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