Quarterly Report — Small Business — Form 10-QSB Filing Table of Contents
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(Exact
name of Registrant as specified in its Charter)
Utah
87-0376691
(State
or jurisdiction of incorporation or organization)
(IRS
Employer Identification No.)
9421
Holliday Road Indianapolis, IN
46201
(Address
of Principal Executive Office)
(Zip
Code)
Registrant’s
telephone number, including area code:
(317)
844-7502
Former
name, former address and former fiscal
year, if changed since last report:
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for a shorter period that the registrant was required
to
file such reports), and (2) has been subject to such filing requirements for
the
past 90 days.
Yes o No x
The
number of shares issued and outstanding of the Registrant’s Common Stock, no par
value, as of July 31, 2007 was26,597,017.
PART
I - FINANCIAL INFORMATION
Item
1:Financial
Statements (Unaudited)
Condensed
Consolidated Balance Sheet
F-1
Condensed
Consolidated Statements of Operations Six Months
F-2
Condensed
Consolidated Statements of Operations Three Months
F-3
Condensed
Consolidated Statements of Cash Flows
F-4
Notes
to the Condensed Consolidated Financial Statements
F5-F20
AMERICAN
BASKETBALL ASSOCIATION, INC. AND SUBSIDIARY
The
Accompanying Notes Are An Integral Part Of These Condensed Consolidated
Financial Statements
F-3
AMERICAN
BASKETBALL ASSOCIATION, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the Period Ended
June
30
2007
2006
CASH
FLOWS FROM OPERATING ACTIVITIES
Net
loss
$(1,217,775)
$(204,279)
Adjustments
to reconcile net loss to net
cash
used in operating activities:
Depreciation
and amortization
779
779
Compensatory
element of stock transactions
288,329
—
Changes
in operating assets and liabilities:
Accrued
expenses and other current liabilities
(171,499
)
164,612
TOTAL
ADJUSTMENTS
117,609
165,391
NET
CASH USED IN OPERATING
ACTIVITIES
(1,100,167
)
(38,888
)
CASH
FLOWS FROM INVESTING ACTIVITIES
Capital
expenditures
—
—
NET
CASH USED IN
INVESTING
ACTIVITIES
—
—
CASH
FLOWS FROM FINANCING ACTIVITIES
Proceeds
from Bridge Loan
—
25,000
NET
CASH PROVIDED BY
FINANCING
ACTIVITIES
$
—
$
25,000
NET
(DECREASE) INCREASE IN CASH
$
(1,100,167
)
$
(13,888
)
CASH
-
Beginning
1,198,567
21,159
CASH
-
Ending
$
98,400
$
7,271
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW
INFORMATION
The
Accompanying Notes Are An Integral Part Of These Condensed Consolidated
Financial Statements
F-4
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Nature of Operations and Summary of Significant Accounting
Policies:
Organization
and Nature of Operations
American
Basketball Association, Inc., is an Indiana corporation which was formed on
April 21, 2004, for the purpose of providing basketball and sports entertainment
for people of all ages. The league currently has over 47 teams located in the
United States of America (USA), Canada, and Mexico that are set to begin play
for the 2007-2008 basketball season.
Basketball
operations under the American Basketball Association banner were revived in
the
year 2000 after approximately 25 years of inactivity following the original
American Basketball Association league’s merger with the National Basketball
Association. American Basketball Association league play was operated by
different management and a distinct entity during the 2000-2001 and 2001-2002
basketball seasons. League play was suspended during the 2002-2003 season.
American Basketball Association league play resumed for the 2003-2004 season.
The Company took over league operations for the 2004-2005, 2005-2006, 2006-2007
seasons as well as the upcoming 2007-2008 season. Prior entities which operated
the league have either been legally dissolved, administratively dissolved,
or
have ceased operations as of the inception date, and have no relationship to
the
Company.
Concurrent
with the closing of the Share Purchase that is described below, Souvall-Page
and
Company, Inc., a Utah corporation (the “Registrant” or “Company”), ABA
Acquisition Corp., Inc., an Indiana corporation and a subsidiary of Registrant
(the “Sub”), and the ABA executed and delivered that certain Agreement and Plan
of Merger (the “Merger Agreement”), whereby (i) 22,518,153 issued and
outstanding shares of common stock of the ABA, constituting all of its issued
and outstanding shares, were exchanged, on a 1:1 share ratio for shares of
the
Company (inclusive of shares issued upon conversion of the Bridge Loans, as
defined below), (ii) each of the Purchaser Warrants (defined below), and (iii)
each of the ABA’s other extant warrants giving the holders thereof the right to
purchase in the aggregate 1,000,000 shares of common stock, were exchanged,
respectively, for a warrant to acquire one share of the Company’s common stock
(the shares and warrants being issued pursuant to the preceding clauses (i)
-
(iii) being, the “Exchanged Shares” and “Exchanged Warrants”, respectively and
the exchange transaction being the “Share Exchange”). Each of the Placement
Warrants were exchanged for a warrant to purchase units, each of which allows
the holder to acquire two shares of the Company’s common stock and one warrant
to acquire a share of the Company’s common stock (collectively the “Exchanged
Placement Warrants”). Holders of the Exchanged Shares will be entitled to
receive dividends, if any, that are paid on the Company’s common stock. The
Exchanged Warrants and the Exchanged Placement Warrants are subject to
adjustment or modification in the event of a stock split or other change to
the
Company’s capital structure so as to maintain the initial share ratio between or
among the Exchanged Shares, the Exchanged Warrants, the Exchanged Placement
Warrants and the Company’s common shares. The Company believes that the
securities issued in connection with the merger were exempt from registration
requirements pursuant to the provisions or standards of Regulation D promulgated
under the Securities Act of 1933, as amended.
F-5
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1
- Nature of Operations and Summary of Significant Accounting Policies
(Continued):
In
connection with the merger, the Company paid $300,000 to David Merrell a former
officer, director and principal beneficial owner of the Company’s common stock,
and also issued to him 300,000 shares of common stock in consideration for
which
David Merrell agreed to indemnify the Company for and against liabilities of
and
claims against the Company existing as of and through the date of the merger.
