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EX-32.1 - SAHARA MEDIA HOLDINGS, INC.v181305_ex321.htm
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UNITED STATES
 
 SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
___________________________
 
FORM 10-K
 
 
(mark one)
 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the fiscal year ended December 31, 2009
   
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _______ to _______
 
Commission File No. 000-52363
 
SAHARA MEDIA HOLDINGS, INC.
(Exact Name of registrant as specified in its charter)
 
Delaware
74-2820999
(State or Other Jurisdiction of Incorporation
or Organization)
(I.R.S.  Employer Identification No.)
   
81 Greene Street, 4 th Floor, New York, New York
10012
(Address of Principal Executive Offices)
(Zip Code)
   
(212) 343-9200
(Issuer’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Each Class
to be so Registered:
Name of each exchange on which registered
None
None

Securities registered under Section 12(g) of the Act:

Common Stock, Par Value $.003
(Title of Class)

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

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

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 such filing requirements for the past 90 days.  Yes [X] No []

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files. Yes [ ] No [ ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or amendment to Form 10-K. Yes [X] No [ ]

 

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

Large Accelerated Filer [_]                                                                Accelerated Filer [_]
Non-accelerated Filer     [_]                                                                Smaller reporting company [X]

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

As of June 30, 2009, the aggregate market value of the issued and outstanding common stock held by non-affiliates of the registrant, based upon the closing price of the common stock, under the symbol  “SHHD” as quoted on the OTC Bulletin Board was approximately $36.5 million.   For purposes of the statement in the preceding statement, all directors, executive officers and 10% shareholders are assumed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for any other purpose.


(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [_] No [_]

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: The Registrant’s common stock outstanding as of April 6, 2010, was 33,491,709 shares of common stock.

 
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SAHARA MEDIA HOLDINGS, INC.
 
 
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FORWARD-LOOKING STATEMENTS

Certain statements made in this report on Form 10-K are "forward-looking statements" regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Sahara Media Holdings, Inc. (the "Company", “we”, “us”, or “our”) to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company's plans and objectives are based, in part, on assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.

 
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PART I
 
 
Sahara Media Holdings, Inc. (the “Company”) is a Delaware corporation organized on September 26, 1997 under the name Keystone Entertainment, Inc. On January 14, 1998, the Company’s corporate name was changed to Mac Filmworks, Inc. (“MFI”).   On September 26, 2008, the Company’s corporate name was changed to Sahara Media Holdings, Inc.   References in this report on Form 10-K to, “we,” “us,” “our” and similar words refer to the Company and its wholly-owned subsidiary, “Sahara”, unless the context indicates otherwise, and, prior to the effectiveness of the reverse acquisition discussed below, these terms refer to Sahara Media, Inc. References to MFI relate to the Company prior to the reverse acquisition.
 
From October 2007 until its acquisition of Sahara Media, Inc. in September 2008, MFI was not engaged in any active business. Prior to October 2007, MFI had a limited operating history engaged in the development, marketing and sales of a library of feature films, television series, and made-for-television movies for sale through various channels. The Company did not generate any revenues during the years ended December 31, 2007 and December 31, 2006. In October 2007, MFI completed an asset sale transaction whereby it issued 276,674 shares of MFI’s common stock and transferred substantially all of MFI’s assets net of accounts payable to Jim McCullough, its then Chief Executive Officer, in exchange for McCullough forgiving $405,673 in debt owed by MFI to Mr. McCullough and his affiliates. Effective upon the completion of the asset sale, MFI ceased all active business operations.

On September 17, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Sahara Media Acquisitions, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (the “Subsidiary”) and Sahara Media, Inc., a Delaware corporation.  Pursuant to the Merger Agreement, which closed on September 17, 2008 (the “Closing Date”), the Subsidiary merged into Sahara Media, Inc. and Sahara Media, Inc. became a wholly-owned subsidiary of the Company. Pursuant to the Merger Agreement, the Company issued 18,150,000 shares of the Company’s Common Stock to the shareholders of Sahara Media, Inc. (the “Acquisition Shares”) (subject to the placement of 5,000,000 Acquisition Shares in escrow pursuant to the Securities Escrow Agreement (defined below), representing approximately 58.9% of the Company’s aggregate issued and outstanding common stock following the closing of the Merger Agreement and the Private Placement (defined below) that closed in September and October of 2008, and the outstanding shares of common stock of Sahara Media, Inc. were cancelled and converted into the right to receive the Acquisition Shares. The 18 shareholders of Sahara Media, Inc. who were issued the 18,150,000 Acquisition Shares were all accredited investors.

In connection with the recapitalization, on September 17, 2008, October 8, 2008, and October 20, 2008, the Company entered into a series of identical subscription agreements (the “Subscription Agreements”) with accredited investors (the “Investors”), pursuant to which, the Company issued and sold approximately 79.44 units, with each unit consisting of 100,000 shares of Common Stock and five-year warrants to purchase 100,000 shares of common stock with an exercise price of $2.50, for a purchase price of $125,000 per unit (the “Private Placement”). Pursuant to the Private Placement, the Company issued and sold to the Investors an aggregate of 7,944,034 shares of common stock (the “Common Shares”) and five-year warrants to purchase 7,944,034 shares of Common Stock  with an exercise price of $2.50 (the “Investor Warrants”), for an aggregate purchase price of approximately $9,930,000. The Investor Warrants may not be exercised to the extent such exercise would cause the holder of the warrant, together with its affiliates, to beneficially own a number of shares of common stock which would exceed 4.99% of the Company’s then outstanding shares of common stock following such exercise. Pursuant to the Subscription Agreements, the Company agreed to use its reasonable best efforts to file a registration statement registering the Common Shares and the shares of common stock underlying the Investor Warrants, subject to Securities and Exchange Commission (“SEC”) limitations, within 45 days of the filing by the Company with the SEC of its report on Form 8K reporting the reverse acquisition (which filing occurred on September 24, 2008).
 

 


 
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John Thomas Financial, Inc. (“JTF”) was retained as the exclusive placement agent for the Private Placement.  JTF received a commission of approximately $993,000 (equal to 10% of the gross proceeds) and a non-accountable expense allowance of approximately $297,900 (equal to 3% of the gross proceeds). JTF also received a finder’s fee of $200,000 in connection with the reverse acquisition, and a success fee of $400,000, based on the receipt of gross proceeds of at least $8,000,000. Upon exercise of the Investor Warrants, JTF will receive a 10% commission and a 3% non-accountable expense allowance. In addition, we have retained JTF to assist us with our investment banking requirements on an exclusive basis for a period of one year, pursuant to which, on the Closing Date, the placement agent was issued five-year warrants to purchase 1,000,000 shares of common stock of the Company with an exercise price of $1.30 (the “Broker Warrants”). The Broker Warrants are exercisable on a cashless basis, which represents stock settled stock appreciation rights.

JTF will also be issued one share of common stock of the Company for every four Investor Warrants that are exercised within 12 months of the date on which the registration statement registering the resale of the common stock underlying such Investor Warrants has been declared effective by the SEC, and we retained JTF as a consultant for a monthly fee of $10,000. Also, in connection with the reverse acquisition, on the Closing Date, JTF was issued 3,000,000 shares of the Company’s common stock. The Company also paid an additional finder’s fee of $120,000 to Aubry Consulting Group, Inc. in connection with the reverse acquisition.

In connection with the foregoing, the Company relied upon the exemption from securities registration afforded by Rule 506 of Regulation D as promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”) and/or Section 4(2) of the Securities Act. 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, and transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933.

In connection with the reverse acquisition, the following occurred:

(i) MFI completed a 30-to-1 reverse stock split of its common stock, pursuant to which MFI’s issued and outstanding shares of common stock, was reduced to 818,000 (prior to the Merger and the Private Placement). All share and per share information in this report on Form 10-K give retroactive effect to the reverse split.

(ii) The Company entered into a securities escrow agreement (the “Securities Escrow Agreement”) with Sahara Media, Inc., the shareholders of Sahara named therein (the “Sahara Escrow Shareholders”), and Sichenzia Ross Friedman Ference LLP, as escrow agent. Pursuant to the Securities Escrow Agreement, the Sahara Escrow Shareholders agreed to place 5,000,000 Acquisition Shares (the “Escrow Shares”) into an escrow account. The Escrow Shares will either be released to the Sahara Escrow Shareholders, or returned to the Company for cancellation, based upon the achievement of certain performance thresholds as set forth therein

(iii) Sahara Media, Inc. entered into an indemnification agreement (the “Indemnification Agreement”) with John Thomas Bridge & Opportunity Fund (“JTO”), pursuant to which JTO agreed to indemnify Sahara for any breaches of the representations and warranties made by the Company under the Merger Agreement, in an amount up to $400,000, for up to two years. Sahara paid JTO a fee of $400,000 upon the execution of the Indemnification Agreement.

Pursuant to the reverse acquisition, Sahara Media Holdings, Inc. became the parent company of Sahara Media, Inc., a Delaware corporation formed in January 2005. Sahara is a development-stage company located in New York City. Since its formation, Sahara has concentrated on the development of its business strategy. Until March 2004, Vanguarde Media, an entity not affiliated with Sahara, published Honey Magazine, a publication aimed at the 18-34 urban female demographic. As a result of financial difficulties of Vanguarde Media, Honey Magazine ceased publishing in 2004.  Vanguarde Media filed for bankruptcy in November 2003, and in February 2005 Sahara, through the bankruptcy proceedings, purchased the “Honey” trademark for the class of paper goods and printed matter (which relates to printed publications).

Although Vanguarde Media (which also owned Savoy and Heart & Soul magazines in addition to Honey) filed for bankruptcy, we believe we can succeed with the Honey brand. Honey magazine had circulation of 400,000, the largest of Vanuarde’s three publications (source: “Vanguarde media files for bankruptcy; Savoy, Heart & Soul, and Honey fold due to lack of capital, flawed business strategy”, Black Enterprise, February 2004, available at http://findarticles.com/p/articles/mi_m1365/is_7_34/ai_n6065782). While Honey under Vanguarde was a print publication, we have launched Honey online. Online advertising has been growing as a percentage of total advertising, reaching 7.6% in 2007 from 5.3% in 2004 (source: TNS Media Intelligence, “TNS Media Intelligence Reports U.S. Advertising Expenditures Grew 0.2 Percent in 2007”, March 25, 2008, available at http://www.tns-mi.com/news/03252008). Online advertising is projected to grow to 15.2% of total media advertising by 2013 (source: eMarketer, available at http://www.iab.net/insights_research/947883/1675/804370).In addition, our online magazine will leverage user generated content through our social network Hivespot.com.  Furthermore, by launching as an online rather than print magazine, we will avoid the printing and labor costs of print publications.
 
We expect that the primary components of our business will be:
 
·           Our online magazine Honeymag.com

·           Our social network Hivespot.com, which will be re-launched under a new name
             with new capabilities.

·           Our database of names in the 18-34 urban female demographic (“Honey Database”)

With the Honey brand and the Honey Database we will seek to connect with audiences and secure brand leadership for our target demographic.

The online magazine Honeymag.com and the social network Hivespot.com are currently operating websites that were officially launched on March 5, 2009. We believe this strategy will allow us to exploit the synergies of our online magazine and social networking site as well as live events.  Through December 31, 2009, our websites have had an aggregate of approximately 626,076 visits and 1,940,707 page views, by 473,208 unique visitors, with average time on site of 3 minutes and 13 seconds, and 7,023 registered users.
 
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We anticipate that our primary source of revenue will be the sale of advertising on our online magazine Honeymag.com and our social network. We plan to sell advertising through our direct sales ad team. We entered into advertising and sponsorship agreements for the sale of an aggregate of $60,000 in advertising and sponsorship in the second half of 2009, which generated $35,000 in 2009 revenues, and are currently in negotiations with additional potential advertisers which we believe have the potential to generate significantly greater revenues. We have chosen to not renew our ad aggregator agreements with BET and GLAM Media since we believe that through our direct sales ad team we have the ability to sell higher margin ads.
 
To increase our web traffic, we are working with web consultants who help us link our site with other websites, such as Facebook.com and Twitter.com (which does not require us to enter into agreements with such websites).  Linking to other websites allows us to attract web traffic from people who do not know about our site.  Additionally, we continually seek to improve the content on our site, which we believe will increase our page views because users of the site will stay on the site longer and visit more parts of the site.  Furthermore, we are currently in discussion regarding the sponsorship of a television program aimed at urban females, which we believe will have the potential to significantly increase traffic to our web site. There is no assurance such negotiations will lead to a definitive agreement or an increase in traffic to our web site.

The following table sets forth our web traffic for each month since the launch of our website in March 2009.

Month
Visits
Page views
Unique visitors
Registered users
March 2009
14,229
82,509
9,367
668
April 2009
21,425
82,374
15,967
211
May 2009
27,011
95,504
20,349
1,256   
June 2009
53,969
157,286
41,609
1,070   
July 2009
83,116
223,105
63,292
818
August 2009
73,355
225,214
54,754
677
September 2009
72,804
215,945
55,549
645
October 2009
77,444
277,856
56,472
904
November 2009
105,560  
291,352
87,000
608
December 2009
97,163
289,562
68,849
166
January 2010
97,361
251,760
70,932
899
February 2010
87,588
209,594
65,375
891
 
Based on the industry experience of our management, we believe that, at a level of approximately 75,000 monthly unique visitors, our website will be considered a viable advertising venue for companies seeking to target urban women, and thus further enable us to attract additional direct advertisers. As set forth above, we are undertaking numerous actions to increase our web traffic levels; nonetheless, there is no assurance we will be able to achieve or maintain this level of web traffic or generate significant advertising revenues.
  
We anticipate that we will begin efforts to generate revenue from licensing of the Honey Database commencing in the first half of 2010. There is no assurance we will succeed in generating revenues from the licensing of the Honey Database.
 
The Market Opportunity
 
We believe there is an unmet market need for a marketing product that integrates online and offline media.  Online advertising as a percentage of advertising budgets has been increasing over the years, reaching 7.6% in 2007 from 5.3% in 2004 (source: TNS Media Intelligence, “TNS Media Intelligence Reports U.S. Advertising Expenditures Grew 0.2 Percent in 2007”, March 25, 2008, available at http://www.tns-mi.com/news/03252008). For the first nine months of 2008, internet advertising spending grew 7% compared to the same period in 2007, even as total advertising spending declined 1.7% (source: TNS Media Intelligence, “TNS Media Intelligence Reports U.S. Advertising Expenditures Declined 1.7 Percent in First Nine Months of 2008”, available at http://www.tns-mi.com/news/12112008.htm)  

 Market Positioning and the Honey Database
 
We plan to develop and use Honey’s online presence, the Honey Database and other cost-effective marketing to reconnect with the Honey audience.
 
Sahara acquired approximately 3,660,000 of the 4,050,000 names (approximately 3,900,000 names after the database was scrubbed) included in the Honey Database pursuant to an asset purchase agreement (the “Database Purchase Agreement”), by and between Sahara Media, Inc. and BPA Associates, LLC (“BPA”). The remaining portion of the Honey Database, including approximately 384,000 names, was already owned by Sahara prior to entering into the Database Purchase Agreement. BPA is an entity owned by Bertha Anderson, who is the mother of Philmore Anderson IV, our chief executive officer. Under the Database Purchase Agreement, we paid BPA $825,000 in cash, of which $50,000 was paid upon the closing of a bridge loan in July 2008, and an additional $775,000 was paid upon the closing of the Private Placement on September 17, 2008. In addition, pursuant to the Database Purchase Agreement, upon the closing of the Private Placement, we issued BPA 1,425,000 shares of common stock. The closing under the Database Purchase Agreement occurred upon the closing of the Private Placement on September 17, 2008.
 
Commencing with the launch of our online magazine and social network in March 2009, we have begun to attract unique visitors to our online magazine and develop our advertising base by enhancing and refining our editorial and production standards to provide consistently fresh, relevant content.

Commencing in the first half of 2010, we will seek to expand the reach of the Honey brand through licensing to radio, television, consumer products, and other platforms as appropriate to reach our target demographic. We do not have any such licensing deals in place and cannot assure you that we will be successful in implementing and generating revenues from these plans.

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We do not anticipate incurring additional expenses in connection with these plans, apart from our ongoing operational expenditures as set forth under “Business Model” below.
 
Market Size and Analysis
 
African-American Consumer Profile: Young, Increasingly Affluent and Educated
 
The African-American population skews younger than the U.S. population. In 2005, the median age of the African-American population was 31.3 compared to 40.4 for non-Hispanic whites (source: U.S. Census Bureau, 2005) In addition, females represent a greater percentage of the African-American population than of the general U.S. population (Source: U.S. Census Bureau, 2004).
 
Snapshot of the African-American Market
 
The following trends provide specific evidence of the size, growth, and viability of Honey’s target market:
 
African-American influence pervades American culture—fashion, music, dance and language are just a few examples of the power that this market segment has on America.
 
From 1990 to 2012, the African-American population is projected to grow by 35.3% compared to a 26.6% increase for the total U.S. population (source: Jeffrey M. Humphreys, “The Multicultural economy 2007”, Georgia Business and Economic Conditions, Volume 67, Number 3, available at http://www.selig.uga.edu/forecast/GBEC/GBEC0703Q.pdf). Currently, the African-American population comprises 13% of the total U.S. population. The percent of African-Americans who are new immigrants continues to grow and contribute to the vitality of the community. The market research firm Synovate estimated in 2006 that 8.5% of the African-American population was foreign born. This represents an increase from the 7.4% of the African-American population who were immigrants in 1990 (Source: U.S. Census Bureau, 2004).
 
The buying power of African-Americans rose 166% in 17 years, from $318 billion in 1990 to $845 billion in 2007 (source: Jeffrey M. Humphreys, “The Multicultural economy 2007”, Georgia Business and Economic Conditions, Volume 67, Number 3, Third Quarter 2007, available at http://www.selig.uga.edu/forecast/GBEC/GBEC0703Q.pdf). By 2012, the buying power of African-Americans is projected to grow to more than $1 trillion (source: Jeffrey M. Humphreys, “The Multicultural economy 2007”, Georgia Business and Economic Conditions, Volume 67, Number 3, Third Quarter 2007, available at http://www.selig.uga.edu/forecast/GBEC/GBEC0703Q.pdf).
 
 Honey targets a significant segment within the African-American market

·                 There are 5.027 million African-American women between the ages of 18 – 34 (source: U.S. Census Bureau, 2004)

·                 86% of African-Americans adults are regular magazine readers, compared to 85% of all U.S. adults, as of the fall of 2007 (source: Magazine Publishers of America, “African-American/Black Market Profile” (2008), available at http://www.magazine.org/ASSETS/2457647D5D0A45F7B1735B8ABCFA3C26/market_profile_black.pdf, and filed as an exhibit to the registration statement of which this prospectus forms a part (the “MPA Report”)

·                 The median number of magazine issues read in a month by African-American magazine readers is 10.7, compared to 7.5 per month for all U.S. adults, as of the fall of 2007 (source: MPA Report).
 
 
Competition
 
We face formidable competition in every aspect of our business, and particularly from other companies that seek to connect people with information and entertainment on the web. We intend to leverage the Honey brand by integrating our online magazine and the Honey Database, and working with our operational, PR and professional partners to effectively compete. Below is a breakdown of the competition that we face in our three main planned business segments.
 
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Competition in the Social Networking Space

Online social networking services are used regularly by millions of people. We believe that the principal competitive factors in the social networking market are name recognition, functionality, performance, ease of use, value-added services and features, and quality of support.

We will seek to reach our core target demographic of African-American women in the 18-34 age bracket through content that integrates our social networks Hivespot.com and the full version of our online magazine. We will exploit content and brand equity from Honey’s six-year run as a print publication.  We also plan to attract users to our social network through use of our Honey Database of approximately 3.9 million women in our target demographic.

Competition in the Online Magazine Space

We officially launched Honeymag.com as an online magazine on March 5, 2009. We believe there is not currently any other pure online magazine especially targeting urban women. Accordingly, we believe the principal competition for the online magazine will be the websites of print publications targeted at African-Americans.

We will attempt to distinguish Honey from its competition through unique and original content developed for our Honey brand, as well as through content that integrates our social network Hivespot.com and the full version of our online magazine. In addition, we plan to exploit content and brand equity acquired from Honey’s six year run as a print publication. We also plan to attract readers to our online magazine by use of our Honey Database of approximately 3.9 million women in our target demographic. In addition, by launching as an online rather than print magazine, we will avoid the printing and labor costs of print publications.

Competition in the Database Management Business
 
Our main asset besides our Honey brand is our proprietary Honey Database. We believe the Honey Database will be integral to our business, by generating revenue through the licensing of the Honey Database to advertisers, political parties, and others.

We do not anticipate that competition in the database management business will materially affect our operations. We will seek to compete in the database management business by continually enhancing and growing our database through individual registration on our online magazine and social network websites.
 
