If we purchase shares in a "passive foreign investment company" (a "PFIC"), we may be subject to U.S. federal income tax on a portion of any "excess distribution" or gain from the disposition of such shares, even if such income is distributed as a taxable dividend by us to our stockholders. Additional charges in the nature of interest may be imposed on us in respect of deferred taxes arising from such distributions or gains. If we invest in a PFIC and elect to treat the PFIC as a "qualified electing fund" under the Code (a "QEF"), in lieu of the foregoing requirements, we will be required to include in income each year a portion of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed to us. Alternatively, we may elect to mark-to-market at the end of each taxable year our shares in such PFIC; in this case, we will recognize
as ordinary income any increase in the value of such shares, and as ordinary loss any decrease in such value to the extent it does not exceed prior increases included in income. Our ability to make either election will depend on factors beyond our control, and are subject to limitations which may limit the availability of benefit of these elections. Under either election, we may be required to recognize in any year income in excess of our distributions from PFICs and our proceeds from dispositions of PFIC stock during that year, and such income will nevertheless be subject to the Annual Distribution Requirement and will be taken into account for purposes of determining whether we satisfy the Excise Tax Requirement.
Our functional currency is the U.S. dollar for U.S. federal income tax purposes. Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time we accrue income, expenses or other liabilities denominated in a foreign currency and the time we actually collect such income or pay such expenses or liabilities may be treated as ordinary income or loss. Similarly, gains or losses on foreign currency forward contracts, the disposition of debt denominated in a foreign currency and other financial transactions denominated in foreign currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, may also be treated as ordinary income or loss.
If we borrow money, we may be prevented by loan covenants from declaring and paying dividends in certain circumstances. Even if we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements, under the Investment Company Act, we generally are not permitted to make distributions to our stockholders while our debt obligations and senior securities are outstanding unless certain "asset coverage" tests or other financial covenants are met. Limits on our payment of dividends may prevent us from meeting the Annual Distribution Requirement, and may, therefore, jeopardize our qualification for taxation as a RIC, or subject us to the 4% excise tax on undistributed income.
Some of the income and fees that we recognize, such as management fees, may not satisfy the 90% Income Test. In order to ensure that such income and fees do not disqualify us as a RIC for a failure to satisfy the 90% Income Test, we may be required to recognize such income or fees through one or more entities treated as U.S. corporations for U.S. federal income tax purposes. While we expect that recognizing such income through such corporations will assist us in satisfying the 90% Income Test, no assurance can be given that this structure will be respected for U.S. federal income tax purposes, which could result in such income not being counted towards satisfying the 90% Income Test. If the amount of such income were too great and we were otherwise unable to mitigate this effect, it could result in our disqualification as a RIC. If, as we expect, the structure is respected, such corporations will
be required to pay U.S. corporate income tax on their earnings, which ultimately will reduce the yield on such income and fees.
If we fail to satisfy the 90% Income Test or the Diversification Tests in any taxable year, we may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures of the diversification requirements where we correct the failure within a specified period. If the applicable relief provisions are not available or cannot be met, all of our income would be subject to U.S. federal corporate-level income tax as
described below. We cannot provide assurance that we would qualify for any such relief should we fail the 90% Income Test or the Diversification Test.
If we fail to satisfy the Annual Distribution Requirement or otherwise fail to qualify as a RIC in any taxable year, and are not eligible for relief as described above, we will be subject to tax in that year on all of our taxable income, regardless of whether we make any distributions to our stockholders. In that case, all of our income will be subject to U.S. federal corporate-level income tax, reducing the amount available to be distributed to our stockholders. In contrast, assuming we qualify as a RIC, our U.S. federal corporate-level income tax should be substantially reduced or eliminated. See "Election to Be Taxed as a RIC" above and "Risk Factors—Risks Relating to Our Business—We may be subject to certain corporate-level taxes regardless of whether we continue to qualify as a RIC."
Capital Loss Carry forwards and Unrealized Losses
As a RIC, we are permitted to carry forward a net capital loss realized in a taxable year beginning on or before January 1, 2011 to offset our capital gain, if any, realized during the eight years following the year of the loss. A capital loss carry forward realized in a taxable year beginning before January 1, 2011 is treated as a short-term capital loss in the year to which it is carried. We are permitted to carry forward a net capital loss realized in taxable years beginning on or after January 1, 2011 to offset capital gain indefinitely. For net capital losses realized in taxable years beginning on or after January 1, 2011, the excess of our net short-term capital loss over our net long-term capital
gain is treated as a short-term capital loss arising on the first day of our next taxable year and the excess of our net long-term capital loss over our net short-term capital gain is treated as a long-term capital loss arising on the first day of our next taxable year. If future capital gain is offset by carried-forward capital losses, such future capital gain is not subject to fund-level U.S. federal income tax, regardless of whether distributed to stockholders. A RIC cannot carry back or carry forward any net operating losses.
TAXATION OF U.S. STOCKHOLDERS
Whether an investment in the shares of our preferred stock or common stock is appropriate for a U.S. stockholder will depend upon that person's particular circumstances. An investment in the shares of our preferred stock or common stock by a U.S. stockholder may have adverse tax consequences. The following summary generally describes certain U.S. federal income tax consequences of an investment in shares of our preferred stock and common stock by taxable U.S. stockholders and not by U.S. stockholders that generally are exempt from U.S. federal income taxation. U.S. stockholders should consult their own tax advisors before investing in shares of our preferred stock or common stock.
Distributions on Our Common Stock
Distributions by us generally are taxable to U.S. stockholders as ordinary income or long-term capital gain. Distributions of our investment company taxable income (which is, generally, our ordinary income excluding net capital gain) will be taxable as ordinary income to U.S. stockholders to the extent of our current and accumulated earnings and profits, whether paid in cash or reinvested in additional shares of our common stock. Distributions of our net capital gain (which generally is the excess of our net long-term capital gain over our net short-term capital loss) properly reported by us as "capital gain dividends" will be taxable to U.S. stockholders as long-term capital gains (which, under current law, are taxed at preferential rates in the case of individuals, trusts or estates). This is true regardless of U.S. stockholders' holding periods for their common stock and regardless of
whether the dividend is paid in cash or reinvested in additional common stock. Distributions in excess of our earnings and profits first will reduce a U.S. stockholder's adjusted tax basis in such stockholder's preferred stock or common stock and, after the adjusted tax basis is reduced to zero, will constitute capital gain to such U.S. stockholder. We have made distributions in excess of our earnings and profits and may continue to do so in the future. As a result, a U.S. stockholder will need to consider the effect of our distributions on such U.S. stockholder's adjusted tax basis in our common stock in their individual circumstances.
A portion of our ordinary income dividends, but not capital gain dividends, paid to corporate U.S. stockholders may, if certain conditions are met, qualify for the 70% dividends-received deduction to the extent that we have received dividends from certain corporations during the taxable year, but only to the extent such ordinary income dividends are treated as paid out of our earnings and profits. We expect only a small portion of our dividends to qualify for this deduction. A corporate U.S. stockholder may be required to reduce its basis on its preferred stock with respect to certain "extraordinary dividends," as provided under Section 1059 of the Code. Corporate U.S. stockholders should consult their own tax advisors in determining the application of these rules in their particular circumstances.
In general, "qualified dividend income" realized by non-corporate U.S. stockholders is taxable at the same rate as net capital gain. Generally, qualified dividend income is dividend income attributable to certain U.S. and foreign corporations, as long as certain holding period requirements as met. As long as certain requirements are met, our dividends paid to non-corporate U.S. stockholders attributable to qualified dividend income may be treated by such U.S. stockholders as qualified dividend income, but only to the extent such ordinary income dividends are treated as paid out of our earnings and profits. We expect only a small portion of our dividends to qualify as qualified dividend income.
Although we currently intend to distribute any of our net capital gain for each taxable year on a timely basis, we may in the future decide to retain some or all of our net capital gain, and may designate the retained amount as a "deemed distribution." In that case, among other consequences, we will pay tax on the retained amount, each U.S. stockholder will be required to include such stockholder's share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit equal to such stockholder's allocable share of the tax paid thereon by us. The amount of the deemed distribution net of such tax will be added to the U.S. stockholder's adjusted tax basis for such stockholder's common stock.
Because we expect to pay tax on any retained net capital gain at our regular corporate tax rate, and because that rate currently is in excess of the maximum rate currently payable by individuals on net capital gain, the amount of tax that individual stockholders will be treated as having paid and for which they will receive a credit would exceed the tax they owe on the retained net capital gain. Such excess generally may be claimed as a credit against a U.S. stockholder's other U.S. federal income tax obligations or may be refunded to the extent it exceeds the stockholder's liability for U.S. federal income tax. A U.S. stockholder that is not subject to U.S. federal income tax or otherwise is not required to file a U.S. federal income tax return would be required to file a U.S. federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. In order to utilize
the deemed distribution approach, we must provide a written statement to our stockholders reporting the deemed distribution after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a "deemed distribution."
We will be subject to the alternative minimum tax, also referred to as the "AMT," but any items that are treated differently for AMT purposes must be apportioned between us and our stockholders and this may affect U.S. stockholders' AMT liabilities. Although regulations explaining the precise method of apportionment have not yet been issued, such items generally will be apportioned in the same proportion that dividends paid to each stockholder bear to our taxable income (determined without regard to the dividends paid deduction), unless a different method for a particular item is warranted under the circumstances.
For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) the amount of dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the U.S. stockholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However, any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it had been received by our U.S. stockholders on December 31 of the year in which the dividend was declared.
We have the ability to declare a large portion of a dividend in shares of our stock. As long as a portion of such dividend is paid in cash and certain requirements are met, the entire distribution will be treated as a dividend for U.S. federal income tax purposes. As a result, our stockholders will be taxed on 100% of the fair market value of the dividend on the date the dividend is received in the same manner as a cash dividend, even though most of the dividend was paid in shares of our stock, which may result in our U.S. stockholders having to pay tax on such dividends, even if no cash is received, and our non-U.S. stockholders may be subject to withholding tax in respect of amounts distributed in our common stock. In general, any dividend on shares of our common stock will be taxable as a dividend, regardless of whether any portion is paid in stock.
If investors purchase shares of our common stock shortly before the record date of a distribution, the price of the shares will include the value of the distribution and the investors will be subject to tax on the distribution even though it represents a return of their investment. We have built-up or have the potential to build up large amounts of unrealized gain which, when realized and distributed, could have the effect of a taxable return of capital to stockholders.
Sale or Other Disposition of Our Preferred Stock or Common Stock
A U.S. stockholder generally will recognize taxable gain or loss if the U.S. stockholder sells or otherwise disposes of such stockholder's shares of our preferred stock or common stock. The amount of gain or loss will be measured by the difference between such stockholder's adjusted tax basis in the stock sold and the amount of the proceeds received in exchange. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the stockholder has held such stockholder's shares for more than one year. Otherwise, such gain or loss will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our preferred stock or common stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain
deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of our preferred stock or common stock may be disallowed if substantially identical stock or securities are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition.
In general, U.S. stockholders that are individuals, trusts or estates are taxed at preferential rates on their net capital gain (generally, the excess of net long-term capital gain over net short-term capital loss for a taxable year, including long-term capital gain derived from an investment in our shares). Such rate is lower than the maximum rate on ordinary income currently payable by individuals. Corporate U.S. stockholders currently are subject to U.S. federal income tax on net capital gain at the maximum rate that also applies to ordinary income. Non-corporate U.S. stockholders with net capital losses for a year (i.e., capital loss in excess of capital gain) generally may deduct up to $3,000 of such losses against their ordinary income each year; any net capital losses of a non-corporate U.S. stockholder in excess of $3,000 generally may be carried forward and used in subsequent years as
provided in the Code. Corporate U.S. stockholders generally may not deduct any net capital losses for a year, but may carry back such losses for three years or carry forward such losses for five years.