Effective December 21, 2006, Chiricahua Investments, LLC, a company controlled
by David Merrell, returned 26,400,000 shares to the Company and those shares
were canceled pursuant to the terms of the Merger Agreement. All other existing
shareholders of Souvall-Page retained 2,723,864 shares of the Company’s common
stock.
In
connection with the merger, Joseph F. Newman and Richard P. Tinkham agreed
to
indemnify the ABA for and against certain liabilities of and claims against
the
ABA existing as of and through the date of the Merger. Mr. Newman and Mr.
Tinkham have each agreed to deposit 500,000 shares of common stock into an
escrow as further security for this indemnity agreement.
Financial
Statements
The
financial statements and notes are representations of the Company’s management,
who is responsible for their integrity and objectivity. The accounting policies
conform to accounting principles generally accepted in the United States of
America and have been consistently applied in the preparation of the financial
statements.
The
accompanying financial statements have been prepared using generally accepted
accounting principles applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. As reported in the financial statements, the Company has incurred
losses of approximately $20,642,460 from inception of the Company through June30, 2007, and has negative cash flows from operations. The Company's
stockholders' deficiency at June 30, 2007 was $1,326,666 and its current
liabilities and claims and contingencies exceeded its current assets by
$1,331,780. These factors combined, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans to address and
alleviate these concerns are as follows:
The
Company's management continues to develop a strategy of exploring all options
available to it so that it can develop successful operations and have sufficient
funds to be able to operate over the next twelve months. As a part of this
plan,
management is currently in negotiations with their target industries' key
players to develop additional business opportunities. In addition, management
is
exploring options in order to raise additional operating capital through debt
and/or equity financing. No assurance can be given that funds will be available,
or, if available, that it will be on terms deemed satisfactory to
management.
The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually attain profitable operations. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result from the outcome of these
uncertainties.
F-6
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1
- Nature of Operations and Summary of Significant Accounting Policies
(Continued):
Use
of Estimates and Assumptions
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments that are purchased within three
months or less of an instruments maturity date to be cash
equivalents.
Accounts
Receivable
The
Company carries its accounts receivable at invoiced amounts less an allowance
for doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on history
of past write-offs and collections and current credit conditions. The Company’s
policy is not to accrue interest on past due trade receivables. Management
has
established an allowance for doubtful accounts of $151,125 as of June 30, 2007
which reduced the net accounts receivable balance to $156,274 as of June 30,2007. The Company carried $0 of accounts receivable at June 30, 2006 net of
an
allowance for doubtful accounts.
Property
and Equipment
Property
and equipment are recorded at cost and includes expenditures for new additions
and those, which substantially increase the useful lives of existing assets.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, which is generally five years. Expenditures for
repairs or maintenance are charged to expense as incurred. The cost of property
or equipment retired or otherwise disposed of and the related accumulated
depreciation are removed from the accounts in the year of disposal with the
resulting gain or loss reflected in earnings.
F-7
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1
- Nature of Operations and Summary of Significant Accounting Policies
(Continued):
New
Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation (“FIN”) No. 48, “Accounting
for Uncertainty in Income Taxes”,
which
clarifies the accounting for uncertainty in income taxes recognized in financial
statements in accordance with Statement No. 109, “Accounting
for Income Taxes.”
This
Interpretation prescribes a recognition threshold and measurement attribute
for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. The Interpretation requires that the
Company recognize in the financial statements the impact of a tax position
if
that position is more likely than not of being sustained on audit, based on
the
technical merits of the position. The Interpretation also provides guidance
on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact this interpretation will have on its financial statements.
In
March 2006, the FASB issued FASB Statement No. 156, “Accounting for
Servicing of Financial Assets.”Statement
156 amends FASB Statement No. 140, “Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities,” and requires all
separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable, and permits an entity to subsequently
measure those servicing assets and servicing liabilities at fair value. This
statement is effective for fiscal years beginning after September 15, 2006.
The Company does not expect this statement to have a material impact on its
financial position, results of operations or cash flows.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain
Hybrid Financial Instruments — An Amendment of FASB Statements No. 133
and 140.” SFAS No. 155 provides entities with relief from having to
separately determine the fair value of an embedded derivative that would
otherwise be required to be bifurcated from its host contract in accordance
with
SFAS No. 133. SFAS No. 155 allows an entity to make an irrevocable
election to measure such a hybrid financial instrument at fair value in its
entirety, with changes in fair value recognized in earnings. SFAS No. 155
is effective for all financial instruments acquired, issued or subject to a
remeasurement event occurring after the beginning of an entity’s first fiscal
year that begins after September 15, 2006. The Company is currently
evaluating the impact this interpretation will have on its financial
statements.
In
May
2005, the FASB issued Statement SFAS No. 154 “Accounting Changes and Error
Corrections” (SFAS 154) which supersedes APB Opinion No. 20, Accounting Changes”
and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”.
SFAS 154 provides guidance on the accounting for and reporting of accounting
changes and error corrections. It establishes, unless impractical, retrospective
application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to the
newly adopted accounting principle. The correction of an error in previously
issued financial statements is not an accounting change. However, the reporting
of an error correction involves adjustments to previously issued financial
statements similar to those generally applicable to reporting an accounting
change retroactively. Therefore, the reporting of a
F-8
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1
- Nature of Operations and Summary of Significant Accounting Policies
(Continued):
correction
of an error by restating previously issued financial statements is also
addressed by this Statement. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not believe this standard has a material impact on its
financial statements.
In
December 2004, the FASB issued Statement No. 123R (SFAS 123R), “Share-Based
Payment”. This statement is a revision of SFAS 123, “Accounting for Stock-Based
Compensation” (SFAS 123), and supersedes Accounting Principles Board Opinion No.
25, “Accounting for Stock Issued to Employees” (APB 25). SFAS 123R focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. The Statement required entities
to
recognize
compensation
expense for awards of equity instruments to employees based on the grant-date
fair value of those awards (with limited exceptions). SFAS 123R also requires
the benefits of tax deductions in excess of recognized compensation expense
to
be reported as a financing cash flow, rather than as an operating cash flow
as
prescribed under the prior accounting rules. On December 31, 2006, the Company
adopted the provisions of SFAS 123R using the modified prospective method,
the
results of which did not have a material impact on its financial position,
results of operations or cash flows.
