UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
o 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.: 333-118799
FOLDERA, INC.
(Name of small business issuer in its charter)
Nevada | 20-0375035 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
17011 Beach Blvd., Suite 1500 | ||
Huntington Beach, CA | 92647 | |
(Address of principal executive offices) | (Zip Code) |
(714) 766-8700
(Issuer’s telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 11, 2006, 101,266,940 shares of the issuer’s Common Stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes o No x.
Foldera, Inc.
September 30, 2006 Form 10-QSB Quarterly Report
Table of Contents
Page | ||||
Part I Financial Information | 2 | |||
Item 1. Financial Statements | 2 | |||
Unaudited Consolidated Balance Sheet at September 30, 2006 | 2 | |||
Unaudited Consolidated Statements of Operations for the Three Month and Nine Month Periods Ended September 30, 2006 and 2005 and for the Period from December 3, 2001 (Inception) to September 30, 2006 | 3 | |||
Unaudited Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2006 and 2005 and for the Period from December 3, 2001 (Inception) to September 30, 2006 | 4 | |||
Notes to Unaudited Consolidated Financial Statements | 5 | |||
Item 2. Management’s Discussion and Analysis or Plan of Operation | 17 | |||
Item 3. Controls and Procedures | 25 | |||
Part II Other Information | 26 | |||
Item 1. Legal Proceedings | 26 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 26 | |||
Item 3. Defaults Upon Senior Securities | 26 | |||
Item 4. Submission of Matters to a Vote of Security Holders | 26 | |||
Item 5. Other Information | 26 | |||
Item 6. Exhibits and Reports on Form 8-K | 26 | |||
Signatures | 27 |
1
Part I Financial Information
Item 1. Financial Statements
FOLDERA, INC. | ||||||
(A Development Stage Company) | ||||||
Consolidated Balance Sheet | ||||||
As of September 30, 2006 | ||||||
(Unaudited) | ||||||
ASSETS | ||||||
CURRENT ASSETS: | ||||
Cash & cash equivalents | $ | 4,011,479 | ||
Prepaid expenses and other current assets | 58,009 | |||
TOTAL CURRENT ASSETS | 4,069,488 | |||
CERTIFICATE OF DEPOSIT | 66,033 | |||
PROPERTY AND EQUIPMENT, net | 1,467,343 | |||
SECURITY DEPOSIT | 36,997 | |||
$ | 5,639,861 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||
CURRENT LIABILITIES: | ||||
Accounts payable and accrued expenses | $ | 792,167 | ||
Shares to be issued | 3,798,227 | |||
Current portion of capital lease obligations | 86,854 | |||
TOTAL CURRENT LIABILITIES | 4,677,248 | |||
CAPITAL LEASE OBLIGATIONS, net | 58,964 | |||
STOCKHOLDERS' EQUITY: | ||||
Common stock, $0.001 par value, 250,000,000 shares authorized, | ||||
101,381,940 shares issued and outstanding | 101,382 | |||
Prepaid investor relations expense | (381,123 | ) | ||
Deferred expenses | (168,850 | ) | ||
Additional paid in capital | 17,763,460 | |||
Deficit accumulated during development stage | (16,411,220 | ) | ||
TOTAL STOCKHOLDERS' EQUITY | 903,649 | |||
$ | 5,639,861 | |||
The accompanying notes are an integral part of these consolidated financial statements | ||||
2
FOLDERA, INC | ||||||||||||||||
(A Development Stage Company) | ||||||||||||||||
Consolidated Statements of Operations | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Cumulative from | ||||||||||||||||
December 3, | ||||||||||||||||
For the three Month Periods Ended September 30, | For the Nine Month Periods Ended September 30, | 2001(inception) to | ||||||||||||||
2006 | 2005 | 2006 | 2005 | September 30, 2006 | ||||||||||||
NET SALES | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||
OPERATING EXPENSES | ||||||||||||||||
General and administrative | 1,922,944 | 909,081 | 7,657,917 | 1,975,573 | 16,411,422 | |||||||||||
OPERATING LOSS | (1,922,944 | ) | (909,081 | ) | (7,657,917 | ) | (1,975,573 | ) | (16,411,422 | ) | ||||||
OTHER INCOME/(EXPENSE) | ||||||||||||||||
Loss on settlement of debt | - | - | - | (21,960 | ) | (64,022 | ) | |||||||||
other expenses | - | - | - | (3,331 | ) | (4,492 | ) | |||||||||
Interest income/(expense) | 27,859 | (98 | ) | 63,476 | - | 68,716 | ||||||||||
Total other income (expense) | 27,859 | (98 | ) | 63,476 | (25,291 | ) | 202 | |||||||||
NET LOSS | $ | (1,895,085 | ) | $ | (909,179 | ) | $ | (7,594,441 | ) | $ | (2,000,864 | ) | $ | (16,411,220 | ) | |
LOSS PER SHARE - BASIC AND DILUTED | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.08 | ) | $ | (0.02 | ) | $ | (0.18 | ) | |
WEIGHTED AVERAGE NUMBER OF | ||||||||||||||||
SHARES OUTSTANDING - BASIC & DILUTED | 101,135,111 | 91,613,720 | 98,893,443 | 91,613,720 | 91,741,736 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements |
3
(A Development Stage Company) | ||||||||||
Consolidated Statements of Cash Flows | ||||||||||
(Unaudited) | ||||||||||
Cumulative from | ||||||||||
For the Nine Month Periods Ended September 30, | December 3, 2001 (inception) to | |||||||||
2006 | 2005 | September 30, 2006 | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
Net loss | $ | (7,594,441 | ) | $ | (2,000,864 | ) | $ | (16,411,220 | ) | |
Adjustments to reconcile net loss to | ||||||||||
net cash used in operating activities: | ||||||||||
Depreciation | 351,670 | 29,483 | 486,601 | |||||||
Loss on settlement of debt | - | 21,960 | 64,022 | |||||||
Impairment of property & equipment | - | 9,533 | 9,533 | |||||||
Issuance of stock options for compensation | 619,753 | 421,031 | 2,796,424 | |||||||
Issuance of shares for services | 1,201,600 | 327,200 | 3,229,108 | |||||||
Issuance of warrants for services | 348,128 | - | 348,128 | |||||||
Shares issued for acquisition of software | - | - | 625,000 | |||||||
Shares to be issued for services | 21,400 | - | 21,400 | |||||||
Issuance of stock options for services | 39,050 | - | 39,050 | |||||||
Changes in assets and liabilities: | ||||||||||