 
Honey Brand Name
 
The Honey brand is aimed at the 18-34 year old black female. It aims to address the lifestyle and interests of this demographic by providing editorial content that is relevant, entertaining, informative, and inspiring.

Description of the Brand

We intend to re-establish the Honey brand with a focus on the issues and lifestyle that affect the black female--what she wears, what she wants out of her career, how she connects to others, what she aspires to in life, and how she feels about herself.

To re-establish the Honey brand, we intend to create and provide content such as skin care tips, make-up techniques, club fashion, clothing reviews, shopping advice, sexual columns, and health news, all from a young, black, female perspective.

We believe that at this time, there is no other online publication exclusively targeting the 18-34 urban female market.

Honey’s closest competition is Essence magazine. However, Essence’s audience base is older, married, and has a higher percentage of men.

Other competition includes magazines targeting African-American readership in general: Ebony, Vibe, Vixen, Jet, Source, and Black Enterprise. However, these publications have had a different editorial focus.

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Business Model
 
Bringing the Online and Offline Models Together
 
We will seek to combine online advertising and live events under one roof. To this end, the Honey Database will be used to maximize Honey’s brand awareness and to drive traffic to our social network, online magazine and to events.
 
Commencing in the second half of 2009, we implemented a plan to hold live events through partnerships with sponsors seeking to reach Honey’s target demographic, such as, a record launch sponsored by a liquor company, or a hairstyle-related event sponsored by a cosmetics company. If we are successful in implementing such plans, the sponsor of the event would pay us a fee for holding the event, for the exposure to Honey’s target demographic. In July 2009 we participated in the Essence Music Festival where we hosted a VIP lounge on behalf of a cosmetics company client. We are currently in discussions regarding an additional live event featuring musical performances to be held in the second half of 2010. There is no assurance such discussions will result in a definitive agreement.
 
Through online advertising, direct marketing, events and social networking, we will seek to leverage the Honey brand name and the Honey Database.

We will seek to quickly connect with Honey’s past advertisers while forging new agency and corporate relationships.

We will also seek to create advertising impact, such that advertising agencies and brands will view Honey as the best way to reach our highly targeted audience. Ads should appear in the relevant editorial context to maximize receptivity. Online quality and ad layout should exceed sponsor expectations.  We will seek to integrate Honey’s online content with the social network Hivespot.com to maximize our target marketing potential.

Finally, we will seek to make all production and distribution dates in a timely fashion while exercising cost discipline in all areas of the business.

Content for the magazine will be driven by the full-time and freelance editorial staff, re-purposed past content from the Honey print publication, and user generated content through our proprietary social network Hivespot.com.
 
Ongoing operational expenditures related to content development fall under the following categories:
 
§                   Editorial staff salaries (approximately $394,000 annually)
§                   Distribution & network expense (approximately $162,000 annually)
§                   Editorial & creative expense (approximately $120,000 annually)
§                   Amortization expense (approximately $600,000 annually)
§                   Rent expense (approximately $281,000 annually)
§                   Office expenses (approximately $14,000 annually)
§                   Insurance (approximately $41,000 annually)
§                   Utilities (approximately $46,000 annually)

We intend to seek additional capital through the sale of equity securities, and together with anticipated revenues, we believe that such additional capital will be sufficient to fund our content generation. However, we cannot assure you that such financing will be secured, our cost estimates are accurate, that anticipated revenues will materialize, or that unforeseen events will not occur that would cause us to seek additional funding to meet our need for working capital. There can be no assurance that additional financing, if and when needed, will be available in amounts or on terms acceptable to us, or at all.
 
Expansion Plan
 
We anticipate that the foundation for our expansion, will involve:

·      The utilization of the Honeymag.com website and its integration with the social network Hivespot.com, which will be re-launched under a new name with new capabilities in mid-2010, to drive web traffic;
 
·       The licensing of our Honey Database for potential revenue generation (we anticipate commencing efforts to generate revenue from licensing the Honey Database commencing in the first half of 2010)
 
·       The holding of live events in partnership with sponsors (which we commenced in the second half of 2009), such as, for example, a record launch sponsored by a liquor company (no such arrangements are currently in place); and

·        Our use of direct mail and email to contact names on our Honey Database,
 
Commencing in the third quarter of 2009, we launched Honey as a quarterly, limited edition online magazine.

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We anticipate that the cost of re-launching our social network with new capabilities will be approximately $400,000, of which approximately $162,000 was incurred through December 31, 2009. We do not anticipate incurring any other additional expenses in connection with our expansion plans, apart from our ongoing operational expenditures as set forth under “Business Model” above.

We intend to seek additional capital through the sale of equity securities, and together with anticipated revenues, we believe that such additional capital will be sufficient to fund our content generation. However, we cannot assure you that such financing will be secured, our cost estimates are accurate, that anticipated revenues will materialize, or that unforeseen events will not occur that would cause us to seek additional funding to meet our need for working capital. There can be no assurance that additional financing, if and when needed, will be available in amounts or on terms acceptable to us, or at all.
 
Sales Strategy

We plan to generate revenues through (i) advertising sales from our online magazine and social network websites; (ii) licensing our Honey Database; and (iii) direct marketing and sponsorships.
 
We anticipate that our advertising revenues will begin to scale in the second half of 2010.  We plan to sell advertising through our direct sales ad team. We entered into advertising and sponsorship agreements for the sale of an aggregate of $60,000 in advertising and sponsorship in the second half of 2009, which generated $35,000 in 2009 revenues, and are currently in negotiations with additional potential advertisers which we believe have the potential to generate significantly greater revenues. There is no assurance that such negotiations will result in definitive agreements or the generation of any revenues. We have chosen to not renew our ad aggregator agreements with BET and GLAM Media since we believe that through our direct sales ad team we have the ability to sell higher margin ads. The amount of advertising revenue generated will be directly related to the amount of web traffic the sites will generate.

To increase our web traffic, we are working with web consultants who help us link our site with other websites, such as Facebook.com and Twitter.com (which does not require us to enter into agreements with such websites).  Linking to other websites allows us to attract web traffic from people who do not know about our site.  Additionally, we continually seek to improve the content on our site, which we believe will increase our page views because users of the site will stay on the site longer and visit more parts of the site.  Furthermore, we are currently in discussion regarding the sponsorship of a television program aimed at urban females, which we believe will have the potential to significantly increase traffic to our web site. There is no assurance such negotiations will lead to a definitive agreement or an increase in traffic to our web site.

Based on the industry experience of our management, we believe that, at a level of approximately 75,000 monthly unique visitors, our website will be considered a viable advertising venue for companies seeking to target urban women, and thus further enable us to attract additional direct advertisers (see table in “Item 1.Business.” for details of our monthly web traffic). As set forth above, we are undertaking numerous actions to increase our web traffic levels; nonetheless, there is no assurance we will be able to achieve or maintain this level of web traffic or generate significant advertising revenues.

We anticipate that we will begin efforts to generate revenue from licensing of the Honey Database commencing in the first half of 2010. There is no assurance we will succeed in generating revenues from the licensing of the Honey Database.
 
We plan to target both brands, including both past Honey advertisers and new prospects; and agencies, including African-American focused and other agencies, to secure advertising sales.

For both brands and agencies, we will offer a range of sponsorships, including online ads, special issues, special sections, branded promotions, and other integrated media as appropriate.

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The following are priorities for our sales effort, commencing with the launching of our online magazine and social network in March 2009:

· Connect with advertisers who have supported Honey in the past

· Leverage special issues and promotions for increased ad sales

Honey will use a range of special issues, sections, and promotions to add value for advertising partners and attract new sponsors.

Special issues currently planned include Holiday Gift Guide, Automotive, Travel, and Health. These issues will be complemented by a range of promotional opportunities such as travel contests, beauty makeover contests, technology giveaway contests, and others as appropriate.

· Develop rate incentive program for new and valued advertising partners

Charter advertiser incentives will be developed for advertising partners who commit to long-term insertions. Currently, we plan to offer a rate break for those who commit to nine or more insertions.

· Provide integrated, multi-platform solutions to complement online offering

The focus of our initial media programs will be the online magazine and social network supplemented by off-line promotion.

We believe that in the coming years, advertisers will increasingly demand integrated media solutions that combine print, web, events, and broadcast media. To meet this demand, we anticipate the development of a number of other media options, including Honey Radio, Honey TV, Honey Music, and other brand extensions. Our success does not rely on these extensions. However, we believe that they will be a highly cost effective way to enhance brand equity while creating additional sponsorship value for our advertising partners.
 
As noted above, we also plan to generate revenue from the Honey Database, which targets a highly specific demographic group, by licensing it to advertisers as well as non-profit organizations.  We anticipate that we will begin efforts to generate revenue from licensing of the Honey Database commencing in the first half of 2010. There is no assurance we will succeed in generating revenues from the licensing of the Honey Database.

 Project Development

Pursuant to a project order agreement with Dogmatic, Inc. (“Dogmatic”), dated July 8, 2008, we retained Dogmatic, a creative production services agency with offices in New York City and Venice, CA., to develop and launch our online magazine and social networking site. We paid Dogmatic $550,000 for their services under the agreement, including an initial deposit of $75,000 upon execution of the agreement. No further amounts are due to Dogmatic under the agreement.

In the fourth quarter of 2009, we retained an IT consultant to begin enhancements to the design and functionality of our website. We incurred $162,000 in costs through December 31, 2009 and anticipate additional costs upon completion, which is estimated to occur in the second quarter of 2010.
 
Hivespot.com—Social Networking Functionality

Web branding and design will allow us to select and coordinate available components so as to create an efficient layout and structure. Dogmatic will design a web shell that is simple and flexible to display content according to various user preferences (both front-end (users who have registered for the site) and back-end (users who are part of the administrative staff of the magazine)). Creating an appropriate balance between eye-catching design and engaging/informative content will reinforce the Honey web brand. This combination will encourage visitors to become accustomed to and ultimately return to our website for new content and information posted since the user’s previous visit.
 
Government Regulation
 
We are subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the internet. In addition, laws and regulations relating to user privacy, freedom of expression, content, advertising, information security and intellectual property rights are being debated and considered for adoption by many countries throughout the world. We face risks from some of the proposed legislation that could be passed in the future.
 
In the U.S., laws relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims, which include actions for defamation, libel, invasion of privacy and other data protection claims, tort, unlawful activity, copyright or trademark infringement and other theories based on the nature and content of the materials searched, the ads posted or the content generated by users. Certain foreign jurisdictions are also testing the liability of providers of online services for activities of their users and other third parties. Any court ruling that imposes liability on providers of online services for activities of their users and other third parties could harm our business.
 
Likewise, a range of other laws and new interpretations of existing laws could have an impact on our business. For example, in the U.S. the Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, our liability for listing, linking or hosting third-party content that includes materials that infringe copyrights or other rights. The Child Online Protection Act and the Children’s Online Privacy Protection Act restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from children under 13. In addition, the Protection of Children from Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. The costs of compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any failure on our part to comply with these laws may subject us to significant liabilities.
 
Similarly, the application of existing laws prohibiting, regulating or requiring licenses for certain businesses of our advertisers, including, for example, online gambling, distribution of pharmaceuticals, adult content, financial services, alcohol or firearms, can be unclear. Application of these laws in an unanticipated manner could expose us to substantial liability and restrict our ability to deliver services to our users. For example, some French courts have interpreted French trademark laws in ways that would, if upheld, limit the ability of competitors to advertise in connection with generic keywords.

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We are also subject to federal, state and foreign laws regarding privacy and protection of user data. Any failure by us to comply with our posted privacy policies or privacy-related laws and regulations could result in proceedings against us by governmental authorities or others, which could potentially harm our business. In addition, the interpretation of data protection laws, and their application to the internet, in Europe and other foreign jurisdictions is unclear and in a state of flux. There is a risk that these laws may be interpreted and applied in conflicting ways from country to country and in a manner that is not consistent with our current data protection practices. Complying with these varying international requirements could cause us to incur additional costs and to have to change our business practices. Further, any failure by us to protect our users’ privacy and data could result in a loss of user confidence in our services and ultimately in a loss of users, which could adversely affect our business.

In addition, because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, even where we have no local entity, employees or infrastructure.
 
Intellectual Property

Our Honey Database, trademarks, trade secrets, copyrights and other intellectual property rights are important assets for us. In particular, we consider the “Honey” trademark and our related trademarks to be valuable to us and will aggressively seek to protect them. We have registered the following trademarks in the United States for the class of paper goods and printed matter (which relates to printed publications): Honey, and Honey Hair & Beauty. In addition, we have U.S. trademark applications pending for the class of paper goods and printed matter for the following trademarks: Honey Bride, and Honey Teen; and have U.S. trademark applications pending for the class of education and entertainment for the following trademarks: Honey, Honey Bride, Honey Teen, and Honey Hair & Beauty.

Employees
 
As of March 30, 2010, we have 6 employees (all of whom are full-time). None of our employees are represented by a labor union. We consider our employees relations to be good.
 
Research and Development

For the years ended December 31, 2009 and 2008, we incurred $1,438,685 and $296,694, respectively, on product development.

Subsequent Events
 
In January 2010 and February 2010, the Board of Directors approved, and the Company issued, 3,344,999 shares and 5,000 shares of common stock, respectively, to employees (including Board members) and non-employees for services rendered in 2009. The shares were valued at $0.35 per share, $1,170,750 and $1,750, respectively, the fair value at December 31, 2009. The Company accrued a liability for the stock-based compensation to employees (and directors) and non-employees of $1,135,750 (3,244,999 shares) and $36,750 (105,000 shares), respectively, in the year ended December 31, 2009. In the first quarter of 2010, the Company will incur additional stock-based compensation to employees (and directors) of $421,850 and to non-employees of $12,500 based on the fair value of the shares of common stock at the grant date.
 
On March 4, 2010, the Company entered into an Investment Banking, Strategic Advisory and Consulting Agreement (the “IB Agreement”) with JTF, whereby the Company engaged JTF to render such investment banking, advisory and consulting services as defined in the IB Agreement. The investment banking services, which among other possible assisted transactions, will include the offering for sale of a series of convertible preferred stock up to a maximum of $9,000,000 for which JTF will be separately compensated as defined in the IB Agreement and , will be in effect for a two year period commencing March 4, 2010. The consulting services will be for a two year period, at $10,000 per month, commencing on the closing of the $1,000,000 minimum amount of the offering, as defined in the IB Agreement.

On March 24, 2010, the Company entered into a Purchase Agreement (‘Purchase Agreement”) with JTBO and other potential investors (collectively the “Investor”), whereby the Company agreed to sell and the Investor agreed to purchase (i) a debenture in the principal amount of a minimum of $490,000 and a maximum of up to $980,000, bearing interest at the rate of 16% per annum, and (ii) a minimum of 1,000,000 shares and a maximum of up to 2,000,000 shares of Company common stock issued for a minimum of $10,000 and a maximum of up to $20,000 of consideration, as defined in the debenture (“Debenture”) and stock purchase agreement (“Stock Purchase Agreement”).

On March 24, 2010, JTBO purchased a Debenture in the principal amount of $490,000, bearing interest at 16%. The Debenture is due on September 30, 2010. The Company may extend the Debenture’s maturity date by three month periods if by the maturity date, the Company notifies JTBO and delivers to JTBO 1,000,000 shares of the Company’s common stock as consideration for the extension. Upon the closing by the Company of one or more financings in which the Company receives gross proceeds of less than $1,500,000 the Company shall pay an amount equal to 50% of the proceeds of such financing to reduce the principal amount of the Debenture. In addition, pursuant to the Stock Purchase Agreement, JTBO purchased 1,000,000 shares of common stock for consideration of $10,000. The Company also agreed to issue JTBO 200,000 shares of the Company’s common stock in connection with the closing of the financing. The Company incurred financing costs of $417,500 ($290,000 of which is share-based) in connection with the sale of the debenture and common stock which will be amortized over the term of the debenture. In connection with this investment the investor has been granted piggy back registration rights.

On April 14, 2010, pursuant to the Purchase Agreement, another investor purchased a Debenture in the principal amount of $245,000, bearing interest at 16%. The Debenture is due on October 14, 2010. The Company may extend the Debenture’s maturity date by three month periods if by the maturity date, the Company notifies the investor and delivers to the investor 500,000 shares of the Company’s common stock as consideration for the extension. Upon the closing by the Company of one or more financings in which the Company receives gross proceeds of less than $1,500,000 the Company shall pay an amount equal to 50% of the proceeds of such financing to reduce the principal amount of the Debenture. In addition, pursuant to the Stock Purchase Agreement, the investor purchased 500,000 shares of common for consideration of $5,000.
 
On April 14, 2010, the Company borrowed $65,000 from its CEO for working capital purposes. The promissory note bears interest at 9% per annum and is secured by certain assets of the Company. Principal and all accrued and unpaid interest to the date of repayment will be paid through the issuance of shares of the Company’s common stock at a rate of $0.50 per share. The entire unpaid portion of the note, together with all accrued interest through the date of payment may be declared immediately due and payable by the CEO upon the attaining of certain capital funding by the Company, as defined in the agreement.
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Risk Factors
 
We have a limited operating history upon which an evaluation of our prospects can be made.
 
We have had only limited operations since our inception upon which to evaluate our business prospects. As a result, an investor does not have access to the same type of information in assessing his or her proposed investment as would be available to purchasers in a company with a history of prior operations. We face all the risks inherent in a new business, including the expenses, difficulties, complications and delays frequently encountered in connection with conducting operations, including capital requirements and management’s potential underestimation of initial and ongoing costs. We also face the risk that we may not be able to effectively implement our business plan. If we are not effective in addressing these risks, we may not operate profitably and we may not have adequate working capital to meet our obligations as they become due.
 

We have a history of losses and a large accumulated deficit and we may not be able to achieve profitability in the future.

For the years ended December 31, 2009 and 2008 we incurred net losses of $7,166,818 and $2,034,056, respectively. From the date of inception (January 18, 2005) through December 31, 2009, we have accumulated net losses of $11,161,274. There can be no assurance that we will be profitable in the future. If we are not profitable and cannot obtain sufficient capital we may have to cease our operations.
 
Additional financing may be necessary for the implementation of our strategy, which we may be unable to obtain.

Our capital requirements in connection with our development activities and transition to commercial operations have been and will continue to be significant. We believe that our available capital together with anticipated revenues will be sufficient to continue the development of our business for the foreseeable future. However, we cannot assure you that our cost estimates are accurate, that anticipated revenues will materialize, or that unforeseen events will not occur that would cause us to seek additional funding to meet our need for working capital. There can be no assurance that financing, if and when needed, will be available in amounts or on terms acceptable to us, or at all.

We may not be able to effectively control and manage our growth, which would negatively impact our operations.
 
If our business and markets grow and develop it will be necessary for us to finance and manage expansion in an orderly fashion. We may face challenges in managing expanding service offerings and in integrating any acquired businesses with our own. Such eventualities will increase demands on our existing management, workforce and facilities. Failure to satisfy increased demands could interrupt or adversely affect our operations or cause administrative inefficiencies.

We may be unable to successfully execute any of our identified business opportunities or other business opportunities that we determine to pursue.
 
We currently have a limited corporate infrastructure. In order to pursue business opportunities, we will need to continue to build our infrastructure and operational capabilities. Our ability to do any of these successfully could be affected by any one or more of the following factors:

·
our ability to raise substantial additional capital to fund the implementation of our business plan;
·
our ability to execute our business strategy;
·
the ability of our products and services to achieve market acceptance;
·
our ability to manage the expansion of our operations and any acquisitions we may make, which could result in increased costs, high employee turnover or damage to customer relationships;
·
our ability to attract and retain qualified personnel;
·
our ability to manage our third party relationships effectively; and
·
our ability to accurately predict and respond to the rapid technological changes in our industry and the evolving demands of the markets we serve.
 
Our failure to adequately address any one or more of the above factors could have a significant adverse effect on our ability to implement our business plan and our ability to pursue other opportunities that arise.

Our business depends on the development of a strong brand, and if we do not develop and enhance our brand, our ability to attract and retain subscribers may be impaired and our business and operating results may be harmed.

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We believe that our “Honey” brand will be a critical part of our business. Re-establishing, developing and enhancing the “Honey” brand may require us to make substantial investments with no assurance that these investments will be successful. If we fail to re-establish, promote and develop the ‘‘Honey’’ brand, or if we incur significant expenses in this effort, our business, prospects, operating results and financial condition may be harmed. We anticipate that re-establishing, developing, maintaining and enhancing our brand will become increasingly important, difficult and expensive.

Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our services and brand.