Revenue
Recognition
Revenues
are expected to be generated from a number of sources including national
sponsorships, market reservation fees, broadcasting revenue and basketball
and
other merchandise sales. It is expected that sponsorship and broadcasting
revenue will be recognized over the period of the agreements; market reservation
fees will be recognized when receipt is assured; and merchandise sales less
returns and allowances will generally be recognized when title and risk of
product loss is transferred to the buyer. Such risk of product loss is expected
to generally coincide with the time of shipment.
Advertising
The
Company charges advertising costs to expense as incurred. Advertising expenses
amounted to $0 for the period ended June 30, 2007, and $0 for the period ended
June 30, 2006.
F-9
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1
- Nature of Operations and Summary of Significant Accounting Policies
(Continued):
Income
Taxes
Deferred
tax assets are recognized for taxable temporary differences, tax credit and
net
operating loss carryforwards. These assets are reduced by a valuation allowance,
which is established when it is more likely than not that some portion or all
of
the deferred tax assets will not be realized. In 2007, based on this evaluation,
the Company recorded a 100% valuation allowance on the consolidated balance
sheet for its deferred tax assets. In addition, management is required to
estimate taxable income for future years by taxing jurisdictions and to consider
this when making its judgment to determine whether or not to record a valuation
allowance for part or all of a deferred tax asset. A one percent change in
the
Company’s overall statutory tax rate for 2007 would not have a material effect
in the carrying value of the net deferred tax assets or
liabilities.
The
Company may have future operations in multiple taxing jurisdictions and would
be
subject to audit in these jurisdictions. Tax audits by their nature are often
complex and can require several years to resolve. Accruals of tax contingencies
require management to make estimates and judgments with respect to the ultimate
outcome of tax audits. Actual results could vary from these
estimates.
Earnings
per Share
Basic
earnings (loss) per share is computed by dividing income (loss) available to
common stockholders by the weighted average number of common shares available.
Diluted earnings (loss) per share is computed similar to basic earnings (loss)
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
At June 30, 2007 and 2006, all common stock equivalents were
anti-dilutive.
F-10
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
2 - Property and Equipment:
Property
and equipment consist of the following as of June 30, 2007 and
2006:
2007
2006
Computer
equipment
$
7,786
$
7,786
Less
accumulated depreciation
2,671
724
$
5,115
$
7,062
The
company recorded depreciation expenses of $779 for the period ending June 30,2007 and 2006.
Note
3 - Accrued Compensation and Conversion to Common Stock:
The
Company has recorded accrued compensation of $262,499 as of June 30, 2007 and
$125,000 as of June 30, 2006, respectively.
The
Company has one class of capital stock which is no par value common stock with
equal voting rights.
Issuance
of Common Stock prior to recapitalization on December 22, 2006:
In
April
2004, the Company issued 1,000 shares of its no par value common stock to its
co-founders in exchange for services rendered. In May 2005, the Company issued
each co-founder an additional 7,175,380 shares of common stock for services
rendered. In August 2005, 510,943 shares were issued to unrelated investors
for
convertible debentures and accrued interest.
F-11
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
4 - Stockholders' Equity - continued
Issuance
of Common Stock in conjunction with recapitalization on December 22,2006:
As
discussed in Note 1, the Company entered into a merger agreement on December21,2006. The merger agreement forced the Company into a recapitalization on or
around this date. The Company issued shares of its common stock to sellers,
investors and employees as disclosed in the Share Purchase Agreement (SPA)
included in the merger agreement as disclosed below.
The
Company received a $400,000 bridge loan from investors included in the SPA
to
assist the Company with certain offering related costs in preparation of the
merger agreement. The proceeds were received by the Company at various dates
ranging from June 2006 through September 2006. On December 22, 2006, the Company
converted the bridge loan, discount and accrued interest to 920,909 shares
of
common stock. The common stock was valued at the offering price included in
the
SPA of $0.60 per common share.
On
December 22, 2006, the Company issued 2,714,541 shares of common stock to
consultants for services performed related to the SPA and key employees expected
to be associated with the Company’s future league operations. The common stock
was valued at the offering price included in the SPA of $0.60 per common share.
The expense is included as a component of Compensatory Element of Stock
Transactions in the Company’s Consolidated Statement of Operations for the year
ended December 31, 2006.
On
December 22, 2006, the Company issued 4,050,000 shares of common stock to
investors for cash proceeds of $2,010,000, net of direct offering costs of
$420,000. The common stock was valued at the offering price included in the
SPA
of $0.60 per common share.
On
December 22, 2006, the Company issued 2,723,864 shares of stock to the seller
in
conjunction with the merger agreement. The agreement required a 1:1 conversion
of 2,723,864 shares of seller stock in exchange for the Company’s common stock.
On
December 22, 2006the Company issued 300,000 shares to a seller’s former officer
and director in consideration for items described in Note 1. The common stock
was valued at the offering price included in the SPA of $0.60 per common
share.
F-12
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
5 - Concentrations of Credit Risk:
Financial
instruments, which potentially subject the Company to concentration of credit
risk, consist primarily of cash and cash equivalents. The Company maintains
its
cash and cash equivalents with high credit quality institutions which, at times,
may exceed federally insured limits. Accounts are guaranteed by the Federal
Deposit Insurance Corporation (FDIC) up to $100,000. The Company has not
experienced any losses in such accounts and does not believe it is exposed
to
any significant credit risk on cash and cash equivalents, which may, at times,
exceed federally insured limits. The Company routinely assesses the financial
strength of its stockholders and employees and, as a consequence, believes
that
its receivable credit risk exposure is limited.
Note
6 - Licensing Agreement:
The
commercial use of the trademarks “ABA” and “American Basketball Association” by
the Company, alone or in combination with other words, phrases and design,
is
governed by a license agreement with NBA Properties, Inc. (NBA). The scope
of the license covers services and products as well as manufacturing,
distributing and selling practices. The license contains product quality
language. Under trademark law, if a trademark owner issues a license without
retaining the right to control product quality, it risks losing its ownership
rights to the trademark. Quality Approval provisions require the licensee
to cause licensed Services and licensed
Products
to meet and conform to high standards of style, quality and appearance.