Information Reporting and Backup Withholding
We will send to each of our U.S. stockholders, after the end of each calendar year, a notice providing, on a per share and per distribution basis, the amounts includible in such U.S. stockholder's taxable income for such year as ordinary income and as long-term capital gain. In addition, the U.S. federal tax status of each year's distributions generally will be reported to the IRS. Distributions may also be subject to additional state, local and foreign taxes depending on a U.S. stockholder's particular situation.
We may be required to withhold U.S. federal income tax ("backup withholding") from all taxable distributions to any non-corporate U.S. stockholder (1) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding or (2) with respect to whom the IRS notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individual's taxpayer identification number is his or her social security number. Backup withholding is not an additional tax. Any amount withheld under backup withholding is allowed as a credit against the U.S. stockholder's U.S. federal income tax liability and may entitle such stockholder to a refund, provided that proper information is timely provided to the IRS.
Medicare Tax on Net Investment Income
For taxable years of non-corporate U.S. holders beginning after December 31, 2012, such holders generally will be subject to a 3.8% Medicare tax on their "net investment income," which ordinarily includes taxable distributions or deemed distributions on stock, such as our common stock, as well as taxable gain on the disposition of stock, including our common stock.
Withholding and Information Reporting on Foreign Financial Accounts
Under legislation enacted in 2010 and recent guidance from the IRS, the relevant withholding agent generally will be required to withhold 30% of any dividends on our common stock paid after December 31, 2013 and the gross proceeds from a sale of our common stock paid after December 31, 2016 to (i) a foreign financial institution (whether such financial institution is the beneficial owner or an intermediary) unless such foreign financial institution agrees to verify, report and disclose its U.S. accountholders and meets certain other specified requirements or (ii) a non-financial foreign entity (whether such entity is the beneficial owner or an intermediary) unless such entity certifies that it does not have any substantial United States owners or provides the name, address and taxpayer identification
number of each substantial United States owner and such entity meets certain other specified requirements. We will not pay any additional amounts in respect to any amounts withheld.
Reportable Transactions
Under U.S. Treasury regulations, if a stockholder recognizes a loss with respect to shares of $2 million or more for a non-corporate stockholder or $10 million or more for a corporate stockholder in any single taxable year (or a greater loss over a combination of years), the stockholder must file with the IRS a disclosure statement on Form 8886. Direct stockholders of certain portfolio securities in many cases are excepted from this reporting requirement, but under current guidance, stockholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to stockholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Significant monetary penalties apply to a failure to comply with this reporting requirement. States may
also have a similar reporting requirement. Stockholders should consult their own tax advisors to determine the applicability of these regulations in light of their individual circumstances.
TAXATION OF NON-U.S. STOCKHOLDERS
Whether an investment in shares of our common stock is appropriate for a non-U.S. stockholder will depend upon that person's particular circumstances. An investment in shares of our common stock by a non-U.S. stockholder may have adverse tax consequences and, accordingly, may not be appropriate for a non-U.S. stockholder. Non-U.S. stockholders should consult their own tax advisors before investing in our common stock.
Distributions on our Common Stock
Distributions of our investment company taxable income to non-U.S. stockholders will be subject to U.S. withholding tax (unless lowered or eliminated by an applicable income tax treaty) to the extent payable from our current and accumulated earnings and profits unless an exception applies.
If a non-U.S. stockholder receives distributions and such distributions are effectively connected with a U.S. trade or business of the non-U.S. stockholder and, if an income tax treaty applies, attributable to a permanent establishment in the United States of such non-U.S. stockholder, such distributions generally will be subject to U.S. federal income tax at the rates applicable to U.S. persons. In that case, we will not be required to withhold U.S. federal income tax if the non-U.S. stockholder complies with applicable certification and disclosure requirements. Special certification requirements apply to a non-U.S. stockholder that is a foreign trust and such entities are urged to consult their own tax advisors.
Actual or deemed distributions of our net capital gain (which generally is the excess of our net long-term capital gain over our net short-term capital loss) to a non-U.S. stockholder, and gains recognized by a non-U.S. stockholder upon the sale of our common stock, will not be subject to withholding of U.S. federal income tax and generally will not be subject to U.S. federal income tax unless (a) the distributions or gains, as the case may be, are effectively connected with a U.S. trade or business of the non-U.S. stockholder and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the non-U.S. stockholder in the United States (as discussed above) or (b) the non-U.S. stockholder is an individual, has been present in the United States for 183 days or more during the taxable year, and certain other conditions are satisfied. For a corporate non-U.S. stockholder,
distributions (both actual and deemed), and gains recognized upon the sale of our common stock that are effectively connected with a U.S. trade or business may, under certain circumstances, be subject to an additional "branch profits tax" (unless lowered or eliminated by an applicable income tax treaty). Non-U.S. stockholders of our common stock are encouraged to consult their own advisors as to the applicability of an income tax treaty in their individual circumstances.
In general, no U.S. source withholding taxes will be imposed on dividends paid by RICs in taxable years beginning before January 1, 2014 to non-U.S. stockholders to the extent the dividends are designated as "interest-related dividends" or "short-term capital gain dividends." Under this exemption, interest-related dividends and short-term capital gain dividends generally represent distributions of interest or short-term capital gain that would not have been subject to U.S. withholding tax at the source if they had been received directly by a non-U.S. stockholder, and that satisfy certain other requirements. However, no assurance can be given that we will distribute any interest-related or short-term capital dividends.
If we distribute our net capital gain in the form of deemed rather than actual distributions (which we may do in the future), a non-U.S. stockholder will be entitled to a U.S. federal income tax credit or tax refund equal to the non-U.S. stockholder's allocable share of the tax we pay on the capital gain deemed to have been distributed. In order to obtain the refund, the non-U.S. stockholder must obtain a U.S. taxpayer identification number (if one has not been previously obtained) and file a U.S. federal income tax return even if the non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal income tax return.
We have the ability to declare a large portion of a dividend in shares of our common stock. As long as a portion of such dividend is paid in cash (which portion can be as low as 20%) and certain requirements are met, the entire distribution will be treated as a dividend for U.S. federal income tax purposes. As a result, our non-U.S. stockholders will be taxed on 100% of the fair market value of the dividend on the date the dividend is received in the same manner as a cash dividend (including the application of withholding tax rules described above), even though most of the dividend was paid in shares of our common stock. In such a circumstance, we may be required to withhold all or substantially all of the cash we would otherwise distribute to a non-U.S. stockholder. In general, any dividend on shares of our common stock will be taxable as a dividend, regardless of whether any portion is paid
in stock.
A non-U.S. stockholder who is otherwise subject to withholding of U.S. federal income tax, may be subject to information reporting and backup withholding of U.S. federal income tax on dividends unless the non-U.S. stockholder provides us or the dividend paying agent with an IRS Form W-8BEN (or an acceptable substitute form) or otherwise meets documentary evidence requirements for establishing that it is a non-U.S. stockholder or otherwise establishes an exemption from backup withholding.
Under legislation enacted in 2010 and recent guidance from the IRS, the relevant withholding agent generally will be required to withhold 30% of any dividends paid on our common stock paid after December 31, 2013 and the gross proceeds from a sale of our common stock paid after December 31, 2016 to (i) a foreign financial institution unless such foreign financial institution agrees to verify, report and disclose its U.S. accountholders and meets certain other specified requirements or (ii) a non-financial foreign entity that is the beneficial owner of the payment unless such entity certifies that it does not have any substantial United States owners or provides the name, address and taxpayer identification number of each substantial United States owner and such entity meets certain other specified
requirements. If payment of this withholding tax is made, non-U.S. stockholders that are otherwise eligible for an exemption from, or reduction of, U.S. federal withholding taxes with respect to such dividends or proceeds will be required to seek a credit or refund from the IRS to obtain the benefit of such exemption or reduction. Non-U.S. stockholders should consult their own tax advisers regarding the particular consequences to them of this legislation and guidance. We will not pay any additional amounts in respect to any amounts withheld.
FAILURE TO QUALIFY AS A RIC
If we were unable to qualify for treatment as a RIC, and relief were not available as discussed above, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders and would not be required to make distributions for tax purposes. Distributions generally would be taxable to our stockholders as ordinary dividend income to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate U.S. stockholders would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder's tax basis, and any remaining distributions would be treated as a capital gain. If we were to fail to meet the RIC requirements for more than two consecutive
years and then sought to requalify as a RIC, we would be required to recognize gain to the extent of any unrealized appreciation in our assets unless we made a special election to pay corporate-level tax on any such unrealized appreciation recognized during the succeeding 10-year period.
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSIDERATIONS
Prospective investors should recognize that the present U.S. federal income tax treatment of an investment in shares of our common stock may be modified by legislative, judicial or administrative action at any time, and that any such action may affect investments and commitments previously made. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. Revisions in U.S. federal tax laws and interpretations thereof could adversely affect the tax consequences of an investment in us.
PLAN OF DISTRIBUTION
HNET is offering a maximum of 3,333,333 shares of common stock at a purchase price of $1.50 per share on a "best efforts" basis. There is no minimum offering amount that is required to be raised to break escrow. All subscription funds will be placed into a non-interest bearing escrow account with a bank. The offering will remain open until November 28, 2014 unless extended at the discretion of HNET.
HNET will hold successive "rolling" closings until up to $5,000,000 (3,333,333 shares) has been raised. The date of, and number of shares sold at, each successive closing will be determined at the sole discretion of HNET. $5,000,000 is the maximum amount that may be raised in the Offering. The dates of such successive closings will be determined at the sole discretion of HNET.
Investors must be "accredited investors" under the Securities Act and execute a subscription agreement attesting to that fact and providing other information.
MANAGEMENT AND CERTAIN SECURITY HOLDERS OF THE ISSUER
The following table sets forth as of December 2013 each person known by HNET to be the beneficial owner of five percent or more of the common stock of HNET, all directors individually and all directors and officers of HNET as a group. Except as noted, each person has sole voting and investment power with respect to the shares shown.
|
Name and Address of Beneficial Owner
|
Position
|
|
Amount of Beneficial Ownership
|
|
|
Percentage of Class
|
|
| |
|
|
|
|
|
|
|
|
Infanto Holdings, Inc.
Joseph C. Passalaqua-owner
7325 Oswego Road
|
Secretary, Chief Financial Officr and Director
|
|
|
12,000,000
|
|
|
|
70.82
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
Data Capital Corp
228 Park Ave South
|
5% Holder
|
|
|
2,000,000
|
|
|
|
11.80
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
Gemini Group Global
228 Park Ave South
|
5% Holder
|
|
|
2,000,000
|
|
|
|
11.80
|
%
|
| |
|
|
|
|
|
|
|
|
|
| Danny Mendelson |
Vice President |
|
|
150,000 |
|
|
|
.08 |
% |
| |
|
|
|
|
|
|
|
|
|
| Richard Weaver |
Vice President |
|
|
150,000 |
|
|
|
.08 |
% |
| |
|
|
|
|
|
|
|
|
|
| All Executive Officers, Directors and 5% Holders as a Group (9 Persons) |
|
|
|
18,615,360
|
|
|
|
94.58 |
% |
The management of the Company consists of two directors and three officers – Joseph Passalaqua, Secretary and director; Alfonso Knoll, Chief Executive Officer and director; Danny Mendelson, Vice President; Richard Weaver, Vice President
Biographies
Alfonso C. Knoll, has been President of Terra Silex Holdings, LLC, a private venture capital firm since December 2001. He was acting CEO of Mountain Top Properties, Inc., a company engaged in the business of Real Estate Investment and Management from December 2006 to December 2011. He has been president of Bullfly Trading Company, Inc. since December 2005. Mr. Knoll was CEO and president of Endeavor Power Corp., Inc. from November 2010 to May 2011 and Rock Ridge Resources, Inc. since May 2012. Mr. Knoll is a graduate of Wesley College and has attended Franklin and Marshall College and Widener University School of Law. Mr. Knoll is also currently President and Director of EZRecycling, Inc., the wholly owned subsidiary of Highlight Networks.