Prepaid expenses and other current assets | (1,424 | ) | (127,078 | ) | (58,259 | ) | ||||
Deposits | (6,773 | ) | - | (103,030 | ) | |||||
Accounts payable, accrued expenses and other liabilities | 59,560 | 100,275 | 348,530 | |||||||
Total adjustments | 2,632,964 | 782,404 | 7,806,507 | |||||||
NET CASH USED IN OPERATING ACTIVITIES | (4,961,477 | ) | (1,218,460 | ) | (8,604,713 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||
Purchase of property and equipment | (980,269 | ) | (245,148 | ) | (1,549,010 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
Proceeds from issuance of shares for cash | 1,800,115 | 2,017,501 | 10,940,801 | |||||||
Shares to be issued for cash received | 3,776,827 | - | 3,776,827 | |||||||
Receipts from exercise of warrants | 169,905 | - | 169,905 | |||||||
Payment to shareholders of legal acquiree | (175,000 | ) | - | (175,000 | ) | |||||
Payments to related parties | (1,750 | ) | - | (2,765 | ) | |||||
Loans from related party | - | (250 | ) | 2,765 | ||||||
Prepaid investor relations expense | (381,123 | ) | - | (381,123 | ) | |||||
Payments for leased equipment | (61,794 | ) | (6,912 | ) | (166,208 | ) | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 5,127,180 | 2,010,339 | 14,165,202 | |||||||
NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENT | (814,566 | ) | 546,731 | 4,011,479 | ||||||
CASH & CASH EQUIVALENT- BEGINNING OF PERIOD | 4,826,045 | 10,600 | - | |||||||
CASH & CASH EQUIVALENT- END OF PERIOD | $ | 4,011,479 | $ | 557,331 | $ | 4,011,479 | ||||
The accompanying notes are an integral part of these consolidated financial statements | ||||||||||
4
FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Note 1. Description of Business and Basis of Presentation
Taskport, Inc. (“TI”), a California corporation, was incorporated in 2001 to develop a proprietary, web-based software system that enables users to work collaboratively in a highly organized fashion within a shared electronic workspace.
On February 13, 2006, TI entered into a merger agreement with Expert Systems, Inc., a Nevada corporation, whereby, Expert Systems, Inc. issued 91,313,720 (adjusted for the Company’s forward 4-for-1 split on May 16, 2006) shares to acquire 100% of TI’s stock. Expert Systems, Inc. had 8,559,600 shares outstanding immediately prior to the merger. As a result of the merger, the stockholders of TI own approximately 92% of the combined entity. Accordingly, the merger is accounted for as a reverse acquisition of Expert Systems, Inc. by TI and it resulted in a recapitalization of TI in a manner similar to the pooling of interest method. No pro forma financial information is disclosed as the amounts involved are immaterial. Concurrent with the merger, the name of Expert Systems, Inc. was changed to Foldera, Inc.
The accompanying consolidated financial statements include the accounts of Foldera, Inc. and its wholly owned subsidiary, TI (collectively, the “Company”). All significant inter-company accounts and transactions have been eliminated in consolidation. The historical results for the period ended September 30, 2006 include both, Foldera, Inc. (from the acquisition date) and TI (for the full period) while the historical results for the period ended September 30, 2005 includes only TI. Additionally, all historical share count and per share information has been adjusted for the Company’s 4-for-1 forward stock split that became effective on May 16, 2006.
The Company is a development stage company as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises.” The Company is devoting substantially all of its present efforts to establishing its new business, and its planned principal operations have not yet commenced. All losses accumulated since inception has been considered as part of the Company’s development stage activities.
The unaudited consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and footnotes for the year ended December 31, 2005. The results of the nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year ending December 31, 2006.
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
5
FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Revenue Recognition
The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104. Revenue is recognized when a formal arrangement exists, the price is fixed or determinable, all obligations have been performed pursuant to the terms of the formal arrangement and collectibility is reasonably assured. The Company anticipates generating revenue from two primary sources: the up-selling of Premium Services and Paid Search.
The Company anticipates deriving Premium Service revenue from the sale of extra data storage, vanity email, domain hosting, custom branding and technical support, which will be recorded when the service has been provided to clients or, in the case of extra storage, on an accrual basis, after monthly fees have been billed to clients.
Another anticipated revenue source is Paid Search. The Company anticipates that each time a user uses the Company’s embedded search box and clicks on an ad of an advertiser in the search network, revenue will be generated. Revenue will be recognized on a daily basis, based upon reported revenue from the selected search company.
Depreciation and Amortization
Property and equipment are being depreciated on the straight-line basis over the following estimated useful lives:
Machinery & equipment | 2-5 years |
Leasehold improvements | 10 years |
Furniture & fixture | 5-7 years |
Included in property and equipment is approximately $281,591 of assets, which are leased under non-cancelable leases and accounted for as capital leases, which expire through March of 2008. The accumulated amortization included in the property and equipment for these leases is approximately $133,735.