Our trademarks, trade secrets, copyrights and other intellectual property rights are important assets for us. In particular, we consider the “Honey” trademark and our related trademarks to be valuable to us and will aggressively seek to protect them. We have registered the following trademarks in the United States for the class of paper goods and printed matter (which relates to printed publications): Honey, and Honey Hair & Beauty. In addition, we have U.S. trademark applications pending for the class of paper goods and printed matter for the following trademarks: Honey Bride, and Honey Teen; and have U.S. trademark applications pending for the class of education and entertainment for the following trademarks: Honey, Honey Bride, Honey Teen, and Honey Hair & Beauty. Various events outside of our control pose a threat to our intellectual property rights as well as to our services. For example, effective intellectual property protection may not be available in every country in which our services are made available through the internet. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Also, protecting our intellectual property rights is costly and time consuming. Any unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results.
 
We may be unable to protect our intellectual property from infringement by third parties.
 
Our business plan is significantly dependent upon exploiting our intellectual property. There can be no assurance that we will be able to control all of the rights for all of our intellectual property. We may not have the resources or capital necessary to assert infringement claims against third parties who may infringe upon our intellectual property rights. Litigation can be costly and time consuming and divert the attention and resources of management and key personnel.

In providing our services we could infringe on the intellectual property rights of others, which may cause us to engage in costly litigation and, if we do not prevail, could also cause us to pay substantial damages and prohibit us from selling our services.

Third parties may assert infringement or other intellectual property claims against us. We may have to pay substantial damages, if it is ultimately determined that our services infringe on a third party’s proprietary rights. Even if claims are without merit, defending a lawsuit takes significant time, may be expensive and may divert management’s attention from our other business concerns.

Traffic levels on our Website can fluctuate, which could materially adversely affect our business.

Traffic levels to our Website can fluctuate significantly as a result of social, political and financial news events.  The demand for advertising, cross promotion and subscriptions on our Website as well as on the Internet in general can cause changes in rates paid for Internet advertising. This could impede our ability to obtain or renew marketing or advertising agreements and raise budgeted marketing and advertising costs.

Our business may be adversely affected by malicious applications that interfere with, or exploit security flaws in, our services.

Our business may be adversely affected by malicious applications that make changes to our users’ computers and interfere with the Honeymag.com experience. These applications may attempt to change our users’ internet experience. The interference may occur without disclosure to or consent from users, resulting in a negative experience that users may associate with Honeymag.com. These applications may be difficult or impossible to uninstall or disable, may reinstall themselves and may circumvent other applications’ efforts to block or remove them. In addition, we plan to offer a number of services that our users will download to their computers or that they will rely on to store information and transmit information to others over the internet. These services are subject to attack by viruses, worms and other malicious software programs, which could jeopardize the security of information stored in a user’s computer or in our computer systems and networks. The ability to reach users and provide them with a superior experience is critical to our success. If our efforts to combat these malicious applications are unsuccessful, or if our services have actual or perceived vulnerabilities, our reputation may be harmed and our user traffic could decline, which would damage our business.

We may face liability for information displayed on or accessible via our website, and for other content and commerce-related activities, which could reduce our net worth and working capital and increase our operating losses.

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Because materials may be downloaded by the services that we operate or facilitate and the materials may be subsequently distributed to others, we could face claims for errors, defamation, negligence or copyright or trademark infringement based on the nature and content of such materials, which could adversely affect our financial condition. Even to the extent that claims made against us do not result in liability, we may incur substantial costs in investigating and defending such claims.

We may be subjected to claims for defamation, negligence, copyright or trademark infringement or based on other theories relating to the information we publish on our website. These types of claims have been brought, sometimes successfully, against marketing and media companies in the past. We may be subject to liability based on statements made and actions taken as a result of participation in our chat rooms or as a result of materials posted by members on bulletin boards on our website. Based on links we provide to third-party websites, we could also be subjected to claims based upon online content we do not control that is accessible from our website.
 
Although we plan to carry general liability insurance, our insurance may not cover all potential claims to which we are exposed or may not be adequate to indemnify us for all liabilities to which we are exposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage would reduce our net worth and working capital and increase our operating losses.

Changing laws, rules and regulations and legal uncertainties could increase the regulation of our business and therefore increase our operating costs.

We are subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the internet. In addition, laws and regulations relating to user privacy, freedom of expression, content, advertising, information security and intellectual property rights are being debated and considered for adoption by many countries throughout the world. We face risks from some of the proposed legislation that could be passed in the future.
 

In the U.S., laws relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims, which include actions for defamation, libel, invasion of privacy and other data protection claims, tort, unlawful activity, copyright or trademark infringement and other theories based on the nature and content of the materials searched, the ads posted or the content generated by users. Certain foreign jurisdictions are also testing the liability of providers of online services for activities of their users and other third parties. Any court ruling that imposes liability on providers of online services for activities of their users and other third parties could harm our business.

Likewise, a range of other laws and new interpretations of existing laws could have an impact on our business. For example, in the U.S. the Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, our liability for listing, linking or hosting third-party content that includes materials that infringe copyrights or other rights. The Child Online Protection Act and the Children’s Online Privacy Protection Act restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from children under 13. In addition, the Protection of Children from Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. The costs of compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any failure on our part to comply with these laws may subject us to significant liabilities. Similarly, the application of existing laws prohibiting, regulating or requiring licenses for certain businesses of our advertisers, including, for example, online gambling, distribution of pharmaceuticals, adult content, financial services, alcohol or firearms, can be unclear. Application of these laws in an unanticipated manner could expose us to substantial liability and restrict our ability to deliver services to our users. For example, some French courts have interpreted French trademark laws in ways that would, if upheld, limit the ability of competitors to advertise in connection with generic keywords.

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We are also subject to federal, state and foreign laws regarding privacy and protection of user data. Any failure by us to comply with our posted privacy policies or privacy-related laws and regulations could result in proceedings against us by governmental authorities or others, which could potentially harm our business. In addition, the interpretation of data protection laws, and their application to the internet, in Europe and other foreign jurisdictions is unclear and in a state of flux. There is a risk that these laws may be interpreted and applied in conflicting ways from country to country and in a manner that is not consistent with our current data protection practices. Complying with these varying international requirements could cause us to incur additional costs and to have to change our business practices. Further, any failure by us to protect our users’ privacy and data could result in a loss of user confidence in our services and ultimately in a loss of users, which would adversely affect our business.

We could face liability for breaches of security on the Internet.

To the extent that our activities or the activities of third-party contractors involve the storage and transmission of information, such as credit card numbers, social security numbers or other personal information, security breaches could disrupt our business, damage our reputation and expose us to a risk of loss or litigation and possible liability. We could be liable for claims based on unauthorized purchases with credit card information, impersonation or other similar fraud claims. We could also be liable for claims relating to security breaches under recently-enacted or future data breach legislation. These claims could result in substantial costs and a diversion of our management’s attention and resources.

We are dependent on third party databases and computer systems.
 
We depend on the delivery of information over the Internet, a medium that depends on information contained primarily in an electronic format, in databases and computer systems maintained by third parties and us. A disruption of third-party systems or our systems interacting with these third party systems could prevent us from delivering services in a timely manner, which could have a material adverse effect on our business and results of operations.
  
Our systems are also heavily reliant on the availability of electricity. If we were to experience a major power outage, we would have to rely on back-up generators. These back-up generators may not operate properly and their fuel supply could be inadequate during a major power outage. This could result in a temporary disruption of our business.

Our business depends on continued and unimpeded access to the Internet by us and our users. Internet access providers may be able to block, degrade or charge for access to certain of our services, which could lead to additional expenses and the loss of users and advertisers.

Our planned services depend on the ability of our users to access the internet, and certain of our services will require significant bandwidth to work effectively. Currently, this access is provided by companies that have significant and increasing market power in the broadband and internet access marketplace, including existing telephone companies, cable companies and mobile communications companies. Some of these providers have stated that they may take measures that could degrade, disrupt or increase the cost of user access to certain of our anticipated services by restricting or prohibiting the use of their infrastructure to support or facilitate our offerings, or by charging increased fees to us or our users to provide our offerings. These activities may be permitted in the U.S. after recent regulatory changes, including recent decisions by the U.S. Supreme Court and Federal Communications Commission and under legislation being considered by the U.S. Congress. While interference with access to our planned services seems unlikely, such carrier interference could result in a loss of existing users and advertisers, increased costs, and impair our ability to attract new users and advertisers, thereby harming our revenue and growth.
 

We face intense competition from social networking sites and other Internet businesses and may not be able to successfully compete.

We face formidable competition in every aspect of our planned business, and particularly from other companies that seek to connect people with information and entertainment on the web. Such competitors include Blackplanet, YouTube, My Space, Craig’s List, Evite, and Facebook.

In addition, we will be competing with other Internet companies, including general purpose consumer online services, such as America Online and Microsoft Network; and other web “portal” companies, such as Excite, Yahoo!, Google and Lycos.

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We will also face competition from the online versions of newsstand magazines, such as EbonyJet.com (the online version of Ebony and Jet magazines), Essence.com, and Blackenterprise.com.

Our competitors have longer operating histories and more established relationships with customers and end users. They can use their experience and resources against us in a variety of competitive ways, including by making acquisitions, investing more aggressively in research and development and competing more aggressively for advertisers and web sites. They may have a greater ability to attract and retain users than we do because they operate internet portals with a broader range of content products and services. If our competitors are successful in providing similar or better web sites, more relevant advertisements or in leveraging their platforms or products to make their web services easier to access, our user traffic and the size of our network could be negatively affected, which could negatively affect our revenues.

We face competition from traditional media companies, and we may not be included in the advertising budgets of large advertisers, which could harm our operating results.

In addition to Internet companies and online magazines, we face competition from companies that offer traditional media advertising opportunities, including television, radio and print. This would include such companies as News Corp., Time, Inc. and CBS, among others.  Most large advertisers have set advertising budgets, a portion of which is allocated to internet advertising. We expect that large advertisers will continue to focus most of their advertising efforts on traditional media. If we fail to convince these companies to spend a portion of their advertising budgets with us, our operating results would be harmed.

If we do not innovate and provide services that are useful to users, we may not be able to effectively compete, and our revenues and operating results could suffer.

Our success depends on providing services that make using the internet a more useful and enjoyable experience for our users. Our competitors are constantly developing innovations in web based services. As a result, we must invest significant resources in research and development in order to introduce and enhance services that people can easily and effectively use. If we are unable to provide quality services, then we will fail to attract users, or our users may become dissatisfied and move to a competitor’s services. Our operating results would also suffer if our anticipated services are not responsive to the needs of our users and members, are not appropriately timed with market opportunities or are not effectively brought to market. As internet broadcasting technology and social networks continue to develop, our competitors may be able to offer services that are, or that are seen to be, substantially similar to or better than ours. This may force us to compete in different ways and expend significant resources in order to remain competitive.
 
We need to enter into strategic relationships with other Websites. If we are unable to do so, our revenues and operating results will suffer.

We will need to establish and maintain strategic relationships with other Websites to attract users, advertisers and compelling content.  There is intense competition for placements and cross promotion on these sites, and we may not be able to enter into relationships on commercially reasonable terms or not at all.  In addition, we may have to pay significant fees to establish and maintain these relationships.

Our business model is dependent upon continued growth in the use of the Internet by our target demographic, and acceptance of our services by our target demographic. If such growth and acceptance do not occur, our business will suffer.

Our business model depends on creating and increasing demand for our content and e-commerce initiatives from our 18-34 urban female target demographic. This in turn depends on this demographic continuing to increase its use of the Internet for obtaining information pertaining to social, political, financial and lifestyle events. There can be no assurance that such growth will continue, or that our services will be accepted by this demographic. If such growth and acceptance do not occur, our business will be materially adversely affected.

Existing technologies can block our ads, which would harm our business.

We expect that much of our revenues will be derived from fees paid by advertisers in connection with the display of ads on web pages. There are existing technologies that can block display of some of the ads which we anticipate will be displayed on our website. As a result, ad-blocking technology could adversely affect our operating results.

We rely on key personnel and, if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to grow effectively.

Our success depends in large part upon the abilities and continued service of our chief executive officer, Philmore Anderson IV and other key employees. There can be no assurance that we will be able to retain the services of Mr. Anderson and other key employees.  Our failure to retain the services of our key personnel could have a material adverse effect on us.   In order to support our projected growth, we will be required to effectively recruit, hire, train and retain additional qualified management personnel.  Our inability to attract and retain the necessary personnel could have a material adverse effect on us.
 

17

If the downturn in the United States economic conditions continues it could adversely affect our business and our ability to raise capital, if and when needed.

The U.S. economy has recently experienced a significant contraction, and it is expected that we will see continued weakness in the immediate future. We expect that much of our revenues will be derived from fees paid by advertisers in connection with the display of ads on web pages, including from companies whose success is dependent upon consumers’ willingness to spend money on entertainment and other discretionary items. Challenging economic conditions or outlook could reduce the consumption of discretionary products and services and, thus, reduce advertising for such products and services. This may adversely affect our ad revenues which would adversely affect our business and financial results.

Furthermore, during challenging economic times, we may face greater difficulties gaining timely access to financings, if and when needed, which could result in an impairment of our ability to continue our business activities.

Although we have generated de minimis revenues to date and have a history of losses, we intend to spend approximately $980,000 in salaries, including approximately $350,000 in management salaries, over the next year, which will deplete a significant amount of our available cash.

As of December 31, 2009, we have generated de minimis revenues since inception. For the years ended December 31, 2009 and 2008 we incurred net losses of $6,743,508 and $2,034,056, respectively.  As of December 31, 2009, we have cash and cash equivalents of $316,317. Nonetheless, we intend to spend approximately $980,000 in salaries, including approximately $350,000 in management salaries, over the next year. Such spending on salaries will deplete a significant amount of our remaining available cash and increases the possibility that we will need to obtain additional financing in the future, which may not be available on terms acceptable to the Company, or at all.

 
Risks Related to our Common Stock:

There is not an active liquid trading market for our common stock.
 
Our common stock is registered under the Securities Exchange Act of 1934, as amended, and is currently listed on the OTC Bulletin Board. However, there is a limited amount of trading in our common stock, with no reported trading on many trading days, and we cannot give an assurance that an active trading market will develop. If an active market for our common stock develops, there is a significant risk that our stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control:
 
·
variations in our quarterly operating results;
·
announcements that our revenue or income are below analysts’ expectations;
·
General economic slowdowns;
·
sales of large blocks of our common stock;
·
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; and
·
fluctuations in stock market prices and volumes, which are particularly common among highly volatile securities of early stage technology companies.
 
The ownership of our common stock is highly concentrated in our officers and directors.
 
Our current executive officers and directors beneficially own approximately 52.0% of the Company’s outstanding common stock, including approximately 44.7% of our outstanding shares which are beneficially owned by our Chief Executive Officer and Chairman Philmore Anderson IV. As a result, if they act in concert, our executive officers and directors will control all of the issues submitted to a vote of the Company’s shareholders.  Such concentration of share ownership may have the effect of discouraging, delaying or preventing a change in control of the Company.
 
Our common stock is subject to the “penny stock” rules of the SEC, which may make it more difficult for stockholders to sell our common stock.
 
18

The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:

·
that a broker or dealer approve a person's account for transactions in penny stocks; and
·
the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person's account for transactions in penny stocks, the broker or dealer must:

·
Obtain financial information and investment experience objectives of the person; and
·
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:

·
sets forth the basis on which the broker or dealer made the suitability determination; and
·
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

The regulations applicable to penny stocks may severely affect the market liquidity for the Company’s common stock and could limit an investor’s ability to sell the Company’s common stock in the secondary market.

As an issuer of “penny stock,” the protection provided by the federal securities laws relating to forward looking statements does not apply to us.

Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, the Company will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by the Company contained a material misstatement of fact or was misleading in any material respect because of the Company’s failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
 
We have not paid dividends in the past and do not expect to pay dividends for the foreseeable future.  Any return on investment may be limited to the value of our common stock.
 
No cash dividends have been paid on the Company’s common stock. We expect that any income received from operations will be devoted to our future operations and growth. The Company does not expect to pay cash dividends in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as the Company’s board of directors may consider relevant. If the Company does not pay dividends, the Company’s common stock may be less valuable because a return on an investor’s investment will only occur if the Company’s stock price appreciates.

The sale of a significant number of shares could depress the price of our common stock.

Because there is not an active, liquid public market for our common stock, there may be significant downward pressure on our stock price caused by the sale or potential sale of a significant number of shares of our common stock, which could allow short sellers of our stock an opportunity to take advantage of any decrease in the value of our stock. The presence of short sellers in our common stock may further depress the price of our common stock.

If a significant number of shares of our common stock are sold, the market price of our common stock may decline.

Our issuance of common stock upon exercise of outstanding warrants may depress the price of our common stock.

As of April 6, 2010, we had 33,691,709 shares of common stock and warrants to purchase 10,394,034 shares of common stock outstanding. The issuance of shares of common stock upon exercise of outstanding warrants could result in substantial dilution to our stockholders, which may have a negative effect on the price of our common stock.
 
Unresolved Staff Comments
 
Not applicable.
 
Properties.
 
Our principal executive office is located at 81 Greene Street, 4th Floor, New York, New York 10012. The offices consist of approximately 2,750 square feet. Our current monthly rent is $9,300 (which will increase to $9,600 by October 2010) under a three year lease that commenced in October 2008.

19

In December 2009, we entered into a two year lease agreement with Sahara Entertainment, LLC (“SELLC”), an entity wholly-owned by the Company’s Chief Executive Officer (“CEO”) for a property in East Hampton, New York which will be used for various production and promotional purposes. The lease term is effective from December 1, 2009 through November 30, 2011, with an option available to the Company to renew for a third year, at $84,000 per annum ($7,000 per month).

We believe that our properties are adequate for our current and immediately foreseeable operating needs.

 
Legal Proceedings.
 
We are not subject to any pending or threatened legal proceedings, nor is our property the subject of a pending or threatened legal proceeding. None of our directors, officers or affiliates are involved in a proceeding adverse to our business or has a material interest adverse to our business.
 
[Reserved.]
 
Not applicable.

 
20

 
 
PART II
 
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
The Company’s Common Stock is quoted on the Over-the-Counter Bulletin Board (“OTC.BB”) under the symbol “SHHD.”  Trading in the Common Stock is limited, with no reported trades occurring on many trading days. The following table sets forth the range of high and low bid prices of our common stock as reported and summarized on the OTC.BB for the periods indicated.  These prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.

Calendar Quarter
 
High Bid
   
Low Bid
 
                 
2008 First Quarter
 
$
0.90
   
$
0.60
 
2008 Second Quarter
 
$
0.30
   
$
0.30
 
2008 Third Quarter
 
$
4.50
   
$
0.30
 
2008 Fourth Quarter
 
$
4.00
   
$
2.00
 
2009 First Quarter
 
$
3.00
   
$
3.00
 
2009 Second Quarter
 
$
3.00
   
$
3.00
 
2009 Third Quarter
 
$
3.25
   
$
3.00
 
2009 Fourth Quarter
 
$
3.25
   
$
0.19
 
 
As of April 6, 2010, there were 307 holders of record of the Company’s Common Stock. On April 6, 2010, our common stock was trading at $0.25.
 
Dividends.
 


Securities Authorized for Issuance Under Equity Compensation Plan

In January 1998, MFI’s board of directors approved a stock option plan under which 16,667 shares of common stock have been reserved for issuance. The following table shows information with respect to each equity compensation plan under which the Company’s common stock is authorized for issuance as of December 31, 2009.
 
 
EQUITY COMPENSATION PLAN INFORMATION

Plan category
 
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
   
Weighted average
exercise price of
outstanding options,
warrants and rights
   
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
   
(a)
   
(b)
   
(c)
 
Equity compensation plans approved by security holders
   
0
     
0
     
16,667
 
                         
Equity compensation plans not approved by security holders
   
N/A
     
N/A
     
N/A
 
                         
Total
   
N/A
     
N/A
     
16,667
 
 
 
Recent Sales Of Unregistered Shares.

None.

Issuer Repurchases of Equity Securities

None.

Selected Financial Data

 
Not Applicable.
 
21


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements and Associated Risks.  

Some of the statements contained in this report on Form 10-K that are not historical facts are "forward-looking statements" which can be identified by the use of terminology such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this report on Form 10-K, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:
 
·
Our ability to attract and retain management, and to integrate and maintain technical information and management
information systems;

·
Our ability to raise capital when needed and on acceptable terms and conditions;

·
The intensity of competition; and

·
General economic conditions.
 
        All written and oral forward-looking statements made in connection with this report that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
 
Plan of Operation
 
We are a development-stage company located in New York. Since our formation, we have concentrated on developing our business strategy and obtaining financing. We expect that the primary components of our business will be:

·
Our online magazine Honeymag.com

·
Our social network Hivespot.com, which will be re-launched under a new name with new capabilities

·
Our database of names in the 18-34 urban female demographic (the ÒHoney DatabaseÓ)
 
The online magazine, Honeymag.com, and the social network, Hivespot.com, are currently operating websites that were officially launched on March 5, 2009. With the Honey brand and the Honey Database we will seek to connect with audiences and secure brand leadership for our target demographic.