Mr. Knoll does not have a family relationship with any of the officers or directors of the Company and there are no compensation arrangements or any related party transactions to disclose.
Mr. Passalaqua, has been the president and a director of Biolog, Inc. on February 21, 2011. He was the president, treasurer and a director of Hardwired Interactive, Inc. from October 2010 to November 2011. He was the secretary and director of Pegasus Tel, Inc. from July 2010 until March 2011 and January 2012 to March 2012. He became president and a director of Plantation Lifecare Developers, Inc. in February 2009. He was the Secretary of Digital Utilities Ventures, Inc. from March 2009 through July 2010. Previously, Mr. Passalaqua owned Laqua’s Chevrolet franchise and Laqua’s 481 Pontiac, Buick, GMC Truck Center dealerships until July 2008. Mr. Passalaqua is also currently Secretary and Director of EZRecycling, Inc., the wholly owned subsidiary of Highlight Networks.
Mr. Passalaqua does not have a family relationship with any of the officers or directors of the Company and there are no compensation arrangements or any related party transactions to disclose.
Board Composition
HNET's Board of Directors consists of two directors. At each annual meeting of its stockholders, all of its directors are elected to serve from the time of election and qualification until the next annual meeting following election. In addition, HNET's bylaws provide that the maximum authorized number of directors may be changed by resolution of the stockholders or by resolution of the board of directors.
Meetings and Committees of the Board of Directors
Our Board of Directors conducts its business through meetings of the Board and by acting pursuant to unanimous written consent without a meeting. From January 1, 2013 to December 31, 2013, the Board of Directors held seven (7) meetings in person or by teleconference. During 2013 the Board of Directors also acted by unanimous written consent zero (0) times.
HNET has a Stock Option Committee but does not have any other board committees, including an audit committee. HNET's Stock Option Committee was formed in January 2013 and consists of Alfonso Knoll and Joseph C. Passalaqua. The Stock Option Committee administers the Company's Stock Option Plan. The Stock Option Committee acted by unanimous written consent one (1) time in 2013.
HNET does not have a nominating committee or committee performing similar functions. HNET's Board of Directors believes that it is appropriate for HNET not to have such a committee because of the costs associated with such process and that HNET has not yet raised sufficient capital or made its first portfolio investment. All directors participate in the consideration of director nominees.
HNET does not have any procedures by which security holders may recommend nominees to its board of directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Based upon a review of filings with the SEC, we believe that all our directors, executive officers and 10% beneficial owners complied during fiscal 2013 with the reporting requirements of Section 16(a) of the Exchange Act.
Limitations of Liability and Indemnification of Directors and Officers
Our bylaws limit the liability of directors and officers to the maximum extent permitted by Delaware law. We will indemnify any person who was or is a party, or is threatened to be made a party to, an action, suit or proceeding, whether civil, criminal, administrative or investigative, if that person is or was a director, officer, employee or agent of ours or serves or served any other enterprise at our request.
We have been advised that it is the position of the SEC that insofar as the indemnification provisions referenced above may be invoked to disclaim liability for damages arising under the Securities Act, these provisions are against public policy as expressed in the Securities Act and are, therefore, unenforceable.
HNET does not have directors' and officers' liability insurance.
In 2012, Anthony E. Lombardo resigned as the Company’s President, Chief Executive Officer, and Director of the Company and Damion D. Glushko resigned as Secretary, Chief Financial Officer, and Director of the Company. Alfonso Knoll was appointed as President, Chief Executive Officer and Director of the Company and Joseph C. Passalaqua was appointed Secretary, Chief Financial Officer and Director of the Company.
In 2013, Alfonso Knoll was appointed President and Director and Joseph Passalaqua was appointed Secretary and Director of EZRecycling, Inc., the newly formed, wholly owned subsidiary of Highlight Networks. Danny Mendelson was appointed CEO of EZRecycling, Inc.
In the year ended June 30, 2013, Richard Weaver and Danny Mendelson were both appointed as Vice Presidents of Highlight Networks.
Departure of Directors or Certain Officer: Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
| |
(a)
|
Resignation of Directors and Officers
|
During 2012, Anthony E. Lombardo resigned as the Company’s President, Chief Executive Officer, and Director of the Company and Damion D. Glushko resigned as Secretary, Chief Financial Officer, and Director of the Company. The resignations are not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
| |
(b)
|
Appointment of Directors and Officers
|
During 2012 and 2013, the following persons were appointed as our officers and directors.
The directors and executive officers of the Company for the reported period are as follows:
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
37
|
|
|
President, Chief Executive Officer and Director
|
|
Joseph C. Passalaqua
|
|
|
64
|
|
|
Secretary; Chief Financial Officer and Director
|
|
Danny Mendelson
|
|
|
61
|
|
|
Vice President
|
|
Richard Weaver
|
|
|
71
|
|
|
Vice President
|
| |
|
|
|
|
|
|
Alfonso C. Knoll has been President of Terra Silex Holdings, LLC, a private venture capital firm since December 2001. He was acting CEO of Mountain Top Properties, Inc., a company engaged in the business of Real Estate Investment and Management from December 2006 to December 2011. He has been president of Bullfly Trading Company, Inc. since December 2005. Mr. Knoll was CEO and president of Endeavor Power Corp., Inc. from November 2010 to May 2011 and Rock Ridge Resources, Inc. since May 2012. Mr. Knoll is a graduate of Wesley College and has attended Franklin and Marshall College and Widener University School of Law. Mr. Knoll is also currently President and Director of EZRecycling, Inc., the wholly owned subsidiary of Highlight Networks.
Mr. Knoll does not have a family relationship with any of the officers or directors of the Company and there are no compensation arrangements or any related party transactions to disclose.
Joseph C. Passalaqua, CFO, Secretary, and Director
Mr. Passalaqua has been the president and a director of Biolog, Inc. on February 21, 2011. He was the president, treasurer and a director of Hardwired Interactive, Inc. from October 2010 to November 2011. He was the secretary and director of Pegasus Tel, Inc. from July 2010 until March 2011 and January 2012 to March 2012. He became president and a director of Plantation Lifecare Developers, Inc. in February 2009. He was the Secretary of Digital Utilities Ventures, Inc. from March 2009 through July 2010. Previously, Mr. Passalaqua owned Laqua’s Chevrolet franchise and Laqua’s 481 Pontiac, Buick, GMC Truck Center dealerships until July 2008. Mr. Passalaqua is also currently Secretary and Director of EZRecycling, Inc., the wholly owned subsidiary of Highlight Networks.
Mr. Passalaqua does not have a family relationship with any of the officers or directors of the Company and there are no compensation arrangements or any related party transactions to disclose.
Danny Mendelson, Vice-President
Danny Mendelson, 61, was employed for the past five years by Wise Metals Group LLC as it Executive Vice-president and Chief Strategic Officer. He holds degrees from the University of Michigan (BBA), Detroit College of Law (JD) and Georgetown University Law Center (LLM). Mr. Mendelson is also currently CEO of EZRecycling, Inc., the wholly owned subsidiary of Highlight Networks.
Mr. Mendelson does not have a family relationship with any of the officers or directors of the Company and there are no compensation arrangements or any related party transactions to disclose.
Richard M. Weaver, Vice-President
Richard M. Weaver, 71, was employed by Wise Metals Group LLC as Executive Vice-President for Non-core business, 2008-2012, and as Executive Vice-president for Corporate Development, 2011-2102.
Mr. Weaver does not have a family relationship with any of the officers or directors of the Company and there are no compensation arrangements or any related party transactions to disclose.
Executive Compensation
We have Employment Agreements with our current Officers.
Employment Agreements
We have entered into an employment agreement with both of our four officers and employment arrangements are all subject to the discretion of our board of directors.
Indemnification of Officers and Directors
Our articles of incorporation and bylaws indemnify our directors and officers to the fullest extent permitted by Nevada corporation law. Insofar as indemnification for liability arising under the Securities Act may be permitted to directors, officers, and controlling persons, we are aware that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act of 1933 and is unenforceable. Set forth below is information regarding the business experience of the current Directors and executive officers of the Company.
EXECUTIVE COMPENSATION.
The following table sets forth, for the fiscal years indicated, all compensation awarded to, earned by or paid to the all executive officers of the Company as of June 30, 2012 and June 30, 2013. Other significant employees would not be required to be included in the table due to the fact that such employees were not executive officers of the Company at the end of the most recently completed fiscal year:
Summary Compensation Table
| |
|
|
|
Annual Compensation
|
|
Payouts
|
|
|
|
Name and Principal Position Current Officers:
|
|
Fiscal Year
|
|
Salary
|
|
Bonus
|
|
Other Annual Compensation
|
|
Underlying Options
|
|
All Other Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President/CEO/Director
|
|
2012-2013
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph C. Passalaqua
Secretary/CFO/Director
|
|
2012-2013
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Danny Mendelson
Vice President
|
|
2013
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
|
150,000 shares*
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Weaver
Vice President
|
|
2013
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
|
150,000 shares*
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Former Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony E. Lombardo
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President/Director/CEO
|
|
2011-2012
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Damion D. Glushko
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secretary/Director/CFO
|
|
2011-2012
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
|
* 75,000 are currently vested
|
|
|
|
|
|
|
|
|
|
|
|
|
Options/Stock Appreciation Rights
There were no stock options and stock appreciation rights ("SARs") granted to executive officers during the fiscal year ended June 30, 2013 or for the previous year ended June 30, 2012.
Director Compensation
The Company does not have any standard arrangements pursuant to which directors of the Company are compensated for services provided as a director. All directors are entitled to reimbursement for expenses reasonably incurred in attending Board of Directors' meetings. There have been no distributions of Stock to the Board Members as of the end of June 30, 2013 and the same period ending June 30, 2012.
Compensation Agreements, Termination of Employment and Change-in-Control Arrangements
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
On June 3, 2010, Highlight Networks, Inc.’s (the “Company”) majority shareholders entered into a stock purchase agreement (the “Purchase Agreement”) with Infanto Holdings, Corp. (“Infanto”), pursuant to which, Infanto purchased: 500,000 shares of the Company’s issued and outstanding common stock from Perry D. West, the President and CEO of the Company; 500,000 shares of the Company’s issued and outstanding common stock from Taylor B. West, a shareholder of the Company; and 500,000 shares of the
Company’s issued and outstanding common stock from Hee Joon Park, a shareholder of the Company.
The total of 1,500,000 shares represented 99.9% of the Company’s outstanding common stock as of that date. Infanto paid a total of $50,000 to selling shareholders.
During 2010 in connection with the change of control and pursuant to the Purchase Agreement, Perry D. West resigned as the Company’s President, Chief Executive Officer, and Director of the Company. Anthony E. Lombardo was appointed as Director, President and Chief Executive Officer, and Damion D. Glushko was appointed as Director and Secretary.
