Attached files
file | filename |
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EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - FUND.COM INC. | f10q0909ex31i_fund.htm |
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - FUND.COM INC. | f10q0909ex32i_fund.htm |
EX-32.2 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - FUND.COM INC. | f10q0909ex32ii_fund.htm |
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - FUND.COM INC. | f10q0909ex31ii_fund.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September
30, 2009
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For the
transition period from _________ to _________
Commission
file number 001-34027
FUND.COM
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
30-0284778
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employee Identification No.)
|
14
Wall Street, 20th
Floor, New York, New York 10005
(Address
of principal executive offices)
(212) 618-1633
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days.
Yes
x No o
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
o No o
Indicate
by check mark whether the registrant is a large accelerated filer, 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.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act)
Yes
o
No x
FUND.COM INC.
FORM
10-Q
INDEX
PAGE
|
|||
PART I
|
FINANCIAL
INFORMATION
|
F-1 to F-19
|
|
Item
1.
|
Consolidated
Balance Sheets for the period ending September 30, 2009
(unaudited) and December 31, 2008 (audited)
|
F-1
|
|
Consolidated
Statements of Operations for the three and nine months ending September
30, 2009 and 2008 (unaudited) and for the period September 20, 2007
(inception) through September 30, 2009
|
F-2
|
||
Consolidated
Statements of Cash Flows for the nine months ending September 30, 2009 and
2008 (unaudited) and for the period September 20, 2007 (inception) through
September 30, 2009
|
F-3
|
||
Notes
to Unaudited Consolidated Financial Statements
|
F-4
to F-19
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
1
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
15
|
|
Item
4T.
|
Controls
and Procedures
|
15
|
|
PART II
|
OTHER
INFORMATION
|
18
|
|
Item
1.
|
Legal
Proceedings
|
18
|
|
Item
1A.
|
Risk
Factors
|
18
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
18
|
|
Item
3.
|
Defaults
on Senior Securities
|
19
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
19
|
|
Item
5.
|
Other
Information
|
20
|
|
Item
6.
|
Exhibits
|
20
|
|
Signatures
|
21
|
ITEM
1. FINANCIAL STATEMENTS
FUND.COM
INC.
|
||||||||
(A
Development Stage Company)
|
||||||||
CONSOLIDATED
BALANCE SHEETS
|
||||||||
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND
|
||||||||
THE
YEAR ENDED DECEMBER 31, 2008
|
||||||||
September
30, 2009
|
December
31, 2008
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
|
$ | 602,143 | $ | 158,083 | ||||
Accounts
receivable
|
200 | - | ||||||
Prepaid
expenses
|
106,000 | - | ||||||
Total
current assets
|
708,343 | 158,083 | ||||||
Property,
plant and equipment, net
|
4,555 | 122 | ||||||
Intangible
Assets, net
|
9,999,500 | 9,999,500 | ||||||
Investments
|
22,448,333 | - | ||||||
Certificate
of Deposit
|
- | 21,138,333 | ||||||
Advances
on behalf of minority shareholder
|
379,955 | 106,333 | ||||||
TOTAL
ASSETS
|
$ | 33,540,686 | $ | 31,402,371 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY:
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 1,631,137 | $ | 1,085,210 | ||||
Accrued
payroll
|
394,013 | - | ||||||
Accrued
interest
|
64,797 | - | ||||||
Advances
from shareholders
|
- | 23,580 | ||||||
Notes
Payable
|
2,753,614 | 443,000 | ||||||
Total
current liabilities
|
4,843,561 | 1,551,790 | ||||||
TOTAL
LIABILITIES
|
4,843,561 | 1,551,790 | ||||||
STOCKHOLDERS'
EQUITY:
|
||||||||
Preferred
stock, 10,000,000 shares authorized, none issued and
outstanding
|
- | - | ||||||
Class
A Common stock, $0.001 par value, 100,000,000 shares
|
||||||||
authorized;
44,087,335 shares issued and outstanding
|
44,087 | 44,087 | ||||||
Class
B Common stock, $0.001 par value, 10,000,000 shares
|
||||||||
authorized;
6,387,665 shares issued and outstanding
|
6,388 | 6,388 | ||||||
Additional
paid-in-capital
|
35,046,258 | 33,492,056 | ||||||
Accumulated
deficit during the Development Stage
|
(6,399,608 | ) | (3,691,950 | ) | ||||
Total
stockholders' equity
|
28,697,125 | 29,850,581 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 33,540,686 | $ | 31,402,371 | ||||
F-1
FUND.COM
INC.
|
||||||||||||||||||||
(A
Development Stage Company)
|
||||||||||||||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||||||||||
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 AND
|
||||||||||||||||||||
FOR
THE PERIOD SEPTEMBER 20, 2007 (INCEPTION) THROUGH SEPTEMBER 30,
2009
|
||||||||||||||||||||
Three
Months
|
Three
Months
|
Nine
Months
|
Nine
Months
|
September
20, 2007
|
||||||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
(Inception)
through
|
||||||||||||||||
September
30, 2009
|
September
30, 2008
|
September
30, 2009
|
September
30, 2008
|
September
30, 2009
|
||||||||||||||||
Revenue
|
$ | 200,000 | $ | - | $ | 220,267 | $ | - | $ | 220,267 | ||||||||||
|
||||||||||||||||||||
Costs
of revenue
|
- | - | - | - | - | |||||||||||||||
Gross
profit
|
200,000 | - | 220,267 | - | 220,267 | |||||||||||||||
Operating
expense
|
1,606,879 | 1,265,268 | 3,915,967 | 3,029,314 | 8,854,854 | |||||||||||||||
Loss
from operations before interest income and
|
||||||||||||||||||||
provision
for (benefit from) income tax
|
(1,406,879 | ) | (1,265,268 | ) | (3,695,700 | ) | (3,029,314 | ) | (8,634,587 | ) | ||||||||||
Unrealized
Loss on investments
|
(40,000 | ) | 0 | (40,000 | ) | 0 | (40,000 | ) | ||||||||||||
Other
income
|
3,500 | - | 3,500 | - | 5,254 | |||||||||||||||
Interest
income
|
250,687 | 250,649 | 750,920 | 750,937 | 1,889,963 | |||||||||||||||
Income
tax expense
|
- | - | - | - | (193 | ) | ||||||||||||||
214,187 | 250,649 | 714,420 | 750,937 | 1,855,024 | ||||||||||||||||
Minority
interest
|
110,472 | 10,934 | 273,622 | 39,484 | 379,955 | |||||||||||||||
Net
loss
|
(1,082,220 | ) | (1,003,685 | ) | (2,707,658 | ) | (2,238,893 | ) | (6,399,608 | ) | ||||||||||
Net
loss per common share - basic and diluted (Class A &
B)
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.12 | ) | |||||
Weighted
average number of common shares outstanding:
|
||||||||||||||||||||
during
the period - basic and diluted (Class A & B)
|
50,475,000 | 40,437,665 | 50,475,000 | 40,437,665 | 50,475,000 | |||||||||||||||
F-2
FUND.COM
INC.
|
||||||||||||
(A
Development Stage Company)
|
||||||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 AND
|
||||||||||||
FOR
THE PERIOD SEPTEMBER 20, 2007 (INCEPTION) THROUGH SEPTEMBER 30,
2009
|
||||||||||||
Nine
Months
|
Nine
Months
|
September
20, 2007
|
||||||||||
Ended
|
Ended
|
(Inception)
through
|
||||||||||
September
30, 2009
|
September
30, 2008
|
September
30, 2009
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
Net
loss
|
$ | (2,707,658 | ) | $ | (2,179,668 | ) | $ | (6,399,608 | ) | |||
Adjustments
to reconcile net loss to net cash
|
||||||||||||
used
in operating activities:
|
||||||||||||
Compensation
recognized under stock incentive plan
|
1,554,202 | 962,188 | 3,435,169 | |||||||||
Minority
interest
|
(273,622 | ) | - | (379,955 | ) | |||||||
Writedown
of investment
|
40,000 | - | 40,000 | |||||||||
Changes
in assets and liabilities:
|
||||||||||||
Increase
in accounts receivable
|
(200 | ) | - | (200 | ) | |||||||
Increase
in prepaid expenses
|
(106,000 | ) | - | (106,000 | ) | |||||||
Increase
in accounts payable
|
545,927 | 567,624 | 1,631,136 | |||||||||
Increase
in accrued payroll
|
394,013 | - | 394,013 | |||||||||
Increase
in accrued interest
|
64,797 | - | 64,797 | |||||||||
Accrued
interest from certificate of deposit
|
1,138,333 | (750,000 | ) | - | ||||||||
Net
cash used in operating activities
|
649,792 | (1,399,856 | ) | (1,320,648 | ) | |||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Purchase
of Property, Plant and Equipment
|
(4,433 | ) | - | (4,555 | ) | |||||||
Certificate
of deposit
|
20,000,000 | - | - | |||||||||
Investment
in entities
|
(22,488,333 | ) | (22,488,333 | ) | ||||||||
Purchase
of intangible asset
|
- | - | (9,999,500 | ) | ||||||||
Net
cash used in investing activities
|
(2,492,766 | ) | - | (32,492,388 | ) | |||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
Proceeds
from the sale of common stock
|
- | 950,000 | 31,661,565 | |||||||||
Proceeds
from Notes Payable
|
2,310,614 | - | 2,753,614 | |||||||||
Advances
from shareholders
|
- | - | 77,150 | |||||||||
Repayment
of shareholders advances
|
(23,580 | ) | (53,570 | ) | (77,150 | ) | ||||||
Net
cash provided by financing activities
|
2,287,034 | 896,430 | 34,415,179 | |||||||||
INCREASE
(DECREASE) IN CASH
|
444,060 | (503,426 | ) | 602,143 | ||||||||
CASH,
BEGINNING OF YEAR
|
158,083 | 603,558 | - | |||||||||
CASH,
END OF PERIOD
|
$ | 602,143 | $ | 100,132 | $ | 602,143 | ||||||
Supplemental
Disclosures
|
||||||||||||
Cash
paid during the year for interest
|
$ | - | $ | - | $ | - | ||||||
Cash
paid during the year for taxes
|
$ | - | $ | - | $ | - | ||||||
Supplemental
disclosure of non-cash financing activities
|
||||||||||||
Compensation
recognized under stock incentive plan
|
$ | 1,554,202 | $ | 962,188 | $ | 3,435,169 | ||||||
F-3
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
NOTE 1 –
ORGANIZATION
The
consolidated financial statements of Fund.Com Inc. (the “Company”) include the
accounts of its wholly owned subsidiaries, Fund.com Online Technologies Inc.
(“FOT”), Fund.com Managed Products Inc. (“FMP”), Fund.com Capital Inc. (“FC”),
Whyte Lyon Socratic Inc. (“WLS”) and its majority owned subsidiary,
AdvisorShares Investments, LLC (“AdvisorShares”). The year end for
the Company and its subsidiaries is December 31.
On
September 20, 2007, the Company was incorporated in the state of
Delaware. The Company is in its development stage and has not begun
the process of operating this business. The Company is still in the
process of researching and developing its business and raising
capital.
On
September 27, 2007, FOT was incorporated in the state of Delaware. FOT is a
wholly owned operating subsidiary of the Company and was established to acquire
the domain name “fund.com” and other related intellectual property and
assets. The subsidiary will be responsible for operating the
Company’s internet properties.
On
September 27, 2007, FMP was incorporated in the state of
Delaware. FMP is a wholly owned operating subsidiary of the Company
that focuses on asset management advisory services and related
products.
On
September 27, 2007, FC was incorporated in the state of Delaware. FC
is a wholly owned operating subsidiary of FMP that will serve as an investment
vehicle for the purposes of making active (non-passive) investments in other
financial institutions, fund management companies or, in certain instances,
products offered or managed by either.
On
October 12, 2006, AdvisorShares was incorporated in the state of
Delaware. AdvisorShares is a developer of proprietary exchange traded
funds, also known as ETFs, with a focus on “actively managed” ETFs.
On June
1, 2009, WLS was incorporated in the state of New York. WLS is a
developer of online education programs for investors, debtors and
professionals
Change of
name
On
January 8, 2008, the Company and its subsidiaries changed their names to the
following:
To:
|
From:
|
|
Meade
Technology Inc.
|
Fund.com
Inc.
|
|
Meade
Online Technologies Inc.
|
Fund.com
Online Technologies Inc.
|
|
Meade
Managed Products Inc.
|
Fund.com
Managed Products Inc.
|
|
Meade
Capital Inc.
|
Fund.com
Capital Inc.
|
F-4
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These
financial statements and related notes are presented in accordance with
accounting principles generally accepted in the United States of America.
Significant accounting policies are as follows:
Basis of
Presentation
The
Company has not produced any significant revenue from its principal business and
is a development stage company as defined by the Accounting Standards
Codification (ASC) 915 Development Stage Entities.
The
accompanying unaudited interim condensed consolidated financial statements of
the Company, and the notes thereto have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
These condensed consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008. The interim financial information contained herein is not
certified or audited; it reflects all adjustments (consisting of only normal
recurring accruals) which are, in the opinion of management, necessary for a
fair statement of the operating results for the periods presented, stated on a
basis consistent with that of the audited financial statements.
The
results of operations for the nine months ended September 30, 2009 are not
necessarily indicative of annual results. The Company manages its business as
one reportable segment.
Principles of
Consolidation
The
consolidated financial statements include the accounts of Fund.com Inc. and its
subsidiaries. All material intercompany accounts and transactions are
eliminated in consolidation.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. These estimates and assumptions also affect
the reported amounts of revenues, costs and expenses during the reporting
period. Management evaluates these estimates and assumptions on a
regular basis. Actual results could differ from those
estimates.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 605 Revenue
Recognition which established that revenue can be recognized when
persuasive evidence of an arrangement exists, the product has been shipped, all
significant contractual obligations have been satisfied and collection is
reasonably assured.
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash and cash
equivalents are defined to include cash on hand and cash in the
bank.
Certificate of
Deposit
On
November 9, 2007, the Company deposited $20,000,000 into a fixed Certificate of
Deposit with an interest rate of 5.00% per annum, for a term of three
years. Accrued interest of $500,000 and $500,000 has been recorded
for the six months ended June 30, 2009 and 2008,
respectively. Pursuant to a securities purchase agreement dated
September 24, 2009 which the Company entered into with Vensure Employer
Services, Inc., the rights were assigned to receive payments under the
Certificate of Deposit to Vensure, effective as of September 29, 2009 for
certain consideration. In October 2009, Global Bank of Commerce
advised the Company of its intention to exercise its contractual rights to
exchange the certificate of deposit for a 10 year 6.5% annuity contract issued
by a third party, and on November 2, 2009 Vensure agreed to accept such annuity
contract in lieu of the certificate of deposit.
F-5
FUND.COM INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
Investments
The
Company’s investments consist of marketable equity securities. All
investments are initially recorded at cost. After initial
recognition, investments, which are classified as fair value through income, are
measured at fair value.