Depreciation and amortization expense for the nine months ended September 30, 2006 and 2005 was $351,670 and $29,483, respectively.
The Company capitalizes expenditures that materially increase asset lives and charges ordinary repairs and maintenance to operations as incurred. When assets are sold or otherwise disposed of, the cost and related depreciation or amortization is removed from the accounts and any resulting gain or loss is included in other income (expense) in the accompanying statements of operations.
Property and equipment consisted of the following as of September 30, 2006:
$ | 1,784,420 | |||
Furniture & fixtures | 159,216 | |||
Software | 7,270 | |||
Accumulated depreciation | (483,563) | |||
Net fixed assets | $ | 1,467,343 |
6
FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash in banks in demand and time deposit accounts with maturities of 90 days or less.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, and cash equivalents and trade receivables. The Company maintains cash and cash equivalents with high-credit quality financial institutions. At September 30, 2006, the cash balances held at financial institutions were either in excess of federally insured limits or not subject to the federal insurance system.
Credit is generally extended based upon an evaluation of each customer’s financial condition, with terms consistent in the industry and no collateral required. The Company determines an allowance for collectibility on a periodic basis. Amounts are written off against the allowance in the period the Company determines that the receivable is uncollectible.
Fair Value of Financial Instruments
The Company considers its financial instruments, which are carried at cost, to approximate fair value due to their near-term maturities.
Long-Lived Assets
Property and equipment is stated at cost and depreciation is provided for by the straight-line method over the related assets' estimated economic lives ranging from three to five years. Amortization of leasehold improvements is provided for by the straight-line method over the lesser of the estimated economic useful lives or the lease term. Property under capital leases is amortized over the lease terms and included in depreciation and amortization expense.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Accounting for Stock-Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including stock options based on their fair values. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), which the Company previously followed in accounting for stock-based awards. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) to provide guidance on SFAS 123(R). The Company has applied SAB 107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective transition method as of and for the nine months ended September 30, 2006. In accordance with the modified prospective transition method, the Company’s financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation expense recognized is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Share-based compensation expense recognized in the Company’s Consolidated Statement of Operations during the nine months ended September 30, 2006 includes compensation expense for share-based payment awards granted after December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123.
7
FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Recent Pronouncements
In September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)’ This Statement improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
a. A brief description of the provisions of this Statement
b. The date that adoption is required
c. The date the employer plans to adopt the recognition provisions of this Statement, if earlier.
The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on financial statements.
In September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.
In March 2006 FASB issued SFAS 156 “Accounting for Servicing of Financial Assets.” This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement:
8
FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
1. | Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. |
2. | Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. |
3. | Permits an entity to choose “Amortization method” or “Fair value measurement method” for each class of separately recognized servicing assets and servicing liabilities. |
4. | At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. |
5. | Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. |
This statement is effective as of the beginning of the Company’s first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the financial statements.
In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 155 amends SFAS No 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAF No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the financial statements.
In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. This statement is effective for fiscal years beginning after December 15, 2006. The Company is currently in the process of evaluating the expected effect of FIN 48 on its results of operations and financial position.
Note 3. Accounts Payable and Accrued Expenses
Following is the detail of accounts payable and accrued expenses as of September 30, 2006.
Accounts payable | $ | 275,835 | ||
Accrued vacation | 237,751 | |||
Salaries and 401(k) | 75,091 | |||
Rent | 1,444 | |||
Technical outsourcing | 21,097 | |||
Telephone | 3,787 | |||
Legal | 86,795 | |||
Employee reimbursement | 1,839 | |||
Other | 88,528 | |||
Total accrued expenses | $ | 792,167 | ||
9
FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Note 4. Related Party Transactions
In March, 2005, the Company, through TI, entered into an engagement agreement with CFO 911 pursuant to which CFO 911 agreed to provide services to TI including assistance in completing TI’s business plan and performing due diligence on TI’s financial projections for reasonableness and accuracy from a financial investor’s perspective. The Company agreed to pay CFO 911 a total of $10,000 for these services. The Company may engage CFO 911 to perform other services. The Company’s Chief Financial Officer is associated with CFO 911, and is a brother of an associate of Brookstreet Securities Corporation, the placement agent of three private placements by TI/Foldera.
The Company has entered into reverse merger transaction which was approved by the majority of the Company’s shareholders on February 13, 2006. This event triggered the issuance of 300,000 share of common stock to CFO 911.
In March 2004, the Company, through TI, entered into a consulting agreement with Jnan Dash, TI’s Chief Technology Evangelist, pursuant to which TI agreed to pay him a fee of $10,000 per month commencing upon receipt by TI of at least $3,000,000 of financing, and further agreed to issue to him 200,000 shares of common stock upon commencement, an additional 300,000 shares upon TI’s receipt of at least $3,000,000 of financing, and up to an additional 700,000 shares in increments upon achievement by TI of certain milestones pertaining to the successful beta launch of TI’s service, the successful production launch of the TI service and the receipt of subscriptions from 1,000,000 users of the TI service. The agreement may be terminated at any time by either party. During the nine-month period ended September 30, 2006, the Company paid $90,000 to Jnan Dash pursuant to the above agreement and issued 300,000 shares as referred in note 5 to the financial statements.
The Company entered into indemnification agreements with each of its directors and officers. The indemnification agreements and the Company’s certificate of incorporation and bylaws require it to indemnify its directors and officers to the fullest extent permitted by Nevada law.