During 2012, Anthony E. Lombardo resigned as the Company’s President, Chief Executive Officer, and Director of the Company and Damion D. Glushko resigned as Secretary, Chief Financial Officer, and Director of the Company. Alfonso Knoll was appointed as President, Chief Executive Officer and Director of the Company and Joseph C. Passalaqua was appointed Secretary, Chief Financial Officer and Director of the
Company.
The following two tables presents certain information regarding beneficial ownership of our common stock for the years ended June 30, 2013 and June 30, 2012 by each person known by us to be the beneficial owner of more than 5% of the outstanding shares of common stock, each of our directors, each named executive officer and all directors and executive officers as a group. Unless otherwise indicated, each person in the table has sole voting and investment power as to the shares show.
The following table presents certain information regarding beneficial ownership of our common stock as of
| |
|
Shares |
|
|
Percent of |
|
| |
|
Beneficially
|
|
|
Total Shares |
|
|
Name of Beneficial Owner
|
|
Owned
|
|
|
Outstanding |
|
| |
|
|
|
|
|
|
| Alfonso Knoll |
|
|
0 |
|
|
|
0 |
% |
| President, CEO, Director |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Infanto Holdings Corp. |
|
|
2,000,000 |
|
|
|
69.09 |
% |
| Secretary, CFO, Director |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Richard Weaver |
|
|
150,000 |
|
|
|
5.18 |
% |
| Vice President |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Danny Mendelson |
|
|
150,000 |
|
|
|
5.18 |
% |
| Vice President |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Officers and Directors as a Group |
|
|
2,300,000 |
|
|
|
79.45 |
% |
| |
|
|
|
|
|
|
|
|
| *2,894,600 shares of outstanding common stock as of June 30, 2013 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
The following table presents certain information regarding beneficial ownership of our common stock as of
| |
|
Shares |
|
|
Percent of |
|
| |
|
Beneficially
|
|
|
Total Shares |
|
|
Name of Beneficial Owner
|
|
Owned
|
|
|
Outstanding |
|
| |
|
|
|
|
|
|
| Alfonso Knoll |
|
|
0 |
|
|
|
0 |
% |
| President, CEO, Director |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Infanto Holdings Corp. |
|
|
2,000,000 |
|
|
|
82.65 |
% |
| Secretary, CFO, Director |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Officers and Directors as a Group |
|
|
2,000,000 |
|
|
|
82.65 |
% |
| |
|
|
|
|
|
|
|
|
| *2,894,600 shares of outstanding common stock as of June 30, 2013 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Miscellaneous
The Board of Directors generally may amend or terminate the Stock Option Plan or any provision of the Stock Option Plan at any time. To the extent required by the Exchange Act, or the Code, however, absent approval by our stockholders, no amendment may (i) materially alter the group of persons eligible to participate in the Stock Option Plan; (ii) except as specifically provided in the Stock Option Plan, increase the number of shares available for Awards under the Stock Option Plan; (iii) extend the period during which incentive stock options may be granted; or (iv) decrease the exercise price of any option granted under the Stock Option Plan. Furthermore, without the consent of the participant, no amendment to or discontinuance of the Stock Option Plan or any provision thereof shall adversely affect any Award granted to the participant under the Stock Option Plan.
Federal Income Tax Consequences
The following is a brief description of the Federal income tax consequences to the participants and HNET of the issuance and exercise of stock options under the Stock Option Plan. All ordinary income recognized by a participant with respect to Awards under the Stock Option Plan shall be subject to both wage withholding and employment taxes. The deduction allowed to us for the ordinary income recognized by a participant with respect to an Award under the Stock Option Plan will be limited to amounts that constitute reasonable, ordinary and necessary business expenses.
Incentive Stock Options
In general, no income will result for Federal income tax purposes upon either the granting or the exercise of any incentive option issued under the Stock Option Plan. If certain holding period requirements (at least two years from the date of grant of the option and at least one year from the date of exercise of the option) are satisfied prior to a disposition of stock acquired upon exercise of an incentive option, the excess of the sales price upon disposition over the option exercise price generally will be recognized by the participant as a capital gain, and HNET will not be allowed a business expense deduction.
If the holding period requirements with respect to incentive options are not met, the participant generally will recognize, at the time of the disposition of the stock, ordinary income in an amount equal to the difference between the option price of such stock and the lower of the fair market value of the stock on the date of exercise and the amount realized on the sale or exchange. The difference between the option price of such stock and the fair market value of the stock on the date of exercise is a tax preference item for purposes of calculating the alternative minimum tax on a participant’s federal income tax return. If the amount realized on the sale or exchange exceeds the fair market value of the stock on the date of exercise, then such excess generally will be recognized as a capital gain. In the case of a disposition prior to satisfaction of the holding period requirements which results in the
recognition of ordinary income by the participant, we generally will be entitled to a deduction in the amount of such ordinary income in the year of the disposition.
If a participant delivers shares of our Common Stock in payment of the option price, the participant generally will be treated as having made a like-kind exchange of such shares for an equal number of the shares so purchased, and no gain or loss will be recognized with respect to the shares surrendered in payment of said option price. In such a case, the participant will have a tax basis in a number of shares received pursuant to the exercise of the option equal to the number of shares of Common Stock used to exercise the option and equal to such participants tax basis in the shares of Common Stock submitted in payment of the option price. The remaining shares of Common Stock acquired pursuant to the exercise of the option will have a tax basis equal to the gain, if any, recognized on the exercise of the option and any other consideration paid for such shares on the exercise of the option.
Notwithstanding the foregoing, if a participant delivers any stock that was previously acquired through the exercise of an incentive stock option in payment of all or a portion of the option price of an option, and the holding period requirements described above have not been satisfied with respect to the shares of stock so delivered, the use of such stock to pay a portion of the option price will be treated as a disqualifying disposition of such shares, and the participant generally will recognize income.
Nonqualified Stock Options
The grant of nonqualified stock options under the Stock Option Plan will not result in any income being taxed to the participant at the time of the grant or in any tax deduction for us at such time. At the time a nonqualified stock option is exercised, the participant will be treated as having received ordinary income equal to the excess of the fair market value of the shares of Common Stock acquired as of the date of exercise over the price paid for such stock. At that time, we will be allowed a deduction for Federal income tax purposes equal to the amount of ordinary income attributable to the participant upon exercise. The participant's holding period for the shares of Common Stock acquired will commence on the date of exercise, and the tax basis of the shares will be the greater of their fair market value at the time of exercise or the exercise price.
Item 1. Capital Stock and Other Securities
The authorized capital stock of HNET consists of one hundred and fifty million (150,000,000) shares of Common Stock, par value $.001 per share, of which there are 16,942,600 issued and outstanding as of the date of this Preliminary Offering Circular. The following statements relating to the capital stock set forth the material terms of the securities of HNET; however, reference is made to the more detailed provisions of, and such statements are qualified in their entirety by reference to, the certificate of incorporation and the by-laws, copies of which are available on the SEC's web site, www.sec.gov,
under "Highlight Networks, Inc.."
Common Stock
Holders of shares of Common Stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of Common Stock do not have cumulative voting rights. Holders of Common Stock are entitled to share ratably in dividends, if any, as may be declared from time to time by the Board of Directors in its discretion from funds legally available therefore. In the event of a liquidation, dissolution or winding up of HNET, the holders of Common Stock are entitled to share pro rata all assets remaining after payment in full of all liabilities. All of the outstanding shares of Common Stock are fully paid and non-assessable.
Holders of Common Stock have no preemptive rights to purchase the Common Stock of HNET. There are no conversion or redemption rights or sinking fund provisions with respect to the Common Stock.
Preferred Stock
HNET does not have any shares of preferred stock authorized.
Fee Structure
Reference is made "Remuneration; Affiliated Transactions; Investment Adviser" above regarding F500 and the fees that HNET will pay F500 for its services.
F500 will be paid a placement agent fee of (i) $.15 per share (10%) of the purchase price per share for each share they sell in the offering to investors unless the Company has raised the Equity Financing without the involvement from F500 in which case the placement fee shall be four percent (4%).of the gross proceeds.
Finance500 will be paid a placement agent fee of (i) $.15 per share (ten percent (10%) of the purchase price per share) for each share sold in the offering to investors not affiliated with the Company unless the Company has raised the Equity Financing without the involvement from F500 in which case the case placement fee shall be four percent (4%) of the gross proceeds, and (ii) $.075 per share (five percent (5%) of the purchase price per share) for each share sold in the offering to investors affiliated with the Company unless the Company has raised the Equity Financing
without the involvement from F500 in which case the case placement fee shall be four percent (4%) of the gross proceeds, pursuant to the Placement Agent Agreement.
Dividends
Subject to the BDC provisions of the Investment Company Act and to having sufficient net income for distribution, we intend to distribute at least 90% of HNET’s net income (net of fees and general administrative expenses) and gains to shareholders. The balance will be held as retained earnings for general corporate purposes including but not limited to expansion of the company’s capital base. No assurance can be given that HNET’s investments will generate such income.
Prospective investors in HNET's Common Stock are urged to carefully review all of HNET's SEC filings. They may be found on the SEC's web site, www.sec.gov.
ITEM 7- FINANCIAL STATEMENTS
| |
|
|
|
Reports of Independent Registered Public Accounting Firms - MaloneBailey LLP
|
40
|
| |
|
|
| Reports of Independent Registered Public Accounting Firms - Patrick Rogers, CPA, PA |
|
41 |
| |
|
|
|
|
42
|
| |
|
|
|
43
|
| |
|
Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended June 30, 2013 and 2012
|
44
|
| |
|
|
|
45
|
| |
|
|
Notes to Consolidated Financial Statements
|
46
|
| |
|
|
|
51
|
| |
|
|
|
52
|
| |
|
Unaudited Consolidated Statements of Stockholders’ Deficit for the three months ended September 30, 2013
|
53
|
| |
|
|
|
54
|
| |
|
|
Unaudited Notes to Consolidated Financial Statements
|
55
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Highlight Networks, Inc.
Liverpool, New York
We have audited the accompanying consolidated balance sheet of Highlight Networks, Inc and its subsidiary. (collectively, the “Company”) as of June 30, 2013 and the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for the year ended June 30, 2013. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Highlight Networks, Inc. and its subsidiary as of June 30, 2013 and the results of their operations and their cash flows for the year ended June 30, 2013 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has generated net losses since its inception and has a working capital deficit as of June 30, 2013. The Company requires additional funds to meet its obligations and the costs of its operations. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters
also are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Houston, Texas
309 E. Citrus Street
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Highlight Networks, Inc.
I have audited the accompanying balance sheet of Highlight Networks, Inc. (a development stage company) as of June 30, 2012 and the statements of operations, stockholders’ equity, and cash flows for the year ended June 30, 2012. These financial statements are the responsibility of the Company’s management. My responsibility is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor was I engaged to perform, an audit of its internal control over financial reporting. My audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, I express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provide a reasonable basis for my opinion.