Licensee’s use of the Licensed Marks are deemed approved. Notwithstanding,
NBA has discretion, using good faith, to revoke its approval of particular
uses
of the Licensed Mark that relate to gambling, adult content, or any other
subject matter that would damage or reflect unfavorably upon the NBA, any of
its
member teams, or the Original ABA; violate provisions of the License; or misuse,
mutilate, dilute or otherwise tarnish the Licensed Mark. The right to use of
the
marks under the license discontinues on expiration or termination of the
agreement except for sell off of inventory. The agreement can end if the
league ceases operations, is no longer owned or operated by a licensee, or
if
product quality concerns are not corrected after notice. Management
believes the Company has complied with the requirements and conditions of the
license, intends to meet its requirements and conditions and has received no
notice otherwise. All royalties due under the license have been
satisfied.
F-13
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
7 - Other Significant Agreements:
The
Company entered into a sponsorship agreement with a manufacturer of basketballs
(“Manufacturer”) whereby the Company would receive minimum royalties of $10,000
as well as other royalties based on sales of basketballs. In addition,
Manufacturer is to provide a set number of basketballs to the teams and league.
In exchange, the Manufacturer receives certain marketing and promotional
opportunities as well as tickets to basketball games for teams included in
the
league.
Management
represents that other agreements exist and were executed for the period ended
June 30, 2007 and 2006. However, management believes the financial effects
from
the agreements are immaterial to the financial statements as a whole.
Note
8 - Commitments and Contingencies:
Various
entities have been created by current and predecessor members of management
since the year 2000. These entities include ABA, LLC, ABA Bounce, ABA Founders
& Properties, LLC, ABA League, LLC, and ABA Operations, LLC. The Company’s
independent legal counsel and management represent such entities either cease
to
exist, or are administratively dissolved at December 31, 2005. No material
commitments or contingencies exist from these entities, not already accrued
that
would effect the financial position, operations, and cash flows of the Company
for the period ended June 30, 2007 and for the period ended June 30,2006.
The
Company is involved with a variety of lawsuits for the periods ended June 30,2007. Independent legal counsel has provided the Company with a summary of
estimated claims and contingencies and believe certain cases will result in
an
unfavorable outcome. As a result the Company has included $1,045,331 of
estimated accrued contingencies in its consolidated balance sheet at June 30,2007
On
January 9, 2007, American Basketball Association, Inc. (the “Company”) entered
into a Consulting agreement with Cioffi Business Management Services. The
Consulting Agreement is for an initial term of twelve (12) months. The Company
has agreed to compensate the consultant $102,000 as well as issue the Consultant
550,000 shares of its common stock for the initial 12 month term. During the
term of the Consulting Agreement, the principal shareholder of the consultant,
Mr. Darren Cioffi, will act as the Company's Chief Financial
Officer.
The
Company has secured the marketing and other product consulting services of
Meriwether Capital Group of which David Howitt, a director of the Company,
is a
controlling person. On January 3, 2007 the
Meriwether Group Inc., entered into a consulting agreement with the ABA that
is
dated as of the agreement’s effective date of January 15, 2007. The agreement
has a term of 24 months. Meriwether agreed to assist the ABA in developing
and
implementing a strategic sponsorship and licensing program for key merchandising
categories that include uniforms, footwear, apparel, accessories, sport
beverage, memorabilia and other agreed to categories. Meriwether also agreed
to
use its relationships with key brand managers and executives of internationally
known sports, lifestyle, and food and beverage companies to assist the ABA
in
developing strategic licensing /supplier agreements and relationships. The
ABA
agreed to pay Meriwether:
F-14
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
8 - Commitments and Contingencies: continued
·
An
initial payment of $12,500,
·
A
retainer of $2,500 per month,
·
A
$10,000 bonus for each major licensing/sponsorship transaction secured
by
Meriwether and deemed earned after the ABA has derived at least $50,000
or
more in revenue over its term,
·
A
4% royalty from all revenue earned from any transaction that Meriwether
brings to the ABA,
·
An
award of 225,000 shares of common stock as a performance incentive,
and
·
All
reasonable and approved travel and out of pocket expenses incurred
by
Meriwether in providing its services to the
ABA.
Note
9 - Legal proceedings:
In
a case
titled Troy
Fisher and 3 Ball Management, LLC. vs. American Basketball Association, RAG,
LLC, Richardson Consulting Group, Ricardo Richardson, Reginald Jones, Robert
Blackwell, and Indiana Alley Cats
pending
in the Marion County Superior Court, Indiana under Cause No.
49D120511CT043427, the Plaintiffs seek to recover alleged damages from the
Company after their team was suspended from the League for failure to follow
the
ABA Team Operations Manual. The
Company intends to defend this litigation aggressively, expects that the courts
will concur with the Company’s views that these actions and claims are without
merit and
currently
believes that the outcome, other than costs of suit, will not be materially
adverse to the ABA. Nevertheless, an adverse judgment on these actions could
materially harm the business of
the
Company. No assurance can be given that the Company’s position will be upheld or
will prove to be correct over the course of litigation.
American
Arbitration Association case: 52 180 E 00612 06 Jaren W. Jackson v. The American
Basketball Association, LLC, the Philadelphia Fusion, Wayne Butler and Jeffrey
Wilson.
In
November 2006 Jaren Jackson commenced arbitration against the Company for unpaid
wages of
about
$15,000
owed by
the Philadelphia Fusion, one of the teams of the ABA that played during
the 2004 ABA season.
The arbitration is to be held in Indianapolis, Indiana but no date has been
set.
F-15
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
9 - Legal proceedings - continued
Steven
Jaloza and Salvatore Fradella v. Joseph Newman, Richard P. Tinkham, Jr., and
the
American Basketball Association, Inc.,
pending in the Marion County Circuit Court under Cause
No.:49C010611PL0046089. In this action, filed in November
2006, plaintiffs assert that Joseph Newman and Richard Tinkham breached
fiduciary duties owed to them under the Operating Agreement of a separate
entity, ABA Founders and Properties, LLC. The Company is not a party to the
Operating Agreement. Plaintiffs
seek to add the Company as a defendant as an alter ego of Newman and
Tinkham. Hearing
on the Company’s Motion to Dismiss is set for February 5, 2007. This
motion by the Company is based on an action pending in the Marion County
Superior Court, under Cause No. 49D010608PL033078, filed by the same plaintiffs,
that also asserts breach of fiduciary duties owed by Joseph Newman to them
under
the Operating Agreement of ABA Founders and Properties, LLC. In that
action the Company, after hearing, was found not subject to the remedies sought
in that action. The
Company intends to defend this litigation aggressively, expects that the courts
will concur with the Company’s views that these actions and claims are without
merit and currently believes that the outcome, other than costs of suit, will
not be materially adverse to the ABA. Nevertheless, an adverse judgment on
these
actions could materially harm the business of the Company. No assurance can
be
given that the Company’s position will be upheld or will prove to be correct
over the course of litigation.