For
investments that are actively traded in organized financial markets, fair value
is determined by reference to stock exchange bid market prices at the close of
business on the balance sheet date.
All
marketable security transactions are recognized on the trade
date. Fair value and realized gains and losses adjustments are
recorded in the statement of operations.
Advertising
Costs
All
advertising costs are charged to expense as incurred. There was no advertising
expense for the nine months ended September 30, 2009 and 2008.
Research and
Development
Costs are
expensed as incurred. There were no research and development expense
for the nine months ended September 30, 2009 and 2008.
Property and
Equipment
Property
and equipment is recorded at cost and depreciated over the estimated useful
lives of the assets using principally the straight-line method. When items are
retired or otherwise disposed of, income is charged or credited for the
difference between net book value and proceeds realized
thereon. Ordinary maintenance and repairs are charged to expense as
incurred, and replacements and betterments are capitalized. The range
of estimated useful lives to be used to calculate depreciation for principal
items of property and equipment are as follow:
Asset
Category
|
Depreciation/
Amortization
Period
|
|
Furniture
and Fixture
|
3
Years
|
|
Office
equipment
|
3
Years
|
|
Leasehold
improvements
|
5
Years
|
Income
Taxes
Deferred
income taxes are recognized based on the provisions of ASC 740 Income Taxes for
the tax consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Earnings Per Share
Basic
earnings per share is computed by dividing net income (loss) available to common
shareholders by the weighted average number of common shares outstanding during
the reporting period. Diluted earnings per share reflects the potential dilution
that could occur if stock options and other commitments to issue common stock
were exercised or equity awards vest resulting in the issuance of common stock
that could share in the earnings of the Company. Common shareholders
include both Class A and Class B as the holders of Class A common stock shall be
entitled to receive, on a pari passu basis with the holders of Class B common
stock, if, as and when declared from time to time by the Board of Directors out
of any assets of the Company legally available therefor, such dividends as may
be declared from time to time by the Board of Directors.
Fair Value of Financial
Instruments
The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties other than in a
forced sale or liquidation. The carrying amounts of financial
instruments, including cash, accounts payable and accrued expenses approximate
fair value because of the relatively short maturity of the
instruments.
F-6
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
Accounting for the
Impairment of Long-Lived Assets
The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. It is reasonably possible that these assets could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to be
generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of assets exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to
sell.
During
the fourth quarter of 2008, the Company tested the carrying value of its
intangible assets for impairment. The results of the tests indicated
that the carrying value of the intangible assets was not impaired as of December
31, 2008. The Company will again test the carrying value for
impairment as of December 31, 2009.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with ASC 718
Compensation – Stock Compensation.
The ASC
provides that instruments that
were originally issued as employee compensation and
then modified, and that modification is made to the terms of the
instrument solely to reflect an
equity restructuring that occurs when
the holders are no longer employees, then no change in the
recognition or the measurement (due to a change
in classification) of those instruments will result
if both of the following conditions are met: (a) there is no increase in fair
value of the award (or the ratio of intrinsic value to the exercise
price of the award is preserved, that is, the holder is made whole),
or the antidilution provision is not added to the terms of the award
in contemplation of an
equity restructuring; and (b) all holders of the same class of
equity instruments (for example, stock options) are treated in the same
manner.
Accounting
Standards Updates
In June
2009, the Financial Accounting Standards Board (FASB) issued its final Statement
of Financial Accounting Standards (SFAS) No. 168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles a Replacement of FASB Statement No. 162”.
SFAS No. 168 made the FASB Accounting Standards Codification (the
Codification) the single source of U.S. GAAP used by nongovernmental
entities in the preparation of financial statements, except for rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws, which are sources of authoritative
accounting guidance for SEC registrants. The Codification is meant to simplify
user access to all authoritative accounting guidance by reorganizing
U.S. GAAP pronouncements into roughly 90 accounting topics within a
consistent structure; its purpose is not to create new accounting and reporting
guidance. The Codification supersedes all existing non-SEC accounting and
reporting standards and was effective for the Company beginning July 1,
2009. Following SFAS No. 168, the Board will not issue new standards
in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts; instead, it will issue Accounting Standards Updates (ASU). The FASB
will not consider ASUs as authoritative in their own right; these updates will
serve only to update the Codification, provide background information about the
guidance, and provide the bases for conclusions on the change(s) in the
Codification.
In August
2009, the FASB issued ASU 2009-05 which includes amendments to Subtopic 820-10,
“Fair Value Measurements and Disclosures—Overall”. The update provides
clarification that in circumstances, in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the techniques provided for in this
update. The amendments in this ASU clarify that a reporting entity is not
required to include a separate input or adjustment to other inputs relating to
the existence of a restriction that prevents the transfer of the liability and
also clarifies that both a quoted price in an active market for the
identical liability at the measurement date and the quoted price for the
identical liability when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required are Level 1 fair value
measurements. The guidance provided in this ASU is effective for the first
reporting period, including interim periods, beginning after issuance. The adoption of
this standard did not have a material impact on the Company’s consolidated
financial position and results of operations as of September 30, 2009 as the
Company’s material investment was made effective September 29, 2009 just one day
prior to the end of the quarter. This standard may have a material
impact in future reporting periods.
F-7
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
In
September 2009, the FASB issued ASU 2009-06, Income Taxes (Topic 740),
”Implementation Guidance on Accounting for Uncertainty in Income Taxes and
Disclosure Amendments for Nonpublic Entities”, which provides implementation
guidance on accounting for uncertainty in income taxes, as well as eliminates
certain disclosure requirements for nonpublic entities. For entities
that are currently applying the standards for accounting for uncertainty in
income taxes, this update shall be effective for interim and annual periods
ending after September 15, 2009. For those entities that have deferred the
application of accounting for uncertainty in income taxes in accordance with
paragraph 740-10-65-1(e), this update shall be effective upon adoption of those
standards. The adoption of this standard is not expected to have an impact on
the Company’s consolidated financial position and results of operations since
this accounting standard update provides only implementation and disclosure
amendments.
In
September 2009, the FASB has published ASU No. 2009-12, “Fair Value Measurements
and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent)”. This ASU amends Subtopic 820-10,
“Fair Value Measurements and Disclosures – Overall”, to permit a reporting
entity to measure the fair value of certain investments on the basis of the net
asset value per share of the investment (or its equivalent). This ASU also
requires new disclosures, by major category of investments including the
attributes of investments within the scope of this amendment to the
Codification. The guidance in this Update is effective for interim and annual
periods ending after December 15, 2009. Early application is permitted. The adoption of this
standard is not expected to have a material impact on the Company’s consolidated
financial position and results of operations.
In
October 2009, the FASB has published ASU 2009-13, “Revenue Recognition (Topic
605)-Multiple Deliverable Revenue Arrangements”, which addresses the accounting
for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than as a combined unit.
Specifically, this guidance amends the criteria in Subtopic 605-25, “Revenue
Recognition-Multiple-Element Arrangements”, for separating consideration in
multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c)
estimates. This guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method and also
requires expanded disclosures. The guidance in this update is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is permitted.
The adoption of this standard is not expected to have any impact on the
Company’s consolidated financial position and results of
operations.
In
October 2009, the FASB has published ASU 2009-14, “Software (Topic 985)-Certain
Revenue Arrangements that Include Software Elements” and changes the accounting
model for revenue arrangements that include both tangible products and software
elements. Under this guidance, tangible products containing software components
and nonsoftware components that function together to deliver the tangible
product's essential functionality are excluded from the software revenue
guidance in Subtopic 985-605, “Software-Revenue Recognition”. In addition,
hardware components of a tangible product containing software components are
always excluded from the software revenue guidance. The guidance in
this ASU is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. Early
adoption is permitted. The adoption of this standard is not expected
to have any impact on the Company’s consolidated financial position and results
of operations.
Other
ASUs not effective until after September 30, 2009, are not expected to have
a significant effect on the Company’s consolidated financial position or results
of operations.
NOTE 3 –
INTANGIBLE ASSET
Intellectual Property
Asset:
During
2007, the Company acquired 24 domain names including “fund.com” and one
trademark for a total cost of $9,999,950. The Company has determined that
the intangible assets have an indefinite live but are subject to periodic
impairment assessment as stated in ASC 350 Intangibles – Goodwill and
Other.
NOTE 4 -
FAIR VALUE
The
Company records fair value of monetary and nonmonetary instruments in accordance
with ASC 820 Fair Value Measurements and Disclosures The ASC
establishes a framework for measuring fair value, establishes a fair value
hierarchy based on inputs used to measure fair value, and expands disclosure
about fair value measurements. Adopting this statement has not had an effect on
the Company’s financial condition, cash flows, or results of
operations.
In
accordance with ASC 820, the financial instruments have been categorized, based
on the degree of subjectivity inherent in the valuation technique, into a fair
value hierarchy of three levels, as follows:
F-8
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
•
|
Level
1: Inputs are unadjusted, quoted prices in active
markets for identical instruments at the measurement date (e.g., U.S.
Government securities and active exchange-traded equity
securities).
|
•
|
Level
2: Inputs (other than quoted prices included within
Level 1) that are observable for the instrument either directly or
indirectly (e.g., certain corporate and municipal bonds and certain
preferred stocks). This includes: (i) quoted prices for similar
instruments in active markets, (ii) quoted prices for identical or
similar instruments in markets that are not active, (iii) inputs
other than quoted prices that are observable for the instruments, and
(iv) inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
|
||
•
|
Level
3: Inputs that are unobservable. Unobservable inputs
reflect the reporting entity’s subjective evaluation about the assumptions
market participants would use in pricing the financial instrument (e.g.,
certain structured securities and privately held
investments).
|
The
composition of the investment portfolio as of September 30, 2009
was:
Investment
|
Level
1
|
Level
2
|
Level
3
|
Total
|
Cost
|
||||||||||
Fair
|
Fair
|
Fair
|
Fair
|
||||||||||||
Value
|
Value
|
Value
|
Value
|
||||||||||||
Equity
securities
|
$
|
460,000
|
-
|
$
|
21,888,333
|
$ |
22,348,333
|
$ |
22,388,333
|
Our
portfolio valuations that are classified as Level 1 in the above table were
based on market prices as of the valuation date and Level 3 in the above table
are priced using subjective evaluation about the assumptions market participants
would use in pricing the financial instrument.
Based on
the criteria described above, the Company believes that the current level
classifications are appropriate based on the valuation techniques used and that
our fair values accurately reflect current market assumptions in the
aggregate.
NOTE 5 –
INVESTMENTS
Investment in Vensure
Employer Services, Inc.
On
September 24, 2009, the Company and Vensure Employer Services, Inc. (“Vensure”)
entered into a securities purchase agreement (the “Venture Purchase Agreement”).
Consummation of the transactions contemplated by the Vensure Purchase Agreement
occurred on November 2, 2009; provided, that for all purposes the Closing Date
and delivery of all closing documents and instruments were deemed to have
occurred effective at 5:00 p.m. on September 29, 2009.
Under the
terms of the Venture Purchase Agreement, the Company agreed to sell and assign
to Vensure, its right to receive payments under the original $20.0 million
certificate of deposit issued in November 2007 by Global Bank in exchange for
consideration consisting of (a) 218,883.33 shares of Series A participating
convertible preferred stock of Vensure (the “Series A Preferred Stock”), and (b)
a seven year content agreement (the “Content Agreement”) among Vensure, Vensure
Retirement Administration, Inc., a whole owned subsidiary of Vensure, the
Company and Whyte Lyon Socratic, Inc. (“Whyte Lyon”). In October 2009, the
Company was orally advised by Global Bank of its intention to elect to exercise
its contractual rights to exchange and swap its obligations under the
certificate of deposit for a ten year 6.5% annuity contract issued by a third
party. The Company notified Vensure of the banks election (which was
subsequently confirmed in writing), and on November 2, 2009 Vensure agreed to
accept such annuity contract in lieu of the certificate of deposit.
F-9
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
The
Vensure Series A Preferred Stock:
· has a
liquidation value of $100 per share or $21,888,333 as to all 218,883.33
shares;
· is senior
to all other capital stock of Vensure;
· pays
dividends as and when declared by the board of directors of Vensure on its
common stock;
·on a
“sale of control” (as defined) of Vensure to any unaffiliated third party, in
addition to receipt of the first $21,888,333 of consideration payable in respect
of Vensure capital stock, participates with the holders of the common stock to
the extent of 25% of all additional consideration paid or payable in excess of
the maximum $21,888,333 liquidation value of the Series A Preferred;
and
· is
convertible at any time after September 30, 2012 upon 61 days prior notice to
Vensure into either 25% of the common stock of Vensure; provided, that the board
of directors of Vensure may (subject to the Series A Preferred stockholder’s
right to rescind its conversion notice) require that the shares of Series A
Preferred Stock convert into a maximum of 49.5% of the capital stock of Vensure
Retirement Administration, a wholly-owned subsidiary of
Vensure.
Under the
terms of a related stockholders agreement among the Company, Vensure and the
Vensure stockholders, the Company is entitled to designate two members of the
board of directors of Vensure. The stockholders agreement also contains
customary buy/sell and related provisions in the event of sales of any shares of
Vensure. The Series A Preferred Stock also contains certain
protective provisions that requires the approval of the Company or its designees
on the board of directors of Vensure before Vensure may implement or commit to
certain actions, including:
· the
issuance of securities senior to or on a par with the Series A Preferred
Stock;
· the
issuance of any additional capital stock of Vensure;
· any
change it’s the fundamental nature of its business;
· the
acquisition of the assets or securities of other parties; or
· the sale
or pledge of substantial assets; or
· any
material changes in compensation of senior executive officers.
In
addition to its receipt of the Series A Preferred Stock, the Company has
received the benefits of the Content Agreement. Under the terms of
the Content Agreement, the Company and Whyte Lyon will provide all existing and
future employees, co-employees and other associates (collectively, the “End
Users”) of Vensure, its subsidiaries and affiliates, as well as Vensure clients
(collectively, the “Venture Group”) with access to on-line educational content
to be streamed to such End-Users from the website(s) of the Vensure
Group. Such Content, to be designated and branded as “Vensure University,” “The Money School” or other
brand name acceptable to the parties to the Content Agreement, will include up
to 84 five to seven minute educational course segments on personal finance
management, financial products and other related financial topics as are
approved by Vensure and the Company. Course segments may also include
safety training, health care and other topics of interest to workers and the
work place.
In
consideration for providing the Content, the Vensure Group is required to pay
the Company and its Whyte Lyon subsidiary an access fee of $19.95 per month (the
“Monthly Access Fee”) for each End-User who has access to the Content from the
website(s) of the Venture Group, whether or not such End-User actually clicks on
such website and views the Content. Based on the current Vensure
employment complement of approximately 4,000 employees or co-employees, this
represents approximately $80,000 a month in anticipated revenues to the Company
from such Monthly Access Fee as soon as the initial Content is
provided. The Company and its subsidiary have agreed to deliver
approximately three course segments during each calendar quarter commencing with
the quarter ending March 31, 2010 and ending December 31, 2016. Following
October 2012, the $19.95 Monthly Access Fee is subject to renegotiation at the
option of Vensure.