In my opinion, these financial statements present fairly, in all material respects, the financial position of Highlight Networks, Inc. as of June 30, 2012 and the results of its operations and its cash flows for the year ended June 30, 2012 in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred a $147,178 cumulative loss from operations, consumed approximately $50,861 of cash from current operating activities, has no revenues, and requires additional financing in order to finance its business activities through June 30, 2013. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Altamonte Springs, Florida
|
HIGHLIGHT NETWORKS, INC.
|
|
CONSOLIDATED BALANCE SHEETS
|
| |
| |
|
|
June 30,
|
|
|
|
|
|
| |
|
|
|
|
|
|
2012
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
50,010
|
|
|
$
|
15,708
|
|
|
Accounts receivable
|
|
|
1,182
|
|
|
|
-
|
|
|
Prepaid expenses
|
|
|
2,055
|
|
|
|
-
|
|
|
Inventory
|
|
|
13,069
|
|
|
|
-
|
|
|
Total Current Assets
|
|
|
66,316
|
|
|
|
15,708
|
|
| |
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
66,316
|
|
|
$
|
15,708
|
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS' (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
40,855
|
|
|
$
|
-
|
|
|
Accrued expenses
|
|
|
7,683
|
|
|
|
7,000
|
|
|
Due to related parties
|
|
|
161,330
|
|
|
|
-
|
|
|
Total Current Liabilities
|
|
|
209,868
|
|
|
|
7,000
|
|
| |
|
|
|
|
|
|
|
|
|
Stockholders' (Deficit) Equity:
|
|
|
|
|
|
|
|
|
|
Common stock; $.001 par value; 150,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
2,894,600 and 2,419,600 shares issued and outstanding as of
|
|
|
|
|
|
|
|
|
|
|
|
|
2,895
|
|
|
|
2,420
|
|
|
Additional paid-in capital
|
|
|
685,373
|
|
|
|
153,466
|
|
|
Accumulated deficit
|
|
|
(831,820
|
)
|
|
|
(147,178
|
)
|
|
Total Stockholders' (Deficit) Equity
|
|
|
(143,552
|
)
|
|
|
8,708
|
|
| |
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' (Deficit) Equity
|
|
$
|
66,316
|
|
|
$
|
15,708
|
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
|
HIGHLIGHT NETWORKS, INC.
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| |
|
|
|
|
| |
|
Years Ended
|
| |
|
|
| |
|
|
|
2012
|
| |
|
|
|
|
|
Revenue
|
|
$
|
48,819
|
|
|
$
|
-
|
|
|
Cost of goods sold
|
|
|
(53,638
|
)
|
|
|
-
|
|
|
Gross loss
|
|
|
(4,819
|
)
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Consulting expense
|
|
|
532,382
|
|
|
|
-
|
|
|
General and administrative
|
|
|
112,258
|
|
|
|
43,371
|
|
|
Rent expense
|
|
|
32,000
|
|
|
|
-
|
|
|
Total Operating Expenses
|
|
|
676,640
|
|
|
|
43,371
|
|
| |
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(681,459
|
)
|
|
|
(43,371
|
)
|
| |
|
|
|
|
|
|
|
|
|
Other Expenses:
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,183
|
)
|
|
|
(1,954
|
)
|
| |
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(684,642
|
)
|
|
$
|
(45,325
|
)
|
| |
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.27
|
)
|
|
$
|
(0.02
|
)
|
| |
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
2,517,545
|
|
|
|
2,419,600
|
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
HIGHLIGHT NETWORKS, INC.
|
|
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Stockholders’
|
|
| |
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Equity
|
|
| |
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
|
|
2,419,600 |
|
|
$ |
2,420 |
|
|
$ |
153,466 |
|
|
$ |
(101,853 |
) |
|
$ |
54,033 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(45,325 |
) |
|
|
(45,325 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,419,600 |
|
|
|
2,420 |
|
|
|
153,466 |
|
|
|
(147,178 |
) |
|
|
8,708 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for services
|
|
|
475,000 |
|
|
|
475 |
|
|
|
531,907 |
|
|
|
- |
|
|
|
532,382 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(684,642 |
) |
|
|
(684,642 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,894,600 |
|
|
$ |
2,895 |
|
|
$ |
685,373 |
|
|
$ |
(831,820 |
) |
|
$ |
(143,552 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
|
HIGHLIGHT NETWORKS, INC.
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| |
|
|
| |
|
Years Ended
|
| |
|
|
| |
|
|
|
2012
|
| |
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(684,642
|
)
|
|
$
|
(45,325
|
)
|
|
Adjustments required to reconcile net loss
|
|
|
|
|
|
|
|
|
|
to net cash used in operating expenses:
|
|
|
|
|
|
|
|
|
|
Stock issued for services
|
|
|
532,382
|
|
|
|
-
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,182
|
)
|
|
|
-
|
|
|
Inventory
|
|
|
(13,069
|
)
|
|
|
-
|
|
|
Prepaid expenses
|
|
|
(2,055
|
)
|
|
|
-
|
|
|
Accounts payable and accrued expenses
|
|
|
41,538
|
|
|
|
5,028
|
|
|
Net cash used in operating activities
|
|
|
(127,028
|
)
|
|
|
(40,297
|
)
|
| |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
Proceeds from related party debt borrowings
|
|
|
161,330
|
|
|
|
2,900
|
|
|
Payments on related party debt borrowings
|
|
|
-
|
|
|
|
(13,464
|
)
|
|
Net cash provided by financing activities
|
|
|
161,330
|
|
|
|
(10,564
|
)
|
| |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
34,302
|
|
|
|
(50,861
|
)
|
|
Cash at beginning of period
|
|
|
15,708
|
|
|
|
66,569
|
|
|
Cash at end of period
|
|
$
|
50,010
|
|
|
$
|
15,708
|
|
| |
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
3,676
|
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
HIGHLIGHT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1-Organization and summary of significant accounting policies
Organization and Nature of Business
Highlight Networks, Inc. (“the Company”) was formed on June 21, 2007 as a Nevada corporation. During 2013, the Company began new business venture in recycling, refining, metals trading and assisting in metal recovery, with a focus on precious metals refining from electronic waste. The Company commenced its principal revenue producing activities during 2013 and generated revenue of $48,819 during the year ended June 30, 2013.
Principles of Consolidation
On March 11, 2013, EZ Recycling, Inc was formed and incorporated to serve as a wholly owned subsidiary of Highlight Networks, Inc. EZ Recycling is incorporated in the State of Nevada. All inter-company balances and transactions are eliminated in consolidation. The Company has a June 30 year end.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes.
Allowance for Doubtful Accounts
Accounts Receivable was $1,182 and $0 as of June 30, 2013 and 2012, respectively. The Company recognizes an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectibility. Bad debt reserves are maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer’s inability to meet its financial obligation, such as in the case of bankruptcy filings or deterioration in the customer’s operating
results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. As of June 30, 2013 and 2012, the Company has determined an allowance for doubtful accounts is not necessary.
Inventory
As of June 30, 2013, the company had 8,017 lbs. of scrap metal and used circuit boards in inventory and has recognized $48,400 in revenue from the processing, recycling, refining or sale of inventory. Inventories are periodically monitored to ensure that the reserve for obsolescence covers any obsolete items. As of June 30, 2013, there was no reserve for obsolescence. Inventories are valued at the lower of cost (using average cost) or market.
As of June 30, 2013, the company had 446 items of EBAY merchandise in inventory and has recognized $419 in revenue from the sale of this merchandise in inventory. Inventories are periodically monitored to ensure that the reserve for obsolescence covers any obsolete items. As of June 30, 2013, there was no reserve for obsolescence. Inventories are valued at the lower of cost (using average cost) or market.
| |
|
June 30,
|
|
|
| |
|
|
|
2012
|
|
EBAY merchandise
|
|
$
|
6,186
|
|
|
$
|
-
|
|
|
Scrap metal
|
|
|
6,883
|
|
|
|
-
|
|
|
Total inventory
|
|
$
|
13,069
|
|
|
$
|
-
|
|
HIGHLIGHT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1-Organization and summary of significant accounting policies (Continued)
Revenue Recognition
The Company recognizes revenue in accordance with FASB ASC 605 when persuasive evidence of an arrangement exists, the product has been delivered or services have been performed, the selling price is fixed or determinable, and collection is reasonably assured and there are no further obligations to customers. Revenue is recognized when a product is delivered or shipped to the customer and all material conditions relating to the sale have been substantially performed. For cash received in advance for goods, the Company records a liability classified as deferred revenue. As of June 30, 2013 and 2012, there was no deferred revenue.
Concentrations
The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company had cash and cash equivalents of $50,010 and $15,708 as of June 30, 2013 and 2012, respectively, all of which was fully covered by federal depository insurance.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
The Company accounts for stock-based compensation to employees in accordance with FASB ASC 718, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. FASB ASC 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. FASB ASC 718 requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will
be recognized over the period during which an employee is required to provide service in exchange for the award the requisite service period (usually the vesting period). No compensation costs are recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. The Company recorded stock-based compensation to employees of $269,882 and $0 during
the years ended June 30, 2013 and 2012, respectively.
The Company accounts for share based payments to nonemployees in accordance with FASB ASC 505-50. The fair value of equity instruments issued to a nonemployee is measured by using the stock price and other measurement assumptions as of the date of either: (i) a commitment for performance by the nonemployee has been reached; or (ii) the counterparty’s performance is complete. Expenses related to nonemployee awards are generally recognized in the same period and in the same period as the Company incurs the related liability for goods and services received. The Company stock compensation to nonemployees of recorded $262,500 and $0 during the years ended
June 30, 2013 and 2012, respectively.
Net Loss per Common Share
The Company has adopted the provisions of FASB ASC Topic 260, Earning per Share. ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their
effect is anti dilutive.
HIGHLIGHT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1-Organization and summary of significant accounting policies (Continued)
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740, which requires accounting for deferred income taxes under the asset and liability method. Deferred income tax asset and liabilities are computed for difference between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on the enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce the deferred income tax assets to the amount expected to be realized.
The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company’s consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities. When facts and circumstances change, the Company reassesses these probabilities
and records any changes in the consolidated financial statements as appropriate.
In accordance with GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce stockholders’ equity. This policy also provides guidance on
thresholds, measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better consolidated financial statement comparability among different entities. Management’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. Generally, the tax filings are no longer subject to income tax examinations by major taxing authorities for years ended before June 30, 2010. Any potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal, state and local tax laws. The Company's management
does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Reclassifications
Certain reclassifications have been made to the 2012 consolidated financial statements to conform to the June 30, 2013 presentation.
Recently Adopted Accounting Pronouncements
The Company does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on its financial position, results of operations or cash flows.
Note 2-Going concern
The accompanying consolidated financial statements have been prepared on the basis of accounting principles applicable to a “going concern,” which assumes that the Company will continue in operation for at least one year and will be able to realize its assets and discharge its liabilities in the normal course of operations.
Several conditions and events raise substantial doubt as to the Company’s ability to continue as a “going concern.” The Company has incurred net losses of $831,820 for the period from June 21, 2007 (inception) to June 30, 2013, has an accumulated deficit and a working capital deficit as of June 30 2013, and requires additional financing in order to finance its business activities on an ongoing basis. The Company’s future capital requirements will depend on numerous factors including, but not limited to, continued progress in the pursuit of business
opportunities. The Company is actively pursuing alternative financing and has had discussions with various third parties, although no firm commitments have been obtained. In the interim, shareholders of the Company have committed to meeting its minimal operating expenses. Management believes that actions presently being taken to revise the Company’s operating and financial requirements provide them with the opportunity to continue as a “going concern.”
These financial statements do not reflect adjustments that would be necessary if the Company were unable to continue as a “going concern.” While management believes that the actions already taken or planned, will mitigate the adverse conditions and events which raise doubt about the validity of the “going concern” assumption used in preparing these financial statements, there can be no assurance that these actions will be successful. If the Company were unable to continue as a “going concern,” then substantial adjustments would be necessary to the carrying values of assets, the reported amounts of its liabilities, the reported revenues and expenses, and the balance sheet classifications used.
HIGHLIGHT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3-Related party transactions
Infanto Holdings LLC, whose principal stockholder Joseph C. Passalaqua is also an officer and principal stockholder of Highlight Networks, Inc., loaned the Company $2,900, $3,684 and $6,880 during years ended June 30, 2012, 2011, and 2010, respectively, which totaled $13,464. These notes were unsecured, accrued simple interest annually at 18% and were due on demand. On April 27, 2012, the Company repaid the total principal due of $13,464 plus accrued interest of $3,676, for a total payment of $17,140.