The Company has been focused on driving unique visitors (traffic) and impressions through organic and viral means to our sites.  This methodology of ramping in these categories will allow our sites to become viable advertising mediums in the first half of 2010.

We plan to generate revenues through: (i) advertising sales from our online magazine and social network web sites; (ii) licensing of our database; and, (iii) direct marketing and sponsorships.

We anticipate that we will begin generating advertising revenues during the first half of 2010. We plan to sell advertising through our direct sales ad team.  Our direct sales ad team signed our first advertising client, Alberto Culver, in the second half of 2009 which generated $35,000 in revenues in 2009. Additionally, we have entered into advertising agreements with two Fortune 500 clients in the last half of 2009 and are currently negotiating additional agreements which are expected to be executed in 2010. We have discontinued our ad aggregator agreements with BET and GLAM Media due to the fact we have the ability to sell higher margin ads utilizing our in-house ad team.  We anticipate that the available ad space on our site will be filled through our internal ad team going forward.  The amount of revenue that will be generated through these initial ads, as well as future ads, will depend on the amount of traffic the site will generate.

To track this traffic on our integrated web properties we utilize Google Ad Works.  Google Ad Works calculates the total number of pages (impressions) that visitors viewed on our web properties.  To date, we have recorded the following monthly total impressions: April - 650,816; May - 782,648; June - 1,114,206; July - 1,729,823; August - 1,888,048; September - 1,802,203; October - 550,067; November - 693,832; December - 798,142; January 2010 - 714,095; February 2010 - 618,707. These impressions have all been achieved through organic/viral means, which, at this point allow us to become a viable advertising medium for brands in the first half of 2010 as planned.
 
The U.S. economy has recently experienced a contraction and it is possible that we may see further economic deterioration in the immediate future. We expect that much of our revenues will be derived from fees paid by advertisers in connection with the display of ads on web pages, including from companies whose success is dependent upon consumers' willingness to spend money on entertainment and other discretionary items. Weakening economic conditions or outlook could reduce the consumption of discretionary products and services and, thus, reduce advertising for such products and services. This may adversely affect our ad revenue, which would adversely affect our business and financial results.
 
Results of Operations

Since inception, we have generated de minimis revenue from sponsorships, advertising and the licensing of our database.  In the same period, we have incurred expenses related to securing the “Honey” Brand trademarks, funding the development and initial execution of our business plan, and raising capital.

The following table sets forth, for the periods indicated, certain items from the consolidated statements of operations.  Comparative analysis of ratios of costs and expenses to revenues is not shown in the following narrative discussion as management believes such ratios to be uninformative due to the insignificant levels of revenues in each period.

   
For the Years Ended
 
   
December 31,
 
   
2009
   
2008
 
             
Revenue
  $ 38,867     $ 8,183  
                 
Costs and expenses
               
Product development
    1,435,035       296,694  
Selling and marketing
    339,770       133,468  
General and administrative
    5,036,937       1,528,743  
Interest income
    (33,372 )     (24,608 )
Interest expense – related party
    --       17,053  
Interest expense
    --       90,889  
Loss on sale of available-for-sale security
    4,005       --  
                 
Net loss
  $ (6,743,508 )   $ (2,034,056 )
                 
Net loss per share – basic and diluted
  $ (0.22 )   $ (0.15 )


Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

Revenues for the year ended December 31, 2009 were $38,867 compared to $8,183 for the year ended December 31, 2008, an increase of approximately $31,000.   We generated $35,000 in sponsorship revenues and $3,867 in on-line advertising and list rental revenue from several clients in 2009 as we continued to implement our business plan. The website Honeymag.com was not launched as our online magazine until March 5, 2009, however, ads were sold on a prior version of the Honeymag.com website (which had much less content than our planned online magazine and did not include a social network).

Product development expenses for the year ended December 31, 2009 were $1,435,035 compared to $296,694 for the year ended December 31, 2008, an increase of approximately $1,138,000. The increase is primarily attributable to increased payroll costs of $417,000 (of which $37,000 is share-based), additional amortization expenses of $380,000, increased editing and creative expenses of $108,000 and licensing and network costs of $225,000 (of which $35,000 is share-based). In fiscal 2009 we incurred additional production costs as we continued the process of implementing our strategic plan to generate revenues. In March 2009, we launched our online magazine and social network. In connection with the launch, we began amortizing the costs associated with our website and customer database.
Selling and marketing expenses for the year ended December 31, 2009 were $339,770 compared to $133,468 for the year ended December 31, 2008, an increase of approximately $206,000. The increase in selling and marketing expenses is primarily attributable to increased payroll of $96,000, advertising of $62,000 and marketing of $50,000.

General and administrative expenses for the year ended December 31, 2009 were $5,036,937 compared to $1,528,743 for the year ended December 31, 2008. We attribute the increase of approximately $3,509,000 to increases in: payroll and related expenses of $1,555,000 (of which $1,099,000 is share-based); professional fees of $1,271,000 (of which $1,429,000 is share-based); business consultant costs of $356,000 (of which $48,000 is share-based); travel and entertainment costs of $155,000; public relations expense of $71,000; rent of $34,000.

Interest expense and interest expense to a related party for the year ended December 31, 2008 was $90,889 and $17,053, respectively. There were no comparative amounts in the year ended December 31, 2009. The bridge loans and related party promissory notes and advances which generated the interest were all settled in 2008.

We earned interest income of $33,372 and $24,608 for the years ended December 31, 2009 and 2008, respectively, from cash and investments.
 
As a result of the foregoing, the net loss for the year ended December 31, 2009 was $6,743,508 compared to $2,034,056 for the year ended December 31, 2008.

 


22


Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Revenues for the year ended December 31, 2008 were $8,183 compared to $2,347 for the year ended December 31, 2007.   We generated on-line revenue from several clients. Although the website Honeymag.com had not yet been launched as our online magazine, ads were sold on a prior version of the Honeymag.com website (which had much less content than our planned online magazine and did not include a social network).

Product development expenses for the year ended December 31, 2008 was $296,694 compared to $246,842 for the year ended December 31, 2007.We attribute the increase of $49,852 (20%) to website development and licensing expenses.

Selling and marketing expenses for the year ended December 31, 2008 were $133,468 compared to $74,482 for the year ended December 31, 2007. We attribute the increase of $58,986 (79%) to consulting fees.

General and administrative expenses for the year ended December 31, 2008 were $1,528,743 compared to $352,763 for the year ended December 31, 2007. We attribute the increase of $1,175,980 (333%) to professional fees of approximately $673,000 paid for accounting, legal and financial advisory services related to our required SEC filings; payroll and management consultant costs of approximately $369,000; rent of $81,600.

Interest expense to a related party for the year ended December 31, 2008 was $17,053 compared to $37,663 for the year ended December 31, 2007. The decrease of $20,610 (55%) is attributed to the settlement of promissory notes and advances due prior to the Company’s reorganization.

Interest expense for the year ended December 31, 2008 was $90,889 compared to $19,326 for the year ended December 31, 2007.  We attribute the increase of $71,563 (370%) to interest on two bridge loans for working capital purposes as well as the value of warrants issued as additional compensation for one of the loans.

We earned interest income of $24,608 for the year ended December 31, 2008 from cash received from the sale of our common stock (see below). We had no earned interest income for the year ended December 31, 2007.
 
As a result of the foregoing, the net loss for the year ended December 31, 2008 was $2,034,056 compared to $728,729 for the year ended December 31, 2007.
 
23


Liquidity and Capital Resources
The accompanying consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  The Company has had minimal revenues since inception, incurred losses from operations since its inception and has a deficit accumulated during the development stage amounting to $10,737,964 as of December 31, 2009. In addition, the current economic environment, which is characterized by tight credit markets, investor uncertainty about how to safely invest their funds and low investor confidence, has introduced additional risk and difficulty to the Company’s challenge to secure additional working capital.  There can be no assurance that the Company will be profitable in the future.  If the Company is not profitable and cannot obtain sufficient capital to fund operations, the Company may have to cease operations. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Management’s plan with regards to this condition primarily includes the continuance of executing upon its business plan.  In accordance with this plan, our direct sales ad team signed our first advertising client in the second half of 2009 which generated $35,000 in revenues in 2009. Additionally, we have entered into advertising agreements with two Fortune 500 clients in the last half of 2009 and are currently negotiating additional agreements which are expected to be executed in 2010. The Company anticipates that with continued increases in traffic and impressions to its websites, that the Company will experience revenue growth beginning in 2010.  Additionally, the Company is presently working to raise capital through debt and equity financings. There can be no assurance that such revenues will reach anticipated amounts or that the Company will be able to raise additional capital to execute its strategy.

As of December 31, 2009, we have cash and cash equivalents available of $316,317 and an available-for-sale investment of $295,500. The investment, which is a corporate debt instrument which matures in August 2024, accrues interest at the rate of 12% in its initial year. However, beginning in year 2 through the date of maturity, the rate of interest is variable as defined in the debt agreement, and as a result the investment is subject to various risks that are difficult to predict and beyond our control. As of December 31, 2008, we had cash and cash equivalents of $4,437,465.

During the year ended December 31, 2009, we utilized $3,476,862 in cash for operating activities, which was primarily a result of our net loss of $6,743,508 as adjusted for depreciation and amortization of $474,241 and share based expenses of $1,219,077. In addition, we invested $500,000 in a corporate debt instrument (see above), of which $200,000 was sold. We also disbursed $111,403 to acquire a list database comprised of double opt-in email addresses extracted from names in our current database and incurred $199,754 in website development costs. Operations and the cash used for the investment purchase, net of the proceeds received from its partial sale, and our intangible acquisitions were the primary components of our reduction in cash and cash equivalents of $4,121,148 from December 31, 2008 to December 31, 2009.

We expect that we will need to raise additional capital to execute our business plan. Our cash and cash equivalents on hand at December 31, 2009 will not be sufficient to fund our operations at their current level for the next twelve months.  There can be no assurance that our cost estimates are accurate, that anticipated revenues will materialize, or that we will be successful in securing equity or debt financing to meet our need for working capital. There can be no assurance, in light of the current economic crisis, that such financing, if and when needed, will be available in amounts or on terms acceptable to us, or at all. 

On March 4, 2010, the Company entered into an Investment Banking, Strategic Advisory and Consulting Agreement (the “IB Agreement”) with JTF, whereby the Company engaged JTF to render such investment banking, advisory and consulting services as defined in the IB Agreement. The investment banking services, which among other possible assisted transactions, will include the offering for sale of a series of convertible preferred stock up to a maximum of $9,000,000 for which JTF will be separately compensated as defined in the IB Agreement and , will be in effect for a two year period commencing March 4, 2010. The consulting services will be for a two year period, at $10,000 per month, commencing on the closing of the $1,000,000 minimum amount of the offering, as defined in the IB Agreement.

On March 24, 2010, the Company entered into a Purchase Agreement (‘Purchase Agreement”) with JTBO, whereby the Company agreed to sell and JTBO agreed to purchase (i) a debenture in the principal amount of a minimum of $490,000 and a maximum of up to $980,000, bearing interest at the rate of 16% per annum, and (ii) a minimum of 1,000,000 shares and a maximum of up to 2,000,000 shares of Company common stock issued for a minimum of $10,000 and a maximum of up to $20,000 of consideration, as defined in the debenture (“Debenture”) and stock purchase agreement (“Stock Purchase Agreement”).

On March 24, 2010, JTBO purchased a Debenture in the principal amount of $490,000, bearing interest at 16%. The Debenture is due on September 30, 2010. The Company may extend the Debenture’s maturity date by three month periods if by the maturity date, the Company notifies JTBO and delivers to JTBO 1,000,000 shares of the Company’s common stock as consideration for the extension. Upon the closing by the Company of one or more financings in which the Company receives gross proceeds of less than $1,500,000 the Company shall pay an amount equal to 50% of the proceeds of such financing to reduce the principal amount of the Debenture. In addition, pursuant to the Stock Purchase Agreement, JTBO purchased 1,000,000 shares of common stock for consideration of $10,000. The Company also agreed to issue JTBO 200,000 shares of the Company’s common stock in connection with the closing of the financing. The Company incurred financing costs of $417,500 ($290,000 of which is share-based) in connection with the sale of the debenture and common stock which will be amortized over the term of the debenture.
 
24


Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board ("FASB") issued, and the Company adopted, Accounting Standards Codification (“ASC”) Update No. 2010-05 “Escrowed Share Arrangements and the Presumption of Compensation” (“ASCU No. 2010-05”). ASCU No. 2010-05 codifies the SEC staff’s views on escrowed share arrangements which historically has been that the release of such shares to certain shareholders based on performance criteria is presumed to be compensatory. When evaluating whether the presumption of compensation has been overcome, the substance of the arrangement should be considered, including whether the transaction was entered into for a reason unrelated to employment, such as to facilitate a financing transaction. In general, in financing transactions the escrowed shares should be reflected as a discount in the allocation of proceeds. In debt financings the discounts are to be amortized using the effective interest method, while discounts on equity financings are not generally amortized. The Company adopted ASCU No. 2010-05 effective January 1, 2010, although it has been in compliance with the SEC staff’s views on escrowed share arrangements, as it relates to future financings, the adoption of this update may have a material effect on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASC Update No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” which updated guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. This update requires new disclosures on significant transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy (including the reasons for these transfers) and the reasons for any transfers in or out of Level 3. This update also requires a reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure requirements, this update clarifies certain existing disclosure requirements. For example, this update clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities rather than each major category of assets and liabilities. This update also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. This update will become effective for the Company with the interim and annual reporting period beginning January 1, 2010, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will become effective for the Company with the interim and annual reporting period beginning January 1, 2011. The Company will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. Other than requiring additional disclosures, adoption of this update will not have a material effect on the Company's consolidated financial statements.

The Company adopted the provisions of ASC Topic No. 855, “Subsequent Events” (“ASC 855”), on a prospective basis.  The provisions of ASC 855 provide guidance related to the accounting for the disclosure of events that occur after the balance sheet date but before the consolidated financial statements are issued or are available to be issued.  Effective February 24, 2010, the FASB issued ACSU No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements” which revised certain disclosure requirements. ASU No. 2010-09 did not have a significant impact on the Company’s consolidated financial statements. The Company evaluated subsequent events, which are events or transactions that occurred after December 31, 2009 through the issuance of the accompanying consolidated financial statements.

Off Balance Sheet Arrangements

None. 
 
25

 
Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP.  The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.  Though we evaluate our estimates and assumptions on an ongoing basis, our actual results may differ from these estimates.

Certain of our accounting policies that we believe are the most important to the portrayal of our consolidated financial condition and the consolidated results of operations and that require management’s subjective judgments are described below to facilitate a better understanding of our business activities.  We base our judgments on our experience and assumptions that we believe are reasonable and applicable under the circumstances.

Revenue Recognition
Revenue is recognized when all of the following criteria are met:  (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and, (4) collectibility is reasonably assured.

Equity-Based Compensation
The Company accounts for equity-based compensation transactions with employees under the provisions of ASC Topic No. 718, “Compensation, Stock Compensation” (“Topic No. 718”). Topic No. 718 requires the recognition of the fair value of equity-based compensation in net income. The fair value of the Company’s equity instruments are estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each award. In addition, the calculation of equity-based compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of equity-based awards granted to employees is amortized over the vesting period of the award and the Company elected to use the straight-line method for awards granted after the adoption of Topic No. 718.

The Company accounts for equity based transactions with non-employees under the provisions of ASC Topic No. 505-50, “Equity-Based Payments to Non-Employees” (“Topic No. 505-50”). Topic No. 505-50 establishes that equity-based payment transactions with non-employees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, which ever is more reliably measurable. When the equity instrument is utilized for measurement the fair value of the equity instrument is estimated using the Black-Scholes option valuation model. In general, the Company recognizes an asset or expense in the same manner as if it was to receive cash for the goods or services instead of paying with or using the equity instrument.

Intangible Assets
The intangible assets, initially recorded at cost, are considered to approximate fair value at the time of purchase. Amortization is provided for on a straight-line basis over the estimated useful lives of the assets. The Company evaluates the recoverability of its intangible assets periodically and takes into account events or circumstances that warrant revised estimates of their useful lives or indicate that impairments exist. Management believes that based on an independent valuation as of December 31, 2009 that there is no impairment of the Company’s intangible assets. In December 2009, the Company acquired a database of double opt-in email addresses extracted from names in its current database.  In addition, in the fourth quarter of 2009, the Company began significant updates to its website which are expected to be completed in the second quarter of 2010.  The magazine trademark, list database and website development costs are amortized on the straight-line method over seven years, which approximates their estimated useful lives. Amortization of the email database and website costs incurred in the fourth quarter of 2009 will begin when they have been placed into service, the first quarter of 2010 and second quarter of 2010, respectively. 

 
26

 
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 
Not Applicable
 
 
Our financial statements, together with the independent registered public accounting firm's report of Weiser LLP begin on page F-1, immediately after the signature page.
 
Controls and Procedures.
                             
Evaluation of Disclosure Controls and Procedures.
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is a process designed by, or under the supervision of the Chief Executive Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management’s evaluation of internal control over financial reporting includes using the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, framework, an integrated framework  for the evaluation of internal controls issued by COSO, to identify the risks and control objectives related to the evaluation of our control environment. Based on their evaluation under the frameworks described above, our chief executive officer have concluded that our internal control over financial reporting was ineffective as of December 31, 2009 because of the following material weaknesses in internal controls over financial reporting:
 
 
·
A lack of sufficient resources and an insufficient level of monitoring and oversight, which may restrict our ability to gather, analyze and report information relative to the financial statement and income tax assertions in a timely manner.
 
·
The limited size of the accounting department makes it impracticable to achieve an optimum separation of duties.
 
·
The Company has not yet established an audit committee.
 
Remediation Plan

We are seeking ways to remediate these weaknesses, which stem from our small workforce, that will not require us to hire additional personnel. The Company is in the process of seeking financing through the sale of equity securities, upon the acquisition of adequate capital the Company intends to remediate the deficiencies through the deployment of additional personnel and implementation of an audit committee. 

Management’s Report on Internal Control over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting in accordance with Exchange Act Rule 13a-15. With the participation of our chief executive officer and principal financial officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was ineffective as of December 31, 2009, based on those criteria. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. 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.
 
This annual report does not include an attestation report of the Company’s registered accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission
 
Changes in internal controls
 
Our management, with the participation of Philmore Anderson IV, our chief executive officer and principal financial officer (“CEO”), performed an evaluation as to whether any change in our internal controls over financial reporting occurred during the three months ended December 31, 2009.  Based on that evaluation, our CEO concluded that no change occurred in the Company's internal controls over financial reporting during the three months ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting
 
Other Information
 
None.

 
27

 


PART III
 
Directors, Executive Officers, And Corporate Governance.
 
The Company’s executive officers and directors are as follows:
 
Directors and Executive Officers
 
Age
 
Position
Philmore Anderson IV
 
45
 
Chief Executive Officer and Chairman of the Board
Philmore Anderson III
 
67
 
Director
David Walker
 
46
 
Director
Tamera Reynolds*
 
41
 
Director
 
 * Tamera Reynolds resigned as a director of the Company on December 24, 2009.
 

Family Relationships.
 
Philmore Anderson IV is the son of Philmore Anderson III.
 
Background of Executive Officers and Directors

Philmore Anderson IV, Chief Executive Officer and Chairman of the Board

Philmore Anderson IV has been Chief Executive Officer of the Company since September 2008, and Chairman of the Company since October 2008. Mr. Anderson has been Chief Executive Officer, Chairman, and Director of Sahara Media, Inc. since its inception in January 2005.

From 2003 to 2004, Mr. Anderson was a partner at Gotham Entertainment, a music management company.

Mr. Anderson holds a BA in economics from Lake Forest College.

Philmore Anderson IV is the son of Philmore Anderson III, a director of the Company.

 
28

Philmore Anderson III, Director

Philmore Anderson III has been a director of the Company since October 2008. Mr. Anderson has been a director of Sahara Media, Inc. since July 2005.

Mr. Anderson has been semi-retired since 2005, during which time he has assisted in the management of BPA Associates, LLC (“BPA”), a company owned by Mr. Anderson’s wife that provides consulting services to minority-owned and small businesses who have or are interested in securing federal and state supplier contracts. Prior to the inception of BPA in 2005, Mr. Anderson served for 13 years as the State Purchasing Agent for the Commonwealth of Massachusetts.

Mr. Anderson holds a BS in accounting from Central State University in Wilberforce, Ohio, and attended the Harvard Business School.

Philmore Anderson III is the father of Philmore Anderson IV, the chief executive officer and chairman of the Company.
 
 

David Walker, Director

David Walker has been a director of the Company since December 2009. Mr. Walker, Executive Director and Senior Portfolio Manager, is Co-Lead of the Van Kampen Technology Fund, the Morgan Stanley Information Fund and Sun America Technology Portfolio.   Mr. Walker is also the co-portfolio manager responsible for Developing Technologies UIT.  He joined Van Kampen as a Quantitative Analyst in 1990.