The
Company’s board of directors considered a number of factors in exercising its
business judgment to consummate the investment in Vensure, including, among
other things, the likelihood that the Global Bank certificate of deposit would
not be paid on its November 2010 maturity date but would be exchanged for a
long-term investment instrument; the board’s belief in the attractiveness of
investing in the Vensure business which we believe is rapidly growing; and the
board’s belief that significant revenues are expected to be received by our
Company in 2010 and thereafter from the Content Agreement with
Vensure. However, there can be no assurance that our Company’s
decision to invest in Vensure will ultimately prove profitable or in the best
interests of the Company or its shareholders.
The
Company’s investments consisted of the following as of September 30,
2009:
Fair
|
Original
|
Realized
|
Unrealized
|
|||||||
Investment
|
Value
|
Cost
|
Gain
(Loss)
|
Gain
(Loss)
|
Total
|
|||||
Equity
securities
|
$
|
22,348,333
|
$
|
22,388,333
|
$
|
-
|
$
|
(40,000)
|
$
|
22,348,333
|
NOTE 6 –
EQUITY
Initial
Capitalization
During
2007, the issuances of Class A common stock consisted of the
follows:
·
18,700,000 shares common stock to its founders totaling
$1,564;
|
·
|
5,000,000
shares common stock and 2,500,000 shares preferred series A through
private placement for $2.00 per unit totaling $10,000,000;
and
|
|
·
|
10,350,000
shares common stock through a second private placement for $2.00 per share
totaling $20,700,000.
|
F-10
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
Merger
On
January 15, 2008, Fund.com Inc. merged (the “Merger”) with and into Eastern
Services Holdings, Inc. (“Eastern”) pursuant to an Agreement and Plan of Merger,
dated as of January 15, 2008 (the "Agreement"). In connection with the merger
Eastern Services Holdings, Inc. changed its name to Fund.com Inc. (the
"Surviving Corporation"). Pursuant to the Agreement, each share of
common stock, par value $0.00001 per share of Fund (“Fund Common Stock”) was
converted into the right to receive .1278 validly issued, fully paid and
non-assessable shares of Class A Common Stock of the Surviving Corporation;
provided, however, if a holder of Fund Common Stock also held Series A Preferred
Stock, par value $.001 per share, of Fund (“Fund Preferred Stock”) then each
share of Fund Common Stock held by such holder was converted into the right to
receive .1278 validly issued, fully paid and non-assessable shares of Class
B Common Stock (and Fund Preferred Stock held by such holder was
cancelled). Also pursuant to the Agreement, each share of common
stock, $0.001 par value per share, of Eastern was converted into the right to
receive one validly issued, fully paid and non-assessable share of Class A
Common Stock of the Surviving Corporation. Holders of such shares were
entitled to receive the previously declared 9-for-1 stock dividend payable to
holders of record as of January 15, 2008.
As a
result, at closing (and giving effect to the stock dividend) the Company
issued an aggregate of 37,112,345 shares of our Class A Common Stock and
6,387,665 shares of our Class B Common Stock to former shareholders of Fund.com
Inc., representing 87% of our outstanding Class A Common Stock and 100% of our
Class B Common Stock following the merger. The merger consideration was
determined as a result of arm’s-length negotiations between the
parties.
Each
share of Class A Common stock has one (1) vote per share. Each share
of Class B Common Stock has ten (10) votes per share. The holders of
Class B Common Stock have the right to convert each share of Class B Common
Stock into one share of Class A Common Stock (adjusted to reflect subsequent
stock splits, combinations, stock dividends and recapitalizations). Subject
to the prior rights of holders of all classes of stock at the time outstanding
having prior rights as to dividends, the holders of Class A Common Stock shall
be entitled to receive, on a pari passu basis with the holders of Class B Common
Stock, if, as and when declared from time to time by the Board of Directors out
of any assets of the Company legally available therefor, such dividends as may
be declared from time to time by the Board of Directors.
Common Shares
Issued
In
connection with a private placement, the Company issued 475,000 shares of its
Class A common stock at $2.00 per share for total proceeds of $950,000 during
2008. No shares have been issued for the six months ended June 30,
2009.
Stock Option
Plan
On
December 27, 2007, the Company adopted the Meade Technologies Inc. 2007
Incentive Compensation Plan. Under this plan, stock options may be
granted to employees, officers, consultants or others who provide services to
the Company. The Plan is administered by the Board. However, the
Board may delegate any or all administrative functions under the Plan otherwise
exercisable by the Board to one or more Committees. The aggregate
number of Shares authorized for issuance as Awards under the original Plan shall
not exceed five million fifty-five thousand (5,055,000)
Shares. However, on April 30, 2009, the Company received majority
shareholder approval to increase the amount of shares able to be granted under
the Plan to ten million (10,000,000) shares. The number of shares,
exercise price, term and vesting are all determined by the Board at the time of
grant.
On
December 27, 2007, 2,076,111 stock options with a purchase price of $2.30 per
share were granted to officers and employees of the Company.
On March
4, 2008, 2,500,000 stock options with a purchase price of $3.50 were granted to
officers, employees and a director of the Company.
On March
28, 2008, 250,000 stock options with a purchase price of $4.00 were granted to a
director of the Company.
On May
16, 2008, 250,000 stock options with a purchase price of $4.00 were granted to a
director of the Company.
Lastly,
on August 6, 2008, 653,000 stock options with a purchase price of $3.25 were
granted to an officer, employee and director of the Company.
The
Black-Scholes method option pricing model was used to estimate fair value as of
the date of grant using the following assumptions:
Risk-Free
|
1.66%
- 4.23%
|
|
Expected
volatility
|
50%-
83%
|
|
Forfeiture
rate
|
10%
|
|
Expected
life
|
4
Years
|
|
Expected
dividends
|
-
|
F-11
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
The
following details stock options for the period ending September 30, 2009 and the
year ending December 31, 2008:
Weighted
|
Weighted
|
|||||||||||||||
Average
|
Average
|
|||||||||||||||
Weighted
|
Remaining
|
Grant
Date
|
||||||||||||||
Average
|
Contractual
|
Fair
|
||||||||||||||
Shares
|
Exercise
Price
|
Term
(Years)
|
Value
|
|||||||||||||
Balance,
December 31, 2007
|
2,076,111 | $ | 2.30 | $ | 0.78 | |||||||||||
Granted
|
3,653,000 | $ | 3.52 | $ | 2.04 | |||||||||||
Exercised
|
- | - | - | |||||||||||||
Canceled
|
- | - | - | |||||||||||||
Forfeited
|
- | - | - | |||||||||||||
Balance,
December 31, 2008
|
5,729,111 | $ | 3.08 | $ | 3.06 | $ | 1.58 | |||||||||
Granted
|
- | - | - | |||||||||||||
Exercised
|
- | - | - | |||||||||||||
Canceled
|
- | - | - | |||||||||||||
Forfeited
|
(1,453,565 | ) | $ | 2.30 | ||||||||||||
Balance,
September 30, 2009
|
4,275,546 | $ | 3.34 | $ | 2.58 | $ | 1.86 | |||||||||
Exercisable,
September 30, 2009
|
2,132,636 | $ | 3.20 | $ | 2.58 | $ | 1.72 |
The
following details stock option vested shares for the period ending September 30,
2009 and the years ending December 31, 2008 and 2007:
Shares
|
|
Balance,
December 31, 2007
|
-
|
Vested
|
-
|
Balance,
December 31, 2008
|
-
|
Vested
|
2,132,636
|
Balance,
September 30, 2009
|
2,132,636
|
Based on the assumptions noted above,
the fair market value of the options issued was valued at $7,952,515.
For the
nine months ended September 30, 2009 and 2008, there was $1,554,202 and
$962,188, respectively, in expense recorded in the Statement of Operations for
stock option grants. There was no expense recorded as of December 31,
2007.
NOTE 7 –
RELATED PARTY TRANSACTIONS
On March
4, 2008, Fund.com Inc. (the “Company”) entered into a Consulting Agreement with
Fabric Group, LLC (“Fabric”). Fabric is wholly-owned and managed by the
chairman, director and former Chief Executive Officer of the
Company. Under the Consulting Agreement, Fabric will receive an
annual base fee of $300,000, in return for strategic consulting services
provided by both the Chairman and the Chief Marketing Officer of the
Company in the areas of business development, product marketing and online
strategy and for performance of other duties as requested from time to time by
the Board. In addition, pursuant to the Consulting
Agreement, Fabric will receive a one time fee of $55,000 for
services previously rendered to the Company. Included in the operating
expenses for the six months ending September 30, 2009 and 2008 are $150,000 and
$205,000, respectively. Included in accounts payable as of June 30, 2009
is $405,000 related to this agreement. This agreement has been
mutually terminated and Fabric has agreed to accept in lieu of payment of
$405,000, a total of 1,928,570 shares equally distributed to Lucas Mann and
Daniel Klaus at 964,285 each.
On March
4, 2008, the Company entered into a Consulting Agreement with MKL Consulting
Ltd. (“MKL”). MKL is wholly-owned and managed by the executive vice
president and a director of the Company. Under the Consulting Agreement, MKL
will receive an annual base fee of $150,000, in consideration for services
provided to the Company as Executive Vice President and for performance of other
duties as requested from time to time by the Board. In addition,
pursuant to the Consulting Agreement, MKL will receive a one-time fee
of $25,000 for services previously rendered to the Company. This agreement
was not renewed and expired on February 28, 2009 under the terms of the
agreement. Included in the operating expenses for the six months
ending September 30, 2009 and 2008 are $25,000 and $112,500,,
respectively. Included in accounts payable as of September 30, 2009, is
$150,000 related to this agreement.
F-12
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
On
November 2, 2009, IP Global sold $623,700 principal amount of its $2,500,000
convertible note to Bleecker Holdings Inc. (“Bleecker”), an entity wholly-owned
by Joseph J. Bianco, our Chairman of the Board, and sold an additional $6,300
principal amount of the note to one other unaffiliated entity. Under the terms
of the sale, each of the purchasers paid an aggregate of $630,000 by delivery of
their 5% recourse notes to IP Global.
NOTE 8 –
LEASES
The
Company presently has no long-term commitments for leases.
NOTE 9 –
INVESTMENT IN SUBSIDIARIES
AdvisorShares Investments,
LLC
On
October 31, 2008, the Company entered into a Purchase and Contribution
Agreement, dated as of October 31, 2008 (the “Purchase and Contribution
Agreement”), with AdvisorShares Investments, LLC (“AdvisorShares”) and the
Managing Member and principal officer of AdvisorShares. Pursuant to
the Purchase and Contribution Agreement, the Company purchased 6,000,000 Units
of AdvisorShares, (representing 60% of the outstanding membership interests of
AdvisorShares) for a purchase price of $4,000,000, with an initial contribution
of $275,000 and up to an additional $3,725,000 being contributed to
AdvisorShares upon the achievement of certain milestones relating to
AdvisorShares’ receiving from the Securities and Exchange Commission (the “SEC”) of its notice
(the “SEC Exemptive
Order”) regarding the approval of the application for exemptive relief
and total assets under management. In connection with our acquisition
of 60% of the equity interests in AdvisorShares, the Company entered into an
Amended and Restated Limited Liability Company Agreement of AdvisorShares, dated
as of October 31, 2008 (the “LLC Agreement”), and was admitted as a member of
AdvisorShares.
Acquisition of Whyte Lyon Socratic,
Inc.
On
October 14, 2009, the Company entered into an agreement with the stockholders of
Whyte Lyon Socratic, Inc., a Delaware corporation, d/b/a “The Institute of Modern
Economy” (“Whyte Lyon”) to acquire 100% of the capital stock of such
corporation in exchange for 500,000 shares of the Company’s common stock, which
the parties valued at $2.00 per share. In addition, the Company will
provide an additional $250,000 of working capital to Whyte
Lyon. Closing of the acquisition of the shares of Whyte Lyon occurred
on November 2, 2009 following consummation of the transactions contemplated by
the Vensure Purchase Agreement; provided, that for all purposes the closing date
and delivery of all closing documents and instruments were deemed to have
occurred effective at 5:00 p.m. on September 29, 2009. Upon
completion of the Company’s acquisition of Whyte Lyon, its principal
stockholder, Joseph J. Bianco, became Chairman of the Board of Directors of the
Company.
NOTE 10 –
NOTES PAYABLE
Working
Capital Loan with IP Global Investors Ltd.
Through
September 30, 2009, we have borrowed an aggregate of $2,288,114 from the
above lending source. Effective May 1, 2009, the Company entered
into a $1.343 million line of credit agreement with IP Global under which the
Company was permitted to receive loans of up to $1,343,000, less $723,000
of prior advances that the Company received from IP Global between October 31,
2008 and April 30, 2009. In consideration for these advances, the Company:
(i) agreed to pay 9% interest on all advances (including the prior advances),
(ii) granted the lender the right to convert the note into our Class A Common
Stock at $0.60 per share (subject to certain adjustments) and (iii) are
obligated to pay certain fees to the lender. Such fees include a
$16,500 per month loan servicing fee which accrues and is payable on the
maturity date of the note, and a CD release fee (to be paid if the lender
arranges for an early payment on our CD with Global Bank of Commerce that
matures November 2010 on terms satisfactory to us), payable in shares of our
class A common stock determined by dividing $1,343,000 by the conversion price
then in effect. All of the Company’s subsidiaries guaranteed payment of the note
and the Company issued IP Global a lien on most of our accounts and our
domain name to secure payment of the Note. Additionally, the Company
agreed to issue IP Global a warrant to purchase that number of shares of our
Class A common stock equal to $1,343,000, divided by an exercise price of $0.60
per shares (subject to certain adjustments, including weighted average
anti-dilution adjustments). No additional loans were advanced under the May 1,
2009 agreement.
F-13
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
Effective
as of August 28, 2009, the Company, and IP Global and Equities Media Acquisition
Corp. Inc., a principal stockholder of the Company, consummated the transactions
under an amended and restated line of credit agreement pursuant to which
such lenders agreed to provide the Company with an increased line
of credit facility which superseded and restated in its entirety the prior
May 2009 maximum $1.343 million credit agreement. Under the terms of
the restated line of credit agreement, the Company is entitled to receive a
maximum of $2.5 million of advances, less an aggregate of $723,000 of
advances made through May 1, 2009 and a total $1,565,114 of additional
advances made subsequent to May 1, 2009 (including the $1,275,000 paid to
AdvisorShares on behalf of the Company through August 18, 2009 and an additional
$150,000 of advances funded through August 28, 2009). The Company
intends to draw down the balance of such credit facility to provide it with
additional working capital. All obligations under the line of credit
agreement have been guaranteed by Fund.com Capital Inc., Fund.com Technologies
Inc. and Fund.com Managed Products Inc., all wholly-owned subsidiaries of the
Company.
