares.
We currently do not have any financing commitments (binding or non-binding), and we cannot give you any assurance that we will be able to secure the additional cash or working capital we may require to continue our operations and fully implement the initial phase of our business plan.
The Company issued shares of common stock valued at approximately $152,555 since inception as compensation to service providers and vendors. However, further funding is not assured for the Company to continue as a going concern for a reasonable period, and, ultimately, we need to generate profitable operations to sustain our business activities. We cannot give any assurances regarding the success of management's plans. Our consolidated financial statements do not include adjustments relating to the recoverability of recorded assets or liabilities that might be necessary should we be unable to continue as a going concern.
Cash Flow from Operating Activities - We used cash of $37,613 in our operating activities during the six months ended June 30, 2013 and $1,442 during the six months ended June 30, 2012.
We recorded a net loss of $59,118 and $30,781 during the six months ended June 30, 2013 and 2012.
Our cash from operating activities also includes cash flow provided by changes in our operating assets and liabilities of $ 65,901 for the six months ended June 30, 2013 compared to cash flow provided by change in our operating assets and liabilities of $16,504 for the six months ended June 30, 2012.
Our inventory was $0 at June 30, 2013 compared to $3,104 at June 30, 2012.
Accounts payable and accrued expenses were $11,880 at June 30, 2013 a decrease of $38,142 from $50,022 at June 30, 2012. This use of funds is due to the timing of payments for services accrued during 2013.
Cash Flow from Investing Activities - We used $0 cash in our investing activities during the three months ended June 30, 2013 and 2012.
We have no commitments for the purchase of property and equipment or other long lived assets.
Cash Flow from Financing Activities -We have been substantially dependent on these types of financings since inception.
In March of 2012 we issued an additional $1,000 short term promissory note to the same fund that issued a $6,000 note. In April of 2012 the previous notes along with a new note for $18,000 were combined into one note totaling $25,000 with a one year term. That fund is managed by our former Chief Executive Officer, Sean Lyons. The notes accrued interest at twelve percent per annum for one year with a default clause of an additional $3,000 added to principal. The note is secured by inventory and domains owned by the Company. On June 24, 2013 the note was paid in full in the amount of $28,968.
Additionally, on September 11, 2012, the Company issued a 8% note in the principal amount of $32,500 to an investment fund. The note was convertible into common stock a discount to the market price of the common stock. The Company also issued to two related parties which were stockholders of the Company 8% notes each in the principal amount $10,000 convertible into common stock at a discount to the market price of the common stock.On June 24, 2013 the note issued to the investment fund was paid in full with cash. The Company issued two additional notes for $700 each during the quarter ended June 30, 2013 to related parties of the Company.
On June 18, 2013, the Company entered into and closed a securities purchase agreement with an accredited investor pursuant to which the Company issued to the accredited investor a promissory note in the principal amount of $200,000 (the "Note"), and five-year warrants to purchase an aggregate of 1,100,000 shares of common stock with an exercise price of $0.01. Repayment of the Note is due June 18, 2014 and bears an interest at the rate of 8% per year, which is payable upon maturity of the note.
16 Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements.
Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. For a description of those estimates, see Note 3, Summary of Significant Accounting Policies, contained in the explanatory notes to our financial statements for the period ended June 30, 2013 and June 30, 2012. On an on-going basis, we evaluate our estimates, including those related to deferred tax assets and valuation allowance, impairment of long-lived assets and fair value of our financial instruments and equity instruments. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
While all of our accounting policies impact the consolidated financial statements, certain policies are viewed to be critical. Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and that require management's most subjective or complex judgments and estimates. Management believes the policies that fall within this category are the policies on revenue recognition, accounts receivable, intangible assets, investments and financial instruments.
Revenue Recognition - Revenue is recognized when sunglasses are shipped. In this quarter we recognized revenue on the sale of sunglasses.