Mr. Walker has nineteen years experience in the investment industry.  Prior to joining Van Kampen, Mr. Walker was a Banking Officer for the Bank of New England.

Mr. Walker received his B.S. from Duke University and his M.B.A. from Vanderbilt University.  He is a CFA charter holder and a Chartered Market Technician.

Tamera Reynolds, Director

Tamara Reynolds served as a director of the Company from October 2008 to December 2009. Mrs. Reynolds was a director of Sahara Media, Inc. from its inception in January 2005 until December 2009. Mrs. Reynolds also served as Sahara’s chief operating officer from 2005 to 2007.

Since 2007, Mrs. Reynolds has been director of development and operations of Glam Media’s new African American women’s channel within glam.com. Mrs. Reynolds is responsible for all aspects of development and the ongoing operations of the channel, including design, content, network expansion, staffing, business development and strategic partnerships.

In addition, since 2003, Mrs. Reynolds has owned and operated headed TMR Entertainment, LLC, a consulting firm Mrs. Reynolds founded that provides general business and management services to individuals and businesses primarily in the entertainment and related industries.

Mrs. Reynolds received her Bachelors Degree from Pennsylvania State University and her JD from the University of Colorado Law School.

29

Legal Proceedings.
 
None.
 
Committees; Audit Committee Financial Expert.
 
Currently, the Company does not have an executive, audit or any standing committee of the Board.  The Company does not have an audit committee, or an audit committee financial expert.

 Compliance with Section 16(a) of the Exchange Act
 
Section 16(a) of the Securities Exchange Act of 1934 requires that our officers and directors, and persons who own more that ten percent of a registered class of our equity securities, file reports of ownership and changes in ownership with the Securities and Exchange Commission and with any exchange on which the Company's securities are traded. Officers, directors and persons owning more than ten percent of such securities are required by Commission regulation to file with the Commission and furnish the Company with copies of all reports required under Section 16(a) of the Exchange Act. To our knowledge, based solely upon our review of the copies of such reports furnished to us, during the fiscal year ended December 31, 2009, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with.
 
Code of Ethics
 
The Company has not adopted a Code of Ethics but expects to do so in the near future.
 
Changes in Nominating Procedures
 
None.

Board Leadership Structure and Role in Risk Oversight

Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in the best interests of the Company and its shareholders to combine these roles. Philmore Anderson IV has served as Chairman of the Company since October 2008 and Chairman of Sahara Media, Inc. since its inception in January 2005. Due to the small size and early stage of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined.

Our board of directors is primarily responsible for overseeing our risk management processes, and we do not have an audit committee.  The board of directors receives and reviews periodic reports from management, legal counsel, and others, as considered appropriate regarding our Company’s assessment of risks. The board of directors focuses on the most significant risks facing our Company and our Company’s general risk management strategy, and also ensure that risks undertaken by our Company are consistent with the board’s appetite for risk. While the board oversees our Company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our Company and that our board leadership structure supports this approach.


 
30

 

 
Executive Compensation.
 
 

Summary Compensation Table

The following table sets forth all compensation paid to our Chief Executive Officer for our last two completed fiscal years. No other officer of ours received compensation in excess of $100,000 for either of our last two completed fiscal years (see Note 15 in the consolidated financial statements for details of 2009 stock compensation).
 
Name & Principal
Position
 
Year
 
Salary ($)
 
Bonus ($)
 
Stock
Awards ($)
   
Option
Awards ($)
   
Non-Equity
Incentive Plan
Compensation ($)
   
Change in Pension
Value and Non-
Qualified
Deferred
Compensation
Earnings
 
All
Other
Compensation ($)
 
Total ($)
   
                                               
                                               
Philmore Anderson IV
 
2009
   
300,000
 
155,000
 
1,000,000
     
0
     
0
     
 0
 
0
  $ 1,455,000    
                                                         
Chief Executive Officer and Chairman
 
2008
   
200,000
 
0
 
525,000 (1)
     
0
     
0
     
0
 
  0
 
$
725,000
   
 
(1) Represents 100,000 shares of common stock of Sahara Media, Inc. issued on June 10, 2008 in exchange for Mr. Anderson’s foregoing of $525,000 in salary.


Director Compensation for Year Ended December 31, 2009

The following table summarizes the compensation for our non-employee board of directors for the fiscal year ended December 31, 2009: 
 
Name
 
Fees Earned or Paid in Cash ($)
   
Stock Awards ($)
   
Option Awards ($)
   
All Other Compensation ($)
   
Total
($)
 
Philmore Anderson III
   
--
     
160,000
     
--
     
--
     
160,000
 
Tamera Reynolds
   
--
   
160,000
     
--
     
--
     
160,000
 
David Walker
   
--
     
120,000
     
--
     
--
     
120,000
 
--
* Does not include $20,000 in fees for legal services provided by Ms. Reynolds.


31

 
Employment Agreements

On February 18, 2009, the Company entered into an employment agreement (the “Employment Agreement”) with Philmore Anderson IV, the Company’s chief executive officer and chairman.

Pursuant to the Employment Agreement, Mr. Anderson will serve as the Company’s chief executive officer for a term of three years, commencing on the Commencement Date, subject to earlier termination as provided therein (the “Term”).
 

Mr. Anderson will receive a base salary of $300,000 during the first year of the Term, $325,000 during the second year of the Term, and $350,000 during the third year of the Term. Mr. Anderson will be eligible to receive bonus payments during the Term in the sole discretion of the Company’s Board of Directors. Pursuant to the Employment Agreement, Mr. Anderson also received a signing bonus of $155,000.

Pursuant to the Employment Agreement, the Company agreed to grant Mr. Anderson an option to purchase 3,000,000 shares of the Company’s common stock at an exercise price of $2.00 per share, as soon as practicable following the Commencement Date.

The Employment Agreement may be terminated prior to the expiration of the Term upon thirty days’ written notice by Mr. Anderson. In addition, the Employment Agreement may be terminated prior to the expiration of the Term by the Company. If the Company terminates the Employment Agreement for any reason other than a Termination for Cause (as defined therein), or if Mr. Anderson terminates the Employment Agreement due to a change of control of the Company, Mr. Anderson will be entitled to a severance payment equal to the greater of (a) the balance of Mr. Anderson’s salary payable, and benefits to which Mr. Anderson is entitled, for the balance of the Term, and (b) an amount equal to two and one-half (2.5) times the highest cash compensation paid to Mr. Anderson during any 12 month period prior to termination.
 
We are not party to any other employment agreements.
 
Outstanding Equity Awards at December 31, 2009

The Company did not have any equity awards outstanding as of December 31, 2009.
 
 
32

Security Ownership of Certain Beneficial Owners and Management.
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 

The following table sets forth certain information, as of April 6, 2010 with respect to the beneficial ownership of the Company’s outstanding Common Stock by (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers and directors; and (iii) the Company’s directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.

Name of Beneficial Owner (1)
 
Common Stock
Beneficially Owned
   
Percentage of
Common Stock (2)
 
Directors and Officers:
           
Philmore Anderson IV
   
15,066,333
(3)
   
44.72
%
David Walker
   
250,000
     
*
 
Philmore Anderson III
208 Common Street
Watertown, MA 02742
   
2,210,333
(4)
   
6.56
%
All officers and directors as a group
   
17,526,666
     
52.02
%
Beneficial owners of more than 5%:
               
Sahara Entertainment, LLC (5)
   
12,763,390
     
37.88
%
John Thomas Financial Inc.
14 Wall Street, 5th Floor
New York, NY 10005
   
4,000,000
(6)
   
11.87
%
Steven Benkovsky
80 Rayner Avenue
Ronkonkoma, NY 11779
   
3,200,000
(7)
   
9.50
 
%
Timothy Marks
Amber Barnes Poole Keynes
Cirencester Gloucesterchire UK GL76EG
   
3,200,000
(7)
   
9.50
%
* Less than 1%
 

 

(1)
Except as otherwise indicated, the address of each beneficial owner is c/o Sahara Media Holdings, Inc., 81 Greene Street, 4th Floor, New York, NY 10012.
(2)
Applicable percentage ownership is based on 33,691,709 shares of Common Stock outstanding as of April 6, 2010, together with securities exercisable or convertible into shares of Common Stock within 60 days of April 6, 2010 for each stockholder.  Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Shares of Common Stock that are currently exercisable or exercisable within 60 days of April 6, 2010 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(3)
Includes 12,763,390 shares held by Sahara Entertainment, LLC, an entity owned by Philmore Anderson IV. Also includes 119,610 shares held by Alicia Anderson, Philmore Anderson IV’s wife.
(4)
Includes 1,425,000 shares held by BPA Associates, LLC, an entity owned by Bertha Anderson, Philmore Anderson III’s wife.
(5)
Sahara Entertainment, LLC is owned by Philmore Anderson IV, our chief executive officer and chairman.
(6)
Includes 1,000,000 shares underlying warrants with an exercise price of $1.30. Thomas Belesis has investment and voting power over the securities of the Company owned by John Thomas Financial, Inc. Mr. Belesis disclaims beneficial ownership of the securities.
(7)
Includes 1,600,000 shares of Common Stock issuable upon exercise of warrants issued in the Private Placement.
 

 
33

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

Certain Relationships and Related Transactions

Lease Agreement
Effective December 1, 2009, the Company entered into a two year lease agreement with Sahara Entertainment, LLC (“SELLC”), an entity wholly-owned by the Company’s Chief Executive Officer (“CEO”). The lease term is effective from December 1, 2009 through November 30, 2011, with an option available to the Company to renew for a third year, at $84,000 per annum ($7,000 per month) (See Note 13). The agreement provides for a $15,000 security deposit, which was paid in March 2010. Among other terms, the lease calls for the Company to pay for certain expenses, such as utilities and maintenance.  As of December 31, 2009, $7,000 in accrued rent expense is owed to SELLC.

Services Arrangements
The Company has an arrangement with AG Unlimited International LLC ("AG"), whereby AG manages all licensing agreements on behalf of Sahara. The principal of AG became the spouse of the Company's CEO, during the quarter ended September 30, 2009. The terms of the contract, which was signed November 2009 but effectively began October 2008, provide a monthly fee of $10,000 until such time the contract is cancelled by either party, as well as the issuance of 100,000 shares of the Company’s common stock. The shares of common stock issuable under the agreement are non-forfeitable and were approved for issue by the Company’s Board of Directors and issued in February 2010. The shares, valued at $0.25 per share, are accounted for as issued effective December 31, 2009 and a charge to operations of $25,000 is recorded in 2009 as share-based consulting (See Note 10). Expenses (non share-based) incurred in connection with services provided by AG amounted to $120,000, $30,000, and $150,000 for the years ended December 31, 2009 and 2008 and for the period from inception (January 18, 2005) through December 31, 2009, respectively.

The Company had an arrangement with Tamera Reynolds, a member of its Board of Directors, to provide legal services on an as needed basis which was cancelled in 2009. The member was paid a total of $20,000, $-0-, and $20,000 in the years ended December 31, 2009 and 2008 and for the period from inception (January 18, 2005) through December 31, 2009, respectively.
34

 
Director Independence

 
Principal Accounting Fees And Services
 
Audit Fees

Audit Fees represent the aggregate fees for professional services for the audit of our annual financial statements and review of financial statements included in our quarterly reports on Form 10-Q or services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years.   For the years ended December 31, 2009 and 2008, we paid Weiser LLP $85,705 and $127,575, respectively.

Tax Fees

For the years ended December 31, 2009 and 2008, we did not pay Weiser LLP any fees for tax related services.

All Other Fees.
 
For the year ended December 31, 2009 we paid Weiser LLP $49,697 in other fees and for the year ended December 31, 2008, we did not pay Weiser LLP any fee other than audit fees.

The Board of Directors serves as the audit committee of the Company. The Board of Directors on an annual basis reviews audit and non-audit services performed by the independent registered public accounting firm. All audit and non-audit services are pre-approved by the Board of Directors, which considers, among other things, the possible effect of the performance of such services on the auditors' independence. The Board of Directors has considered the role of Weiser LLP in providing services to us for the fiscal year ended December 31, 2009 and has concluded that such services are compatible with Weiser LLP’s independence as the Company's  independent registered public accounting firm.
 
PART IV
 
Exhibits and Financial Statement Schedules.
         
The following documents are filed as a part of this report or incorporated herein by reference:
 
 
(1)
Our Consolidated Financial Statements are listed on page F-1 of this Annual Report.
  
(2)
Financial Statement Schedules:
 
None

 
35

 
 
 
(3)
Exhibits:
 
 The following documents are included as exhibits to this Annual Report:

Exhibit Number
 
Description
3.1
 
Articles of Incorporation (1)
3.2
 
Certificate of Amendment to Certificate of Incorporation, filed with the Delaware Secretary of State on January 7, 1998 (1)
3.3
 
Certificate of Amendment to Certificate of Incorporation, filed with the Delaware Secretary of State on August 27, 2008 (2)
3.4
 
Certificate of Ownership and Merger, filed with the Delaware Secretary of State on September 26, 2008 (3)
3.5
 
Amended and Restated Bylaws (1)
10.1
 
Agreement and Plan of Merger, dated September 17, 2008, among the Company, Sahara Media, Inc., and Sahara Media Acquisitions, Inc. (4)
10.2
 
Indemnification Agreement, dated September 17, 2008, between Sahara Media, Inc. and John Thomas Bridge & Opportunity Fund (4)
10.3
 
Securities Escrow Agreement, dated September 17, 2008, among the Company, Sahara Media, Inc., the shareholders of Sahara Media, Inc. named therein, and Sichenzia Ross Friedman Ference LLP, as escrow agent (4)
10.4
 
Form of Subscription Agreement (4)
10.5
 
Form of Investor Warrant (4)
10.6
 
Purchase Agreement, dated July 1, 2008, between Sahara Media, Inc. and John Thomas Bridge & Opportunity Fund (4)
10.7
 
Debenture, dated July 1, 2008, in favor of John Thomas Bridge & Opportunity Fund (4)
10.8
 
Security Agreement, dated July 1, 2008, between Sahara Media, Inc. and John Thomas Bridge & Opportunity Fund (4)
10.9
 
Security Agreement, dated July 1, 2008, between BPA, LLC and John Thomas Bridge & Opportunity Fund (4)
10.10
 
Purchase Agreement, dated September 3, 2008, between Sahara Media, Inc. and Cheryl Keeling (4)
10.11
 
Debenture, dated September 3, 2008, in favor of Cheryl Keeling (4)
10.12
 
Asset Purchase Agreement, dated May 15, 2008, between Sahara Media, Inc. and BPA, LLC (4)
10.13
 
Amendment to Asset Purchase Agreement, dated August 1, 2008, between Sahara Media, Inc. and BPA, LLC (4)
10.14
 
Letter agreement, dated May 21, 2008, between Sahara Media, Inc. and John Thomas Financial, Inc. (4)
10.15
 
Amendment to letter agreement, dated August 1, 2008, between Sahara Media, Inc. and John Thomas Financial, Inc. (4)
10.16
 
Finder’s Fee Agreement, dated July 21, 2008, between Sahara Media, Inc. and Aubry Consulting Group, Inc. (4)
10.17
 
Engagement Agreement, dated July 1, 2008, between Sahara Media, Inc. and Marathon Advisors (4)
10.18
 
Consulting Agreement, dated August 13, 2008, between Sahara Media, Inc. and Aurelian Investments, LLC (4)
10.19
 
Surrender Agreement, dated June 10, 2008, between Sahara Media, Inc. and Philmore Anderson IV (4)
10.20
 
Surrender Agreement, dated June 17, 2008, between Sahara Media, Inc. and Sahara Entertainment, LLC (4)
10.21
 
Master Services Agreement, dated July 11, 2008, between Sahara Media, Inc. and Ripple6, Inc. (2)
10.22
 
Purchase Agreement, dated June 9, 2008, between Sahara and Kevan Walker (5)
10.23
 
Amendment No. 2 to letter agreement, dated August 11, 2008, between Sahara Media, Inc. and John Thomas Financial, Inc. (2)
10.24
 
Agreement with Dogmatic, Inc, dated July 8, 2008 (6)
10.25
 
Agreement of Termination and Release, dated December 31, 2008, among Sahara Media, Inc., Sahara Media Holdings, Inc., Marathon Advisors, and Brian Rodriguez (7)
10.26
 
Employment Agreement, dated February 18, 2009, between Sahara Media Holdings, Inc. and Philmore Anderson IV(9)
10.27
 
16% Debenture due September 30, 2012 (10)
10.28
 
Purchase Agreement between the Company and John Thomas Bridge & Opportunity Fund, L.P. (10)
10.29
 
Common Stock Purchase Agreement between the Company and John Thomas Bridge & Opportunity Fund, L.P. (10)
10.30
 
Registration Rights Agreement between the Company and John Thomas Bridge & Opportunity Fund, L.P.
21
 
Subsidiaries of Sahara Media Holdings, Inc. (5)
 
 
 


 
36

 


 
 
(1)   
Filed as an exhibit to the Company’s registration statement on Form SB-2 (No. 333-70526), filed with the SEC on September 28, 2001, and incorporated herein by reference.
   
(2)
Filed as an exhibit to the Company’s 8-K (No. 000-52363) filed with the SEC on August 29, 2008, and incorporated herein by reference.
   
(3)
Filed as an exhibit to the Company’s 8-K (No. 000-52363) filed with the SEC on September 30, 2008, and incorporated herein by reference.
   
(4) 
Filed as an exhibit to the Company’s 8-K (No. 000-52363) filed with the SEC on September 24, 2008, and incorporated herein by reference.
   
(5)
Filed as an exhibit to the Company’ registration statement on Form S-1 (No. 333-155205) filed with the SEC on November 7, 2008.
   
(6)
Filed as an exhibit to the Company’s amendment no.1 to registration statement on Form S-1 (No. 333-155205), filed with the SEC on December 31, 2008, and incorporated herein by reference.
 
(7) 
Filed as an exhibit to the Company’s 8-K (No. 000-52363) filed with the SEC on January 6, 2009, and incorporated herein by reference.
   
(8) 
Filed herewith.
   
(9)
Filed as an exhibit to the Company’s 8-K (No. 000-52363) filed with the SEC on February 19, 2009, and incorporated herein by reference.
   
(10)
Filed as an exhibit to the Company’s 8-K (No. 000-52363) filed with the SEC on March 31, 2010, and incorporated herein by reference.
 

 
37

 
 

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 on this 15th day of April, 2010.

 
SAHARA MEDIA HOLDINGS, INC.
 
       
 
By:
/s/ Philmore Anderson IV  
   
Philmore Anderson IV
 
   
Chief Executive Officer
(Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer)
 
       
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
/s/ Philmore Anderson IV        
Philmore Anderson IV
   
April 15, 2010
 
CEO and Chairman (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)
       
         
/s/ Philmore Anderson IV        
Philmore Anderson III
   
April 15, 2010
 
Director
       
         
/s/ David Walker        
David Walker
   
April 15, 2010
 
Director
       
         
 
38

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Sahara Media Holdings, Inc. (a development stage company)

We have audited the accompanying consolidated balance sheets of Sahara Media Holdings, Inc. and subsidiary (a development stage company) (the “Company”) as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in stockholders' equity (deficiency) and cash flows for each of the years in the two year period ended December 31, 2009 and the period January 18, 2005 (date of inception) through December 31, 2009. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sahara Media Holdings, Inc. and subsidiary as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the years in the two year period ended December 31, 2009 and the period January 18, 2005 (date of inception) through December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the consolidated financial statements, the Company has incurred significant recurring operating losses, decreasing liquidity, and negative cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/   Weiser LLP

New York, NY
April 15, 2010
 
 
F-1

 

Sahara Media Holdings, Inc.
           
(a development stage enterprise)
           
Consolidated Balance Sheets
           
             
             
   
December 31, 2009
   
December 31, 2008
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 316,317     $ 4,437,465  
Available-for-sale security
    295,500       -  
Prepaid expenses and other
    49,539       44,988  
Total current assets
    661,356       4,482,453  
                 
Property and equipment, net
    24,601       26,481  
Intangible assets, net
    3,267,345       3,424,425  
Security deposits
    46,200       37,200  
Investment at cost
    45,000       -  
Deposits on contracts
    20,000       -  
Cash in escrow
    -       40,000  
                 
Total assets
  $ 4,064,502     $ 8,010,559  
                 
Liabilities and stockholders' equity
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 1,400,852     $ 134,228  
Share liability
    1,376,250       87,500  
Total current liabilities
    2,777,102       221,728  
                 
Commitments and contingencies
    -       -  
                 
Stockholders' equity
               
Preferred stock, $0.0001 par value; 10,000,000
               
shares authorized; no shares issued or outstanding
    -       -  
Common stock, $0.003 par value; 50,000,000 shares authorized;
         
31,066,710 shares issued and 30,066,710 shares outstanding
         
at December 31, 2009; 30,812,042 shares issued and
         
outstanding at December 31, 2008
    93,200       92,436  
Additional paid-in capital
    11,939,664       11,690,851  
Accumulated other comprehensive loss
    (4,500 )     -  
Deficit accumulated during the development stage
    (10,737,964 )     (3,994,456 )
      1,290,400       7,788,831  
Less: Treasury stock - (1,000,0000 common shares at
         
December 31, 2009) at cost
    (3,000 )     -  
Total stockholders' equity
    1,287,400       7,788,831  
                 
Total liabilities and stockholders' equity
  $ 4,064,502     $ 8,010,559  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F-2

 
 
Sahara Media Holdings, Inc.
           