Steven
Jaloza and Salvatore Fradella vs. ABA Founders & Properties, LLC, ABA Sports
and Entertainment, Inc., a/k/a ABA Enterprises, Inc., ABA International, Inc.,
ABA League, LLC, ABA Operations, LLC, ABA Properties, LLC, ABA Rental, Inc.
and
ABA Services, Inc.
In the
Marion Superior Court, Room No 5, Indiana. Cause No. 49D010608PL033078. Steven
Jaloza (“Jaloza”) and Salvatore Fradella (“Fradella”) seek damages from ABA
Founders & Properties, LLC, ABA Sports and Entertainment, Inc., a/k/a ABA
Enterprises, Inc., ABA International, Inc., ABA League, LLC, ABA Operations,
LLC, ABA Properties, LLC, ABA Rental, Inc., and ABA Services, Inc. for alleged
breach of fiduciary duties allegedly arising under the Operating agreement
of
ABA Founders & Properties, LLC. The suit was filed in August, 2006. A
hearing for prejudgment attachment and to appoint a receiver over ABA Indiana
was held on October 30, 2006. Prejudgment attachment was not granted and a
receiver was not appointed. Neither ABA Utah nor ABA Indiana is a party to
the
action. The Plaintiffs have not pursued the action in this court since the
date
of the receivership hearing. This matter is covered by the Indemnification
Agreement. The ABA intends to contest the case vigorously. The potential for
an
unfavorable outcome is not significant. The plaintiffs did not appeal the denial
of the request for prejudgment attachment or the decision not to appoint a
receiver. Jaloza and Fradella disassociated from ABA Founders & Properties,
LLC in June, 2001. The Operating Agreement of ABA Founders & Properties, LLC
allowed Newman and Tinkham to engage in or possess interests in other business
ventures of every kind and description for their own account.
F-16
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
9 - Legal proceedings - continued
Credentials
Plus, LLC v. Calderson,
230 F.
Supp.2d (N.D. Ind 2002) holds that fiduciary duties of members of an Indiana
LLC
are governed by I.C. 23-18-4-2(b) and can be eliminated by provisions in the
Operating Agreement. The action should be disposed by summary judgment but
has
been held open in view of the matter pending in the Marion County Circuit Court
under Cause No.:49C010611PL0046089.
Ricardo
Richardson and Richardson Consulting vs. American Basketball Association, a/k/a
ABA Founders & Properties, a/k/a ABA Sports & Entertainment, Inc., Joe
Newman, in his official capacity and Richard P. Tinkham, Jr., in his official
capacity.
In the
Marion Superior Court, Indiana. Cause No. 49D11-0608-PL-33933. Richardson
asserts that as a minority shareholder in ABA Sports & Entertainment, Inc.
he has a right to prevent use of its unspecified proprietary rights which he
alleges it sold to Brax Capital Group. Neither ABA Utah nor ABA Indiana is
a
party to this action. The lawsuit was filed in August, 2006. ABA Sports &
Entertainment, Inc, Newman and Tinkham filed answers. The Court granted the
defendant’s motion to require that Richardson take the matter to the board of
directors of ABA Sports & Entertainment, Inc as required in a derivative
shareholder action. Richardson has not done this. This matter is covered by
the
Indemnification Agreement. The ABA intends to contest the case vigorously.
Jeff
Noordgaard, Michael Hart, Daimon Bethea, Coleco Buie, Deron Hayes, Michael
Robinson and Tremaine Wingfield vs. Joe Newman, ABA Operations, LLC and ABA
League, LLC.
In the
Marion Superior Court, Indiana. Cause No. 49D11-0207-CC-001122. Ryan Hoover,
Jeff Nordgaard, Michael Hart, Daimon Bethea, Coleco Buie, Deron Hayes, Michael
Robinson and Tremaine Wingfield (the “Players”) seek damages under the legal
theory of breach of contract and under the statutory theory of the Wage Payment
Statute for alleged non-payment of wages. Progress of Claim - The lawsuit was
filed in 2003. Summary Judgment was entered against ABA Operations, LLC
(“Operations”) and ABA League, LLC (“League”) on January 5, 2007 in the amount
of $762,331.43. An appeal of this decision was filed with the Indiana Court
of
Appeals on March 8, 2007. This matter is covered by the Indemnification
Agreement. Prior to December 19, 2006, funds of ABA Indiana were held in a
bank
account titled in the name of ABA League, LLC as trustee. Since December 19,2006, all funds of ABA Utah and ABA Indiana have been held in bank accounts
titled in the name of ABA Indiana. The Players have vigorously attempted to
collect this judgment from ABA Utah and ABA Indiana. The ABA intends to contest
the case vigorously. Undersigned counsel has hired Indianapolis attorney, Paul
Ludwig, to represent the interests of ABA Utah and ABA Indiana in this matter.
ABA Utah or ABA Indiana has been named as a Garnishee Defendant. Neither ABA
Utah nor ABA Indiana has funds or contract owed to ABA League, LLC. The bank
account that Players seek to garnish has $32,000 in it.
F-17
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
9 - Legal proceedings - continued
Collateral
is required to post a supercedes bond with the trial court pending appeal.
Severko Hrywnak (“Hrywnak”) has promised to provide the collateral. The strategy
is to have a portion or the entire judgment amount overturned on appeal. The
tactic is to settle this matter using non ABA Indiana or ABA Utah assets. ABA
Management believes that the judgment will be overturned on appeal. The Company
intends to defend this litigation aggressively, expects that the courts will
concur with the Company’s views that these actions and claims are without merit
and currently believes that the outcome, other than costs of suit, will not
be
materially adverse to the ABA. Nevertheless, an adverse judgment on these
actions could materially harm the business of the Company. No assurance can
be
given that the Company’s position will be upheld or will prove to be correct
over the course of litigation.