In 2013, the Company borrowed an aggregate of $161,230 under promissory notes with related parties, Friction & Heat LLC and Joseph C. Passalaqua. Joseph C. Passalaqua is a managing member of Friction & Heat. The promissory notes and unsecured, bear simple interest at 10% per annum and are due on demand. As of June 30, 2013, the aggregate unpaid principal on these notes was $161,230, with interest accrued of $3,183.
In 2013, EZ Recycling, Inc., the wholly owned subsidiary of Highlight Networks, Inc. borrowed $100 from a related party, Joseph C. Passalaqua. The amount is non-interest bearing advance. As of June 30, 2013 the unpaid amount on the advance was $100.
Note 4-Common stock transactions
The Company is authorized to issue 150,000,000 shares of common stock, with par value of $0.001 per share.
No common shares were issued during the year ended June 30, 2012.
On April 17, 2013, the Company issued 175,000 shares of common stock to a nonemployee for consulting services valued at $262,500.
On April 15, 2013, the Company granted an aggregate of 300,000 common shares to officers of the Company for services to be rendered. 150,000 shares vested immediately on April 15, 2013 and 150,000 shares vest on May 1, 2014. The shares were valued at $450,000 of which $269,882 was recognized during the year ended June 30, 2013 and $180,118 will be recognized over the remaining vesting period.
Note 5-Income taxes
The Company had no income tax expense (benefit) for the years ended June 30, 2013 and 2012. At June 30, 2013, the Company’s accumulated net operating loss carry-forwards for federal and state income purposes was approximately $298,000. These losses are available for future years and expire through June 2032. Utilization of these losses may be severely or completely limited if the Company undergoes an ownership change pursuant to Internal Revenue Code Section 382.
At June 30, 2013 and 2012, the Company had deferred tax assets of approximately $104,000 and $47,000, respectively, principally arising from net operating loss carryforwards for income tax purposes. The Company has determined it more likely than not that these timing differences will not materialize and provided a full valuation allowance against all of the deferred tax assets.
Note 6-Commitments
On January 1, 2013, the Company entered into a 3 year consulting agreement. Pursuant to the terms of the agreement, the Company committed to issue 175,000 common shares to the consultant upon execution of the agreement (see Note 4) and the Company committed to paying a cash commission equal to 8% of the gross sales of all merchandise and scrap products shipped and sold under any contract arranged by the consultant over the term of the agreement.
Note 7-Subsequent events
On July 12, 2013, the Company paid $44,000 to a related party, Friction & Heat LLC. The amount was first applied to any accrued interest due to date, with the remaining amount then applied to the principal of previous promissory note agreements with the related party, Friction & Heat LLC.
HIGHLIGHT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7-Subsequent events (continued)
In July, August and September 2013, the Company entered into promissory note agreements with a related party, Friction & Heat LLC, for an additional total of $56,500. The notes are unsecured, bear interest at 10% per annum and are due on demand.
On September 3, 2013, the Company converted all outstanding notes to Friction & Heat into five separate convertible notes in the amounts of; $70,207, $20,225, $25,800, $13,000 and $37,000. The notes are unsecured, bear interest at 10% per annum, mature on April 30, 2014, May 31, 2014, June 30, 2014, July 31, 2014, and August 31, 2014, respectively and are all convertible into common stock of the Company at $0.001 per share.
On September 3, 2013, the company converted the outstanding note due to Joseph C. Passalaqua into a convertible note in the amount of $4,500. The note is unsecured, bears interest at 10% per annum, matures on January 22, 2014 and is convertible into common stock of the Company at $0.001 per share.
|
HIGHLIGHT NETWORKS, INC.
|
|
CONSOLIDATED BALANCE SHEETS
|
|
(UNAUDITED)
|
| |
| |
|
September 30,
|
|
|
|
|
|
| |
|
|
|
|
|
2013
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
$
|
5,629
|
|
|
$
|
50,010
|
|
|
Accounts receivable
|
|
7,242
|
|
|
|
1,182
|
|
|
Prepaid expenses
|
|
2,055
|
|
|
|
2,055
|
|
|
Inventory
|
|
10,899
|
|
|
|
13,069
|
|
|
Total Current Assets
|
|
25,825
|
|
|
|
66,316
|
|
| |
|
|
|
|
|
|
|
|
Total Assets
|
$
|
25,825
|
|
|
$
|
66,316
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
69,824
|
|
|
$
|
40,855
|
|
|
Accrued expenses
|
|
8,169
|
|
|
|
7,683
|
|
|
Advances from related party
|
|
100
|
|
|
|
100
|
|
|
Convertible notes to related parties, net of unamortized discounts
|
|
|
|
|
|
|
|
|
of $112,516 and $0, respectively
|
|
73,216
|
|
|
|
-
|
|
|
Notes payable to related parties
|
|
-
|
|
|
|
161,230
|
|
|
Total Current Liabilities
|
|
151,309
|
|
|
|
209,868
|
|
| |
|
|
|
|
|
|
|
|
Stockholders' Deficit:
|
|
|
|
|
|
|
|
|
Preferred Stock- $.001 par value; 20,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Common Stock- $.001 par value; 150,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,943
|
|
|
|
2,895
|
|
|
Additional paid-in capital
|
|
936,197
|
|
|
|
685,373
|
|
|
Accumulated deficit
|
|
(1,064,624
|
)
|
|
|
(831,820
|
)
|
|
Total Stockholders' Deficit
|
|
(125,484
|
)
|
|
|
(143,552
|
)
|
| |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Deficit
|
$
|
25,825
|
|
|
$
|
66,316
|
|
| |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
|
|
|
|
HIGHLIGHT NETWORKS, INC.
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
(UNAUDITED)
|
| |
|
|
|
|
| |
|
Three Months Ended
|
| |
|
|
| |
|
|
|
2012
|
| |
|
|
|
|
|
Revenue
|
|
$
|
7,302
|
|
|
$
|
-
|
|
|
Cost of goods sold
|
|
|
(2,840
|
)
|
|
|
-
|
|
|
Gross profit
|
|
|
4,462
|
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Consulting expense
|
|
|
73,220
|
|
|
|
-
|
|
|
General and administrative
|
|
|
124,350
|
|
|
|
3,783
|
|
|
Rent expense
|
|
|
24,000
|
|
|
|
-
|
|
|
Total Operating Expenses
|
|
|
221,570
|
|
|
|
3,783
|
|
| |
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(217,108
|
)
|
|
|
(3,783
|
)
|
| |
|
|
|
|
|
|
|
|
|
Other Expenses:
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(15,696
|
)
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(232,804
|
)
|
|
$
|
(3,783
|
)
|
| |
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.00
|
)
|
| |
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
2,900,861
|
|
|
|
2,419,600
|
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
|
|
|
|
HIGHLIGHT NETWORKS, INC.
|
|
|
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
(UNAUDITED)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
| |
|
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
|
| |
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,894,600 |
|
|
$ |
2,895 |
|
|
$ |
685,373 |
|
|
$ |
(831,820 |
) |
|
$ |
(143,552 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for services
|
|
|
48,000 |
|
|
|
48 |
|
|
|
72,672 |
|
|
|
- |
|
|
|
72,720 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt discount due to beneficial conversion feature
|
|
|
- |
|
|
|
- |
|
|
|
123,821 |
|
|
|
- |
|
|
|
123,821 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
- |
|
|
|
- |
|
|
|
54,331 |
|
|
|
- |
|
|
|
54,331 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(232,804 |
) |
|
|
(232,804 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,942,600 |
|
|
$ |
2,943 |
|
|
$ |
936,197 |
|
|
$ |
(1,064,624 |
) |
|
$ |
(125,484 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
|
|
|
|
|
|
|
HIGHLIGHT NETWORKS, INC.
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
(UNAUDITED)
|
| |
|
|
|
|
| |
|
Three Months Ended
|
| |
|
|
| |
|
|
|
2012
|
| |
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(232,804
|
)
|
|
$
|
(3,783
|
)
|
|
Adjustments required to reconcile net loss
|
|
|
|
|
|
|
|
|
|
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Amortization of debt discounts
|
|
|
11,305
|
|
|
|
-
|
|
|
Stock-based compensation
|
|
|
127,051
|
|
|
|
-
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(6,060
|
)
|
|
|
-
|
|
|
Inventory
|
|
|
2,170
|
|
|
|
-
|
|
|
Prepaid expenses
|
|
|
-
|
|
|
|
-
|
|
|
Accounts payable and accrued expenses
|
|
|
29,455
|
|
|
|
-
|
|
|
Net cash used in operating activities
|
|
|
(68,883
|
)
|
|
|
(3,783
|
)
|
| |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable to related parties
|
|
|
50,000
|
|
|
|
-
|
|
|
Proceeds from convertible notes to related parties
|
|
|
15,000
|
|
|
|
|
|
|
Payments on notes payable to related parties
|
|
|
(40,498
|
)
|
|
|
-
|
|
|
Net cash provided by financing activities
|
|
|
24,502
|
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(44,381
|
)
|
|
|
(3,783
|
)
|
|
Cash at beginning of period
|
|
|
50,010
|
|
|
|
15,708
|
|
|
Cash at end of period
|
|
$
|
5,629
|
|
|
$
|
11,925
|
|
| |
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Debt discount due to beneficial conversion feature
|
|
$
|
123,821
|
|
|
$
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
|
|
|
HIGHLIGHT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1—Organization and Basis of Presentation
Organization and Basis of Presentation
The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's June 30, 2013 audited financial statements as reported in Form 10K. The results of operations for the three month period ended September 30, 2013 are not necessarily indicative of the operating results for the full year ended June 30, 2014.
On March 11, 2013, EZ Recycling, Inc was formed and incorporated to serve as a wholly owned subsidiary of Highlight Networks, Inc. EZ Recycling is incorporated in the State of Nevada. All inter-company balances and transactions are eliminated in consolidation.
Nature of Business
In 2013 the Company announced a new business venture in recycling, refining, metals trading and assisting in metal recovery, with a focus on precious metals refining from electronic waste. During 2013, the Company began its new business venture in recycling, refining, metals trading and assisting in metal recovery, with a focus on precious metals refining from electronic waste.
Inventory
In the three months ended September 30, 2013, the company had ending inventory of 5,820 lbs. of scrap metal and used circuit boards and recognized $7,242 in revenue from the processing, recycling, refining or sale of inventory. Inventories are periodically monitored to ensure that the reserve for obsolescence covers any obsolete items. As of September 30, 2013, there was no reserve for obsolescence. Inventories are valued at the lower of cost (using average cost) or market.
In the three months ended September 30, 2013, the company had ending inventory of 444 items of EBAY merchandise and recognized $60 in revenue from the sale of merchandise in inventory. Inventories are periodically monitored to ensure that the reserve for obsolescence covers any obsolete items. As of September 30, 2013, there was no reserve for obsolescence. Inventories are valued at the lower of cost (using average cost) or market.
| |
|
September 30,
|
|
|
|
|
| |
|
|
|
|
2013
|
|
|
EBAY merchandise
|
|
$ |
6,084 |
|
|
$ |
6,186 |
|
|
Scrap metal
|
|
|
4,815 |
|
|
|
6,883 |
|
|
Total inventory
|
|
$ |
10,899 |
|
|
$ |
13,069 |
|
HIGHLIGHT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2—Going Concern
The accompanying financial statements have been prepared on the basis of accounting principles applicable to a “going concern,” which assume that Highlight Networks, Inc. (hereto referred to as the “Company”) will continue in operation for at least one year and will be able to realize its assets and discharge its liabilities in the normal course of operations.