Note 5. Stockholder’s Equity
On May 10, 2006, the board of directors and holders of a majority of the outstanding shares of common stock of the Company, approved (i) an increase in the number of authorized shares of common stock from 100,000,000 shares to 250,000,000 shares and (ii) a 4-for-1 forward split of the outstanding shares of common stock of the Company to effect the Shares Increase and Forward Stock Split by filing a Certificate of Amendment with the Nevada Secretary of State on May 15, 2006, with the Forward Stock Split to be effective May 16, 2006.
All stock issuances have been retroactively updated for the effect of 4-for-1 forward split.
Following is the summary of transactions during the nine-month period ended September 30, 2006.
1. | From January 2006 through September 30, 2006, the Company sold a total of: 4,328,000 shares of its common stock in its second private placement offering, and Brookstreet Securities Corporation acted as placement agent. The cash proceeds for the issuance of shares, net of offering cost of $363,885, amounted to $1,800,115 in the second private placement. Following the closing of its second private placement offering in February 2006, the company issued warrants to the placement agent to purchase 1,228,860 shares of its common stock at a price of $0.25 per share and 2,551,424 shares of its common stock at a price of $0.50 per share. The proceeds from the issuance of the 4,328,000 shares were recorded net of the fair value of the warrants and the placement agent’s commission and expenses. The fair value of the warrants was calculated using the Black Scholes option pricing model using the following assumptions: risk free rate of return of 5.0%, volatility of 0.001%, dividend yield of 0% and expected life of 5 years. |
10
1,957,917 shares of its common stock in its third private placement offering in August 2006, and Brookstreet Securities Corporation acted as placement agent. The cash proceeds for the issuance of shares, net of offering cost of $631,821 amounted to $3,773,493. The Company recorded shares to be issued to investors and dealer as part of liability as of September 30, 2006. Following the closing of its third private placement offering in August 2006, the company issued warrants 978,959 to the investors and 293,687 to the placement agent to purchase shares of its common stock at a price of $2.25 and $2.25 per share respectively. The proceeds from the issuance of the 1,957,913 shares were recorded net of the fair value of the warrants and the placement agent’s commission and expenses. The fair value of the warrants was calculated using the Black Scholes option pricing model using the following assumptions: risk free rate of return of 3.93%, volatility of 73.1% and dividend yield of 0% and expected life of three years. |
2. | On February 13, 2006, the Company issued 300,000 shares to CFO 911 as part of its reverse merger and according to the terms of agreement with CFO 911, as referred in note 4 . These shares have been recorded at fair value of $150,000, which is based on the price of shares issued close to the date of services rendered. |
3. | On February 13, 2006, the Company issued 8,559,600 shares of its common stock and paid $175,000 in cash to Expert Systems Inc., as a result of the recapitalization. These shares were recorded at par value. |
4. | On February 13, 2006, the Company issued 3,020,000 warrants to outside service providers for investor relations and marketing services. The fair value of the warrants was calculated using the Black Scholes option pricing model using the following assumptions: risk free rate of return of 5.0%, volatility of 0.001%, dividend yield of 0% and expected life of 5 years. The fair value of the warrants of $330,966 is being expensed over the term of the related agreements. |
5. | On February 13, 2006, the Company issued 8,720,000 options to employees and 200,000 options to outside consultants. The fair value of the options was calculated using the Black Scholes option pricing model using the following assumptions: risk free rate of return of 5.0%, volatility of 0.001%, dividend yield of 0% and expected life of 10 years. The options vest over a period of three years. During the nine months ended September 30, 2006, the Company recorded $619,753 as expense related to these options. |
6. | On February 15, 2006, the Company issued 340,000 warrants to an outside service provider for legal services. The fair value of the warrants was calculated using the Black Scholes option pricing model using the following assumptions: risk free rate of return of 5.0%, volatility of 0.001%, dividend yield of 0% and expected life of 5 years. The fair value of the warrants of $186,011 has been expensed in the nine months ended September 30, 2006. |
7. | On May 30, 2006, an outside provider of legal services, exercised 40,000 warrants at an exercise price of $0.25 per share. |
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FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
8. | On June 19, 2006, the Company issued 300,000 share of common stock to Jnan Dash, our Chief Technology Evangelist and consultant, for achieving an agreed upon milestone. These shares were recorded at the fair market value. |
9. | On June 30, 2006, the Company issued 40,000 shares of common stock to Joseph McCann, an outside business advisor, as compensation for service provided. These shares were recorded at the fair market value. |
10. | On July 24, 2006, Brookstreet Securities, an outside provider of investment banking services, exercised 409,620 warrants at an exercise price of $0.25 per share. |
11. | On August 8, 2006 the Company issued 4,000 shares to Ms. M. Garcia. Funds from Ms. Garcia had previously been received under the Friends and Family program. |
12. | On August 24, 2006, Mr. Schmitt, an affiliate of Trilogy Capital Partners, an outside investor relations consultant, exercised 25,000 warrants at an exercise price of $0.50 per share. |
13. | On September 12, 2006, Equity Performance Group, an outside investor relations consultant, exercised 90,000 warrants at an exercise price of $0.50 per share. |
Warrants outstanding:
Aggregate Intrinsic Value | Number of Warrants | ||||||
Outstanding at December 31, 2005 | $ | 700,365 | 2,089,280 | ||||
Granted | 8,412,927 | ||||||
Exercised | 564,620 | ||||||
Cancelled | - | ||||||
Outstanding at September 30, 2006 | $ | 14,234,013 | 9,937,587 |
Outstanding Warrants | Exercisable Warrants | ||||
Range of Exercise Price | Number | Average Remaining Contractual Life | Average Exercise Price | Number | Average Exercise Price |
$0.06-$1.68 | 9,937,587 | 4.0 years | $0.61 | 9,937,587 | $0.61 |
The weighted-average assumptions used in estimating the fair value of warrants granted during the period, along with the weighted-average grant date fair values, were as follows.