On June29, 2007 the parties came to a settlement agreement where the ABA will pay
plaintiffs a total of $150,000, payments are scheduled for the first $75,000
on
July 2, 2007, $25,000 on November 30, 2007, $25,000 on February 28, 2008, and
$25,000 on June 2, 2008. Also, each of the eight players is entitled to 10,000
shares of Rule 11 ABA-Utah common stock in lieu of their individual
proportionate cash share of the February 29, 2008 payment. Each player must
give
notice no later than the close of business on February 22, 2008. For each player
not electing to receive stock in lieu of cash, they may then elect the same
option for the June 2, 2008 payment. Notice must be received no later than
May20, 2008.
James
P. Dod vs. Perry R. Hall, a/k/a Pierre Hall, d/b/a Next Level Sports Franchise
Development, LLC, d/b/a The Cleveland Rockers, d/b/a The Lake Erie Rockers,
Ralph W. Underhill, American Basketball Association, Inc., and American
Basketball Association, LLC.
In the
Cleveland Municipal Court, Cuyahoga County, Ohio. Cause No. 06CVF0032421. James
P. Dod (“Dod”) seeks $13,000 in damages under the theory of negligent
misrepresentation from ABA Indiana and American Basketball Association, LLC
as a
result of information about The
Cleveland Rockers
appearing on the ABA website. The lawsuit was filed December 8, 2006. ABA
Indiana filed its answer and cross claim on February 15, 2007. The case is
set
for a pre-trial hearing on June 11, 2007 which required both sides to provide
additional discovery which to date is continuing. This matter is covered by
the
Indemnification Agreement. The ABA intends to contest the case. The potential
for an unfavorable outcome of $13,000 is not significant. The elements of the
tort of negligent misrepresentation are: one who, in the course of his business,
profession or employment, or in any other transaction in which he has a
pecuniary interest, supplies false information for the guidance of others in
their business transactions, is subject to liability for pecuniary loss caused
to them by their justifiable reliance upon the information, if he fails to
exercise reasonable care or competence in obtaining or communicating the
information. The ABA is not in the business of supplying information for the
guidance of others. Such businesses typically include attorneys,
surveyors, abstractors of title and banks dealing with no-depositors'
checks. The ABA was not hired or paid by Dod to supply information.
The ABA does not hold a duty to supply Dod with information nor did it
communicate any affirmative false statement to Dod. If not settled the matter
should be disposed at hearing.
F-18
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
9 - Legal proceedings - continued
Severko
Hrywnak v. Joseph Newman.
Filed
in the Circuit Court of Cook County, Illinois. Cause No. 2007L001101 and removed
to the United States District Court for the Northern District of Illinois and
assigned Cause No. 1:07-cv-00771. Severko Hrywnak (“Hrywnak”) seeks damages
under the legal theories of breach of contract, promissory estoppel and fraud.
Hrywnak alleges that Newman promised to repay losses Hrywnak incurred in hosting
the 2006 ABA all star game by tendering 400,000 shares of ABA Utah stock.
Neither ABA Utah nor ABA Indiana is a party to this lawsuit. The lawsuit was
filed on January 30, 2007. An answer was filed. The matter was settled however,
Hrywnak has not performed a promise of the settlement agreement to provide
collateral for the supercedes appeal bond in the Indiana Legends player case.
Initially, Hrywnaks asserted claims against ABA Utah and not Newman. The claims
against Newman derive from his capacity as CEO of ABA Utah. This matter is
covered by the Indemnification Agreement. The ABA intends to vigorously contest
the case until Hrywnak performs his promise to provide collateral for the
supercedas bond. Potential for Unfavorable Outcome and amount/range of potential
loss - The claims should be dismissed based on the current settlement
negotiations. In any event, no monetary damages can be awarded against either
ABA Utah or ABA Indiana.
Thaddeus
A. Wier, Jr. v. American Basketball Association, Inc.
In the
Superior Court of Erie County, New York. Index No. 2007-001971. On December5,2006, Thaddeus A Weir, Jr. (“Weir”) agreed to fund the ABA Indiana with $200,000
and raise $4,000,000 (the Alternate Financing Plan”) in the event ABA Indiana
could not come to terms with Purchasers under a pending Stock Purchase Agreement
(‘the “SPA”). On December 5, 2006, as part of the Alternate Financing Plan, ABA
Indiana and Big Apple Consulting USA, Inc. (“Big Apple”) entered a contingent
agreement (the “Big Apple Agreement”) pursuant to which, Big Apple was to
provide investor management services to ABA Indiana in the event it did not
come
to terms with Purchasers under the SPA. On December 13, 2006, as part of the
Alternate Financing Plan, Weir and ABA Indiana entered into a contingent
advisory agreement (the “Weir Agreement”) in the event ABA Indiana did not come
to terms with Purchasers under the SPA. Weir failed to wire the $200,000 to
ABA
Indiana. ABA Indiana notified Weir of the termination of the Big Apple Agreement
and the Weir Agreement. ABA Indiana entered into the SPA on December 19, 2006.
On January 9, 2007, Weir asserted that ABA Utah was obligated to perform the
Big
Apple Agreement and the Weir Agreement. On January 29, 2007, ABA Indiana and
ABA
Utah advised Weir that the Alternate Financing Plan was separate and distinct
from the SPA and that the Weir Agreement and the Big Apple Agreement had been
terminated in December, 2006 due to lack of performance. Without service of
summons, Weir filed the action in the Superior Court of Erie County, New York
on
February 20. Without service of summons no response is due. The matter was
settled on February 20, 2007. However, promises under the settlement agreement
have not
F-19
AMERICAN
BASKETBALL ASSOCIATION, INC AND SUBSIDIARY
(formerly
Souvall-Page Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
9 - Legal proceedings - continued
been
performed. The ABA intends to come to satisfactory terms with Wier. Potential
for Unfavorable Outcome and amount/range of potential loss - The potential
amount of loss is significant. However, the likelihood of an unfavorable outcome
is not significant. The Company intends to defend this litigation aggressively,
expects that the courts will concur with the Company’s views that these actions
and claims are without merit and currently believes that the outcome, other
than
costs of suit, will not be materially adverse to the ABA. Nevertheless, an
adverse judgment on these actions could materially harm the business of the
Company. No assurance can be given that the Company’s position will be upheld or
will prove to be correct over the course of litigation.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS
PLAN OVERVIEW
Our
primary business is (i) operating the American Basketball Association (the
“League”), a professional basketball league composed of 47 independently-owned
teams located in the United States, Mexico and Canada, (ii) marketing
League-related merchandise and other products and services offered by the
Company and the League and (iii) developing or expanding media outlets and
ancillary entertainment businesses that complement the League’s operations.