Several conditions and events cast doubt about the Company’s ability to continue as a “going concern.” The Company has incurred net losses of approximately $1,064,624 for the period from June 21, 2007 (inception) to September 30, 2013, has an accumulated deficit, has recurring losses, has no revenues, and requires additional financing in order to finance its business activities on an ongoing basis. The Company’s future capital requirements will depend on numerous factors including, but not limited to, continued progress in the pursuit of business
opportunities. The Company is actively pursuing alternative financing and has had discussions with various third parties, although no firm commitments have been obtained. In the interim, shareholders of the Company have committed to meeting its minimal operating expenses. Management believes that actions presently being taken to revise the Company’s operating and financial requirements provide them with the opportunity to continue as a “going concern.”
These financial statements do not reflect adjustments that would be necessary if the Company were unable to continue as a “going concern.” While management believes that the actions already taken or planned, will mitigate the adverse conditions and events which raise doubt about the validity of the “going concern” assumption used in preparing these financial statements, there can be no assurance that these actions will be successful. If the Company were unable to continue as a “going concern,” then substantial adjustments would be necessary to the carrying values of assets, the reported amounts of its liabilities, the reported revenues and expenses, and the balance sheet classifications used.
Note 3—Commitments
On January 1, 2013, the Company entered into a 3 year consulting agreement. Pursuant to the terms of the agreement, the Company committed to issue 175,000 common shares to the consultant upon execution of the agreement (see Note 5) and the Company committed to paying a cash commission equal to 8% of the gross sales of all merchandise and scrap products shipped and sold under any contract arranged by the consultant over the term of the agreement.
Note 4—Related Party Transactions
During September 2013, the Company modified its outstanding note agreements, with an aggregate principal amount of $170,732, with related parties, Friction & Heat LLC and Joseph Passalaqua whereby a conversion option was added. The promissory notes were originally unsecured, bore simple interest at 10% per annum and were due on demand. The Company also borrowed $50,000 from these related parties under notes with the same terms during the three months ended September 3013. In September 2013, these loans were modified into convertible notes that are unsecured, mature 1 year from the date of the note and bear simple interest at 10% per annum. The notes are convertible into common stock at 60% of the average of the lowest 3 trading prices
during the 10 days preceding the date of conversion. The note holders have agreed to not convert into more common shares than the Company has available and authorized at any time. The Company also borrowed $15,000 under convertible notes with these same terms during the three months ended September 30, 2013. As of September 30, 2013, the aggregate unpaid principal under these convertible notes was $185,732.
The Company evaluated the modification and determined it qualified as an extinguishment of debt due to a substantive conversion option being added. The Company then evaluated the convertible notes under ASC 815 and determined the notes do not qualify as derivative liabilities. The Company then evaluated the notes for a beneficial conversion feature under ASC 470-20 as of the date of the notes and determined that beneficial conversion features existed. The aggregate intrinsic value of the beneficial conversion features was determined to be $123,821 and was recognized as a discount to the debt that is being amortized using the effective interest method
over the life of the notes. During the three months ended September 30, 2013, amortization of $11,305 was recorded against the discounts. As of September 30, 2013, the aggregate unamortized discount on the notes was $112,516.
In 2013, EZ Recycling, Inc., the wholly owned subsidiary of Highlight Networks, Inc. borrowed $100 from a related party, Joseph C. Passalaqua. The amount is non-interest bearing advance. As of September 30, 2013 the unpaid amount on the advance was $100.
HIGHLIGHT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 5— Equity
Highlight Networks, Inc. is authorized to issue 150,000,000 shares of common stock, with par value of $0.001 per share. As of September 30, 2013, a total of 2,942,600 shares of common stock were issued and outstanding. Holders of common stock are entitled to receive dividends, when and if declared by the board of directors, subject to prior rights of holders of any preferred stock then outstanding and to share ratably in the net assets of the company upon liquidation. Holders of common stock do not have preemptive or other rights to subscribe for additional shares. The articles of incorporation do not provide for cumulative voting. Shares of common stock have equal voting, dividend, liquidation and
other rights, and have no preference, exchange or appraisal rights.
On April 15, 2013, the Company granted an aggregate of 300,000 common shares to officers of the Company for services to be rendered. 150,000 shares vested immediately on April 15, 2013 and 150,000 shares vest on May 1, 2014. The shares were valued at $450,000 of which $269,882 was recognized during the year ended June 30, 2013. During the three month period ended September 30, 2013, an additional $54,331 was recognized and $125,787 will be recognized over the remaining vesting period.
Note 6—Subsequent Events
On November 1, 2013, the Company entered into an agreement with a structuring agent wherein compensation will be 4,000,000 common shares. Of these shares, 1,000,000 are due upon execution and the remaining 3,000,000 are due when certain performance objectives are met.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
CONTROLS AND PROCEDURES
The Company's Chief Executive Officer is responsible for establishing and maintaining disclosure controls and procedures for the Company.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
For purposes of this Item 9A, the term disclosure controls and procedures means controls and other procedures of the Company (i) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (15 U.S.C. 78a et seq. and hereinafter the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “Commission”), and (ii) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures do not yet comply with the requirements in (i) and (ii) above and are not effective
On June 30, 2013, Our Chief Executive Officer and Chief Financial Officer reviewed the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) as of the end of the period covered by this report and have concluded that (i) the Company’s disclosure controls and procedures are not effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Commission, and (ii) the Company’s controls and procedures have not been designed
to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The material weaknesses identified relates to the following:
| |
-
|
Lack of proper segregation of duties
|
|
| |
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Lack of a formal control process that provides for multiple levels of supervision and review
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CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There was no change in our internal control over financial reporting identified in connection with our evaluation that occurred as of June 30, 2013 during our last quarter (our fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Exhibit 9(b)
Placement Agent Agreement
Highlight Networks, Inc.
P.O. Box 3143
Re: INVESTMENT BANKING AGREEMENT
Dear Alfonso:
This letter (together with Exhibit A annexed hereto and made a part hereof, all of which taken together constitute this “Engagement Agreement”) confirms our complete understanding with respect to the retention of Finance 500, Inc., a California corporation (herein referred to as “F500”) and Bridgewater Capital Corporation (“Consultant”) (collectively, “Parties”) as the exclusive placement agent and financial advisor to Highlight Networks, Inc. (the “Company”) in connection with an equity financing, a debt financing, a merger and/or acquisition or a business development transaction (the “Transaction”).
RECITALS
WHEREAS, the Company desires professional assistance to complete the Transaction;
WHEREAS, F500 and Consultant have extensive experience and knowledge associated with corporate finance and investment banking business; and
WHEREAS, the Company wishes to engage the services of F500 and Consultant to assist the Company in preparing itself to complete the Transaction and to advise and assist with the management of the Transaction process and implement other investment banking activities as requested by the Company.
NOW, THEREFORE, in consideration of the mutual promises herein contained, the Parties hereto agree as follows:
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1.
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Appointment. The Company hereby retains F500 through certain individuals who are registered and licensed as investment bankers with FINRA (the “Representatives”) associated with Consultant and supervised by F500, and F500 and the Representatives hereby agree to act as the Company’s exclusive placement agent and financial advisor in connection with the Transaction and the financial advisory services as more specifically set forth in paragraph 2 below, effective as of the date hereof (the “Effective Date”). Nothing in this Engagement Agreement shall be construed so as to (i) obligate the Company to complete the Transaction or any
transaction or (ii) entitle F500 to any fees or other compensation with respect to investors with whom the Company declines, in its sole and absolute discretion, to pursue the Transaction.
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2.
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Scope and Certain Conditions of Services. The Company hereby retains F500 and the Representatives to consult with and advise the Company with respect to the Transaction and anything incidental thereto, as directed by the Company. The Company expressly acknowledges and agrees that the obligations of F500 and the Representatives hereunder with respect to the Transaction are on a “best efforts” basis only and that the execution of this Engagement Agreement does not constitute a commitment by F500 and/or the Consultant or Representatives to provide financing
to the Company and does not ensure the success of securing any financing on behalf of the Company. The Company should not make any reliance whatsoever that this “best efforts” Transaction will be completed. The services provided by F500 and the Representatives will include, if appropriate or if reasonably requested by the Company: (a) reviewing the Company’s financial condition, operations, competitive environment, prospects, and related matters for potential investors; (b) preparing the information package or confidential information
memorandum; (c) soliciting, coordinating, and evaluating indications of interest and proposals regarding a Transaction; (d) advising the Company as to the structure of a Transaction; and (e) providing such other financial advisory and investment banking services reasonably necessary to accomplish the foregoing.
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3.
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Finance 500, Inc. Oversight and Approvals. The Representatives are registered, licensed, and supervised by Finance 500, Inc., a registered broker/dealer and member of FINRA/SIPC. All securities contemplated herein will be offered through F500. Consultant is not an affiliate of F500. Required supervision by F500 of registered investment bankers includes, among other things, approval of executed engagement agreements and due diligence oversight.
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4.
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Fees and Compensation. In consideration for the services rendered hereunder, the Company agrees to pay the following fee and other compensation:
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a.
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Success Fee. Upon the successful completion of the Transaction, F500 shall be entitled to the following:
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Equity Transaction- If the Company consummates an Equity Financing (to include debt which is convertible into equity), defined as a corporate investment or financial investment of/with/into the Company, or if stock/equity is purchased directly from a shareholder(s) of the Company, in the course of one or more rounds of investments including, without limitation, a minority or majority investment of either equity securities, research and development funding or non-recurring funding, F500 shall receive a cash placement fee equal to ten percent (10%) of the gross proceeds involved in the Equity Financing.
Debt Financing- If the Company or any subsidiary consummates a non-convertible Debt Financing, defined as a corporate or financial loan with the Company in the course of one or more installments including, without limitation, debt securities, the creation of senior or junior credit lines or facilities or bank loans or borrowings, F500 shall receive a cash placement fee equal to three percent (3%) of the gross facility received by the Company or any subsidiary or assign in the Debt Financing. Consultant is aware that the Company has a senior debt
relationship with Summit Private Capital Group (“Summit”) and thus would carve out any fees through debt directly facilitated by Summit.
M&A Transaction- For any party introduced by or through F500, a fee on any mergers or acquisitions of/by the Company shall be calculated using the Revised Lehman Formula (see attached Exhibit A). This fee is due and payable to F500 in cash or like kind securities (Pro-rata as received/paid) at merger date. The Revised Lehman Formula will be calculated using the total “Consideration” paid for the acquisition. For purposes of this Engagement Agreement, Consideration shall mean the total value received by the Company or "Target" in any transaction(s) and shall include (i) the aggregate value of all cash, securities, the assumption (or forgiveness) of debt and minority interest
obligations, and any other forms of payment received or to be received, directly or indirectly, or paid, by the Company/Target (or any of its subsidiaries), its stockholders, or a third party, as the case may be; (ii) amounts received under the terms of an “earn-out” provision, rights to receive periodic payments and all other rights that may be at any time transferred or contributed to, or by, the Company/Target (or any of its subsidiaries), its affiliates or shareholders in connection with an acquisition of, or by, the Company/Target
or of the assets thereof; and (iii) amounts receivable or payable under consulting agreements in lieu of purchase price, above-market employment contracts to the extent above market, all non-compete agreements or similar arrangements, and all contingent payments in connection with any transaction.