Accounts Receivable - Accounts receivable represent normal trade obligations from customers that are subject to normal trade collection terms, without discounts or rebates. Notwithstanding these collections, we periodically evaluate the collectability of our accounts receivable and consider the need to establish an allowance for doubtful accounts based upon our historical collection experience and specifically identifiable information about our customers.
Inventories - Inventories consist of retail merchandise that is in its finished form and ready for sale to end-user customers. Inventories are recorded at the lower of average cost or market. In-bound freight related costs from our vendors are included as part of the net cost of merchandise inventories. Other costs associated with acquiring, storing and transporting merchandise inventories are expensed as incurred and included in cost of goods sold. Our inventories are acquired and carried for retail sale and, accordingly, the carrying value is susceptible to, among other things, market trends and conditions and overall customer demand.
Impairments - The Company's management evaluates its tangible and definite-lived intangible assets for impairment under Accounting Standards Codification 350 (Intangible Assets) and Accounting Standards Codification 360 (Impairment and Disposals). Our evaluation is a two step process. The first step is to compare our undiscounted cash flows, as projected over the remaining useful lives of the assets, to their respective carrying values. In the event that the carrying values are not recovered by future undiscounted cash flows, as a second step, we compare the carrying values to the related fair values and, if lower, record an impairment adjustment. For purposes of fair value, we generally use replacement costs for tangible fixed assets and discounted cash flows, using risk-adjusted discount rates, for intangible assets.
Financial Instruments - Our financial instruments consist of cash and cash equivalents, inventory, accounts payable and accrued expense. We carry cash and cash equivalents, inventory, accounts payable and accrued expense at historical costs; their respective estimated fair values approximate carrying values because of the short-term nature of these investments.
Loss Per Share - The Company uses the guidance set forth under FASB Topic Accounting Standards Codification 260 (Earnings Per Share) for calculating the basic and diluted loss per share. Basic loss per share is computed by dividing loss by the weighted average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential shares had been issued and if the additional shares were dilutive. Common equivalent shares are excluded from the computation of net loss per share if they would be anti-dilutive. The Company has no potentially dilutive securities for the period ended June 30, 2013 and June 30, 2012.
Income Taxes - Income taxes are accounted for using the liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis, using currently enacted tax rates. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
17 Share-Based Compensation - We apply the grant-date fair value method to our share-based payment arrangements with employees under the rules provided in Accounting Standards Codification 718 (Accounting for Share-Based Payments) and Staff Accounting Bulletin 107. Share-based compensation cost for employees is measured at the grant date fair value based on the value of the award and is recognized over the requisite service period, which is usually the vesting period for employees. For share-based payment transactions with parties other than employees, we apply Accounting Standards Codification 505-50 (Equity Based Payments to Non-Employees). These non-employee services are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for valuing share-based payments made to non-employees is the earlier of the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or the date at which the counterparty's performance is complete. Share-based payments to non-employees are recorded at fair value on the measurement date and reflected in expense over the requisite service period.
Recent Accounting Pronouncements Intedfinite-livied Intangible Assets In July 2012, the FASB issued an accounting standard update intended to simplify how an entity test indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This accounting standard update is effective for Shades Holdings beginning in the first quarter of fiscal 2014 and is not expected to have an impact on the Company's consolidated statements.
Reporting of Amounts Reclassified out of Accumulated Other Comprehensive IncomeIn February 2013, the FASB issued an accounting standard update to require reclassification adjustments for other comprehensive income to be present either in the financial statements or in the notes to the financial statements. This account standard update is effective for Shades Holdings beginning in the first quarter of fiscal 2014, at which time the Company will include the required disclosures, if required.
Cumulative Translation Adjustment In March 2013, the FASB issued an accounting standard update requiring an entity to release into net income the entire amount of a cumulative translation adjustment related to its investment in a foreign entity when as a parent it either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. This accounting standard update is effective for Shades Holdings beginning in the first quarter of fiscal 2014 and is not expected to have an impact of the Company's consolidated financial statements.
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