(a development stage enterprise)
           
Consolidated Statements of Operations
           
 
   
Years Ended
   
Period from inception (January 18, 2005)
 
   
December 31,
   
through
 
   
2009
   
2008
   
December 31, 2009
 
                   
Revenue
  $ 38,867     $ 8,183     $ 74,397  
                         
Costs and expenses:
                       
Product development
    1,435,035       296,694       2,247,700  
Selling and marketing
    339,770       133,468       589,720  
General and administrative
    5,036,937       1,528,743       7,818,300  
                         
                         
Loss from operations
    (6,772,875 )     (1,950,722 )     (10,581,323 )
                         
Interest income
    33,372       24,608       57,980  
Loss on sale of available-for-sale security
    (4,005 )     -       (4,005 )
Interest expense- related party
    -       (17,053 )     (96,735 )
Interest expense
    -       (90,889 )     (113,881 )
                         
Net loss
  $ (6,743,508 )   $ (2,034,056 )   $ (10,737,964 )
                         
Basic and diluted loss per share
  $ (0.22 )   $ (0.15 )        
                         
                         
Weighted average common shares
                       
- basic and diluted     31,002,156       13,389,404          
                         
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-3

 
 

Sahara Media Holdings, Inc.
(a development stage company)
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
For the Period from Date of Inception (January 18, 2005)
through December 31, 2009
 
 
                     
Accumulated 
   
Deficit 
                   
                     
Other 
   
Accumulated 
               
Total 
 
               
Additional 
   
Comprehensive
   
During the
               
Stockholders 
 
   
Common Stock 
   
Paid-in 
   
Income
   
Development
   
Treasury Stock 
   
Equity 
 
   
Shares 
   
Amount 
   
Capital 
   
(Loss)
   
Stage
   
Shares 
   
Amount 
   
(Deficiency) 
 
Balance at January 18, 2005
    -     $ -     $ -     $ -     $ -       -     $ -     $ -  
                                                                 
Issuance of common stock to founder net of cancellation
    1,147,500       12       194,368                                       194,380  
Issuance of common stock to director
    120,000       1       119                                       120  
Issuance of common stock to investors
    499,800       5       495                                       500  
Issuance of common stock to investor
    15,000       -       -                                       -  
                                                                 
Net loss
                                    (405,269 )                     (405,269 )
                                                                 
Balance at December 31, 2005
    1,782,300       18       194,982       -       (405,269 )     -       -       (210,269 )
                                                                 
Issuance of common stock to consultant
    30,000       -       -                                       -  
                                                                 
Net loss
                                    (826,402 )                     (826,402 )
                                                                 
Balance at December 31, 2006
    1,812,300       18       194,982       -       (1,231,671 )     -       -       (1,036,671 )
                                                                 
Issuance of common stock on exercise of warrant
    164,800       2       -                                       2  
                                                                 
Net loss
                                    (728,729 )                     (728,729 )
                                                                 
Balance at December 31, 2007
    1,977,100       20       194,982               (1,960,400 )     -       -       (1,765,398 )
                              -                                  
                                                                 
Issuance of common stock to founder to settle note
                                                         
payable and advances to related parties
    13,363,390       134       1,303,709                                       1,303,843  
Cancellation of common stock on settlement
    (1,147,500 )     (11 )     -                                       (11 )
Issuance of common stock to founder
    100,000       1       524,999                                       525,000  
Issuance of common stock to a director to settle note
                                                 
payable to a related party and accrued interest
    452,000       5       139,237                                       139,242  
Issuance of common stock to a consultant to settle
                                                         
accrued consulting fees to a related party
    210,000       2       142,418                                       142,420  
Cancellation of common stock on settlement
    (30,000 )     -       -                                       -  
Cancellation of common stock
    (312,300 )     (3 )     -                                       (3 )
Issuance of common stock to a consultant to settle
                                                         
accrued consulting fees to a related party
    5,500       -       8,197                                       8,197  
Issuance of common stock to settle accrued charges on note payable
    724,000       7       11,993                                       12,000  
Cancellation of common stock on settlement of accrued charges
    (164,800 )     (2 )     -                                       (2 )
Issuance of common stock to settle note payable and accrued interest
    140,000       1       111,392                                       111,393  
Issuance of common stock to settle accrued consulting fees
    480,000       5       25,782                                       25,787  
Issuance of common stock to settle note payable and accrued interest
    19,610       -       19,610                                       19,610  
Issuance of common stock to an investor
    100,000       1       49,999                                       50,000  
Issuance of common stock to consultant
    200,000       2       3,998                                       4,000  
Issuance of common stock to settle note payable and accrued interest
    31,000       -       -                                       -  
Issuance of common stock
    27,000       -       25,000                                       25,000  
Issuance of common stock to an investor
    100,000       1       49,999                                       50,000  
Issuance of common stock to founder's company as consideration
                                         
for consulting services
    400,000       4       (4 )                                     -  
Issuance of common stock to a related party as additional
                                                               
consideration for purchase of database
    1,425,000       14       1,781,236                                       1,781,250  
Issuance of common stock to a stockholder as
                                                               
consideration for a bridge loan
    50,000       150       62,350                                       62,500  
Par value of common shares under plan of merger
    818,000       2,454       (2,454 )                                     -  
Cancellation of common shares under plan of merger
    (18,150,000 )     (181 )     181                                       -  
Issuance of common shares and recapitalization under plan of merger
    18,150,000       54,450       (54,450 )                                     -  
 
 
F-4

 
 
Sahara Media Holdings, Inc.
                             
(a development stage company)
                             
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
               
For the Period from Date of Inception (January 18, 2005)
                       
through December 31, 2009
                             
 
                     
Accumulated
   
Deficit
                   
                     
Other
   
Accumulated
               
Total
 
               
Additional
   
Comprehensive
   
During the
               
Stockholders'
 
   
Common Stock
   
Paid-in
   
Income
   
Development
   
Treasury Stock
   
Equity
 
   
Shares
   
Amount
   
Capital
   
(Loss)
   
Stage
   
Shares
   
Amount
   
(Deficiency)
 
Issuance of common stock to investors net of issuance costs
                                               
  of $2,370,478 for private placement     6,526,159       19,578       5,768,310                               5,787,888  
Issuance of common stock as additional consideration for bridge loan
    500,000       1,350       (1,350 )                             -  
Issuance of common stock as additional consideration for
                                                       
for private placement brokerage
    3,000,000       9,000       (9,000 )                             -  
Issuance of common stock to consultant for services
    100,000       300       (300 )                             -  
Issuance of common stock to consultant for services
                                                 
related to private placement
    50,000       150       (150 )                             -  
Issuance of common stock as additional consideration
                                                 
for legal services related to private placement
    250,000       750       (750 )                             -  
Issuance of common stock to investors net of issuance costs
                                                       
of $242,897 for private placement
    1,417,883       4,254       1,525,102                               1,529,356  
Stock based compensation for warrants issued to consultant
    -       -       10,815                               10,815  
                                                         
Net loss
                            -       (2,034,056 )               (2,034,056 )
                                                             
Balance at December 31, 2008
    30,812,042       92,436       11,690,851       -       (3,994,456 )     -       -       7,788,831  
                                                                 
Components of comprehensive loss, net of tax:
                                                               
    Net Loss
                                    (6,743,508 )                     (6,743,508 )
Unrealized holding loss on available-for-sale security
                      (4,500 )                             (4,500 )
Total comprehensive loss
                                                            (6,748,008 )
                                                                 
Issuance of common stock to consultants for
                                                 
services accrued in share liability
    66,668       200       199,800                                       200,000  
Issuance of common stock to consultant for services
    100,000       300       (300 )                                     -  
Common stock issuable to consultant for services
    50,000       150       (150 )                                     -  
Stock based compensation for warrants issued to consultants
    -       -       30,547                                       30,547  
Common stock issuable to related party for services
    25,000       75       8,675                                       8,750  
Common stock issuable per settlement agreement
    13,000       39       7,241                                       7,280  
Receipt of common stock for settlement
under escrow share agreement
      3,000                       1,000,000       (3,000 )     -  
                                                                 
                                                                 
                                                                 
Balance at December 31, 2009
    31,066,710     $ 93,200     $ 11,939,664     $ (4,500 )   $ (10,737,964 )     1,000,000     $ (3,000 )   $ 1,287,400  

The accompanying notes are an integral part of these consolidated financial statements.
 
F-5

 
Sahara Media Holdings, Inc.
           
(a development stage company)
           
Consolidated Statements of Cash Flows
           
 
                   
               
Period from
 
               
inception
 
               
(January 18, 2005)
 
   
Years Ended
   
through
 
   
December 31.
   
December 31,
 
   
2009
   
2008
   
2009
 
                   
Cash flows from operating activities:
                 
Net loss
  $ (6,743,508 )   $ (2,034,056 )   $ (10,737,964 )
Adjustments to reconcile net loss to net cash used in
                       
  operating activities:
                       
Depreciation and amortization expense
    474,241       89,709       826,067  
Stock-based compensation
    1,135,750       -       1,135,750  
Stock-based consulting expense
    83,327       10,815       94,142  
Share liability
    1,488,750       87,500       1,576,250  
Loss on sale of available-for-sale security
    4,005       -       4,005  
Amortization of debt discount
    -       3,500       21,000  
Issuance of stock as additional consideration for bridge loan
    -       62,500       62,500  
Changes in assets and liabilities:
                       
Accounts receivable
    -       2,347       -  
Prepaid expenses and other
    (4,551 )     (44,988 )     (49,539 )
Security deposits
    (9,000 )     (37,200 )     (46,200 )
Accounts payable and accrued expenses
    94,124       73,036       364,930  
Accrued expenses, related parties
    -       50,804       235,193  
Accrued salary, related parties
    -       75,000       525,000  
Subscription liability
    -       -       406,000  
                         
Net cash used in operating activities
    (3,476,862 )     (1,661,033 )     (5,582,866 )
                         
Cash flows from investing activities:
                       
Acquisition of intangible asset
    (111,403 )     -       (111,403 )
Capitalization of website development costs
    (199,754 )     (550,000 )     (749,754 )
Acquisition of intangible assets - related party
    -       (825,000 )     (825,000 )
Acquisition of property and equipment
    (4,124 )     (27,809 )     (31,933 )
Purchase of available-for-sale security
    (500,000 )     -       (500,000 )
Proceeds from sale of available-for-sale security
    195,995       -       195,995  
Purchase of non-marketable security
    (45,000 )     -       (45,000 )
Deposits on acquisition agreements
    (20,000 )     -       (20,000 )
Cash in escrow
    40,000       (40,000 )     -  
Acquisition of trademark intangibles
    -       -       (618,673 )
                         
Net cash used in investing activities
    (644,286 )     (1,442,809 )     (2,705,768 )
                         
Cash flows from financing activities:
                       
Payment made to restricted cash
    (500,311 )     -       (500,311 )
Proceeds from restricted cash
    500,311       -       500,311  
Issuance of common stock, net of issuance costs
    -       7,491,886       7,686,886  
Notes payable, related parties
    -       13,553       601,734  
Notes payable
    -       34,338       316,331  
                         
Net cash provided by financing activities
    -       7,539,777       8,604,951  
                         
Net (decrease) increase in cash and cash equivalents
    (4,121,148 )     4,435,935       316,317  
                         
Cash and cash equivalents, beginning of periods
    4,437,465       1,530       -  
                         
Cash and cash equivalents, end of periods
  $ 316,317     $ 4,437,465     $ 316,317  
 
F-6


Sahara Media Holdings, Inc.
           
(a development stage company)
           
Consolidated Statements of Cash Flows
           
 
               
Period from
 
               
inception
 
               
(January 18, 2005)
 
   
Years Ended
   
through
 
   
December 31.
   
December 31,
 
   
2009
   
2008
   
2009
 
                   
Supplementary information:
                 
Cash paid for:
                 
Interest
  $ -     $ -     $ -  
Income Taxes
  $ -     $ -     $ -  
                         
                         
                         
Supplemental disclosures of cash flow information:
                       
                         
Noncash Investing Activities
                       
                         
Issuance of common shares to acquire intangible asset
  $ -     $ 1,781,250     $ 1,781,250  
                         
                         
Noncash Financing Activities
                       
                         
Issuance (receipt) of common shares to settle:
                       
Share liability
  $ 200,000     $ -     $ 200,000  
Unrealized loss on available-for-sale security
    (4,500 )     -       (4,500 )
Escrow agreement - in treasury
    (3,000 )     -       (3,000 )
Notes payable and accrued interest, related parties
    -       601,734       601,734  
Note payable and accrued interest
    -       337,331       337,331  
Advances, accrued expenses and other, related party
    -       1,156,660       1,156,660  
Accounts payable and accrued expenses
    -       181,323       181,323  
    $ 192,500     $ 2,277,048     $ 2,469,548  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F-7

 
Sahara Media Holdings, Inc.
(A Development Stage Company) 
Notes to Consolidated Financial Statements 
For the Years ended December 31, 2009 and 2008





1.  
 Nature of Business

Sahara Media Holdings, Inc. (the “Company”) is a Delaware corporation organized on September 26, 1997 under the name Keystone Entertainment, Inc. On January 14, 1998, the corporate name was changed to Mac Filmworks, Inc. (“MFI”). On September 26, 2008, the corporate name was changed to Sahara Media Holdings, Inc. 

Sahara Media Holdings, Inc. is the parent company of Sahara Media, Inc., a Delaware corporation formed in January 2005 (“Sahara”), which is a development-stage company located in New York City. Since its formation, Sahara has concentrated on the development of its business strategy. Until March 2004, Vanguarde Media, an entity not affiliated with Sahara, published Honey Magazine, a publication aimed at the 18-34 urban female demographic. As a result of financial difficulties of Vanguarde Media, Honey Magazine ceased publishing.  Vanguarde Media filed for bankruptcy and in February 2005 Sahara through the bankruptcy proceedings purchased the “Honey” trademark for the class of paper goods and printed matter. Sahara launched Honey as an online magazine and social network targeting the 18-34 urban female demographic in March 2009.  The Company expects that the primary components of the business will be:
 
 
The online magazine Honeymag.com
 
The social network Hivespot.com, which will be re-launched under a new name with new capabilities
 
A database of names in the 18-34 urban female demographic (the “Honey Database")

On September 17, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Sahara Media Acquisitions, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (the “Subsidiary”) and Sahara, a Delaware corporation.  Pursuant to the Merger Agreement, which closed on September 17, 2008 (the “Closing Date”), the Subsidiary merged into Sahara and Sahara became a wholly-owned subsidiary of the Company. Pursuant to the Merger Agreement, the Company issued 18,150,000 shares of the Company’s Common Stock to the shareholders of Sahara (the “Acquisition Shares”) (subject to the placement of 5,000,000 Acquisition Shares in escrow pursuant to the Escrow Agreement (defined below)), representing approximately 58.9% of the Company’s aggregate issued and outstanding common stock following the closing of the Merger Agreement and the Private Placement (defined below), and the outstanding shares of common stock of Sahara were cancelled and converted into the right to receive the Acquisition Shares.
 
The acquisition of Sahara was treated as a recapitalization, and the business of Sahara became the business of the Company. At the time of the recapitalization, the Company was not engaged in any active business.

The accounting rules for reverse acquisitions require that beginning September 17, 2008, the date of the reverse acquisition, the balance sheet reflects the assets and liabilities of Sahara and the equity accounts were recapitalized to reflect the newly capitalized company. The results of operations reflect the operation of Sahara for the periods presented.

 
F-8

 
 
2.  
Basis of Presentation
 
The accompanying consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  The Company has had minimal revenues since inception, incurred losses from operations since its inception and has a deficit accumulated during the development stage amounting to approximately $10,738,000 as of December 31, 2009. In addition, the current economic environment, which is characterized by tight credit markets, investor uncertainty about how to safely invest funds and low investor confidence, has introduced additional risk and difficulty to the Company’s challenge to secure additional working capital.  There can be no assurance that the Company will be profitable in the future or will be able to secure sufficient funding.  If the Company is not profitable and cannot obtain sufficient capital to fund operations, the Company may have to cease operations.   These circumstances raise substantial doubt about the Company’s ability to continue as a going concern.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
Management’s plan with regards to this condition primarily includes the continuance of executing upon its business plan.  In accordance with this plan, the Company’s direct sales ad team signed its first advertising client in the second half of 2009 which generated $35,000 in revenues in 2009. Additionally, the Company has entered into advertising agreements with two Fortune 500 clients in the last half of 2009 and is currently negotiating additional agreements which are expected to be executed in 2010. The Company anticipates that with continued increases in traffic and impressions to its websites, that the Company will experience revenue growth beginning in 2010.  Additionally, the Company is presently working to raise capital through debt and equity financings. There can be no assurance that such revenues will reach anticipated amounts or that the Company will be able to raise additional capital to execute its strategy.

3.  
Summary of Significant Accounting Policies
 
Codification
Effective July 1, 2009, the Accounting Standards Codification (“ASC”) became the FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (“GAAP”) applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Sahara Media, Inc.  All significant intercompany accounts and transactions have been eliminated.

Use of Estimates
The preparation of the consolidated financial statements in accordance with U. S. generally accepted accounting principles (“GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results may differ from these estimates. The significant estimates and assumptions made by the Company include valuation allowances for deferred tax assets, valuation of share-based payments and the carrying value of its intangible assets.

Cash and Cash Equivalents
The Company considers all highly liquid investments, with a maturity of three months or less when purchased, to be cash equivalents.

Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.  Depreciation and amortization is recorded on the straight-line method over five to ten years, which approximates the estimated useful lives of the assets.  Routine maintenance and repair costs are charged to expense as incurred and renewals and improvements that extend the useful lives of the assets are capitalized.  Upon sale or retirement, the cost and related accumulated depreciation and amortization are eliminated from the respective accounts and any resulting gain or loss is reported in the consolidated statement of operations.
  
Intangible Assets
The intangible assets, initially recorded at cost, are considered to approximate fair value at the time of purchase. Amortization is provided for on a straight-line basis over the estimated useful lives of the assets. The Company evaluates the recoverability of its intangible assets periodically and takes into account events or circumstances that warrant revised estimates of their useful lives or indicate that impairments exist. Management believes that based on an independent valuation as of December 31, 2009 that there is no impairment of the Company’s intangible assets. In December 2009, the Company acquired a database of double opt-in email addresses extracted from names in its current database.  In addition, in the fourth quarter of 2009, the Company began significant updates to its website which are expected to be completed in the second quarter of 2010.  The magazine trademark, list database and website development costs are amortized on the straight-line method over seven years, which approximates their estimated useful lives. Amortization of the email database and website costs incurred in the fourth quarter of 2009 begin when they have been placed into service, during the first quarter of 2010 and second quarter of 2010, respectively. 

Revenue Recognition
Revenue is recognized when all of the following criteria are met:  (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and, (4) collectibility is reasonably assured. 
 
Income Taxes
The Company accounts for income taxes using the asset and liability method.  Deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.  Valuation allowances are provided, based upon the weight of available evidence, if it is more likely than not that some or all of the deferred tax assets will not be realized.

Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents and trade accounts receivable.

The Company maintains its cash and cash equivalents in accounts with major financial institutions in the United States in the form of demand deposits and liquid money market funds.  Deposits in these institutions may exceed the amounts of insurance provided on such deposits There were no deposits subject to risk as of December 31, 2009. The Company has not experienced any losses on deposits of cash and cash equivalents.

Loss Per Share
Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the year. The dilutive effect of the outstanding stock warrants is computed using the treasury stock method. For the years ended December 31, 2009 and 2008, diluted loss per share does not include the effect of 10,394,034 and 10,294,034 stock warrants outstanding, respectively, as their effect would be anti-dilutive.
 
F-9


Equity-based Compensation
The Company accounts for equity based compensation transactions with employees under the provisions of ASC Topic No. 718, “Compensation, Stock Compensation” (“Topic No. 718”). Topic No. 718 requires the recognition of the fair value of equity-based compensation in net income. The fair value of the Company’s equity instruments are estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each award. In addition, the calculation of equity-based compensation costs requires that the Company estimate the number of awards that will be forfeited during the vesting period. The fair value of equity-based awards granted to employees is amortized over the vesting period of the award and the Company elected to use the straight-line method for awards granted after the adoption of Topic No. 718.