Background
The
original American Basketball Association league (the “Original ABA”) existed for
nine full seasons, starting in 1967. It was known as the “lively” league that
created the three-point shot, and it was the “frontier” league that brought
modern professional basketball to many “hoops-crazy” cities. During that time,
the Original ABA competed with the more established, rival NBA for players,
fans, and media attention until 1976 when ABA teams were absorbed into the
NBA
and the original ABA ceased to exist. At that time, four of the strongest
Original ABA teams joined the NBA, while the remaining Original ABA teams
vanished along with the Original ABA itself.
The
League commenced play under the current banner and management in 2004 as the
American Basketball Association. The League is a new professional basketball
league and is not a continuation of the Original ABA whose teams were absorbed
into the NBA in 1976. Since 2004, the League has grown to more than 30 teams
competing in last year’s League championship, and 47 teams competing during
2006. The League continues to gain acceptance as a fan-pleasing entertainment
experience that emphasizes basketball skills and fast-paced games at affordable
prices. The League continues the Original ABA tradition of innovation in its
efforts to bring diverse, fan-friendly, exciting basketball to its fans.
Management believes that the “ABA” name remains synonymous with innovative and
spirited basketball, the 3-point play, “Dr. J.” (former star player Julius
Erving) and slam dunk contests, all of which have contributed significantly
to
the growth and development of professional basketball as it has become known
throughout the world.
The
Company’s Role.
Management views one of its principal operating challenges ahead to be how
to
maximize the League’s brand recognition in combination with new initiatives and
today’s new revenue possibilities. Management believes that, in addition to
basketball, the League’s fans also share an interest in music and emerging pop
culture and that they provide reference points for what are new and hot trends
in the pop-culture. In essence, these fans, by their habits and spending
patterns, are the initiators or predictors of pop trends. The Company intends
to
capitalize on the demographic composition of that fan base and branch into
music
and entertainment, as described below. In the process, management believes
that
fans will not only competitively attractive value for the $10-12 ticket price
and that the League will be transformed into a formidable sports and family
entertainment experience. This approach to League expansion will in management’s
view provide the League with the potential to grow until the total market reach
may be as high as 100 cities and towns in the United States, Mexico, and Canada.
While League cities will be both large and small (including, for example, New
York, Los Angeles, Dallas, Chicago and Detroit, as well as Bellingham,
Washington, Rockville, Maryland, Burlington, Vermont and Waco, Texas) all are
expected to have basketball and music fans in significant and growing
numbers.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preparation of our condensed consolidated financial statements requires us
to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosures. A summary of
those accounting policies can be found in the footnotes to the consolidated
financial statements included elsewhere in this report. Certain of our
accounting policies are considered critical as they are both important to the
portrayal of our financial condition and results of operations and require
judgments on the part of management about matters that are uncertain. We have
identified the following accounting policies that are important to the
presentation of our financial condition and results of operations.
REVENUE
RECOGNITION
Revenues
are expected to be generated from a number of sources including national
sponsorships, market reservation fees, broadcasting revenue and basketball
and
other merchandise sales. It is expected that sponsorship and broadcasting
revenue will be recognized over the period of the agreements; market reservation
fees will be recognized when receipt is assured; and merchandise sales less
returns and allowances will generally be recognized when title and risk of
product loss is transferred to the buyer. Such risk of product loss is expected
to generally coincide with the time of shipment.
RESULTS
OF OPERATIONS
The
following discussion relates to the historical financial statements of American
basketball Association and should be read in conjunction with the consolidated
financial statements and related notes.
Net
revenues increased from $61,122 for the three months ended June 30, 2006 to
$124,483 for the period ending June 30, 2007. Such revenues represent revenues
from market reservation fees. As a result, the increase in revenues was a result
of an increase in market reservation fees.
Cost
of
revenues as a percentage of net revenues increased from 0.0% of net revenues
for
the three months ending June 30, 2006 to 23.37% of net revenues for the three
months ending June 30, 2007. The increase is in direct relation to an increase
in the sale of ABA merchandise as a percentage of revenue.
Compensatory
element of stock transactions decreased from $0 for the three months ending
June30, 2006 to $153,329, for the same period ending June 30, 2007. The increase
was
a result of signing new consulting agreements.
Selling,
general and administrative expenses increased from $129,466 for the three months
ending June 30, 2006, to $574,541 for the three months ending June 30, 2007.
The
increase is due the addition of personnel as well as increased accounting,
legal
and other professional services related to the various legal and accounting
issues since the reverse merger.
Net
revenues increased from $177,674 for the six months ended June 30, 2006 to
$180,628 for the period ending June 30, 2007. Such revenues represent revenues
from market reservation fees and merchandise. As a result, the increase in
revenues was a result of an increase in market reservation fees.
Cost
of
revenues as a percentage of net revenues increased from 0.0% of net revenues
for
the six months ending June 30, 2006 to 18.77% of net revenues for the six months
ending June 30, 2007. The increase is in direct relation to the increase in
the
sale of ABA merchandise as a component of net revenues.
Compensatory
element of stock transactions increased from $0 for the six months ending June30, 2006 to $288,329 for the same period ending June 30, 2007. The increase
was
a result of signing new consulting agreements.
Selling,
general and administrative expenses increased from $384,512 for the six months
ending June 30, 2006, to $1,083,291 for the six months ending June 30, 2007.
The
increase is due the addition of personnel as well as increased accounting,
legal
and other professional services related to the various legal and accounting
issues since the reverse merger.