0.001 | % | |||
Average expected life in years | 4.7 years | |||
Average risk free interest rate | 5.76 | % | ||
Dividend yield | 0 | % |
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FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Note 7. Supplemental Disclosure of Cash Flows
The Company prepares its statements of cash flows using the indirect method as defined under the Financial Accounting Standard No. 95.
The Company paid $0 income tax and $15,552 interest during the period ended September 30, 2006.
Cash from operating and investing activities for the nine months ended September 30, 2006 excludes the effect of $67,113 of property and equipment acquired on account .
Note 8. Stock-Based Compensation
Stock-Based Compensation Plan
In May 2005, the Board of Directors of the Company adopted and approved the 2005 Stock Option Plan (the “Plan”) which authorized the issuance of up to 12,000,000 shares under the Plan.
In February 2006, options to purchase 8,900,000 shares of common stock were granted under the Plan. During the period 1,140,000 options were forfeited and 6,667 options were exercised. As of September 30, 2006 7,753,333 options are outstanding and 4,240,000 options are available for future option grants.
The Company adopted SFAS No. 123-R effective January 1, 2006 using the modified prospective method. Under this transition method, stock compensation expense recognized in the first nine months of 2006 includes compensation expense for all stock-based compensation awards granted on or after January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123-R. There were no stock-based awards outstanding as of December 31, 2005.
Prior to January 1, 2006, the company measured stock compensation expense using the intrinsic value method of accounting in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations (“APB No. 25”). Thus, expense was generally not recognized for the Company’s employee stock option and purchase plans.
Impact of Adoption of SFAS No. 123-R in Q1 2006
Stock compensation expense measured in accordance with SFAS No. 123-R totaled approximately $619,753, or $0.00 per basic and fully diluted share in the first nine months of 2006. The adoption of SFAS No. 123-R resulted in increased expense of approximately $619,753 as compared to the stock compensation expense that would have been recorded pursuant to APB No. 25. In the first nine months of 2005, no expense was recorded as the Company did not have any stock options awarded during that period. Accordingly, pro forma information is not disclosed.
Methods of Estimating Fair Value
Under both SFAS No. 123-R and under the fair value method of accounting under SFAS No. 123 (i.e., SFAS No. 123 Pro Forma), the fair value of restricted stock is determined based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant. The fair value of stock options is determined using the Black-Scholes model.
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FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
The weighted-average assumptions used in estimating the fair value of stock options granted during the period, along with the weighted-average grant date fair values, were as follows.
Expected volatility | 0.001% | . | ||
Expected life in years | 10 years | |||
Risk free interest rate | 5.8% | |||
Dividend yield | 0% | |||
Wt. average grant date fair value | $0.53 | |||
Under SFAS No 123-R, the Company’s expected volatility assumption is based on the historical volatility of the Company’s stock. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Stock compensation expense recognized in the first nine months of 2006 is based on awards expected to vest, and there were no estimated forfeitures. SFAS No. 123-R requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates.
Options outstanding:
Aggregate Intrinsic Value | Number of Options | ||||||
Outstanding at December 31, 2005 | $ | 0 | 0 | ||||
Granted | 8,900,000 | ||||||
Forfeited | 1,140,000 | ||||||
Exercised | 6,667 | ||||||
Outstanding at September 30, 2006 | $ | 7,580,800 | 7,753,333 |
Outstanding Options | Exercisable Options | ||||
Range of Exercise Price | Number | Average Remaining Contractual Life | Average Exercise Price | Number | Average Exercise Price |
$0.50-$0.55 | 7,753,333 | 9.3 years | $0.51 | 3,223,878 | $0.51 |
Note 9. Commitments
(a) SAVVIS agreement:
On December 28, 2004 the Company entered into a collocation agreement with SAVVIS, Inc. SAVVIS is a global information technology (“IT”) utility services provider. With an IT services platform that extends to 47 countries, SAVVIS is an industry leader in delivering secure, reliable and scalable hosting and network and application services.
Under the terms of this agreement, SAVVIS will provide collocation facilities, cage space, bandwidth, power, backup power and security. The term of the agreement shall continue until the expiration of the last expiring service term. On June 30, 2006 the Company signed a twelve month service agreement whereby the Company agreed to pay $15,566 per month for services to be provided by SAVVIS.
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FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
(b) Office Space Lease:
On September 15, 2005, the Company entered into a lease agreement to lease 15,154 square feet of office space in Huntington Beach, California to house its administrative, marketing, system development and technical support operations. The Company pays approximately $28,793 per month in rent under this lease, which expires in September 2010.
(c) Equipment Leases:
As of September 30, 2006, the Company had entered into capital leases with five strategic vendors for the financing of computer equipment. The Company pays approximately $9,004 per month under these leases, the last of which expires in March of 2008.
Total minimum lease payments under the above leases are as follows:
Capital | Operating | Total | ||||||||
Leases | Leases | |||||||||
2006 | $ | 25,221 | $ | 88,650 | $ | 113,871 | ||||
2007 | 98,239 | 328,082 | 426,321 | |||||||
2008 | 31,693 | 366,727 | 398,420 | |||||||
2009 | - | 375,819 | 375,819 | |||||||
2010 | - | 350,057 | 350,057 | |||||||
Thereafter | - | - | - | |||||||
$ | 155,153 | $ | 1,509,335 | $ | 1,664,489 | |||||
Less: Amount representing interest | $ | 9,336 | ||||||||
Present value of minimum lease payments | 145,815 | |||||||||
Less: Current portion | 86,854 | |||||||||
$ | 58,964 |
(d) Consulting agreements:
On March 24, 2004, the Company entered into an agreement with its Chief Technology Evangelist. As part of this service agreement, the Chief Technology Evangelist was also responsible for assisting in the closing of certain financings. The term of the service agreement began on April 1, 2004 and was for a term of ninety (90) days, with automatic monthly renewals. As of September 30, 2006, the Company had issued 1,000,000 shares as per terms of the agreement.