The terms
and conditions of the amended and restated line of credit agreement were
negotiated between the parties in July 2009. The advances made and to be made by
the lenders under the line of credit agreement are evidenced by the Company’s 9%
convertible note due August 28, 2010 (one year from the Closing
Date). The note is convertible at any time prior to its
maturity date, at a conversion price of $0.21 per share into shares of Class B
common stock of the Company. The conversion price was based on 90% of the volume
weighted average price ("VWAP") of the Company's Class A Common's Stock, as
traded on the FINRA OTC Bulletin Board for the 30 trading days
immediately prior to July 6, 2009.
As part
of the transactions contemplated by the line of credit agreement, the lenders or
their designees received an option (expiring December 31, 2009) to purchase up
to $5,000,000 of additional shares of Class A common stock of the Company at an
exercise price of $0.21 per share, or approximately 23.8 million shares of
Class A common stock if such purchase option is fully exercised. The price was
also established on the same VWAP calculation. In addition, the Company issued
to the lenders a warrant, expiring July 31, 2012, entitling the holder(s) to
purchase an aggregate of 50% of the number of shares of Class A common stock
that are purchased upon full or partial exercise of the above purchase option,
at an exercise price of $0.315 per share, or 150% of the conversion price of the
line of credit note. The exercise prices of the purchase option and the
warrant are both subject to certain adjustments, including weighted average
anti-dilution adjustments.
As a
further inducement to the lenders to make available the line of credit, Daniel
Klaus and Lucas Mann, two shareholders of the Company and members of the board
of directors at the time, also sold to the lenders or their designees (in equal
amounts) a total of 2,000,000 of their shares of Class A common stock of the
Company at a price of $0.25 per share, payable on the basis of $50,000 in cash
and the $450,000 balance evidenced by two notes of $225,000 each payable in
equal monthly installments through December 31, 2009. In addition,
Messrs. Klaus and Mann each contributed 500,000 of their Company shares to the
lenders, or their designees, for no consideration, and granted the lenders or
their designees an option, exercisable at any time up to December 31, 2009, to
purchase an additional 2,000,000 of their Class A shares for $0.25 per share.
Effective August 28, 2009, Messrs. Daniel Klaus and Lucas Mann terminated their
consulting agreements with the Company and resigned as members of the board of
directors of the Company and its subsidiaries. There was no disagreement or
dispute between Messrs. Klaus and Mann and the Company which led to their
resignation as directors. They also agreed not to sell their remaining shares in
the Company for a period of at least six months.
Management
is currently in the process of evaluating the impact, if any, associated
with the convertible note, option and warrant on the Company’s financial
statements for the nine months ended September 30, 2009. Based upon such
evaluation, management will determine if such impact is material to its
financial position, results of operations and earnings per share for the nine
months ended September 30, 2009. In such event, the Company will amend its
filing as deemed appropriate.
NOTE 11 –
RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
The
Company has restated its financial statements for the period ending December 31,
2009. The nature of these restatements and presentation as
originally filed and as restated are presented below:
Consolidated Balance Sheets
for the years ended December 31, 2008 and December 31, 2009
The
assets included an item “Minority Interest” which has been revised to “Advances
on behalf of minority shareholder” to more properly reflect the
item. No changes to financial information were made.
Consolidated Statement of
Operations for the year ended December 31, 2008 and for the period September 20,
2007 (inception) through December 31, 2007.
The
consolidated statement of operations was revised to in two areas. The
first was to include a column for September 20, 2007 (inception) through
December 31, 2008 which had been omitted in the original
filing. Below is the presentation including the additional
column:
F-14
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
FUND.COM
INC.
|
||||||||||||
(A
Development Stage Company)
|
||||||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||
FOR
THE YEAR ENDED DECEMBER 31, 2008,
|
||||||||||||
SEPTEMBER
20, 2007 (INCEPTION) THROUGH DECEMBER 31, 2007 AND
|
||||||||||||
SEPTEMBER
20, 2007 (INCEPTION) THROUGH DECEMBER 31, 2008
|
||||||||||||
September
20, 2007
|
September
20, 2007
|
|||||||||||
Year
Ended
|
(Inception)
through
|
(Inception)
through
|
||||||||||
December
31, 2008
|
December
31, 2007
|
December
31, 2008
|
||||||||||
Revenue
|
$ | - | $ | - | $ | - | ||||||
|
||||||||||||
Costs
of revenue
|
- | - | - | |||||||||
Gross
profit
|
- | - | - | |||||||||
Operating
expense
|
4,551,545 | 387,781 | 4,939,326 | |||||||||
Loss
from operations before interest income and
|
||||||||||||
provision
for (benefit from) income tax
|
(4,551,545 | ) | (387,781 | ) | (4,939,326 | ) | ||||||
Other
income
|
1,754 | - | 1,754 | |||||||||
Interest
income
|
1,001,021 | 138,461 | 1,139,482 | |||||||||
Income
tax expense
|
- | (193 | ) | (193 | ) | |||||||
1,002,775 | 138,268 | 1,141,043 | ||||||||||
Minority
interest
|
76,520 | 29,813 | 106,333 | |||||||||
Net
loss
|
(3,472,250 | ) | (219,700 | ) | (3,691,950 | ) | ||||||
Net
loss per common share - basic and diluted (Class A &
B)
|
$ | (0.07 | ) | $ | (0.01 | ) | $ | (0.07 | ) | |||
Weighted
average number of shares outstanding:
|
||||||||||||
during
the year - basic and diluted (Class A)
|
43,829,002 | 34,050,000 | 43,829,002 | |||||||||
Weighted
average number of shares outstanding:
|
||||||||||||
during
the year - basic and diluted (Class B)
|
6,387,665 | - | 6,387,665 |
F-15
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
As
originally filed:
FUND.COM
INC.
|
||||||||
(A
Development Stage Company)
|
||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
FOR
THE YEAR ENDED DECEMBER 31, 2008 AND
|
||||||||
FOR
THE PERIOD SEPTEMBER 20, 2007 (INCEPTION) THROUGH DECEMBER 31,
2007
|
||||||||
September
20, 2007
|
||||||||
Year
Ended
|
(Inception)
through
|
|||||||
December
31, 2008
|
December
31, 2007
|
|||||||
Net
loss
|
(3,472,250 | ) | (219,700 | ) | ||||
Net
loss per share - basic and diluted (Class A)
|
$ | (0.08 | ) | $ | (0.01 | ) | ||
Net
loss per share - basic and diluted (Class B)
|
$ | (0.54 | ) | $ | (0.03 | ) | ||
Weighted
average number of shares outstanding:
|
||||||||
during
the year - basic and diluted (Class A)
|
43,829,002 | 34,050,000 | ||||||
Weighted
average number of shares outstanding:
|
||||||||
during
the year - basic and diluted (Class B)
|
6,387,665 | 6,387,665 |
F-16
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
As
revised:
FUND.COM
INC.
|
||||||||||||
(A
Development Stage Company)
|
||||||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||
FOR
THE YEAR ENDED DECEMBER 31, 2008,
|
||||||||||||
SEPTEMBER
20, 2007 (INCEPTION) THROUGH DECEMBER 31, 2007 AND
|
||||||||||||
SEPTEMBER
20, 2007 (INCEPTION) THROUGH DECEMBER 31, 2008
|
||||||||||||
September
20, 2007
|
September
20, 2007
|
|||||||||||
Year
Ended
|
(Inception)
through
|
(Inception)
through
|
||||||||||
December
31, 2008
|
December
31, 2007
|
December
31, 2008
|
||||||||||
Net
loss
|
(3,472,250 | ) | (219,700 | ) | (3,691,950 | ) | ||||||
Net
loss per common share - basic and diluted (Class A &
B)
|
$ | (0.07 | ) | $ | (0.01 | ) | $ | (0.07 | ) | |||
Weighted
average number of shares outstanding:
|
||||||||||||
during
the year - basic and diluted (Class A)
|
43,829,002 | 34,050,000 | 43,829,002 | |||||||||
Weighted
average number of shares outstanding:
|
||||||||||||
during
the year - basic and diluted (Class B)
|
6,387,665 | - | 6,387,665 |
Consolidated Statements of
Cash Flows for the years ended December 31, 2008 and December 31,
2007
The
consolidated statement of cash flows was revised to include a column for
September 20, 2007 (inception) through December 31, 2008 which had been omitted
in the original filing. Below is the presentation including the
additional column:
F-17
FUND.COM
INC.
|
||||||||||||
(A
Development Stage Company)
|
||||||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
FOR
THE YEAR ENDED DECEMBER 31, 2008,
|
||||||||||||
SEPTEMBER
20, 2007 (INCEPTION) THROUGH DECEMBER 31, 2007 AND
|
||||||||||||
SEPTEMBER
20, 2007 (INCEPTION) THROUGH DECEMBER 31, 2008
|
||||||||||||
September
20, 2007
|
September
20, 2007
|
|||||||||||
Year
Ended
|
(Inception)
through
|
(Inception)
through
|
||||||||||
December
31, 2008
|
December
31, 2007
|
December
31, 2008
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
Net
loss
|
$ | (3,472,250 | ) | $ | (219,700 | ) | $ | (3,691,950 | ) | |||
Adjustments
to reconcile net loss to net cash
|
||||||||||||
used
in operating activities:
|
||||||||||||
Compensation
recognized under stock incentive plan
|
1,880,967 | - | 1,880,967 | |||||||||
Minority
interest
|
(76,520 | ) | (29,813 | ) | (106,333 | ) | ||||||
Changes
in assets and liabilities:
|
||||||||||||
Increase
in accounts payable
|
876,108 | 209,102 | 1,085,210 | |||||||||
Accrued
interest from certificate of deposit
|
(1,000,000 | ) | (138,333 | ) | (1,138,333 | ) | ||||||
Net
cash used in operating activities
|
(1,791,695 | ) | (178,744 | ) | (1,970,439 | ) | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Purchase
of Property, Plant and Equipment
|
- | (122 | ) | (122 | ) | |||||||
Certificate
of deposit
|
- | (20,000,000 | ) | (20,000,000 | ) | |||||||
Purchase
of intangible asset
|
- | (9,999,500 | ) | (9,999,500 | ) | |||||||
Net
cash used in investing activities
|
- | (29,999,622 | ) | (29,999,622 | ) | |||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
Proceeds
from the sale of common stock
|
955,000 | 30,706,564 | 31,661,564 | |||||||||
Proceeds
from Notes Payable
|
443,000 | 443,000 | ||||||||||
Advances
from shareholders
|
- | 77,150 | 77,150 | |||||||||
Repayment
of shareholders advances
|
(53,570 | ) | - | (53,570 | ) | |||||||
Net
cash provided by financing activities
|
1,344,430 | 30,783,714 | 32,128,144 | |||||||||
INCREASE
(DECREASE) IN CASH
|
(447,265 | ) | 605,348 | 158,083 | ||||||||
CASH,
BEGINNING OF YEAR
|
605,348 | - | - | |||||||||
CASH,
END OF YEAR
|
$ | 158,083 | $ | 605,348 | $ | 158,083 | ||||||
Supplemental
Disclosures
|
||||||||||||
Cash
paid during the year for interest
|
$ | - | $ | - | $ | - | ||||||
Cash
paid during the year for taxes
|
$ | - | $ | - | $ | - | ||||||
Supplemental
disclosure of non-cash financing activities
|
||||||||||||
Compensation
recognized under stock incentive plan
|
$ | 1,880,967 | $ | - | $ | 1,880,967 |
F-18
FUND.COM
INC.
(A
Development Stage Company)
Notes to
the Consolidated Financial Statements
For nine
months ended September 30, 2009 and 2008 and
for the
period September 20, 2007 (inception) through September 30, 2009
NOTE 12 –
SUBSEQUENT EVENTS
In
preparing the Company’s financial statements, the Company evaluated events and
transactions for potential recognition or disclosure through November 23, 2009,
the date on which this Quarterly Report on Form 10-Q was filed with the
SEC.
F-19
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Information
This
report contains forward-looking statements regarding our plans, expectations,
estimates and beliefs. Actual results could differ materially from those
discussed in, or implied by, these forward-looking statements. Forward-looking
statements are identified by words such as “believe,” “anticipate,” “expect,”
“intend,” “plan,” “will,” “may,” and other similar expressions. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. We have based
these forward-looking statements largely on our expectations. Forward-looking
statements are subject to risks and uncertainties, certain of which are beyond
our control. Actual results could differ materially from those anticipated as a
result of the factors described in the “Risk Factors” and detailed in our other
Securities and Exchange Commission filings.
Because of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
report or incorporated by reference might not transpire. Factors that
cause actual results or conditions to differ from those anticipated by these and
other forward-looking statements include those more fully described in the “Risk
Factors” section in our annual report on Form 10-K/A filed with
the Securities and Exchange Commission on August 7, 2009. Actual
results may differ materially from those contained in any forward-looking
statements. In addition, we expect that our Form 10-K/A dated August 7, 2009, as
well as our quarterly reports on Form 10-Q for the periods ended March 31, 2009
and June 30, 2009, will be subject to certain amendments as a result of our
recent receipt of a comment letter from the Securities and Exchange
Commission.
The following discussion and analysis
of financial condition and results of operations relates to the operations and
financial condition reported in our financial statements for the three and
nine months ended September 30, 2009.
The
following discussion should be read in conjunction with our financial statements
and the notes thereto which appear elsewhere in this report. The
results shown herein are not necessarily indicative of the results to be
expected in any future periods.
Overview
Through
our 60% owned AdvisorShares Investments LLC subsidiary (“AdvisorShares”),
Fund.com Inc. (the “Company,” “we”, “us” or “our”) has developed an investment
platform that originates actively managed exchange traded funds (“ETFs”) in
conjunction with leading investment managers who are responsible for managing
the assets within the ETFs we create. We believe the $600 billion ETF market
continues to experience rapid growth and represents a widely accepted financial
innovation. We also publish information online about investment funds
at www.fund.com. Our objective is to engage individual investors as an online
educational and research resource and then to match their investment needs with
fund product providers, including ETFs offered by investment managers that use
our ETF platform. We earn investment management fees as a percentage of assets
in our ETFs, which we share with the investment managers. We, therefore, have an
economic incentive to assist in increasing assets under management through
client referrals derived from our online businesses.
The
business of AdvisorShares is to develop a diverse range of "actively managed"
ETFs together with established third party asset managers, and to list these
ETFs on the New York Stock Exchange, or a similar national or international
securities exchange. The target clients of AdvisorShares are third party
investment advisors who already manage clients' assets, have a favorable track
record and desire to package their investment strategy using exchange-traded
funds. Under our business model, the investment manager acts as a
“sub-advisor” to the fund and selects and supervises the investments of its
individual ETF. By accessing the AdvisorShares ETF platform, third
party investment managers will be able to establish their own branded, or
"white-labeled," ETF on a "turn-key" basis, wherein AdvisorShares is
responsible, among other things, for the compliance and administration of the
fund. AdvisorShares and the investment manager share in the fee
income, subject to a monthly minimum paid to AdvisorShares.