Business Development Transaction- The Company shall pay F500 a business development fee equal to five percent (5%) of the total value to the Company of all contracts and/or other business development deals with any party introduced, directly or indirectly, by F500. All such fees due hereunder shall be payable as the Company is paid on any and all such contracts, and which fees shall be payable through to the completion or termination of the contract(s),
inclusive of any and all change orders, amendments and extensions, irrespective of the term and termination provisions of this Engagement Agreement, or upon a merger or acquisition transaction with the Company, of or by the Business Development Transaction party.
The Transaction Success Fee is due and payable immediately upon the closing of the Transaction and shall be dispersed directly to F500 simultaneously with the delivery of the proceeds of the Transaction to the Company.
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b.
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Warrants. Upon successful completion of an Equity Transaction, there shall become due and payable to F500, or its assigns, warrants for the purchase of an amount equal to ten percent (10%) of the common stock issued or issuable in connection with the Equity Transaction, whether issuable at the option of the Company or the investor, whether issuable immediately, at a future date or under specified conditions and whether issued or thereafter issuable pursuant to purchase, subscription, exchange, conversion or other similar rights. In the event that equity is issued in the Equity Transaction that does not bear any right to acquire common stock, then warrants shall be payable on account thereof to F500 or assigns that constitute a right to purchase an amount of such equity equal to ten percent (10%) of such equity issued or issuable
in connection with the Equity Transaction. The warrants shall be exercisable from the date of issuance and for a term of three (3) years, non-callable, non-cancelable, and assignable, with immediate piggy-back registration rights. The warrants shall also have customary anti-dilution provisions for stock dividends, splits, mergers, and any future stock issuances, etc., at a price(s) below said exercise price per share and shall provide for automatic exercise immediately prior to expiration. In the event that after the first 6 months of the closing of the Transaction, and any time thereafter, if there is no effective registration statement covering the warrants then the warrants may be exercised on a cashless basis.
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c.
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Override Fee. In the case of an Equity Financing from an outside party during the term of this Engagement Agreement, F500 shall be entitled to a three percent (3%) cash placement fee.
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d.
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Retainer. The Company agrees to pay F500 a non-refundable fee of 48,000 newly issued restricted shares of Company common stock upon execution of this Engagement Agreement as compensation for advisory services to be rendered pursuant to this Engagement Agreement, shares are to be earned immediately as a retainer for Consultant’s acceptance of this Engagement Agreement and to secure Consultant’s availability.
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e.
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Expense Reimbursement. The Company agrees to reimburse F500 for all out-of-pocket expenses incurred; however, any expense in excess of $500 shall be pre-approved in writing or email by the Company.
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5.
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Payment Instructions. All success fees, expense reimbursements, retainer and other payments made by the Company pursuant to this Engagement Agreement shall be made directly to F500. All payments shall be made by wire or check pursuant to the instructions below:
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* Please note the Company’s name and provide relevant detail on the check or wire
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6.
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Term of Retention. The Engagement Agreement shall expire six (6) months from the date of its execution or terminate upon thirty (30) advance written notice by either party (“Termination”). Notwithstanding the foregoing, no expiration or termination of this Agreement shall affect: (a) F500’s right to receive, and the Company’s obligation to pay, any Transaction Success Fee (as set forth in paragraph 4); and (b) in the event of a dispute between F500 and the Company, the agreements of the Company and F500 with respect to choice of law and forum. If within eighteen (18) months following the termination of this Engagement Agreement (“Tail Period”),
Company enters into an agreement to accept any type of capital from any prospective target/partner introduced to Company by F500 or Representatives during the term of this Engagement Agreement, the Company’s obligations to pay fees and compensation, as defined in paragraph 4, are triggered.
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7.
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Non-Circumvention. The investors or other counter-parties in any Transaction, and the potential investors or other counter-parties who are introduced to the Company by F500 or Representatives before or during the term of this Engagement Agreement, and all of their respective affiliates currently existing or formed hereafter (collectively “Covered Persons”), shall be considered, for purposes of this Engagement Agreement, the property of F500. The Company on behalf of itself, its parent or its subsidiaries agree not to circumvent, directly or indirectly, F500’s relationship with these Covered Persons, their parents
or any of the Covered Persons’ subsidiaries or Affiliates and Company will not directly or indirectly contact or negotiate with any of the Covered Persons regarding a Transaction with the Company, or with any other company, and will not enter into any agreement or transaction with Covered Persons, or disclose the names of Covered Persons, except as such disclosure may be required by any law, rule, regulation, regulatory body, court or administrative agency, during the applicable Tail Period without the prior written approval of F500. In the event that the Company enters into a Transaction (a “Subsequent Transaction”) from a Covered Person in any placement during the applicable Tail Period (regardless
of whether such placement is arranged without an agent or through an agent other than F500), the Company agrees to pay to F500 a fee equal to the fees provided under this Engagement Agreement.
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8.
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Due Diligence. The Company agrees to furnish F500 with such information regarding the business and financial condition of the Company as is reasonably requested, all of which will be, to the Company’s best knowledge, accurate and complete at the time furnished. The Company will promptly notify F500 in writing if it learns of any material misstatement in, or material omission from, any information previously delivered to F500. F500 will conduct independent due diligence on the Company
and will terminate this Engagement Agreement should its due diligence findings not be reasonably consistent with the representations (oral and written) made by the Company.
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9.
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Independent Contractor. The Parties agree that F500 and Consultant will act as an independent contractor in the performance of his duties under this Engagement Agreement. Nothing contained in this Engagement Agreement shall be construed to imply that F500 or Consultant, or any employee, agent or other authorized representative of F500 or Consultant, is a partner, joint venturer, agent, officer or employee of Company.
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10.
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Confidential Information. The Parties acknowledge that each will have access to proprietary information regarding the business operations of the other and agree to keep all such information secret and confidential and not to use or disclose any such information to any individual or organization without the non-disclosing party’s prior written consent. It is hereby agreed that from time to time F500, the Representatives and the Company may designate certain disclosed information as confidential for purposes of this Engagement Agreement.
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11.
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Public Announcements. Prior to any press release or other public disclosure relating to services hereunder which is legally permissible, the Company and F500 shall confer and reach agreement upon the contents of any such disclosure.
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12.
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Indemnification. The Company hereby agrees to indemnify and hold F500 and Consultant harmless from any and all liabilities incurred by F500 and Consultant under the Securities Act of 1933, as amended (the "Act"), the various state securities acts, or otherwise, insofar as such liabilities arise out of or are based upon (i) any material misstatement or omission contained in any offering documents provided by the Company, or (ii) any intentional actions by the Company, direct or indirect, in connection with any offering by the Company, in violation of any applicable
federal or state securities laws or regulations. Furthermore, the Company agrees to reimburse F500 and Consultant for any legal or other expenses incurred by F500 and Consultant in connection with investigating or defending any action, proceeding, investigation, or claim in connection herewith. The indemnity obligations of the Company under this paragraph shall extend to the shareholders, directors, officers, employees, agents, and control persons of F500 and Consultant.
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F500 and Consultant hereby agrees to indemnify and hold the Company harmless from any and all liabilities incurred by the Company under the Act, the various state securities acts, or otherwise, insofar as such liabilities arise out of or are based upon (i) any actions by F500, Consultant, related officers, employees, agents, or control persons, direct or indirect, in connection with any offering by the Company, in violation of any applicable federal or state securities laws or regulations, or (ii) any breach of this Engagement Agreement by F500 or Consultant. Furthermore, F500 and Consultant agrees to reimburse Company for any legal or other expenses incurred by Company in connection
with investigating or defending any action, proceeding, investigation, or claim in connection herewith.
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The indemnity obligations of the Parties under this paragraph 12 shall be binding upon and inure to the benefit of any successors, assigns, heirs, and personal representatives of the Company, F500, the Consultant, and any other such persons or entities mentioned herein above.
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13.
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Covenants of F500 and Representatives. F500 and Representatives covenant and agree with the Company that, in performing Consulting Services related to the raising of capital by the Company or providing other Investment Banking support services, F500 and Representative will:
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(a)
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Not make any representations other than those expressly set forth in documents provided by the Company; and
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(b)
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Not publish, circulate or otherwise use any materials other than materials provided by or otherwise approved by the Company.
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(a)
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Attorneys’ Fees. If either party files any action or brings any proceeding against the other arising out of this Engagement Agreement, then the prevailing party shall be entitled to reasonable attorneys’ fees.
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(b)
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Waiver. No waiver by a party of any provision of this Engagement Agreement shall be considered a waiver of any other provision or any subsequent breach of the same or any other provision. The exercise by a party of any remedy provided in this Engagement Agreement or at law shall not prevent the exercise by that party of any other remedy provided in this Engagement Agreement or at law.
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(c)
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Assignment. This Engagement Agreement shall be binding upon and inure to the benefit of the Parties hereto and no assignment shall be allowed without first obtaining the written consent of the non-assigning party.
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(d)
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Severability. If any condition or covenant herein contained is held to be invalid or void by any court of competent jurisdiction, the same shall be deemed severable from the remainder of this Engagement Agreement and shall in no way effect the other covenants and conditions contained herein.
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(e)
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Amendment. This Engagement Agreement may be amended only by a written agreement executed by all Parties hereto.
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(f)
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Headings. Titles or captions contained herein are inserted as a matter of convenience and for reference, and in no way define, limit, extend, or describe the scope of this Engagement Agreement or any provision hereof. No provision in this Engagement Agreement is to be interpreted for or against either party because that party or his legal representative drafted such provision.
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(g)
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Notice. All written notices, demands, or requests of any kind, which either party may be required or any desire to serve on the other in connection with this Engagement Agreement, must be served by registered or certified mail, with postage prepaid and return receipt requested. In lieu of mailing, either party may cause delivery of such notice, demands and requests to be made by personal service facsimile transmission, provided that acknowledgment of receipt is made. Notice shall be deemed given upon personal delivery or receipt of facsimile transmission, or two days after mailing. All such notices, demands, and requests shall be delivered as follows:
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If to F500 or Consultant:
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Finance 500, Inc.
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(h)
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Entire Agreement. This Engagement Agreement, including any Exhibits or Schedules attached hereto, contains all of the representations, warranties, and the entire understanding and agreement between the Parties. Correspondence, memoranda, or agreements, whether written or oral, originating before the date of this Engagement Agreement are replaced in total by this Engagement Agreement unless otherwise especially stated.
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(i)
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Counterparts; Facsimile Signatures. This Engagement Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The Parties agree that facsimile signatures of this Engagement Agreement shall be deemed a valid and binding execution of this Engagement Agreement.
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(j)
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Governing Law and Venue. This Engagement Agreement shall be governed by and construed in accordance with the laws of the State of California which would apply if both Parties were residents of California and this Engagement Agreement was made and performed in California. In any legal action involving this Engagement Agreement or the Parties' relationship, the Parties agree that the exclusive venue for any lawsuit shall be in the state or federal court located within the County of Orange, California. The Parties agree to submit to the personal jurisdiction of the state and federal courts located within Orange County, California.
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(k)
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Enforceability: Any determination that any provision of this Engagement Agreement may be, or is, unenforceable shall not affect the enforceability of the remainder of this Engagement Agreement.
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(l)
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Survival: Sections 10, 12 and 14 shall survive the termination or expiration of this Engagement Agreement.
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IN WITNESS WHEREOF, the Parties hereto have placed their signatures hereon on the day and year first above written.
“COMPANY” “F500”
Highlight Networks, Inc. FINANCE 500, INC.
_________________________ ___________________________
ITS: President & CEO ITS: President & CEO
“CONSULTANT”
BRIDGEWATER CAPITAL CORPORATION
ITS: Partner
EXHIBIT A
REVISED LEHMAN FORMULA