On February 13, 2006, the Company entered into a consulting agreement with the Equity Performance Group. According to the terms of agreement, Equity Performance will render services related to investor relations and communications. The agreement was for a 90-day period and terminated on May 1, 2006. The Company paid the consultants $10,000 per month and issued warrants to purchase 120,000 shares of the Company’s common stock.
On February 13, 2006, the Company signed a letter of engagement with Trilogy Capital Partners, Inc. According to the terms of the agreement, Trilogy will structure and implement a marketing program designed to create extensive financial market and investor’s awareness for the Company. The agreement shall be for a twelve month period and the Company will pay $12,500 per month to the Trilogy and issue warrants to purchase 2,900,000 shares of the Company’s common stock.
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FOLDERA, INC.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
In April 2006, the Company entered into a one-year consulting agreement with Ibis Consulting Group for the purpose of providing investor relations services. Pursuant to the contract, the Company agreed to pay Ibis $3,500 per month upon commencement of the contract and issue a total of 160,000 shares of common stock based on the following schedule: 80,000 shares will be issued on October 1, 2006 and the balance of 80,000 shares will be issued on April 1, 2007.
Note 10. Subsequent events
On October 3, 2006 the Company cancelled its investor relations consulting agreement with Trilogy Capital Partners and signed a contract with Corporate Communications Network, Inc. to provide similar services. As part of the cancellation agreement Trilogy is required to transfer 1,535,000 warrants to Corporate Communications Network, Inc., the warrants are exercisable at $0.50 per share.
On October 19 2006, the Company sold a total of 4,166,667 shares of its common stock in its fourth private placement offering at $1.08 per share, and HPC Capital Management acted as placement agent. The cash proceeds for the issuance of shares, net of offering cost of $612,500 amounted to $3,887,500 in this round of private placement. Following the closing of its fourth private placement offering in October 2006, the company will issue the following warrants to purchase shares of its common stock at the price listed below:
Issued to | Description | Number of warrants | Exercise Price |
Investors | Series A warrants | 2,083,333 | $1.75 per share |
Investors | Series B warrants | 3,703,704 | $1.25 per share |
Investors | Series C warrants | 1,851,852 | $2.00 per share |
HPC | Dealer warrants | 416,667 | $1.08 per share |
The proceeds from the issuance of the 4,166,667 shares will be recorded net of the fair value of the warrants and the placement agent’s commission and expenses.
To fulfill a commitment made by the Company to the investors in the Company's August 2006 private placement, and in consideration for the waiver by those investors of certain of their registration rights, the Company issued to those investors an aggregate of 2,121,077 additional shares of common stock and warrants to purchase an additional 1,378,960 shares of common stock at an exercise price of $1.75 per share.
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Item 2. Management’s Discussion and Analysis or Plan of Operation
Unless the context otherwise requires, “we,” “our,” “us” and similar phrases refer to Foldera, Inc., together with its wholly-owned subsidiary, Taskport, Inc.
Overview
We are a public company whose common stock is quoted on the OTC Bulletin Board under the symbol “FDRA.” On February 6, 2006, Expert Systems, Inc., a Nevada corporation, entered into an Agreement and Plan of Merger with Taskport, Inc., a California corporation, principally engaged in the development of a proprietary, web-based software system which is a free and easy-to-use online service that combines email, instant messaging, shared folders, document management, calendar, contacts and task management applications into one seamless interface. Immediately prior to the merger, Expert Systems, Inc. had 100,000,000 shares authorized and 2,139,900 shares issued and outstanding. Pursuant to the merger, all of the 22,828,430 outstanding shares of Taskport, Inc. were exchanged for shares of the Expert Systems, Inc. on a 1-for-1 basis for a total of 24,968,330 shares of common stock issued and outstanding. Immediately after the merger, all then existing officers and directors of Expert Systems, Inc. resigned and the management of Taskport, Inc. were elected and appointed to such positions, thereby effecting a change of control. Although Taskport, Inc. became Expert Systems, Inc.’s wholly-owned subsidiary following the transaction, because the transaction resulted in a change of control, the transaction was recorded as a “reverse merger” whereby Taskport, Inc. was considered to be Expert Systems, Inc.’s accounting acquirer. Concurrent with the merger, the name of Expert Systems, Inc. was changed to Foldera, Inc. On May 16, 2006 the Company declared a 4-for-1 forward split.
After the merger, we are a proprietary, web-based software system provider continuing the historic business of Taskport, Inc. Our strategy has been to further develop our proprietary Foldera software product.
Critical Accounting Policies
The critical accounting policies are those that are most important to the portrayal of the financial condition and results of operations, and require our management’s significant judgments and estimates. The application of such critical accounting policies fairly depicts the financial condition and results of operations for all periods presented.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Our revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104. Revenue is recognized when a formal arrangement exists, the price is fixed or determinable, all obligations have been performed pursuant to the terms of the formal arrangement and collectibility is reasonably assured. We anticipate generating revenue from two primary sources: from the up-selling of Premium Services and from Paid Search.
We anticipate deriving Premium Service revenue from the sale of extra data storage, vanity email, domain hosting, custom branding and technical support, which will be recorded when the service has been provided to clients or, in the case of extra storage, on an accrual basis, after monthly fees have been billed to clients.
Another anticipated revenue source is Paid Search. We anticipate that each time a user uses the embedded search box and clicks on an ad of an advertiser in the search network, revenue will be generated. Revenue will be recognized on a daily basis, based upon reported revenue from the selected search company.