1
To date,
we have used our ETF platform to complete one initial public offering in
September 2009, known as the Dent Tactical ETF (NYSE: DENT), which is currently
trading on the New York Stock Exchange. The Dent Tactical ETF is
sub-advised by H.S. Dent Investment Management LLC. Harvey S. Dent
previously sub-advised a $1.7 billion mutual fund known as the Dent Demographic
Trends Fund. We currently have 2 additional ETFs in registration with
the Securities and Exchange Commission, and we expect such ETFs to commence
trading on the New York Stock Exchange in the near future. We are also in
discussions with established investment managers that represent what we believe
is a diversified series of investment strategies and assets classes such that,
if we are able to create and market ETFs with them, it will enable us to offer a
diversified selection of actively managed investment products to select
from.
We
believe that investing in a publicly traded ETF significantly enhances the
individual investor’s liquidity as, unlike a mutual fund or hedge fund, the
investor can buy and sell the ETF as a listed security on a major stock
exchange, such as the NYSE. We also believe that investment managers
will be able to increase their assets under management and improve their client
distribution opportunities, as publicly traded ETFs showcase the investment
track record of the investment manager and its clients are able to allocate
money to the investment manager simply by buying the ETF.
The
AdvisorShares acquisition enhances our strategic goal of connecting individual
investors with appropriate diversified investment products and to also assist
asset fund managers in building client assets under management by
connecting them to individual investors.. We believe that ETFs are
one of the most significant products developed since money market funds in the
1970’s with ETF asset growth approaching $660 billion as of August 2009. We
also believe that economic conditions for ETFs continue to be highly favorable
in the United States inasmuch as ETFs are the mutual fund industry's
fastest-growing marketplace. Over the past 12 months, ETF assets increased $70.9
billion, or 12.1%. According to Tiburon Strategic Advisors, there are currently
10,466 RIAs in the United States that manage $37.5 trillion in professionally
managed assets. The Company believes that many of these RIAs are potential
partners for AdvisorShares.
On
November 5, 2009, we entered into a non-binding letter of intent with Weston
Capital Management LLC ("Weston") and its majority shareholders for the
acquisition of an equity interest from an institutional shareholder and its
founder. Weston is a registered investment advisor that manages
approximately $1.0 billion for investment primarily in other investment funds,
and also provides “seed” capital for new fund products. We believe
that AdvisorShares and Weston are complimentary businesses since Weston will
gain access to larger target markets through AdvisorShares created
exchange-traded products and AdvisorShares will benefit from the fund
distribution experience of Weston.
The
acquisition of Weston is subject to a number of conditions, including execution
of definitive agreements, completion of satisfactory due diligence by all
parties and our accessing the funds necessary to complete our purchase of an
equity interest in Weston. There can be no assurance that we will be
able to consummate the acquisition of an equity interest in Weston or that, if
consummated, that such investment will prove profitable to our
company.
In addition to our AdvisorShares
business, and consistent with our focus of providing on-line financial content,
the Company recently consummated two strategic investments. They
consisted of the acquisition of 100% of the capital stock of Whyte Lyon Socratic
Inc., d/b/a “The Institute of
Modern Economy,” a Delaware corporation (“Whyte Lyon”) and an investment
in the equity of Vensure Employer Services, Inc., an Arizona corporation
(“Vensure”). Both transactions were consummated on November 2, 2009,
but were deemed to be effective as of September 29, 2009.
Whyte Lyon is a development stage
online provider of financial literacy video content delivered over the Internet.
Sometimes referred to as distance learning, such remote educational content is
designed to assist on-line students to:
· develop
the necessary skills to understand financial transactions and financial
markets;
· develop
money management skills to help them manage their income and wealth;
and
· reach
particular goals, including homeownership, debt reconciliation, or improved
credit reports.
2
As part
of that transaction, Whyte Lyon's president Joseph J. Bianco was named chairman
of the board of directors of our Company. Mr. Bianco is private investor and
chairman of Educational Investors, Inc. From 1990 to 1996 he served
as the Chief Executive Officer of New York Stock Exchange-listed Alliance
Entertainment, then the world's leading independent distributor of CD music. His
business experience has spanned many industries: He founded and chaired British
Performance Car Imports, Inc., the exclusive U.S. distributor of Lotus
Performance Cars, which he sold to General Motors, and was chairman of Cognitive
Arts, Inc., a leading creator of educational software. He graduated from Yale
Law School in 1975; he was an editor of the Yale Law Journal.
Simultaneous
with our acquisition of Whyte Lyon, we purchased an equity interest in Mesa,
AZ.-based Vensure Employer Services, Inc., a professional employer organization,
or PEO, located in Mesa, Arizona. Vensure provides a broad range of
services to small and medium-sized businesses, including benefits and payroll
administration, health and workers’ compensation insurance programs, personnel
records management, employer liability management, employee recruiting and
selection, employee performance management, employee training and development
services and retirement obligations, including a retirement services product
line that offers a variety of options to clients like 401(k) plans, 401(k) plans
with safe harbor provisions, profit sharing, and money purchase
plans.
According
to information furnished by Vensure, as of September 25, 2009, Vensure directly
employed or acted as co-employer for approximately 4,000 employees provided to
approximately 269 business clients, up from approximately 2,100 employees and
182 clients as of January 1, 2009.
Vensure’s
target clients are small and medium sized businesses in the United States with
fewer than 100 employees. Vensure advises that there are
approximately 9.4 million employers in the geographic markets that it is
capable of servicing, of which more than 99% have fewer than
100 employees. Based on publicly available industry data,
Vensure estimates that all independent PEOs and other payroll processors serve
approximately 15% of the potential businesses in this market, with much of the
unpenetrated market composed of businesses with ten or fewer
employees.
We
believe that Vensure’s target market is large and therefore provides a
significant potential growth opportunity for Fund.com.
·
|
The
PEO industry generates approximately $51 billion in gross revenues
annually;
|
·
|
The
Harvard Business Review recognized the PEO industry "the fastest growing
business service in the United States during the
1990s;
|
·
|
US
Department of Labor Statistics predicts that by the year 2020, more than
half of American employees will be employed by Professional Employer
Organizations (PEO);
|
·
|
The
US Small Business Administration (SBA) found the average annual cost of
regulation, paperwork and tax compliance for companies with fewer than 500
employees is about $5,000 per employee. For companies with more than 500
employees, the cost is about $3,400 an
employee;
|
·
|
According
to the Office of the Chief Counsel for Advocacy of the U.S. Small Business
Administration, small businesses face an annual regulatory cost of $7,647
per employee, which is 45 percent higher than the regulatory cost facing
large firms (defined as firms with 500 or more employees);
and
|
·
|
An
SBA study estimated that the average small business owner spends between
7% and 25% of his or her time handling employee-related
paperwork.
|
As a
result of our investment in Vensure, we will be able to offer our products to
the employees of Vensure, including The Institute of Modern
Economy online educational courses, to assist them in managing their
personal finances and retirement goals and access other investment products we
may be able to provide. The National Council on Economic Education reported that
33% of employees increased their contributions to their retirement savings plan
after having received financial education. In addition, subject
to compliance with all federal and state securities and tax laws and regulation,
we intend to offer our AdvisorShares ETF products to Vensure employees for their
individual retirement savings plans.
3
As further described in this report
under “Liquidity and Capital Resources” and as described in our Form 8-K, dated
November 5, 2009, we purchased 100% of the capital stock of Whyte Lyon in
exchange for 500,000 shares of the Company’s common stock, which the parties
valued at $2.00 per share. In addition, the Company agreed to provide
by November 30, 2009 an additional $250,000 of working capital to Whyte
Lyon. Closing of the acquisition of the shares of Whyte Lyon occurred
on November 2, 2009, and Joseph J. Bianco, the principal stockholder of Whyte
Lyon became Chairman of the Board of Directors of the Company.
As further described in this report
under “Liquidity and Capital Resources” and as described in our Form 8-K, dated
November 5, 2009, our investment in Vensure consists of the Company’s purchase
of 218,888.33 shares of participating convertible Series A preferred stock of
Vensure, having a liquidation value of $100.00 per share. In
addition, and as a material element of our investment in Vensure, the Company
and Whyte Lyon entered into a Content Agreement with Vensure pursuant to which
online educational content will be supplied to Vensure
employees. Through our Whyte Lyon subsidiary, we will be paid content
licensing fees. The online content will include a range of financial education
content, including content on savings and retirement planning designed to
enhance our business.
Our plan
of operation is to continue the further development of our website. This may
include certain capital expenditures for technology, content and database
management, including certain online advertising systems and affiliate marketing
systems that management believes will assist in executing our customer
acquisition business plan. Our website is anticipated to evolve over time as we
introduce new content and features and generally seek to improve the customer
experience. Our website was launched in March 2009 with the full planned feature
set accessible at www.fund.com. We continue to
seek strategic relationships that will further enhance the website development
and usage.
We have
outsourced our technology to operate our online network and supporting systems
on servers at a secure third-party co-location facility in the Colorado area.
This third-party facility is manned, and our infrastructure and network
connectivity monitored continuously, on a 24-hour a day, 365-day a year basis.
This facility is powered continuously from multiple sources, including
uninterruptible power supplies and emergency power generators. The vast majority
of the information presented on www.fund.com, including
backend databases that serve and store information, will be stored in and
delivered from server farms.
Our
operating and capital requirements in connection with operations have been and
will continue to be significant. Based on our current plans, we anticipate that
revenues earned from lead generation will be the primary source of funds for
operating activities. In addition to existing cash and cash equivalents, we may
rely on bank borrowing, if available, or sales of securities to meet the basic
capital and liquidity needs for the next 12 months. Additional capital may be
sought to fund the development of www.fund.com and marketing
efforts, which may also include bank borrowing, or a private placement of
securities. However, other than our agreement with IP Global, Investors Ltd..,
as discussed below, we have no agreements for funding at this time and there can
be no assurance that funding will be available if we require it.
Critical
Accounting Policies
Our discussion and analysis of results
of operations and financial condition 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 disclosure of contingent assets and liabilities. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company considered the quality and
variability of information regarding the financial condition and operating
performance that may have changed in the past and future that may have a
material effect and has quantified them where possible. Specifically, the
Company considers risk of variability with changes in contract which may affect
the recognition of income and also the possibility of changes in the tax code
which may affect the long term rates of return.
4
Our significant accounting policies are
as follows:
Basis
of Presentation
The Company has not produced any
significant revenue from its principal business and is a development stage
company as defined by the Accounting Standards Codification (ASC) 915
Development Stage Entities.
Principles
of Consolidation
The consolidated financial statements
include the accounts of Fund.com Inc. and its subsidiaries. All
material intercompany accounts and transactions are eliminated in
consolidation.
Use
of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements. These
estimates and assumptions also affect the reported amounts of revenues, costs
and expenses during the reporting period. Management evaluates these
estimates and assumptions on a regular basis. Actual results could
differ from those estimates.
Revenue
Recognition
The Company recognizes revenue in
accordance with ASC 605 Revenue Recognition which established that revenue can
be recognized when persuasive evidence of an arrangement exists, the product has
been shipped, all significant contractual obligations have been satisfied and
collection is reasonably assured.
Cash
and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents are defined to include cash on
hand and cash in the bank.
Certificate
of Deposit
On
November 9, 2007, the Company deposited $20,000,000 into a fixed Certificate of
Deposit with an interest rate of 5.00% per annum, for a term of three
years. Accrued interest of $500,000 and $500,000 has been recorded
for the six months ended June 30, 2009 and 2008,
respectively. Pursuant to a securities purchase agreement dated
September 24, 2009 which the Company entered into with Vensure Employer
Services, Inc., the rights were assigned to receive payments under the
Certificate of Deposit to Vensure, effective as of September 29, 2009 for
certain consideration. In October 2009, Global Bank of Commerce
advised the Company of its intention to exercise its contractual rights to
exchange the certificate of deposit for a 10 year 6.5% annuity contract issued
by a third party, and on November 2, 2009 Vensure agreed to accept such annuity
contract in lieu of the certificate of deposit.
Investments
The Company’s investments consist of
marketable equity securities. All investments are initially recorded
at cost. After initial recognition, investments, which are classified
as fair value through income, are measured at fair value.
For investments that are actively
traded in organized financial markets, fair value is determined by reference to
stock exchange bid market prices at the close of business on the balance sheet
date.
All marketable security transactions
are recognized on the trade date. Fair value and realized gains and
losses adjustments are recorded in the statement of operations.
5
Advertising
Costs
All advertising costs are charged to
expense as incurred. There was no advertising expense for the nine months ended
September 30, 2009 and 2008.
Research
and Development
Costs are expensed as
incurred. There were no research and development expense for the nine
months ended September 30, 2009 and 2008.
Property
and Equipment
Property and equipment is recorded at
cost and depreciated over the estimated useful lives of the assets using
principally the straight-line method. When items are retired or otherwise
disposed of, income is charged or credited for the difference between net book
value and proceeds realized thereon. Ordinary maintenance and repairs
are charged to expense as incurred, and replacements and betterments are
capitalized. The range of estimated useful lives to be used to
calculate depreciation for principal items of property and equipment are as
follow:
Asset
Category
|
Depreciation/
Amortization
Period
|
|
Furniture
and Fixture
|
3
Years
|
|
Office
equipment
|
3
Years
|
|
Leasehold
improvements
|
5
Years
|
Income
Taxes
Deferred income taxes are recognized
based on the provisions of ASC 740 Income Taxes for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Earnings
Per Share
Basic earnings per share is computed by
dividing net income (loss) available to common shareholders by the weighted
average number of common shares outstanding during the reporting period. Diluted
earnings per share reflects the potential dilution that could occur if stock
options and other commitments to issue common stock were exercised or equity
awards vest resulting in the issuance of common stock that could share in the
earnings of the Company. Common shareholders include both Class A and Class
B as the holders of Class A common stock shall be entitled to receive, on a pari
passu basis with the holders of Class B common stock, if, as and when declared
from time to time by the Board of Directors out of any assets of the Company
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
Fair
Value of Financial Instruments
The fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties other than in a forced sale or
liquidation. The carrying amounts of financial instruments,
including cash, accounts payable and accrued expenses approximate fair value
because of the relatively short maturity of the instruments.
6
Accounting
for the Impairment of Long-Lived Assets
The long-lived assets held and used by
the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. It is reasonably possible that these assets could become impaired
as a result of technology or other industry changes. Determination of
recoverability of assets to be held and used is by comparing the carrying amount
of an asset to future net undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
During the fourth quarter of 2008, the
Company tested the carrying value of its intangible assets for
impairment. The results of the tests indicated that the carrying
value of the intangible assets was not impaired as of December 31,
2008. The Company will again test the carrying value for impairment
as of December 31, 2009.
Stock-Based
Compensation
The Company accounts for stock-based
compensation in accordance with ASC 718 Compensation – Stock
Compensation.