The Company accounts for equity based transactions with non-employees under the provisions of ASC Topic No. 505-50, “Equity-Based Payments to Non-Employees” (“Topic No. 505-50”). Topic No. 505-50 establishes that equity-based payment transactions with non-employees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, which ever is more reliably measurable. When the equity instrument is utilized for measurement the fair value of the equity instrument is estimated using the Black-Scholes option valuation model. In general, the Company recognizes an asset or expense in the same manner as if it was to receive cash for the goods or services instead of paying with or using the equity instrument.

Advertising Expense
The Company expenses advertising costs as incurred. Advertising costs incurred in the years ended December 31, 2009 and 2008, and for the period from inception (January 18, 2005) through December 31, 2009 approximated $62,000, $-0- and $62,000, respectively.

Product Development
The Company expenses product development costs as incurred.  Product development costs for the years ended December 31, 2009 and 2008, and for the period from inception (January 18, 2005) through December 31, 2009 approximated $1,435,000, $297,000 and $2,248,000, respectively.

Fair Value of Financial Instruments
The Company measures certain financial and nonfinancial assets and liabilities in accordance with ASC Topic No. 820 “Fair Value Measurements and Disclosures” [see Note 14].

Investments
The Company accounts for its investment in fixed income security, as an available-for-sale security. The difference between cost and fair value, representing unrealized holding gains or losses, net of the related tax effect, if any, is recorded, until realized, as a separate component of stockholders’ equity.

The Company determined that since a quoted market price is not available and it has not yet obtained or developed the valuation model necessary to estimate fair value, and the cost of obtaining an independent valuation would be excessive considering the materiality of the instrument to the Company’s consolidated financial statements in accordance with paragraphs 50-16 through 50-19 of ASC Topic No. 825-10 “Financial Instruments” it is not practicable to estimate fair value of its investment in convertible debenture at this time and accounts for it at cost.  

Reclassifications
Certain general and administrative expenses totaling approximately $54,000 and $157,000 in the year ended December 31, 2008 and the period from inception (January 18, 2005) through December 31, 2008, respectively, have been reclassified to product development to conform to the December 31, 2009 presentation.
 
F-10

 
4.
Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board ("FASB") issued, and the Company adopted, Accounting Standards Codification (“ASC”) Update No. 2010-05 “Escrowed Share Arrangements and the Presumption of Compensation” (“ASCU No. 2010-05”). ASCU No. 2010-05 codifies the SEC staff’s views on escrowed share arrangements which historically has been that the release of such shares to certain shareholders based on performance criteria is presumed to be compensatory. When evaluating whether the presumption of compensation has been overcome, the substance of the arrangement should be considered, including whether the transaction was entered into for a reason unrelated to employment, such as to facilitate a financing transaction. In general, in financing transactions the escrowed shares should be reflected as a discount in the allocation of proceeds. In debt financings the discounts are to be amortized using the effective interest method, while discounts on equity financings are not generally amortized. The Company adopted ASCU No. 2010-05 effective January 1, 2010, although it has been in compliance with the SEC staff’s views on escrowed share arrangements, as it relates to future financings, the adoption of this update may have a material effect on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASC Update No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” which updated guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. This update requires new disclosures on significant transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy (including the reasons for these transfers) and the reasons for any transfers in or out of Level 3. This update also requires a reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure requirements, this update clarifies certain existing disclosure requirements. For example, this update clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities rather than each major category of assets and liabilities. This update also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. This update will become effective for the Company with the interim and annual reporting period beginning January 1, 2010, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will become effective for the Company with the interim and annual reporting period beginning January 1, 2011. The Company will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. Other than requiring additional disclosures, adoption of this update will not have a material effect on the Company's consolidated financial statements.
 
The Company adopted the provisions of ASC Topic No. 855, “Subsequent Events” (“ASC 855”), on a prospective basis.  The provisions of ASC 855 provide guidance related to the accounting for the disclosure of events that occur after the balance sheet date but before the consolidated financial statements are issued or are available to be issued.  Effective February 24, 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements” which revised certain disclosure requirements. ASU No. 2010-09 did not have a significant impact on the Company’s consolidated financial statements. The Company evaluated subsequent events, which are events or transactions that occurred after December 31, 2009 through the issuance of the accompanying consolidated financial statements.

 
F-11

 


5.  
Prepaid Expenses

In August 2009, the Company made an advance to an unrelated party of $35,000. The advance was non-interest bearing until the maturity date, which is November 15, 2009. This advance was made in connection with the Company’s receipt of free services for the use of the unrelated party's facilities. The Company accounted for the substance of this transaction as a cash for services event. As of December 31, 2009, $21,250 has been recorded as a prepaid expense which will be offset against future services, rendered to the Company.

   
6.
Intangible Assets
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
             
Magazine trademark
 
$
618,673
   
$
618,673
 
List database
   
2,717,653
     
2,606,250
 
Website development costs
   
749,754
     
550,000
 
Total intangibles
   
4,086,080
     
3,774,923
 
Less: accumulated amortization
   
818,735
     
350,498
 
Intangibles, net
 
$
3,267,345
   
$
3,424,425
 
                 
 
In December 2009, the Company incurred $111,403 to acquire a list database comprised of double opt-in email addresses extracted from names in its current database.  Additionally in 2009, the Company incurred $199,754 in website development costs, of which $162,534 is in progress as of year end. Amortization of the newly acquired list database will begin in the first quarter of 2010. Amortization of the capitalized website costs, which will be over seven years, will begin when the projects have been completed and placed into service, which is expected to be in the second quarter of 2010. Such amortization is not included in the estimated future amortization table below. Amortization expense for the years ended December 31, 2009 and 2008, and for the period from inception (January 18, 2005) through December 31, 2009 amounted to $468,237, $88,382 and $818,735, respectively.

Estimated amortization expense for the next five years is as follows:

Years ended
       
December 31,      
       
2010
 
 $
561,000
 
2011
   
561,000
 
 2012
   
475,000
 
2013
   
472,000
 
2014
   
472,000
 
Thereafter
   
564,000
 
   
$
3,105,000
 

7.
Property and Equipment
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
             
Office furniture and equipment
 
$
31,933
   
$
27,809
 
Less accumulated depreciation
   
7,332
 
   
1,328
 
             
 
 
Property and equipment, net
 
$
24,601
   
$
26,481
 

Depreciation expense for the years ended December 31, 2009 and 2008, and for the period from inception (January 18, 2005) through December 31, 2009 amounted to $6,004, $1,328 and $7,332, respectively.
 
8. 
Investments

Available-for-sale security

In August 2009, the Company purchased a corporate bond with a face amount of $500,000, at par, and has classified this investment as an available-for–sale security, which matures in August 2024.  Interest will accrue on the bond in the first year at a rate of 12% per annum and in years two to maturity, subject to the financial institution’s redemption right, at a  variable rate per annum equal to six times the difference, if any, between the 30-Year Constant Maturity Swap (“30CMS”) and the 2-Year Constant Maturity Swap Rate (“2CMS”) for the related quarterly interest payment period; subject to the maximum interest rate of 25% per annum and a minimum interest rate of 0% per annum.  As of December 31, 2009, this variable rate approximated 20.94% per annum.

The bond provides the opportunity to receive an above-market interest rate in the first year; however, the bond will not accrue any interest in any interest payment period from the second year to maturity if the CMS reference index level is equal to or less than 0%.  The financial institution has the right to redeem the bond beginning on August 6, 2010 and quarterly thereafter.  All payments on this security, including the repayment of principal, are subject to the credit risk of the financial institution.

This security is subject to various risks not typically found with ordinary floating rate notes, including fluctuations in the 30CMS and 2CMS, fluctuations in the index, and other events that are difficult to predict and beyond the issuer’s control.

In December 2009, bonds with a face amount of $200,000 were sold for $199,128, which included accrued interest of $3,133. The Company realized a loss on the sale of $4,005.  As of December 31, 2009, the estimated market value of the remaining bond, with a face value of $300,000, was $295,500 and an unrealized loss of $4,500 has been recorded as accumulated comprehensive loss in stockholders’ equity at December 31, 2009.

Investment at cost

In October 2009, the Company purchased a convertible debenture from a software development company with a face amount of $45,000. The debenture is non-interest bearing and is redeemable by the issuer two years and one day after closing, on or around October 5, 2011 (the “Maturity Date”). If the debenture is not redeemed by the issuer on or before the maturity date, the Company has the right to convert the debenture into an approximate 1% equity interest in the issuer.
 
F-12

 
9. 
Line of Credit
 
In February 2009, the Company secured a $500,000 line of credit with a financial institution which was due in February 2010.  The Company did not utilize this facility.  In connection with this line of credit, the Company was required to deposit $500,000 with the lending institution which served as collateral against the line.   In April 2009, this facility was terminated and the deposit was released.
 
10.
Stockholders’ Equity
 
 The Company’s Certificate of Incorporation originally authorized the issuance of 1,500,000 shares of common stock, no par value. On January 12, 2007, the authorized shares of common stock were increased to 10,000,000. On June 18, 2008, the total number of authorized shares was increased to 50,000,000 shares of common stock having a par value of $0.003 per share.

On June 1, 2008, the Board of Directors approved a thousand-for-one stock split of the Corporation’s common stock in the form of a stock dividend. Stockholders’ equity and common stock activity for all periods presented have been restated to give retroactive recognition to the stock split. In addition, all references in the consolidated financial statements and notes to the consolidated financial statements about the Company’s common stock have been restated to give retroactive recognition to the stock split.
 
On September 17, 2008, Mac Filmworks, Inc. (formerly “MFI”, now known as Sahara Media Holdings, Inc.) (the “Company”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sahara Media Acquisitions, Inc. a Delaware corporation.  Pursuant to the Merger Agreement, Sahara Media Acquisitions, Inc. merged into Sahara Media, Inc.  ("Sahara") such that Sahara Media Inc., became a wholly-owned subsidiary of the Company. Pursuant to the Merger Agreement, the Company  issued 18,150,000 shares of their common stock to the shareholders of Sahara (the “Acquisition Shares”) (subject to the placement of 5,000,000 Acquisition Shares in escrow pursuant to the Escrow Agreement (defined below)) representing approximately 58.9% of the Company’s aggregate issued and outstanding common stock following the closing of the Merger and the Private Placement (defined below), and the outstanding shares of common stock of Sahara were transferred to the Company and cancelled.
 
In connection with the Merger, the Company entered into a series of identical subscription agreements (the “Subscription Agreements”) with accredited investors (the “Investors”), pursuant to which, concurrent with the closing of the Merger on the Closing Date, the Company issued and sold units, with each unit consisting of 100,000 shares of common stock and five-year warrants to purchase 100,000 shares of common stock with an exercise price of $2.50 per share, for a purchase price of $125,000 per unit (the “Private Placement”). Pursuant to the Private Placement, the Company issued and sold to the Investors an aggregate of 6,526,159 shares of common stock (the “Common Shares”) and five-year warrants to purchase 6,526,159 shares of common stock (the “Investor Warrants”), for an aggregate purchase price of $8,158,366. The Investor Warrants may not be exercised to the extent such exercise would cause the holder of the warrant, together with its affiliates, to beneficially own a number of shares of common stock which would exceed 4.99% of the Company's then outstanding shares of common stock following such exercise. Pursuant to the Subscription Agreements, the Company filed a registration statement registering the Common Shares and the shares of common stock underlying the Investor Warrants, subject to the SEC’s declaration of effectiveness. The SEC declared the registration statement effective on September 22, 2009.

Additionally, in September 2008, the Company issued 2,550,000 warrants with exercise prices ranging from $1.10 to $1.50 per share with a value of $2,068,205, a cost of raising capital that has been recorded as an offset to additional paid-in capital (see Marathon Advisors below).
 
F-13


Common stock issuances

In 2005, Sahara issued 634,800 shares of common stock as founder shares.  Additionally Sahara issued 1,147,500 shares to one of the founders in settlement of $194,380 of advances made.

On January 7, 2006, Sahara issued to a consultant, 30,000 shares in settlement for services rendered.

On June 10, 2008, Sahara issued common shares, as follows:

·  
19,610 shares, valued at $1.00 per share, to settle $19,610 note payable, including accrued interest of $1,610.
·  
724,000 shares, valued at $0.02 per share, to settle accrued interest payable of $12,000.  In connection with this transaction, 164,800 previously issued shares were cancelled.
·  
480,000 shares, valued at $0.05 per share, to settle $25,787 of accrued consulting fees.  In addition, warrants for a 5% per-money interest in the Company were cancelled.
·  
27,000 shares, valued at $0.93 per share, to settle note payable of $25,000.
·  
452,000 shares, valued at $0.31 per share, to a director, a related party, to settle a note payable of $139,242 including accrued interest of $14,242.
·  
100,000 shares, valued at $5.25 per share, to the founder and chief executive officer, a related party, in exchange for $525,000 of accrued salary.
·  
210,000 shares, valued at $0.44 per share, to a consultant, a related party, in exchange for accrued consulting fees of $142,420.  In connection with this transaction, 30,000 previously issued shares were cancelled.
·  
5,500 shares valued at $1.49 per share to a consultant in settlement of accrued consulting fees of $8,197.

On June 12, 2008, Sahara issued 140,000 common shares, valued at $0.80 per share, to settle a note payable of $111,393 including accrued interest of $11,393.

 On June 15, 2008, Sahara issued 100,000 common shares to an investor at $.50 per share for $50,000.

On June 16, 2008, Sahara issued 200,000 common shares, valued at $.02 per share, to settle $4,000 of accrued consulting fees.  In addition, warrants for a 5% pre-money interest in the Company were cancelled.

On June 17, 2008, Sahara issued 13,363,390 common shares, of which 5,000,000 shares were placed in escrow (see Escrow Shares), valued at $0.10 per share, to Sahara Entertainment, LLC, a related party, to settle a note payable and advances aggregating $1,303,843 in the amount of $462,074 including accrued interest of $61,074 and assumption of liabilities on behalf of the Company amounting to $841,769.  In connection with this transaction 1,147,500 previously issued shares were cancelled.

Additionally, on June 17, 2008, Sahara issued 31,000 common shares in exchange for fees.

On July 31, 2008, Sahara issued 100,000 common shares to an investor at $0.50 per share for $50,000.

On July 31, 2008, Sahara issued 400,000 common shares, valued at $0.50 per share, to Sahara Entertainment, LLC, a related party, as payment for consulting relating to the Company’s financing.  The Company recorded $200,000 as an offset to additional paid-in capital as this issuance related to costs of raising capital.

Cheryl Keeling

On September 3, 2008, Sahara issued 50,000 common shares, valued at $1.25 per share, to Cheryl Keeling, as additional consideration for a $100,000 bridge loan made on the same date.  The loan was repaid upon the closing of the Merger and Private Placement on September 17, 2008.

The Company recorded $-0-, $107,942 and $210,616 of interest expense for the years ended December 31, 2009 and 2008, and the period from inception (January 18, 2005) through December 31, 2009, respectively.
 

 
F-14

 

           BPA Associates, LLC

On September 17, 2008, pursuant to a Purchase Agreement dated July 1, 2008, between Sahara and BPA Associates LLC (“BPA”) a related party, the Company issued 1,425,000 common shares, valued at $1.25 per share, to BPA, as additional consideration for the purchase of their database. The Company’s consideration for this purchase is as follows: $50,000 in cash which was paid on July 1, 2008 in consideration of BPA pledging the database in connection with the sale by the Company of a $500,000 debenture to an Investor, $775,000 in cash and 1,425,000 common shares on consummation of the reorganization.

The Company recorded $2,606,250 as an intangible asset which is comprised of the $1,781,250 value of the common shares plus $825,000 of cash paid.

Reverse Split

The Company completed a 1 for 30 reverse stock split of its common shares, pursuant to which MFI’s issued and outstanding shares of common shares, was reduced to 818,000 (prior to the Merger and the Private Placement).
 
Shares issued to investors in the private placement
 
On September 17, 2008, the Company issued 6,526,159 shares of common stock and five-year warrants to purchase 6,526,159 shares of common stock with an exercise price of $2.50 per share in a private placement for an aggregate amount of $8,158,366.  The Company recorded $19,578 to the par value of the common shares and $5,768,310, net of $2,370,478 in placement costs, to additional paid-in capital.  The raise costs were allocated as follows: John Thomas Financial (“JTF”) $65,000, MFI $25,000, Aubrey Consultants for a finders fee $20,000, JTF for legal fees of $13,000, placement legal fees of $187,000, JTF 10%  fee of $992,996, JTF non-accountable expenses of $67,482, JTF success fee of $400,000, JTF finders fee of $200,000 and JTF for indemnification fee of  $400,000.
 
The warrants were valued using the Black-Scholes pricing model with the following weighted average assumptions: 0% dividend yield; risk free interest of 2.52%:  volatility of 94.80%; and an expected life of 5 years. The warrants vest immediately and are exercisable on a cashless basis , which represents stock settled stock appreciation rights.
.

On October 8, 2008, the Company issued an aggregate of 1,413,883 shares of common stock and five-year warrants to purchase 1,413,883 shares of common stock with an exercise price of $2.50 per share to accredited investors, for an aggregate amount of $1,767,253. JTF acted as the exclusive placement agent for the private placement.

On October 20, 2008, the Company issued 4,000 shares of common stock and five-year warrants to purchase 4,000 shares of common stock with an exercise price of $2.50 per share to an accredited investor for a purchase price of $5,000. JTF acted as the exclusive placement agent for the private placement.
 
The Company received $1,529,356 from the October 2008 transactions net of raise costs of approximately $243,000.

The stock warrants issued in October 2008 were valued using the Black-Scholes pricing model using the following weighted average assumptions: dividend yield of 0%; risk free interest rate of 2.70%; volatility of 94.80%; and an expected life of 5 years. The warrants vest immediately and are exercisable on a cashless basis, which represents stock settled stock appreciation rights.

F-15


Shares held in Escrow

The Company entered into a securities escrow agreement (the “Securities Escrow Agreement”) with Sahara, the shareholders of Sahara named in the escrow agreement (the “Sahara Escrow Shareholder”), and the Company’s corporate counsel, as escrow agent.  Pursuant to the Securities Escrow Agreement, the Sahara Escrow Shareholder agreed to place 5,000,000 of the Acquisition Shares (the “Escrow Shares”) into an escrow account. The Escrow Shares will be released to the Sahara Escrow Shareholder, or returned to the Company for cancellation if not released, based upon the achievement of certain performance thresholds as set forth below:
 
 
(a)
If the Company launches the online magazine Honeymag.com six months after the Closing Date (the “First Performance Threshold”), 20% of the Escrow Shares will be released to the Escrow Shareholder.  Honemag.com was launched March 5, 2009. Therefore the First Performance Threshold was met and 20% of the Escrow Shares were released to the Escrow Shareholder.

 
(b)
If the Company launches the social network Hivespot.com seven months after the closing date (the “Second Performance Threshold”), 20% of the Escrow Shares will be released to the Sahara Escrow Shareholder.  Hivespot.com was launched March 5, 2009. Therefore the Second Performance Threshold was met and 20% of the Escrow Shares were released to the Escrow Shareholder.

 
(c)
In the event that, from the period from the launch of the online magazine Honeymag.com, until nine months after the Closing Date, the average number of monthly viewed impressions of the Company’s online magazine Honeymag.com is at least 300,000 (the “Third Performance Threshold”), 20% of the Escrow Shares will be released to the Sahara Escrow Shareholder. The Third Performance Threshold has been met and 20% of the Escrow Shares were released to the Escrow Shareholder.

 
(d)
In the event that the Company’s social networking site Hivespot.com has at least 200,000 pre-registered users on September 30, 2009 (the “Fourth Performance Threshold”), 20% of the Escrow Shares will be released to Sahara Escrow Shareholder. The Fourth Performance Threshold has been met and 20% of the Escrow Shares were released to the Escrow Shareholder.
     
 
(e) 
In the event that the Company either has revenue of at least $1,000,000 for the year ending December 31, 2009, or accounts receivable of at least $1,000,000 as of December 31, 2009, as disclosed in the Company’s audited financial statements included in the Company’s Form 10-K for the year ending December 31, 2009 filed with the SEC (the “Fifth Performance Threshold”), 20% of the Escrow Shares will be released to the Sahara Escrow Shareholder. The Fifth Performance Threshold has not been met and 20% of the Escrow Shares were effectively returned to the Company as treasury stock on December 29, 2009. 
 
John Thomas Bridge and Opportunity Fund

On September 17, 2008, the Company issued 500,000 common shares, valued at $1.25 per share, and five year warrants, with a fair value of $439,128 to purchase 500,000 shares of common stock at an exercise price of $1.50 per share to the John Thomas Bridge and Opportunity Fund (“JTBO”), as additional consideration to complete the equity financing. The warrants vest immediately and are exercisable on a cashless basis, which represents  stock settled stock appreciation rights.