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Property and equipment are depreciated on the straight-line basis over estimated useful lives.
Included in property and equipment is approximately $281,591 assets, which are leased under non-cancelable leases, and accounted for as capital leases, which expire through March of 2008. The accumulated amortization included in the property and equipment for these leases is approximately $133,735.
We capitalize expenditures that materially increase asset lives and charges ordinary repairs and maintenance to operations as incurred. When assets are sold or otherwise disposed of, the cost and related depreciation or amortization is removed from the accounts and any resulting gain or loss is included in other income (expense) in the accompanying statements of operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash in banks in demand and time deposit accounts with maturities of 90 days or less. We also have restricted cash of $66,033 held at a bank, which is shown as certificate of deposit.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash, cash equivalents and trade receivables. We maintain cash and cash equivalents with high-credit quality financial institutions. At September 30, 2006, the cash balances held at financial institutions were either in excess of federally insured limits or not subject to the federal insurance system.
Credit is generally extended based upon an evaluation of each client’s financial condition, with terms consistent in the industry and no collateral required. We determine an allowance for collectibility on a periodic basis. Amounts are written off against the allowance in the period we determine that the receivable is uncollectible.
Fair Value of Financial Instruments
We consider our financial instruments, which are carried at cost, to approximate fair value due to their near-term maturities.
Income Taxes
We follow Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Accounting for Stock-Based Compensation
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including stock options based on their fair values. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), which we previously followed in accounting for stock-based awards. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) to provide guidance on SFAS 123(R). We have applied SAB 107 in our adoption of SFAS 123(R).
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We adopted SFAS 123(R) using the modified prospective transition method as of and for the nine months ended September 30, 2006. In accordance with the modified prospective transition method, our financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation expense recognized is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Share-based compensation expense recognized in our Consolidated Statement of Operations during the nine months ended September 30, 2006 includes compensation expense for share-based payment awards granted after December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123. There were no stock options outstanding as of December 31, 2005.
Recent Pronouncements
In September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)’ This Statement improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
d. A brief description of the provisions of this Statement
e. The date that adoption is required
f. The date the employer plans to adopt the recognition provisions of this Statement, if earlier.
The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on financial statements.
In September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.
In March 2006 FASB issued SFAS 156 “Accounting for Servicing of Financial Assets.” This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement:
1. | Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. |
2. | Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. |
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3. | Permits an entity to choose “Amortization method” or “Fair value measurement method” for each class of separately recognized servicing assets and servicing liabilities: |
4. | At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. |
5. | Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. |
This statement is effective as of the beginning of our first fiscal year that begins after September 15, 2006. Our management believes that this statement will not have a significant impact on our financial statements.
In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 155 amends SFAS No 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAF No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of our first fiscal year that begins after September 15, 2006. Our management believes that this statement will not have a significant impact on our financial statements.
In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. This statement is effective for fiscal years beginning after December 15, 2006. The Company is currently in the process of evaluating the expected effect of FIN 48 on its results of operations and financial position.
Financial Condition and Results of Operations for the nine-month period year ended September 30, 2006
Revenues
Net Revenues for both of the nine-month periods ended September 30, 2006 and September 30, 2005 were zero.
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Cost of Sales
Cost of sales for both of the nine-month periods ended September 30, 2006 and September 30, 2005 were zero.
Gross Profits
With zero revenue and zero cost of sales, overall gross profits for both of the nine-month periods ended September 30, 2006 and September 30, 2005 were also zero.
Operating Expenses
Total operating expenses for the three and nine month periods ended September 30, 2006 increased to $1,922,944 and $7,657,917 or $(0.02) and $(0.08) per share respectively, from $909,081 and $1,975,573 or $(0.01) and $(0.02) per share, respectively, for the three and nine month periods ended September 30, 2005. The overall increase in expenses of $5,682,344, or approximately 288% over the prior year period, is due to increases in equity-based compensation to consultants, payroll, legal, communications and travel expenses.
Net Loss
Our net loss for the three and nine month periods ended September 30, 2006 increased to $1,895,085 and $7,594,441 or $(0.02) and $(0.08) per share, respectively, from $909,179 and $2,000,864 or $(0.01) and $(0.02) per share, respectively, for the three and nine month periods ended September 30, 2005. The overall increase in net loss of $5,593,577, or approximately 280% over the prior year period, is due to increases in equity-based compensation to consultants, payroll, legal, communications and travel expenses.
Assets
Assets increased by $4,700,772 to $5,639,861 as of September 30, 2006, or approximately 501%, from $939,089 as of September 30, 2005. This increase was due primarily to the acquisition of additional equipment and expanded cash and cash equivalent balances.
Liabilities
Total liabilities increased by $4,449,973 to $4,736,212 as of September 30, 2006, or approximately 1,555%, from $286,239 as of September 30, 2005. The increase was due primarily to an increase in accrued expenses and shares to be issued.
Stockholders’ Equity
Stockholders’ equity increased by $250,800 to $903,649 as of September 30, 2006, or approximately 38% from $652,849 as of September 30, 2005. The increase was due primarily to increased financing activity that more than offset a net loss during the nine-month period ended September 30, 2006.
Liquidity and Capital Resources
General
Overall, we had a decrease in cash flows of $814,566 for the nine months ended September 30, 2006 resulting from $4,961,477 cash used in operating activities, $980,269 of cash used in investing activities, offset by $5,127,180 of cash provided by our financing activities.
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Cash Flows from Operating Activities
Net cash used in operating activities of $4,961,477 for the nine months ended September 30, 2006 was primarily attributable to a net loss of $7,594,441, the adjustments to reconcile the net loss to net cash, including depreciation and amortization expense of $351,670, the issuance of warrants, stock options and stock for services of $1,588,778, employee options expense of $619,753, stock to be issued of $21,400, an increase in accounts payable and accrued expenses of $59,560 offset by an increase in prepaid expenses of $1,424 and deposits of $6,773.