The ASC
provides that
instruments that were originally issued as employee compensation and
then modified, and that modification is made to the terms of the
instrument solely to reflect an
equity restructuring that occurs when
the holders are no longer employees, then no change in the
recognition or the measurement (due to a change
in classification) of those instruments will result
if both of the following conditions are met: (a) there is no increase in fair
value of the award (or the ratio of intrinsic value to the exercise
price of the award is preserved, that is, the holder is made whole),
or the antidilution provision is not added to the terms of the award
in contemplation of an
equity restructuring; and (b) all holders of the same class of
equity instruments (for example, stock options) are treated in the same
manner.
Results
from Operations
The following tables show the results
of operations of our business.
Comparison of the
three months ended September
30, 2009 and 2008
Three
Months Ended September 30
|
2009
|
2008
|
||||||
Sales
|
$ | 200,000 | $ | - | ||||
Cost
of Sales
|
$ | - | $ | - | ||||
Total
Expenses
|
$ | 1,606,879 | $ | 1,265,268 | ||||
Other
income (expense)
|
$ | 214,187 | $ | 250,469 | ||||
Income
taxes
|
$ | - | $ | - | ||||
Net
income (loss)
|
$ | (1,082,220 | ) | $ | (1,003,685 | ) |
Results
of Operations for the Three Month Periods ended September 30, 2009 and
2008
We reported a net loss of
$1,082,220 and
$1,003,685 for
the three-month periods ending September 30, 2009 and 2008,
respectively. Until we implement our business plan, we will not have
material operating revenues.
For the three-month period
ending September 30, 2009, we incurred $1,606,879 in operating
costs. This amount includes $535,400 related to compensation
expense for stock options, $87,100 related to legal and
professional fees, $376,600 related to payroll and
benefits for the officers of the Company, and $153,900 for consulting
expenses.
For the three-month period
ending September 30, 2008, we incurred $1,265,268 in operating
costs. This amount includes $401,200 related to compensation
expense for stock options, $144,000 related to legal and
professional fees, $239,700 related to payroll and
benefits for the officers of the Company, $438,100 for consulting
expenses.
7
The $20 million
certificate of deposit with the Global Bank of Commerce (an Antiguan bank), held
by our wholly-owed subsidiary Fund.com Capital Inc., earned interest of
$250,000
for each three-month period ended September 30, 2009 and 2008,
respectively.
Comparison of the
nine months ended September 30, 2009 and 2008
Nine
Months Ended September 30
|
2009
|
2008
|
||||||
Sales
|
$ | 220,267 | $ | - | ||||
Cost
of Sales
|
$ | - | $ | - | ||||
Total
Expenses
|
$ | 3,915,967 | $ | 3,029,314 | ||||
Other
income (expense)
|
$ | 714,420 | $ | 750,937 | ||||
Income
taxes
|
$ | - | $ | - | ||||
Net
income (loss)
|
$ | 2,707,658 | ) | $ | (2,238,893 | ) |
Results
of Operations for the Nine Month Periods ended September 30, 2009 and
2008
We reported a net loss of
$2,707,658 and
$2,238,893 for
the nine-month periods ending September 30, 2009 and 2008,
respectively. Until we implement our business plan, we will not have
material operating revenues.
For the nine-month period
ending September 30, 2009, we incurred $3,915,967 in operating
costs. This amount includes 1,554,200 related to compensation
expense for stock options, $358,600 related to legal and
professional fees, $1,011,900 related to payroll and
benefits for the officers of the Company, and $383,500 for consulting
expenses.
For the nine-month period
ending September 30, 2008, we incurred $3,029,314 in operating
costs. This amount includes $962,200 related to compensation
expense for stock options, $466,600 related to legal and
professional fees, $565,300 related to payroll and
benefits for the officers of the Company, $724,000 for consulting expenses and
$129,000 related
to promotional and public relations expense.
The $20 million
certificate of deposit with the Global Bank of Commerce (an Antiguan bank), held
by our wholly-owed subsidiary Fund.com Capital Inc., earned interest of
$750,000 for each nine-month
period ended September 30, 2009 and 2008, respectively.
Liquidity
and Capital Resources
On September 30, 2009, the Company had
cash of $602,143 and a working capital deficit of approximately
$4,135,000. We will require additional funding in order to meet
operating expenses and our development plan.
We were
originally incorporated as Eastern Services Holdings, Inc. In January
15, 2008 we merged with Meade Technologies Inc., following which we changed our
corporate name to Fund.com Inc. In each case, before giving effect to
the 9-for-1 dividend on our Class A Common Stock and Class B Common Stock, in
November 2007, we sold an aggregate of 10,350,000 shares of our common stock to
eight accredited investors in a private placement at a price of $2.00 per share
and received gross proceeds of $20,700,000, and we sold 5,000,000 shares of our
common stock and 2,500,000 shares of our Series A Preferred Stock to an
accredited investor and received gross proceeds of
$10,000,000. Substantially all of the proceeds from the sale of the
Series A Preferred Stock transaction were used to acquire the domain name www.fund.com.
Following
the merger, we had authorized a total of 110,000,000 shares of common stock, par
value $0.001 per share, of which 100,000,000 shares were authorized as Class A
Common Stock, 10,000,000 shares were authorized as Class B Common
Stock. In addition, 10,000,000 shares were authorized as Preferred
Stock.
8
On
September 2, 2009, the Company amended and restated its certificate of
incorporation to increase its authorized capital stock from 120,000,000 shares
to 320,000,000 shares, of which 300,000,000 shares are designated as Class A
common stock, 10,000,000 shares are designated as Class B common stock and
10,000,000 shares are designated as preferred stock. Each share of
Class A common stock has one vote. Each share of Class B common stock
has 10 votes, votes together with the Class A common stock, and is convertible
by the holder at any time upon 61 days prior written notice into ten shares of
Class A common stock. The authorized shares of preferred stock may be
issued by the board of directors from time to time in one or more series and the
board of directors has the authority to fix the powers, designations rights,
preferences and limitations of any class or series of such preferred
stock.
As at
September 30, 2009, 43,612,335 shares of Class A Common Stock were outstanding,
6,387,665 shares of Class B Common Stock were outstanding and no shares of
Preferred Stock were outstanding.
In connection with a financing
consummated with IP Global Investors Ltd. described below, we issued IP Global
our $2,500,000 convertible note that may be converted at any time at $0.21 per
share into 11,904,761 shares of our Class B common stock.
Securities Purchase Agreement with
National Holdings Corporation
On April 8, 2009, the Company entered
into a definitive Securities Purchase Agreement (the “Purchase Agreement”), with
National Holdings Corporation, a Delaware corporation (“NHC”) whereby the
Company agreed to provide a minimum $5 million financing to NHC (the
“Financing”) exchange for an aggregate of 5,000 shares of NHC to be created
Series C Convertible Preferred Stock, par value $0.01 per share at a purchase
price of $1,000.00 per share, and warrants, exercisable at any time, and
entitling the holder to purchase up to an aggregate of 25,333,333 shares of
common stock of NHC (on an as-exercised basis) with an exercise price of $0.75
per share. The Company provided NHC with an initial investment tranche of
$500,000, as evidenced by NHC’s limited recourse promissory note, dated April 8,
2009, which note would have automatically converted into shares of Series C
Preferred Stock upon consummation of the Financing or, if the Company was unable
to close the balance of the Financing by April 30, 2009, into 666,666 shares of
NHC common stock also based on a $0.75 per common share price. We borrowed the
$500,000 initial tranche from Global Asset Fund Limited, (“GAF”), through a
loan, which is secured by a pledge of NHC’s limited recourse note and all of our
rights and interests in the Purchase Agreement. On May 15, 2009, our $500,000
NHC limited recourse note was converted into 666,666 shares of NHC common stock,
which are pledged as collateral to secure our $500,000 loan from GAF. At
September 30, 2009, the $500,000 note had not been repaid. On
November 3, 2009, GAF and the Company settled the $500,000 obligation by
transferring the pledged stock to GAF.
The Company was unable to obtain the
requisite funding to make the $5.0 million investment in NHC and consummate the
Financing. Accordingly, the Purchase Agreement has been
terminated.
Working
Capital Loan
For the past nine months we have relied
on loans and advances from IP Global Investors Ltd., a privately owned
intellectual property finance company, to provide us with working capital to pay
our operating expenses. Through September 30, 2009, we have borrowed
an aggregate of approximately $2,288,114 from this lending source.
Effective as of August 28, 2009, the
Company, and IP Global and Equities Media Acquisition Corp. Inc., a principal
stockholder of the Company, consummated transactions under a line of credit
agreement pursuant to which IP Global provided the Company with a $2,500,000
line of credit facility which superseded and restated in its entirety a prior
$1.343 million credit agreement with IP Global entered into as of May 1,
2009. Under the terms of the restated line of credit agreement (which
was negotiated and agreed upon in early July 2009), the Company is entitled
to receive a maximum of $2,500,000 of advances, less an aggregate of $723,000
of advances made through May 1, 2009 (including the 1,275,000 paid to
AdvisorShares on behalf of the Company through August 18, 2009 and an additional
$150,000 of advances funded through August 28, 2009). As of September
30, 2009, the Company has borrowed an aggregate of approximately $2,288,114
under the line of credit, including $1,275,000 paid to AdvisorShares on behalf
of the Company. All obligations under the line of credit agreement
have been guaranteed by Fund.com Capital Inc., Fund.com Technologies Inc. and
Fund.com Managed Products Inc., all wholly-owned subsidiaries of the
Company.
9
The advances made under the line of
credit agreement are evidenced by the Company’s 9% convertible note due August
28, 2010 (one year from the Closing Date). The note is
convertible at any time prior to its maturity date, at a conversion price of
$0.21 per share into shares of Class B common stock of the Company. The
conversion price was established based on the public price of Fund.com at the
time the parties reached agreement, the price being based on a quantitative
formula equal to 90% of the volume weighted average price (VWAP) of the
Fund.com stock price as quoted on the OTC Bulletin Board for the thirty days
prior to July 6, 2009.
As part of the transactions
contemplated by the line of credit agreement, the lenders or their designees
received an option (expiring December 31, 2009) to purchase up to $5,000,000 of
additional shares of Class A common stock of the Company at a price of $0.21 per
share, or approximately 23.8 million shares of Class A common stock if such
purchase option is fully exercised. The price was also established on the same
VWAP calculation. In addition, the Company issued to the lenders a warrant,
expiring July 31, 2012, entitling the holder(s) to purchase an aggregate of 50%
of the number of shares of Class A common stock that are purchased upon full or
partial exercise of the above purchase option, at an exercise price of $0.315
per share. The exercise prices of the purchase option and the warrant
are both subject to certain adjustments, including weighted average
anti-dilution adjustments.
As a further inducement to the lenders
to make available the line of credit, Daniel Klaus and Lucas Mann, two
shareholders of the Company and members of the board of directors at the time,
also sold to the lenders or their designees (in equal amounts) a total of
2,000,000 of their shares of Class A common stock of the Company at a price of
$0.25 per share, payable on the basis of $50,000 in cash and the $450,000
balance evidenced by two notes of $225,000 each payable in equal monthly
installments through December 31, 2009. In addition, Messrs. Klaus
and Mann each contributed 500,000 of their Company shares to the lenders, or
their designees, for no consideration, and granted the lenders or their
designees an option, exercisable at any time up to December 31, 2009, to
purchase an additional 2,000,000 of their Class A shares for $0.25 per share.
Effective August 28, 2009, Messrs. Daniel Klaus and Lucas Mann terminated their
consulting agreements with the Company and resigned as members of the board of
directors of the Company and its subsidiaries. There was no disagreement or
dispute between Messrs. Klaus and Mann and the Company which led to their
resignation as directors. They also agreed not to sell their remaining shares in
the Company for a period of at least six months.
On November 2, 2009, IP Global sold
$623,700 principal amount of its $2,500,000 convertible note to Bleecker
Holdings Inc. (“Bleecker”), an entity wholly-owned by Joseph J. Bianco, our
Chairman of the Board, and sold an additional $6,300 principal amount of the
note to one other unaffiliated entity. Under the terms of the sale, each of the
purchasers paid an aggregate of $630,000 by delivery of their 5% seven year
recourse notes to IP Global.
Certificate
of Deposit from Global Bank of Commerce
On November 9, 2007, Meade Capital,
Inc., a wholly owned subsidiary of Meade Technologies Inc. (both privately owned
companies not affiliated with our Company at that time), invested in a
$20,000,000 three-year Certificate of Deposit issued by an Antigua
bank, the Global Bank of Commerce (“Global Bank”). Global Bank is an
affiliate of one of our stockholders (GBC Wealth Management
Limited). This investment was made prior to completing the merger of
Meade Technologies with Eastern Services Holdings, Inc. which occurred on
January 15, 2008 and prior to current management’s employment with our
Company. As part of the merger, the Company’s name was changed to
Fund.com Inc, and its subsidiary’s name to Fund.com Capital.
The
certificate of deposit accrues earned interest at 5% per annum for the term of
three years and is due and payable, together with accrued interest, on November
9, 2010. With accrued interest, the amount of the certificate of
deposit was $21,888,333 as of September 30, 2009. As disclosed in our
Form 8-K filed with the SEC on January 17, 2008, Global Bank had the right,
pursuant to its November 2007 agreement with our Company to exchange the
certificate of deposit at any time prior to its maturity for a long-term annuity
contract to be issued by a third party acceptable to Global Bank.
10
Fund.com
Capital Inc. (then known as Meade Capital, Inc.) was originally established by
Meade Technologies, Inc., the Company’s predecessor, to invest in financial
entities and structure unregistered financial products and instruments,
including fund management companies, and structured products offered or
managed by such entities. As a result, at the time of the merger with Meade
Technologies in January 2008, the Company believed that the certificate of
deposit investment would provide the Company with a material asset base, would
serve as the basis for unregistered structure products and would provide capital
for one or more potential acquisitions within its then business model as set forth in its business plan disclosed in a
Current Report on Form 8-K filed with the Commission on January 17,
2008. However, in view of the Company’s need for additional
working capital, its decision to abandon the issuance of unregistered structured
products in favor of pursuing exclusively investment products registered under
the Securities Act and Global Bank’s right to exchange and swap the three year
certificate of deposit for a long-term annuity instrument that would not provide
the Company with liquidity, our management determined that it would need to seek
additional financing for the Company in order to support our other strategic
initiatives, and could no longer place undue reliance on the investment in the
certificate of deposit.
Consistent
with the above strategy, pursuant to the Company’s investment in and transaction
with Vensure Employer Services, Inc. (as described below under the heading
“Investment in Vensure
Employer Services, Inc.”), as payment for the Series A preferred stock of
Vensure, the Company transferred and assigned its rights under the certificate
of deposit to Vensure, effective as of September 29, 2009. In October
2009, Global Bank advised the Company of its intention to exercise its
contractual rights to exchange the certificate of deposit for a ten year 6.5%
annuity contract in the amount of the certificate of deposit plus accrued
interest issued by a third party. On November 2, 2009 Vensure agreed to accept
such annuity contract in lieu of the certificate of deposit.