The Company entered into a Securities Purchase Agreement, also dated July 1, 2008, pursuant to which the Company issued a 12% Senior Secured Debenture (“Debenture”) in the principal amount of $500,000, bearing interest at the rate of 12% per annum, $80,000, of which, such proceeds were subsequently released to third parties to pay fees with the balance of $420,000 remitted to the Company. The Debenture was subsequently paid with proceeds received in the private placement.

The Securities Purchase Agreement secured certain U.S. trademark registrations for all of the Company’s publications, and all of the Company’s databases as collateral security for the prompt payment in full when due.  In addition, for consideration of a $50,000 payment, a Security Agreement with BPA Associates, under common ownership, was executed whereby BPA agreed to secure the payment on the Debenture with certain assets of the Company, including the database which contains information vital to the business of the Company.
 
F-16

John Thomas Financial, Inc.

On September 17, 2008, the Company issued 3,000,000 common shares, valued at $1.25 per share, and five year warrants to purchase 1,000,000 common shares with a fair value of $904,018 at an exercise price of $1.30 per share to John Thomas Financial, Inc. as additional consideration for private placement services.  The warrants vested immediately and are exercisable on a cashless basis, which represents stock settled stock appreciation rights.

Marathon Advisors

On September 17, 2008, the Company issued 100,000 common shares, valued at $1.25 per share, and five-year warrants, to purchase 300,000 common shares with a fair value of $263,054 at an exercise price of $1.10, to Marathon Advisors (“Marathon”), to complete the equity financing.  The warrants are exercisable on a cashless basis which represents  stock settled stock appreciation rights.
. The warrants vest over a three year period on the anniversary of the issuance date and are recognized pro-rata over the vesting period, as required for non-employees.

The Company recorded $128,017 as a capital raising cost as an offset to additional paid-in capital.

Effective December 31, 2008, the contract with Marathon was terminated.  Per the termination agreement, 200,000 of the original warrants were cancelled.  The Company recorded approximately $31,000 of equity based compensation for the year ended December 31, 2009, relating to the remaining 100,000 warrants.

Aurelian Investments, LLC

In connection with a consulting agreement (the “Agreement”) entered into with Aurelian Investments, LLC (“Aurelian”) on August 13, 2008, the Company was required to issue a total of 200,000 common shares and five-year warrants to purchase 200,000 common shares with an exercise price of $1.50 per share for services rendered by Aurelian in connection with the Recapitalization that was consummated on September 17, 2008 (the “Recapitalization”).  Fifty thousand of the 200,000 common shares were issued on September 17, 2008 (date of Recapitalization) and such shares were properly reflected in the financial statements since that time at $1.25 per share.  An additional 100,000 shares and warrants to purchase 100,000 shares of common stock were issued through the year ended December 31, 2009.

The value ascribed to the 100,000 common shares issued through the year ended December 31, 2009 and the remaining 50,000 common shares still due the consultant is based on the stock price as of the date of the Recapitalization ($1.25). The total value of such shares amounts to $187,500.  The value ascribed to the warrants is based upon the Black-Scholes Option Pricing Model.  The weighted average assumptions were based upon data as of September 17, 2008: volatility 94.8%, dividend yield 0%, risk free interest rate 2.52%, and an expected life of 5 years.  The fair value of the warrants at the date of the Recapitalization was $174,000.  The balance of the shares (50,000) and warrants to purchase shares (100,000) are scheduled to be issued in 2010, and have been recorded as a component of stockholders’ equity.

F-17

Sichenzia Ross

On September 17, 2008, the Company issued 250,000 common shares (see “common share issuance"), valued at $1.25 per share, and five-year warrants with a fair value of $219,564 to purchase 250,000 shares of common stock, with an exercise price of $1.50, to its corporate counsel Sichenzia Ross for legal services.  The warrants vest immediately and are exercisable on a cashless basis, which represents stock settled stock appreciation rights. The Company recorded $532,064 as capital raise costs as an offset to additional paid-in capital.

Additional  Issuances

Common stock issuances

In April 2009, the Board of Directors approved, and on May 6, 2009, the Company issued, 50,000 shares of common stock, valued at $150,000, to two individuals on behalf of Investor Relations Group (“IRG”) for consulting services rendered (see Note 13).

In April 2009, the Board of Directors approved, and on May 6, 2009, the Company issued 16,668 shares of common stock, valued at $50,000, to third parties for financial consulting services rendered to the Company.

Effective December 15, 2009, the Company issued 13,000 shares of common stock, valued at $7,280 ($0.56 per share), to an individual per a settlement and release agreement between the Company and the individual regarding asserted shares owed to such individual. The amount was recorded as share-based expense in the year ended December 31, 2009.

See “Services Arrangement” in Note 12 for additional common stock issuance information.

Warrant issuances

Warrants issued to promissory note holders

In 2006, the Company issued warrants to certain holders of promissory notes at various dates that entitle them to purchase common shares of the Company.  All warrants granted vested immediately. The fair value of the warrants was estimated using the intrinsic value method. The fair value of the common stock related to these warrant issuances approximated $0.02 as determined based on services rendered by a consultant in the amount of $4,000 in exchange for 200,000 warrants in 2006.  The Company has ascribed a value of approximately $9,000 to these warrants.  These warrants were cancelled in 2008.

Aubrey Consulting – Warrants dated September 17, 2008

On September 17, 2008, the Company issued five-year warrants to purchase 500,000 common shares with an exercise price of $1.50 to Aubrey Consulting as additional consideration for a finder’s fee relating to the private placement.  The Company recorded $439,000 as a capital raise cost as an offset to additional paid-in capital. The warrants vest immediately and are exercisable on a cashless basis, which represents stock settled stock appreciation rights.



The above warrants were valued using the Black-Scholes pricing model with the following weighted average assumptions: 0 % Dividend yield; risk free interest rate 2.52%; volatility of 94.8%; and an expected life of 5 years.

Warrant activity for non-employees during the period of inception (January 18, 2005) through December 31, 2009 is as follows:

               
Weighted
       
         
Weighted-
   
Average
       
   
Number of
   
Average
   
Remaining
   
Aggregate
 
   
Warrant
   
Exercise
   
Contractual
   
Intrinsic
 
Warrants
 
Shares
   
Price
   
Term (Years)
   
Value
 
Granted during 2006
    200,000     $ 0.01                  
Balance at December 31, 2006
    200,000     $ 0.01                  
Granted during 2007
    --       --                  
Balance at December 31, 2007
    200,000     $ 0.01                  
Granted during 2008
    10,494,034     $ 2.23                  
Exercised during 2008
    --     $ --                  
Forfeited/cancelled during 2008
    (400,000 )   $ 0.75                  
Outstanding, December 31, 2008
    10,294,034     $ 2.25                  
Granted during 2009
    100,000     $ 1.50                  
Exercised during 2009
    --     $ --                  
Outstanding, December 31, 2009
    10,394,034     $ 2.24       3.76       -0-  
                                 
Exercisable shares, December 31, 2009
    10,327,367     $ 2.25       3.72       -0-  

         
Weighted
 
         
Average
 
         
Grant-Date
 
Non-vested Shares
 
Shares
   
Fair Value
 
Granted during 2006 (none granted during 2007)
   
200,000
   
$
0.02
 
Non-vested December 31, 2007 and 2006
   
200,000
   
$
0.02
 
Granted during 2008
   
10,494,034
   
$
0.79
 
Vested during 2008
   
(10,194,034
)
 
$
0.79
 
Forfeited during 2008
   
(400,000
)
 
$
0.12
 
Non-vested, December 31, 2008
   
100,000
   
$
0.22
 
Granted during 2009
   
100,000
   
$
0.87
 
Vested during 2009
   
(133,333
 
$
0.80
 
Non-vested, December 31, 2009
   
66,667
   
$
0.57
 
 
 
F-18


Equity Compensation Plan

In January 1998, the Company’s board of directors approved a stock option plan under which 16,667 shares of common stock have been reserved for issuance. No options have been granted under this plan 

Share Liability

In February 2009, the Company entered into a four-month agreement for consulting services. The agreement, in addition to cash compensation of $31,950, provides for the Company issuing 20,000 shares of its common stock valued at $60,000 to the consultant. The Company recorded an amount of $60,000 as share liability, which represents the value of the pro rata shares earned per the contract.  There had been no shares issued under the agreement. During the fourth quarter of 2009, through mutual agreement between the consultant and the Company, it was decided the shares would no longer be required to be issued. As a result, in the quarter ended December 31, 2009, the Company reversed the $60,000 of stock-based expense and related share liability.

In February 2009, the Company entered into a one year consulting agreement with Hanover Capital Corporation (“Hanover”). Per the agreement, the Company will issue Hanover a total of 450,000 restricted common shares valued at $3.00 per share ($1,350,000) on a pro rata basis over a period of six months during the term of the agreement. As of December 31, 2009, the shares have not been issued and the Company has recorded a liability of $1,350,000 relating to the common stock required to be issued under this agreement and has recognized $1,350,000 of expense for the year ended December 31, 2009. The shares of stock are expected to be granted during 2010 (See Note 13). 

See “Services Arrangement” in Note 12 for additional Share Liability information.

Treasury Stock

Effective December 29, 2009, 1,000,000 shares of common stock valued at $3,000 ($0.003 per share), which were issued pursuant to the Merger Agreement, were returned to the Company as treasury stock by the Sahara Escrow Shareholders (see “Shares held in Escrow” above).
 
11.
Income Taxes

The Company has provided a valuation allowance for the full amount of its net deferred tax assets because the Company has determined that it is more likely than not that they will not be realized.

As of December 31, 2009, the Company has federal and state net operating loss carryforwards of approximately $6,460,000 and $6,447,000, respectively, available to reduce future taxable income and which expire at various dates through 2029.


Net deferred tax assets consist of the following:
 
   
December 31,
2009
   
December 31,
2008
 
             
             
Net operating loss carryforwards
  $ 2,907,000     $ 1,184,000  
Amortization of intangible assets
    196,000       62,000  
Share-based payments
    1,263,000       --  
Net deferred tax assets
    4,366,000       1,246,000  
Valuation allowance
    (4,366,000 )     (1,246,000 )
            Net deferred tax assets
  $ --     $ --  

The valuation allowance increased by approximately $3,120,000, $903,000 and $4,366,000 during the years ended December 31, 2009 and 2008, and the period from inception (January 18, 2005) through December 31, 2009, respectively.
Under the provisions of Section 382 of the Internal Revenue Code, certain substantial changes in the Company’s ownership result in a limitation on the amount of net operating loss carry forwards which can be used in future years.

 
12.
 Related Party Transactions

Notes payable, Related Party – Interest Expense
There were no related party notes payable as of December 31, 2009 or 2008. The Company recorded related party interest expense of $-0-, $17,053 and $96,735 for the years ended December 31, 2009 and 2008, and the period from inception (January 18, 2005) through December 31, 2009, respectively.

Lease Agreement
Effective December 1, 2009, the Company entered into a two year lease agreement with Sahara Entertainment, LLC (“SELLC”), an entity wholly-owned by the Company’s Chief Executive Officer (“CEO”). The lease term is effective from December 1, 2009 through November 30, 2011, with an option available to the Company to renew for a third year, at $84,000 per annum ($7,000 per month) (See Note 13). The agreement provides for a $15,000 security deposit, which was paid in March 2010. Among other terms, the lease calls for the Company to pay for certain expenses, such as utilities and maintenance.  As of December 31, 2009, $7,000 in accrued rent expense is owed to SELLC.

F-19

Services Arrangement
The Company has an arrangement with AG Unlimited International LLC ("AG"), whereby AG manages all licensing agreements on behalf of Sahara. The principal of AG became the spouse of the Company's CEO, during the quarter ended September 30, 2009. The terms of the contract, which was signed November 2009 but effectively began October 2008, provide a monthly fee of $10,000 until such time the contract is cancelled by either party, as well as the issuance of 100,000 shares of the Company’s common stock. The shares of common stock issuable under the agreement are non-forfeitable and were approved for issue by the Company’s Board of Directors and issued in February 2010. The value of the shares, $35,000 ($0.35 per share), is included in production cost for the year ended December 31, 2009. The Company accounted for 25,000 shares (25%),valued at $8,750, as issued effective December 31, 2009 and recorded 75,000 shares (75%), valued at $26,250,as share liability. Expenses (non share-based) incurred in connection with services provided by AG amounted to $120,000, $30,000, and $150,000 for the years ended December 31, 2009 and 2008 and for the period from inception (January 18, 2005) through December 31, 2009, respectively.
The Company had an arrangement with a member of its Board of Directors to provide legal services on an as needed basis which was cancelled in 2009. The member was paid a total of $20,000, $-0-, and $20,000 in the years ended December 31, 2009 and 2008 and for the period from inception (January 18, 2005) through December 31, 2009, respectively.

13.
 Commitments and Contingencies

Rent expense
In October 2008, the Company entered into a new three year lease for office space, expiring in September 2011. Monthly payments under the lease commence at $9,000 per month and increase to $9,600 per month. The lease commitment is guaranteed by an officer of the Company. In conjunction with this lease the Company has recorded a security deposit of $37,200 which was increased to $46,200 in 2009.  Prior to the inception of this lease agreement, the Company leased office space on a month-to-month basis at an amount of approximately $4,000 per month.

In December 2009, the Company entered into a two year lease with a related party (See Note 12), expiring in November 2011. Payments under the lease are $7,000 per month.

Rent expense was approximately $116,000, $82,000 and $348,000 for the years ended December 31, 2009 and 2008 and the period from inception (January 18, 2005) through December 31, 2009, respectively.
 

Approximate future minimum annual lease payments are as follows:
 
Years Ended
     
December 31,
     
       
2010
 
197,000
 
2011
   
163,000
 
   
$
360,000
 
 
The Investor Relations Group
In late September 2008, the Company entered into a one year agreement with IRG for consulting services. The agreement provides for the Company issuing the equivalent of $300,000 of their common stock, which will be earned pro rata over the twelve month contract period.  Additionally, the Company is obligated to pay a maintenance fee of $10,000 per month.  In April 2009, the Company and IRG mutually agreed to defer the remaining term of the agreement to a later date. In April 2009, the Board of Directors approved the issuance of 50,000 shares of common stock to IRG valued at $150,000 which approximates the pro rata number of shares earned through the date of the deferral and in May 2009, the Company issued the 50,000 shares of common stock to two individuals on behalf of IRG. The Company currently does not have plans to reinstitute the remaining term of the agreement.
 
Employment Agreement
Effective February 18, 2009, the Company entered into an employment agreement with its CEO.  Terms of the agreement include: an annual salary of $300,000, $325,000 and $350,000 over its three year period; a signing bonus of $155,000; and as soon as practicable after the effective date, the Company shall grant to the CEO an option to purchase 3,000,000 shares of Company common stock at an exercise price of $2.00 per share or in another form as acceptable to the Company’s Board of Directors.

Approximate future commitments under the agreement are as follows:
 
Years Ended
     
December 31,
     
       
2010
 
$
322,000
 
2011
   
347,000
 
2012
   
44,000
 
   
$
713,000
 
 
Consulting Agreements

Effective January 1, 2009, the Company entered into a business development and advisory services agreement with a consultant. The agreement is for an annual period through December 2009. In addition to a monthly retainer of $5,000 per month for the first quarter of 2009 and $7,500 per month for the remainder of the year, the agreement provides for a commission based on a percentage of gross revenues as defined in the agreement.

In February 2009, the Company entered into a consulting agreement with Hanover Capital Corporation (“Hanover”). Terms of the agreement include an initial payment of $5,000 and $4,000 per month during the one year term of the agreement.  Per the agreement, the Company will issue Hanover a total of 450,000 restricted common shares. Effective November 2009, the Company cancelled the remaining term of the agreement, but has agreed to issue the total 450,000 restricted common shares provided in the agreement (See Note 10).

Significant Concentration

In 2009, one customer generated 90% of revenues.
 
F-20

 
14. 
Fair Value Measurements

The Company measures certain financial and non-financial assets and liabilities at fair value using inputs that are observable or unobservable.  Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.  These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Pursuant to this hierarchy, the Company uses observable market data, when available, and minimizes the use of unobservable inputs when determining fair value.

(a) Fair Value Measurements on a Recurring Basis
 
The following table presents fair value measurements for major categories of the Company’s financial assets measured at fair value on a recurring basis:
 
   
December 31, 2009
 
December 31, 2008 
   
Fair Value Measurements Using
 
Fair Value Measurements Using 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Available-for-sale-security 
 
$
295,500
   
$
--
   
$
--
   
$
295,500
   
$
--
   
$
--
   
$
--
   
$
--
 
 
(b) Fair Value Measurements of Other Financial Instruments
 
With regard to the Company’s financial instruments that are not required to be carried at fair value, carrying amounts for note receivable and other receivables approximate fair value due to their short maturities.
 
15. 
Subsequent Events

In January 2010 and February 2010, the Board of Directors approved, and the Company issued, 3,344,999 shares and 5,000 shares of common stock, respectively, to employees (including Board members) and non-employees for services rendered in 2009. The shares were valued at $0.35 per share, $1,170,750 and $1,750, respectively, the fair value at December 31, 2009. The Company accrued a liability for the stock-based compensation to employees (and directors) and non-employees of $1,135,750 (3,244,999 shares) and $36,750 (105,000 shares), respectively, in the year ended December 31, 2009. In the first quarter of 2010, the Company will incur additional stock-based compensation to employees (and directors) of $421,850 and to non-employees of $12,500 based on the fair value of the shares of common stock at the grant date.

On March 4, 2010, the Company entered into an Investment Banking, Strategic Advisory and Consulting Agreement (the “IB Agreement”) with JTF, whereby the Company engaged JTF to render such investment banking, advisory and consulting services as defined in the IB Agreement. The investment banking services, which among other possible assisted transactions, will include the offering for sale of a series of convertible preferred stock up to a maximum of $9,000,000 for which JTF will be separately compensated as defined in the IB Agreement and , will be in effect for a two year period commencing March 4, 2010. The consulting services will be for a two year period, at $10,000 per month, commencing on the closing of the $1,000,000 minimum amount of the offering, as defined in the IB Agreement.

On March 24, 2010, the Company entered into a Purchase Agreement (‘Purchase Agreement”) with JTBO and other potential investors (collectively the “Investor”), whereby the Company agreed to sell and the Investor agreed to purchase (i) a debenture in the principal amount of a minimum of $490,000 and a maximum of up to $980,000, bearing interest at the rate of 16% per annum, and (ii) a minimum of 1,000,000 shares and a maximum of up to 2,000,000 shares of Company common stock issued for a minimum of $10,000 and a maximum of up to $20,000 of consideration, as defined in the debenture (“Debenture”) and stock purchase agreement (“Stock Purchase Agreement”).

On March 24, 2010, JTBO purchased a Debenture in the principal amount of $490,000, bearing interest at 16%. The Debenture is due on September 30, 2010. The Company may extend the Debenture’s maturity date by three month periods if by the maturity date, the Company notifies JTBO and delivers to JTBO 1,000,000 shares of the Company’s common stock as consideration for the extension. Upon the closing by the Company of one or more financings in which the Company receives gross proceeds of less than $1,500,000 the Company shall pay an amount equal to 50% of the proceeds of such financing to reduce the principal amount of the Debenture. In addition, pursuant to the Stock Purchase Agreement, JTBO purchased 1,000,000 shares of common stock for consideration of $10,000. The Company also agreed to issue JTBO 200,000 shares of the Company’s common stock in connection with the closing of the financing. The Company incurred financing costs of $417,500 ($290,000 of which is share-based) in connection with the sale of the debenture and common stock which will be amortized over the term of the debenture. In connection with this investment the investor has been granted piggy back registration rights.
 
On April 14, 2010, pursuant to the Purchase Agreement, another investor purchased a Debenture in the principal amount of $245,000, bearing interest at 16%. The Debenture is due on October 14, 2010. The Company may extend the Debenture’s maturity date by three month periods if by the maturity date, the Company notifies the investor and delivers to the investor 500,000 shares of the Company’s common stock as consideration for the extension. Upon the closing by the Company of one or more financings in which the Company receives gross proceeds of less than $1,500,000 the Company shall pay an amount equal to 50% of the proceeds of such financing to reduce the principal amount of the Debenture. In addition, pursuant to the Stock Purchase Agreement, the investor purchased 500,000 shares of common for consideration of $5,000.
 
On April 14, 2010, the Company borrowed $65,000 from its CEO for working capital purposes. The promissory note bears interest at 9% per annum and is secured by certain assets of the Company. Principal and all accrued and unpaid interest to the date of repayment will be paid through the issuance of shares of the Company’s common stock at a rate of $0.50 per share. The entire unpaid portion of the note, together with all accrued interest through the date of payment may be declared immediately due and payable by the CEO upon the attaining of certain capital funding by the Company, as defined in the agreement.

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