Net
cash
used in operating activities was $1,100,166 for the six months ending June30,2007 compared to cash used in operating activities was $38,888 for the six
months ending June 30, 2006. The increase in cash used relates to the hiring
of
additional administrative staff required to implement the Company's business
plan as well as additional accounting, legal and professionals needed since
the
reverse merger.
Net
cash
used in investing activities was $0 for the six months ending June 30, 2007
compared to net cash used in investing activities of $0 for the six months
ending June 30, 2006.
Net
cash
provided from financing activities was $0 for the six months ending June 30,2007 as compared to net cash provided from financing activities of $25,000
for
the six months ending June 30, 2006.
In
view
of our accumulated deficit and recurring losses there is substantial doubt
about
our ability to continue as a going concern. In this regard management is
adopting a plan for the development of our merchandising, sponsorship, media
and
market reservation product lines as well as seeking additional capital through
the private sale of our debt or equity securities. There is no assurance that
we
will complete any financing or that we will achieve profitable operations.
The
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
We
expect
to fund development expenditures and incur losses until we are able to generate
sufficient income and cash flows to meet such expenditures and other
requirements. We do not currently have adequate cash reserves to continue to
cover such anticipated expenditures and cash requirements. These factors, among
others, raise substantial doubt about our ability to continue as a going
concern.
The
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates
and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to income
tax
and marketing related agreements with our affiliates. We base our estimates
on
historical experience and on various other assumptions that are believed to
be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
FORWARD-LOOKING
STATEMENTS: MARKET DATA
The
discussion in this Quarterly Report on Form 10-QSB contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this document
are based on information available to us on the date hereof, and we assume
no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those described in our forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not
limited to, our unproven business model and a limited operating history in
a new
and rapidly evolving industry; our ability to implement our business plan;
and
our ability to manage our growth, retain and grow our customer base and expand
our service offerings.
We
make
forward-looking statements in the "Management's Discussion and Analysis of
Financial Condition and, Results of Operations" above. These forward-looking
statements include, but are not limited to, statements about our plans,
objectives, expectations, intentions and assumptions and other statements that
are not historical facts. We generally intend the, words "expect", "anticipate",
"intend", "plan", "believe", "seek", "estimate" and similar expressions to
identify forward-looking statements.
This
Quarterly Report on Form 10-QSB contains certain estimates and plans related
to
us and the industry in which we operate, which assumes certain events, trends
and activities will occur and the projected information based on those
assumptions. We do not know that all of our assumptions are accurate. In
particular, we do not know what level of growth will exist in our industry,
if
any, and particularly in the foreign markets in which we operate, have devoted
resources and in which we shall seek to expand. If our assumptions are wrong
about any events, trends and activities, then our estimates for future growth
for our business may also be wrong. There can be no assurances that any of
our
estimates as to our business growth will be achieved.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2004, the FASB issued SFAS No. 153, "Exchange of Non-monetary Assets."
SFAS No. 153 amends APB Opinion No. 29, "Accounting for Non-monetary
Transactions," to eliminate the exception for non-monetary exchanges of similar
productive assets. The Company will be required to apply this statement to
non-monetary exchanges after December 31, 2005. The adoption of this standard
is
not expected to have a material effect on the Company's financial position
or
results of operations.
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections-A
Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS No. 154
changes the requirements for the accounting for and reporting of a change in
accounting principle. The Company will be required to apply this statement
for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The adoption of this standard is not expected to have
a
material effect on the Company's financial position or results of
operations.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments -- an amendment of FASB Statements No. 133 and 140.” SFAS
155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities” and related
interpretations. SFAS 155 permits fair value re-measurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation and clarifies which interest-only strips and principal-only
strips are not subject to recognition as liabilities. SFAS 155 eliminates the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS 155 is effective for the Company for
all
financial instruments acquired or issued beginning January 1, 2007. The adoption
of this standard is not expected to have a material effect on the Company's
financial position or results of operations.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets - an amendment of FASB Statement No. 140.” SFAS 156 requires an entity to
recognize a servicing asset or servicing liability each time it undertakes
an
obligation to service a financial asset. It also requires all separately
recognized servicing assets and servicing liabilities to be initially measured
at fair value, if practicable. SFAS 156 permits an entity to use either the
amortization method or the fair value measurement method for each class of
separately recognized servicing assets and servicing liabilities. SFAS 156
is
effective for the Company as of January 1, 2007. The adoption of this standard
is not expected to have a material effect on the Company's financial position
or
results of operations.
Item
3:Controls
and Procedures
We
maintain a set of disclosure controls and procedures designed to ensure that
information required to be disclosed by us in the reports filed under the
Securities Exchange Act, is recorded, processed, summarized and reported within
the time periods specified by the SEC’s rules and forms. Disclosure controls are
also designed with the objective of ensuring that this information is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Based
upon their evaluation as of the end of the period covered by this report, our
chief executive officer and chief financial officer concluded that, our
disclosure controls and procedures are effective to ensure that information
required to be included in our periodic SEC filings is recorded, processed,
summarized, and reported within the time periods specified in the SEC rules
and
forms.
Limitations
of Disclosure Controls and Procedures
Our
management, including our chief executive officer and chief financial officer
does not expect that our disclosure controls or internal control over financial
reporting will prevent all errors or all instances of fraud. A control system,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within our Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls.
The
design of any system of controls is based in part upon certain assumptions
about
the likelihood of future events, and any design may not succeed in achieving
its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent
limitation of a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
PART
II - OTHER INFORMATION
Item
1:
Legal
Proceedings
None
Item
2:
Changes
in Securities
(a)
None
(b)
None
(c)
None
(d)
Not
Applicable.
Item
3.:
Defaults
upon Senior Securities
None
Item
4.:
Submission
of Matters to a Vote of Security
Holders
None
IteItem
5.:
Other
Information
None
Item
4.:
Exhibits
(a)
The
following exhibits are filed as part of this
report:
31.1
Certification
of Chief Executive Officer of Periodic Report pursuant
to Rule 13a-14a and Rule 15d-14(a).
31.2
Certification
of Chief Financial Officer of Periodic Report pursuant
to Rule 13a-14a and Rule 15d-14(a).
32.1
Certification
of Chief Executive Officer of pursuant to 18 U.S.C. -
Section 1350.
32.2
Certification
of Chief Financial Officer of pursuant to 18 U.S.C.-
Section 1350.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