Purchase
and Contribution Agreement with AdvisorShares
The funding requirement for the
additional $3,725,000 to AdvisorShares will be made in accordance with the
achievement of specific milestones as defined in the Purchase and Contribution
Agreement (the “Agreement”) dated October 31, 2008, including (i) $1,000,000
within 30 days of the issuance by the SEC of its notice regarding approval of
the application of AdvisorShares for exemptive relief under the Investment
Company Act of 1940; (ii) $725,000 within 30 days of receipt by the Company from
AdvisorShares’ independent auditors verifying total assets under management
equal to $150,000,000; (iii) $1,000,000 within 30 days of receipt by
the Company from AdvisorShares’ independent auditors verifying total assets
under management equal to $250,000,000; and (iv) $1,000,000 within 30 days
of receipt by the Company from AdvisorShares’ independent auditors
verifying total assets under management equal to $450,000,000.
On August 18, 2009, the Company
consummated payment in full of the $1,000,000 due to AdvisorShares for achieving
the first milestone under the Agreement. The funding was provided to
the Company by IP Global and Equities Media, a principal stockholder of the
Company, under the amended and restated $2.5 million line of credit facility
described above. The Company does not currently have the capital or resources to
make the additional $2,725,000 in payments to AdvisorShares following
AdvisorShares’ achievement of the remaining milestones. In order to
obtain funds to satisfy the remaining payment obligations to AdvisorShares
(assuming the remaining milestones are achieved), we may utilize any of several
potential options, including cash on hand from operating results, the issuance
of debt or equity securities, or a combination thereof. No assurance
can be given that we will have available cash on hand from operating results or
be able to obtain additional financing on favorable terms, if at
all. Moreover, the Company cannot predict with certainty if and when
the remaining milestones for total assets under management will be met by
AdvisorShares.
We
anticipate that our cash requirements for the next 12 months for expenses
related to infrastructure, business development and accounts payable should be
approximately $2,000,000. We believe proceeds from the sale of both
equity and debt instruments will be sufficient to meet presently anticipated
working capital and capital expenditure requirements over the next few
months. However, there can be no assurance that the sale of equity or
notes will take place. To the extent that we do not generate
sufficient revenues, we will be forced to reduce our expenses and/or seek
additional financing. As of November 13, 2009 there were no
commitments for long-term capital expenditures.
Investment
in Vensure Employer Services, Inc.
On September 24, 2009, we and Vensure
Employer Services, Inc. (“Vensure”) entered into a securities purchase agreement
(the “Venture Purchase Agreement”). Consummation of the transactions
contemplated by the Vensure Purchase Agreement occurred on November 2, 2009;
provided, that for all purposes the Closing Date and delivery of all closing
documents and instruments were deemed to have occurred effective at 5:00 p.m. on
September 29, 2009.
11
Under the terms of the Venture Purchase
Agreement, we agreed to sell and assign to Vensure, our right to receive
payments under the original $20.0 million certificate of deposit issued in
November 2007 by Global Bank in exchange for consideration consisting of (a)
218,883.33 shares of Series A participating convertible preferred stock of
Vensure (the “Series A Preferred Stock”), and (b) a seven year content agreement
(the “Content Agreement”) among Vensure, Vensure Retirement Administration,
Inc., a whole owned subsidiary of Vensure, our company and Whyte Lyon Socratic,
Inc. (“Whyte Lyon”). In October 2009, we were orally advised by Global Bank of
its intention to elect to exercise its contractual rights to exchange and swap
its obligations under the certificate of deposit for a ten year 6.5% annuity
contract issued by a third party. We notified Vensure of the banks
election (which was subsequently confirmed in writing), and on November 2, 2009
Vensure agreed to accept such annuity contract in lieu of the certificate of
deposit.
The Vensure Series A Preferred
Stock:
· has a
liquidation value of $100 per share or $21,888,333 as to all 218,883.33
shares;
· is senior
to all other capital stock of Vensure;
· pays
dividends as and when declared by the board of directors of Vensure on its
common stock;
·on a
“sale of control” (as defined) of Vensure to any unaffiliated third party, in
addition to receipt of the first $21,888,333 of consideration payable in respect
of Vensure capital stock, participates with the holders of the common stock to
the extent of 25% of all additional consideration paid or payable in excess of
the maximum $21,888,333 liquidation value of the Series A Preferred;
and
·is
convertible at any time after September 30, 2012 upon 61 days prior notice to
Vensure into either 25% of the common stock of Vensure; provided, that the board
of directors of Vensure may (subject to the Series A Preferred stockholder’s
right to rescind its conversion notice) require that the shares of Series A
Preferred Stock convert into a maximum of 49.5% of the capital stock of Vensure
Retirement Administration, a wholly-owned subsidiary of
Vensure.
Under the terms of a related
stockholders agreement among the Company, Vensure and the Vensure stockholders,
the Company is entitled to designate two members of the board of directors of
Vensure. The stockholders agreement also contains customary buy/sell and related
provisions in the event of sales of any shares of Vensure. The Series
A Preferred Stock also contains certain protective provisions that requires the
approval of the Company or its designees on the board of directors of Vensure
before Vensure may implement or commit to certain actions,
including:
· the
issuance of securities senior to or on a par with the Series A Preferred
Stock;
· the
issuance of any additional capital stock of Vensure;
· any
change it’s the fundamental nature of its business;
· the
acquisition of the assets or securities of other parties; or
· the sale
or pledge of substantial assets; or
· any
material changes in compensation of senior executive officers.
In addition to its receipt of the
Series A Preferred Stock, the Company has received the benefits of the Content
Agreement. Under the terms of the Content Agreement, the Company and
Whyte Lyon will provide all existing and future employees, co-employees and
other associates (collectively, the “End Users”) of Vensure, its subsidiaries
and affiliates, as well as Vensure clients (collectively, the “Venture Group”)
with access to on-line educational content to be streamed to such End-Users from
the website(s) of the Vensure Group. Such Content, to be designated
and branded as “Vensure
University,” “The Money
School” or other brand name acceptable to the parties to the Content
Agreement, will include up to 84 five to seven minute educational course
segments on personal finance management, financial products and other related
financial topics as are approved by Vensure and the Company. Course
segments may also include safety training, health care and other topics of
interest to workers and the work place.
12
In consideration for providing the
Content, the Vensure Group is required to pay the Company and its Whyte Lyon
subsidiary an access fee of $19.95 per month (the “Monthly Access Fee”) for each
End-User who has access to the Content from the website(s) of the Venture Group,
whether or not such End-User actually clicks on such website and views the
Content. Based on the current Vensure employment complement of
approximately 4,000 employees or co-employees, this represents approximately
$80,000 a month in anticipated revenues to the Company from such Monthly Access
Fee as soon as the initial Content is provided. The Company and its
subsidiary have agreed to deliver approximately three course segments during
each calendar quarter commencing with the quarter ending March 31, 2010 and
ending December 31, 2016. Following October 2012, the $19.95 Monthly Access Fee
is subject to renegotiation at the option of Vensure.
Our board of directors considered a
number of factors in exercising its business judgment to consummate the
investment in Vensure, including, among other things, the likelihood that the
Global Bank certificate of deposit would not be paid on its November 2010
maturity date as was disclosed as a potential risk in the Company’s Current Report on Form 8-K filed with the SEC on January
17, 2008. In addition, the Company considered the potential lack of
liquidity arising from the proposed exchange for a long-term investment
instrument.
Acquisition
of Whyte Lyon Socratic, Inc.
On October 14, 2009, the Company
entered into an agreement with the stockholders of Whyte Lyon Socratic, Inc., a
Delaware corporation, d/b/a “The Institute of Modern
Economy” (“Whyte Lyon”) to acquire 100% of the capital stock of such
corporation in exchange for 500,000 shares of the Company’s common stock, which
the parties valued at $2.00 per share. In addition, the Company will
provide an additional $250,000 of working capital to Whyte
Lyon. Closing of the acquisition of the shares of Whyte Lyon occurred
on November 2, 2009 following consummation of the transactions contemplated by
the Vensure Purchase Agreement; provided, that for all purposes the closing date
and delivery of all closing documents and instruments were deemed to have
occurred effective at 5:00 p.m. on September 29, 2009. Upon
completion of the Company’s acquisition of Whyte Lyon, its principal
stockholder, Joseph J. Bianco, became Chairman of the Board of Directors of the
Company.
Accounting
Standards Updates
In June 2009, the Financial Accounting
Standards Board (FASB) issued its final Statement of Financial Accounting
Standards (SFAS) No. 168,
“The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162”.
SFAS No. 168 made the FASB Accounting Standards Codification (the
Codification) the single source of U.S. GAAP used by nongovernmental
entities in the preparation of financial statements, except for rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws, which are sources of authoritative
accounting guidance for SEC registrants. The Codification is meant to simplify
user access to all authoritative accounting guidance by reorganizing
U.S. GAAP pronouncements into roughly 90 accounting topics within a
consistent structure; its purpose is not to create new accounting and reporting
guidance. The Codification supersedes all existing non-SEC accounting and
reporting standards and was effective for the Company beginning July 1,
2009. Following SFAS No. 168, the Board will not issue new standards
in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts; instead, it will issue Accounting Standards Updates (ASU). The FASB
will not consider ASUs as authoritative in their own right; these updates will
serve only to update the Codification, provide background information about the
guidance, and provide the bases for conclusions on the change(s) in the
Codification.
In August 2009, the FASB issued ASU
2009-05 which includes amendments to Subtopic 820-10, “Fair Value Measurements
and Disclosures—Overall”. The update provides clarification that in
circumstances, in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of the techniques provided for in this update. The amendments
in this ASU clarify that a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability and also
clarifies that both a quoted price in an active market for the
identical liability at the measurement date and the quoted price for the
identical liability when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required are Level 1 fair value
measurements. The guidance provided in this ASU is effective for the first
reporting period, including interim periods, beginning after issuance. The adoption of
this standard did not have a material impact on the Company’s consolidated
financial position and results of operations as of September 30, 2009 as the
Company’s material investment was made effective September 29, 2009 just one day
prior to the end of the quarter. This standard may have a material
impact in future reporting periods.
13
In September 2009, the FASB issued ASU
2009-06, Income Taxes (Topic 740), ”Implementation Guidance on Accounting for
Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities”,
which provides implementation guidance on accounting for uncertainty in income
taxes, as well as eliminates certain disclosure requirements for nonpublic
entities. For entities that are currently applying the standards for
accounting for uncertainty in income taxes, this update shall be effective for
interim and annual periods ending after September 15, 2009. For those entities
that have deferred the application of accounting for uncertainty in income taxes
in accordance with paragraph 740-10-65-1(e), this
update shall be effective upon adoption of those standards. The adoption of this
standard is not expected to have an impact on the Company’s consolidated
financial position and results of operations since this accounting standard
update provides only implementation and disclosure amendments.
In September 2009, the FASB has
published ASU No. 2009-12, “Fair Value Measurements and Disclosures (Topic 820)
- Investments in Certain Entities That Calculate Net Asset Value per Share (or
Its Equivalent)”. This ASU amends Subtopic 820-10, “Fair Value Measurements and
Disclosures – Overall”, to permit a reporting entity to measure the fair value
of certain investments on the basis of the net asset value per share of the
investment (or its equivalent). This ASU also requires new disclosures, by major
category of investments including the attributes of investments within the scope
of this amendment to the Codification. The guidance in this Update is effective
for interim and annual periods ending after December 15, 2009. Early application
is permitted. The
adoption of this standard is not expected to have a material impact on the
Company’s consolidated financial position and results of
operations.
In October 2009, the FASB has published
ASU 2009-13, “Revenue Recognition (Topic 605)-Multiple Deliverable Revenue
Arrangements”, which addresses the accounting for multiple-deliverable
arrangements to enable vendors to account for products or services
(deliverables) separately rather than as a combined unit. Specifically, this
guidance amends the criteria in Subtopic 605-25, “Revenue
Recognition-Multiple-Element Arrangements”, for separating consideration in
multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c)
estimates. This guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method and also
requires expanded disclosures. The guidance in this update is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is permitted.
The adoption of this standard is not expected to have any impact on the
Company’s consolidated financial position and results of
operations.
In October 2009, the FASB has published
ASU 2009-14, “Software (Topic 985)-Certain Revenue Arrangements that Include
Software Elements” and changes the accounting model for revenue arrangements
that include both tangible products and software elements. Under this guidance,
tangible products containing software components and nonsoftware components that
function together to deliver the tangible product's essential functionality are
excluded from the software revenue guidance in Subtopic 985-605,
“Software-Revenue Recognition”. In addition, hardware components of a tangible
product containing software components are always excluded from the software
revenue guidance. The guidance in this ASU is effective prospectively
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is permitted. The
adoption of this standard is not expected to have any impact on the Company’s
consolidated financial position and results of operations.
Other
ASUs not effective until after September 30, 2009, are not expected to have
a significant effect on the Company’s consolidated financial position or results
of operations.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial conditions, changes in
financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources.
14
ITEM
3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
applicable.
ITEM
4T. CONTROLS AND
PROCEDURES
As of the
end of the period covered by this quarterly report on Form 10-Q, we evaluated
the effectiveness of the design and operation of (i) our disclosure controls and
procedures, and (ii) our internal control over financial reporting. The
evaluators who performed this evaluation were our Chief Executive Officer and
Chief Financial Officer; their conclusions, based on and as of the date of the
evaluation (i) with respect to the effectiveness of our disclosure controls and
(ii) with respect to any change in our internal controls that occurred during
the most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect our internal controls are presented
below.
CEO
and CFO Certifications
Attached to this quarterly report, as
Exhibits 31.1 and 31.2, are certain certifications of the CEO and CFO, which are
required in accordance with the Exchange Act and the Commission’s rules
implementing such section (the "Rule 13a-14(a)/15d-14(a) Certifications"). This
section of the quarterly report contains the information concerning the
evaluation referred to in the Rule 13a-14(a)/15d-14(a) Certifications. This
information should be read in conjunction with the Rule 13a-14(a)/15d-14(a)
Certifications for a more complete understanding of the topic
presented.
Disclosure
Controls and Internal Controls
Disclosure controls are procedures
designed with the objective of ensuring that information required to be
disclosed in the Company's reports filed with the Securities and Exchange
Commission under the Securities Exchange Act, such as this quarterly report, is
recorded, processed, summarized and reported within the time period specified in
the Commission’s rules and forms. Disclosure controls are also designed with the
objective of ensuring that material information relating to the Company is made
known to the CEO and the CFO by others, particularly during the period in which
the applicable report is being prepared. Internal controls, on the other hand,
are procedures which are designed with the objective of providing reasonable
assurance that (i) the Company's transactions are properly authorized, (ii) the
Company’s assets are safeguarded against unauthorized or improper use, and (iii)
the Company's transactions are properly recorded and reported, all to permit the
preparation of complete and accurate financial statements in conformity with
accounting principles generally accepted in the United States.