Cash Flows from Investing Activities
Net cash used in investing activities of $980,269 for the nine months ended September 30, 2006 was primarily attributable to an investment in fixed assets.
Cash Flows from Financing Activities
Net cash of $5,127,180 generated in financing activities in the nine months ended September 30, 2006 was primarily due to the issuance of shares for cash of $1,800,115, proceeds from shares to be issued of $3,776,827 and exercise of warrants of $169,905 offset by payment to shareholders of Expert Systems, Inc. of $175,000, payments to related party of $1,750, prepayment of investor relations expense of $381,123 and payments for leased equipment of $61,794.
Financing
In the nine months ended September 30, 2006, our funds from operations were insufficient to fund our daily operations. Therefore, we may be required to seek additional funds either through debt or equity financing to finance these debts and contingencies. Failure to raise additional funds could have a material adverse effect on our long-term operations and viability.
Internal Sources of Liquidity
For the nine months ended September 30, 2006, the funds generated from our operations were insufficient to fund our daily operations. There is no assurance that funds from our operations will meet the requirements of our daily operations in the future. In the event that funds from our operations will be insufficient to meet our operating requirements, we will need to seek other sources of financing to maintain liquidity.
External Sources of Liquidity
We will actively pursue all potential financing options as we look to secure additional funds to both stabilize and grow our business operations. Our management will review any financing options at their disposal and will judge each potential source of funds on its individual merits. We cannot assure you that we will be able to secure additional funds from debt or equity financing, as and when we need to, or if we can, that the terms of such financing will be favorable to us or our existing shareholders.
During the nine-month period ended September 30, 2006, we issued 4,328,000 shares and 1,957,913 are to be issued as compared to zero shares were issued or were to be issued during the nine-month period ended September 2005, respectively.
As of September 30, 2006, we had entered into nine capital leases with various equipment suppliers in the amount of $281,591, of which $145,818 was outstanding as of September 30, 2006.
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Inflation
Our management believes that inflation has not had a material effect on our results of operations, and does not expect that it will in fiscal year 2006, except that rising oil and gas prices may materially and adversely impact the economy generally.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Subsequent Events
On October 3, 2006 the Company terminated its investor relations consulting agreement with Trilogy Capital Partners and signed a contract with Corporate Communications Network, Inc. to provide similar services. In connection with the termination agreement Trilogy has transferred 1,535,000 warrants to Corporate Communications Network, Inc.; the warrants are exercisable at $0.50 per share.
On October 19, 2006, the Company sold a total of 4,166,667 shares of its common stock in its fourth private placement offering at $1.08 per share, and HPC Capital Management acted as placement agent. The cash proceeds for the issuance of shares, net of offering cost of $612,500 amounted to $3,887,500 in this round of private placement. Following the closing of its fourth private placement offering in October 2006, the company will issue the following warrants to purchase shares of its common stock at the price listed below:
Issued to | Description | Number of warrants | Exercise Price |
Investors | Series A warrants | 2,083,333 | $1.75 per share |
Investors | Series B warrants | 3,703,704 | $1.25 per share |
Investors | Series C warrants | 1,851,852 | $2.00 per share |
HPC | Dealer warrants | 416,667 | $1.08 per share |
The proceeds from the issuance of the 4,166,667 shares will be recorded net of the fair value of the warrants and the placement agent’s commission and expenses.
To fulfill a commitment made by the Company to the investors in the Company's August 2006 private placement, and in consideration for the waiver by those investors of certain of their registration rights, the Company issued to those investors an aggregate of 2,121,077 additional shares of common stock and warrants to purchase an additional 1,378,960 shares of common stock at an exercise price of $1.75 per share.
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CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
Statements contained in this report contain information that includes or is based upon certain “forward-looking statements” relating to our business. These forward-looking statements represent our management’s current judgment and assumptions, and can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are frequently accompanied by the use of such words as “anticipates,” “plans,” “believes,” “expects,” “projects,” “intends,” and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, including without limitation, those relating to our limited operating history, uncertain market acceptance of our products and services, technology changes, competition, changes in our business strategy or development plans, our ability to attract and retain qualified personnel, and our ability to attract substantial additional capital.
Any one of these or other risks, uncertainties, other factors, and any inaccurate assumptions, may cause actual results to be materially different from those described herein or elsewhere by us. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they were made. Certain of these risks, uncertainties, and other factors are described in greater detail in our filings from time to time with the Securities and Exchange Commission, which we strongly urge you to read and consider, all of which may be accessed from the Securities and Exchange Commission website at www.sec.gov. Subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above and elsewhere in our reports filed with the Securities and Exchange Commission. We expressly disclaim any intent or obligation to update any forward-looking statements.
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Item 3. Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. As of the end of the period covered by this Quarterly Report on Form 10-QSB, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (who serves as our principal executive officer) and our Chief Financial Officer (who serves as our principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our management and our President and Chief Executive Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the foregoing evaluation that occurred during the period covered by this Quarterly Report on Form 10-QSB that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II Other Information
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) | 31.1 | Certification of C.E.O. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of C.F.O. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certificate Pursuant to 10 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
FOLDERA, INC. | ||
Dated: November 14, 2006 | By: | /s/ Richard Lusk |
Richard Lusk | ||
Chief Executive Officer and President | ||
(principal executive officer) | ||
Dated: November 14, 2006 | By: | /s/ Reid Dabney |
Reid Dabney | ||
Senior Vice President and Chief Financial Officer | ||
(principal accounting and financial officer) |
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