Limitations
on the Effectiveness of Controls
The Company's management does not
expect that their disclosure controls or their internal controls will prevent
all error and all fraud. A control system, no matter how well developed and
operated, can provide only reasonable, but not absolute assurance that the
objectives of the control system are met. Further, the design of the control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of a system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated objectives under all potential future conditions. Over
time, control may become inadequate because of changes in conditions, or because
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
15
Scope
of the Evaluation
The CEO and CFO’s evaluation of our
disclosure controls included a review of the controls’ (i) objectives, (ii)
design, (iii) implementation, and (iv) the effect of the controls on the
information generated for use in this quarterly report. In the course of the
evaluation, the CEO and CFO sought to identify data errors, control problems and
acts of fraud, and they sought to confirm that appropriate corrective action,
including process improvements, was being undertaken. This type of evaluation is
done on a quarterly basis so that the conclusions concerning the effectiveness
of our controls can be reported in our quarterly reports on Form 10-Q and annual
reports on Form 10-K. The overall goals of these various evaluation activities
are to monitor our disclosure controls and internal controls, and to make
modifications if and as necessary. Our external auditors also review internal
controls in connection with their audit and review activities. Our intent in
this regard is that the disclosure controls and the internal controls will be
maintained as dynamic systems that change (including improvements and
corrections) as conditions warrant.
Among other matters, the evaluation was
to determine whether there were any significant deficiencies or material
weaknesses in our internal controls, which are reasonably likely to adversely
affect our ability to record, process, summarize and report financial
information, or whether the evaluators identified any acts of fraud, whether or
not material, involving management or other employees who have a significant
role in our internal controls. This information was important for both the
evaluation, generally, and because the Rule 13a-14(a)/15d-14(a) Certifications,
Item 5, require that the CEO and CFO disclose that information to our Board
(audit committee), and our independent auditors, and to report on related
matters in this section of the quarterly report. In the professional auditing
literature, "significant deficiencies" are referred to as "reportable
conditions". These are control issues that could have significant adverse affect
on the ability to record, process, summarize and report financial data in the
financial statements. A "material weakness" is defined in the auditing
literature as a particularly serious reportable condition where the internal
control does not reduce, to a relatively low level, the risk that misstatement
caused by error or fraud may occur in amounts that would be material in relation
to the financial statements and not be detected within a timely period by
employees in the normal course of performing their assigned functions. The
evaluators also sought to deal with other controls matters in the evaluation,
and in each case, if a problem was identified, they considered what revisions,
improvements and/or corrections to make in accordance with our ongoing
procedures.
Conclusions
Based upon the evaluation, our CEO and
CFO concluded that our disclosure controls and procedures as of September 30,
2009 were not
effective such that the information required to be disclosed by us in reports
filed under the Exchange Act is (i) recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and (ii)
accumulated and communicated to our management, including our CEO and CFO, as
appropriate to allow timely decisions regarding disclosure. They concluded that
the Company’s disclosure controls were ineffective due to the inability to
timely file the annual report on Form 10-K and the material weaknesses in its
internal controls over financial reporting as described below,
which led us to file our 10-K late. The actions being taken to
address these ineffective disclosure controls and procedures are set forth
below. Based upon the Evaluation, our CEO and CFO also concluded that our
internal controls are not effective at that assurance level to provide
reasonable assurance that our financial statements are fairly presented in
conformity with accounting principles generally accepted in the United States,
as more fully described below.
Management determined that, as of
September 30, 2009, the Company did not maintain effective internal control over
financial reporting. Management identified the following specific
material weaknesses in the Company’s internal controls over its financial
reporting processes (a material weakness is a deficiency, or a combination of
control deficiencies, in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of the Company’s
annual or interim financial statements will not be prevented or detected on a
timely basis):
•
|
Policies
and Procedures for the Financial Close and Reporting Process — Currently
there are no written policies or procedures that clearly define the roles
in the financial close and reporting process. The various roles
and responsibilities related to this process should be defined,
documented, updated and communicated. Failure to have such
policies and procedures in place amounts to a material weakness to the
Company’s internal controls over its financial reporting
processes.
|
16
•
|
Inability
to close our books and generate required disclosure – Due to timing
constraints related to the finalization of material agreements, we
recognize a material weakness regarding our inability to simultaneously
close the books on a timely basis each month and quarter and to generate
all the necessary disclosure for inclusion in our filings with the
Securities and Exchange Commission. This material weakness caused us to be
late in our filing.
|
•
|
Accounting
and Finance Personnel Weaknesses – Our current accounting staff is
relatively small and we do not have the required infrastructure of meeting
the higher demands of being a U.S. public company. Due to the size of our
accounting staff, we have limitations in the segregation of duties
throughout the financial reporting processes. Due to the
pervasive nature of this issue, the lack of segregation of duties amounts
to a material weakness to the Company’s internal controls over its
financial reporting processes.
|
In light of the foregoing, once we have
the adequate funds, management plans to develop the following additional
procedures to help address these material weaknesses. We believe that
these additional steps will further enhance and strengthen the remediation steps
we implemented in fiscal 2008 to address the material weaknesses we discovered
in our 2007 evaluation, which we believed were sufficient to cure such material
weakness. We recognize now that these must be expanded and developed
to help ensure we achieve and maintain effective controls and
procedures. The Company will create and refine a structure in which
critical accounting policies and estimates are identified, and together with
other complex areas, are subject to review by other members of management as
well as the Company’s independent accountant. We also plan to enhance
and test our quarter-end and year-end financial close
process. Additionally, our board of directors will increase its
review of our disclosure controls and procedures. We also intend to
develop and implement policies and procedures for the financial close and
reporting process, such as identifying the roles, responsibilities,
methodologies, and review/approval process; we also hope to implement a detailed
financial close plan and enhanced and timelier review of manual journal entries,
account reconciliations, estimates and judgments.
Finally, it is our intention to engage
professionals on an as needed basis to assist the Company in the financial
reporting process. We believe these actions will remediate the
material weaknesses by focusing additional attention and resources in our
internal accounting functions. However, the material weaknesses will
not be considered remediated until the applicable remedial controls operate for
a sufficient period of time and management has concluded, through testing, that
these controls are operating effectively and even then, we cannot assure you
that this will be sufficient. We may be required to expend additional resources
to identify, assess and correct any additional weaknesses in disclosure or
internal control. The Company cannot make assurances that it will not identify
additional material weaknesses in its internal control over financial reporting
in the future.
As of the
date of the of this report, we have taken the following steps to address the
above-referenced material weakness in our internal control over financial
reporting to ensure that all information will be recorded, processed, summarized
and reported accurately:
1.
|
On
August 7, 2009, we filed an amended the 10-K to include the Management’s
Report on Internal Controls Over Financial Reporting;
|
2.
|
We
will continue to educate our management personnel on compliance with the
disclosure requirements of the Securities Exchange Act of 1934
and Regulation S-K; and
|
3.
|
We
have increased management oversight of accounting and reporting
functions.
|
The presence of these material
weaknesses does not mean that any misstatement has occurred in our financial
statements, but only that our present controls might not be adequate to detect
or prevent a material misstatement in a timely manner.
17
Changes
in Internal Control over Financial Reporting
There have been no changes in our
internal controls over financial reporting that occurred during our fiscal
quarter to which this Quarterly Report on Form 10-Q relates that have
materially affected, or are reasonably likely to materially affect our internal
controls over financial reporting.
PART
II
ITEM
1.
LEGAL PROCEEDINGS
As of
September 30, 2009, there were no legal actions pending against us, or any
subsidiary, or of which our property, or the property of any subsidiary, was
subject nor to our knowledge are any such proceedings contemplated.
Our
subsidiary, AdvisorShares Investments, LLC is currently not involved in any
legal proceedings.
Notwithstanding
the foregoing, an arbitration proceeding was commenced on November 7, 2008
against Mr. Noah Hamman, AdvisorShares' CEO and part owner ("Member") of Arrow
Investment Advisors, LLC ("Arrow"), by Arrow. The arbitration was
commenced pursuant to the provisions of the LLC Operating Agreement of Arrow and
brought under the auspices of the International Institute for Conflict
Prevention and Resolution in New York, as required under the LLC Operating
Agreement. The arbitration involves the other Members of Arrow who have asserted
an ownership claim regarding Mr. Hamman's ownership interest in
AdvisorShares. Such Members claim that AdvisorShares’ business is
based on the improper usurpation and conversion by Mr. Hamman of Arrow’s
corporate opportunities and assets, including the business of
AdvisorShares. The arbitration hearing is currently scheduled for December
14, 2009 and a decision is expected approximately 30 days
thereafter.
If the
other Members of Arrow prevail on their claims, this could impact the amount of
ownership Mr. Hamman indirectly holds in AdvisorShares in that Mr. Hamman could
lose his 40% interest in AdvisorShares to Arrow. In addition, if Arrow
prevails, Arrow could assert other claims including that the Purchase and
Contribution Agreement (to which we are a party) was inappropriately executed
and seek to nullify the obligations associated with that agreement. In such
event, we could lose our investment in AdvisorShares and
have to undergo the process of seeking another acquisition that could provide us
with the results we hope to receive from acquiring our membership interest in
AdvisorShares. Although we would vigorously defend against any award in the
arbitration that would cause us to lose our investment in AdvisorShares, there
is no assurance that we would be successful in such defense, or if required, in
locating or consummating an appropriate alternative acquisition
transaction.
Other
than as set forth herein, we are not a party to any material legal proceeding
and to our knowledge no such proceeding is currently contemplated or pending.
ITEM
1A. RISK
FACTORS
There
have been no material changes to the risks to our business described in our
Annual Report on Form-10-K/A for the year ended December 31, 2008 filed with the
SEC on August 7, 2009.
ITEM
2.
UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
Effective as of August 28, 2009, the
board of directors of the Company authorized and granted to Lucas Mann, its
former director and officer, a stock award in the amount of 964,285 shares of
the Company’s Class A Common Stock, (the “Mann Shares”), along with a similar
grant and award of 964,285 shares of the Company’s Class A Common Stock, to
Daniel Klaus, its former director (the “Klaus Shares”), each valued at $0.21 per
share in lieu of 50% of an aggregate of $405,000 of past due consulting payments
owed by the Company to Fabric Group, LLC (“Consultant”) pursuant to the terms of
that certain Consulting Agreement between the Company and Consultant dated as of
February 1, 2008, as amended as of March 9, 2009 (the “Consulting
Agreement”). The Mann Shares and Klaus Shares are fully vested
and owned by Messrs. Mann and Klaus, respectively, as of August 28,
2009. Messrs. Mann and Klaus agreed that they cannot sell, pledge,
hypothecate, transfer or assign the Mann Shares and Klaus Shares, respectively,
until April 30, 2010 (the “Lockup Expiration Date”) and that they will not
publicly sell, in any one month, a number of their Mann Shares and Klaus Shares,
respectively, that exceed 100% of the average weekly trading volume of Company
shares, during the immediately preceding month. In addition, the Company
has the irrevocable option, exercisable at any time and from time to time until
the Lockup Expiration Date, to redeem the Mann Shares and Klaus Shares,
respectively, at a purchase price of $0.21 per share. Based upon the
foregoing, the Mann Shares and Klaus Shares are being held in escrow pending the
expiration of the Lockup Expiration Date.
18
In October 2009, we issued options (the
“Options”) to purchase an aggregate of 1,600,000 shares of Class A common stock
which was approved by our board of directors on May 14, 2009 under our Amended
and Restated 2007 Stock Incentive Plan to the following directors and officers,
and in the following amounts, as compensation for services performed and to be
performed on behalf of our company:
Grantee
|
Number
of Options
|
|||
Gregory
Webster
|
750,000 | |||
Philip
Gentile
|
250,000 | |||
Michael
Hlavsa
|
250,000 | |||
Ivar
Eilertsen
|
300,000 | |||
Raul
Biancardi
|
50,000 |
The Options are exercisable at a
price of $0.60 per share for a period of 5 years from the date of
grant. The Options vest as follows: (i) 1/3rd on
May 14, 2009; (ii) 1/3rd on
May 14, 2010; and (iii) 1/3rd on
May 14, 2011.
In October 2009, we issued 100,000
restricted shares of our Class A common stock to Gregory Webster which was
approved by our board of directors on May 14, 2009 under our Amended and
Restated 2007 Stock Incentive Plan as compensation for services performed and to
be performed on behalf of our company. In addition, on May 14, 2009
our board of directors approved the issuance of an additional 150,000 restricted
shares of our Class A common stock to Gregory Webster as compensation for
services performed and to be performed on behalf of our company which vest as
follows: (i) 75,000 on May 14, 2010; and (ii) 75,000 on May 14,
2011.
On November 2, 2009, IP Global sold
$623,700 principal amount of its $2,500,000 convertible note to Bleecker
Holdings Inc. (“Bleecker”), an entity wholly-owned by Joseph J. Bianco, our
Chairman of the Board, and sold an additional $6,300 principal amount of the
note to one other unaffiliated entity. Under the terms of the sale, each of the
purchasers paid an aggregate of $630,000 by delivery of their 5% seven year
recourse notes to IP Global.
All of the above offerings and sales
were deemed to be exempt under rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, as amended. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors, business
associates of Fund.com Inc. or executive officers of Fund.com Inc., and transfer
was restricted by Fund.com Inc. in accordance with the requirements of the
Securities Act of 1933. In addition to representations by the above-referenced
persons, we have made independent determinations that all of the
above-referenced persons were accredited or sophisticated investors, and that
they were capable of analyzing the merits and risks of their investment, and
that they understood the speculative nature of their investment. Furthermore,
all of the above-referenced persons were provided with access to our Securities
and Exchange Commission filings.
ITEM
3. DEFAULTS
ON SENIOR SECURITIES
As
reported in the Company’s Form 8-K dated April 8, 2009, Global Asset Fund
Limited a company organized under the laws of the British Virgin Islands (:GAF”)
made a $500,000 demand loan to the Company to provide it with funds to provide
initial financing to National Holdings Corporation. As collateral to
secure the loan, the Company pledged a $500,000 limited recourse note of
National Holdings Corporation to GAF. On May 15, 2009, pursuant to
its terms, the National Holdings Note was converted into 666,666 shares of the
common stock of National Holdings which were pledged to GAF. At
September 30, 2009, the $500,000 note had not been repaid. On
November 3, 2009, GAF and the Company settled the $500,000 obligation by
transferring the pledged stock to GAF.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to our security holders during the period covered by this
report.
19
ITEM
5. OTHER
INFORMATION
None.
ITEM
6. EXHIBITS
The
exhibits listed below are required by Item 601 of Regulation
S-K. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form 10-Q has been
identified.
Exhibit
No.
|
Exhibit
Name
|
|
31.1
|
Certification
of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange
Act, as enacted by Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange
Act, as enacted by Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 United States Code Section
1350, as enacted by Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 United States Code Section 1350,
as enacted by Section 906 of the Sarbanes-Oxley Act of
2002.
|
20
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.
Date:
November 23, 2009
|
FUND.COM
INC.
|
/s/
Gregory Webster
|
|
Gregory
Webster
|
|
Chief
Executive Officer (Principal Executive
Officer)
|
21