NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Proguard Acquisition Corp. (the “Company”) was incorporated under the laws of the State of Florida in June 2004. The Company provided professional protection to clients through installation and monitoring of fire, intrusion and environmental security systems.
On May 7, 2012, the Company closed the reverse merger and related transactions contemplated by the Agreement of Merger and Plan of Reorganization dated April 27, 2012 (the “Merger Agreement”) with Random Source Inc. (“Random Source”), a privately held company, and Proguard Acquisition Subsidiary Corp., the Company’s newly-formed, wholly-owned Florida subsidiary (the “Acquisition Sub”). Upon closing of the transactions contemplated under the Merger Agreement (the “Merger”), the Acquisition Sub merged with and into Random Source, and Random Source, as the surviving corporation, became a wholly-owned subsidiary of the Company. In the Merger, all of the issued and outstanding capital stock of Random Source was transferred to the Company in exchange for shares of common stock of the Company issued to shareholders of Random Source. Such Merger caused Random Source to become a wholly-owned subsidiary of the Company.
Prior to the Merger, Proguard Acquisition Corp. was a shell company with no business operations.
The Merger was accounted for as a reverse merger and recapitalization of Random Source since the shareholders of Random Source obtained voting control (approximately 97.2%) and management control of Proguard Acquisition Corp. Random Source was the acquirer for financial reporting purposes and the Company was the acquired company. The Company paid $275,000 and issued a promissory note of $54,000 that totaled to $329,000 in connection with the recapitalization of the Company (see Note 7). Consequently, the assets and liabilities and the operations reflected in the historical financial statements prior to the Merger were those of Random Source and was recorded at the historical cost basis of Random Source, and the consolidated financial statements after completion of the Merger included the assets and liabilities of the Company and Random Source, historical operations of Random Source and operations of Proguard Acquisition Corp. from the closing date of the Merger.
Random Source was incorporated under the laws of the State of Florida in September 2008. The Company operates and sells office supplies such as high-quality, brand-name office products primarily to medium and large-sized businesses through its retail websites. The Company carries a wide selection of merchandise, including general office supplies, business machines and computers, office furniture, and other business-related products. Random Source has two subsidiaries, Lamfis, Inc. d/b/a Hinson Office Supply (“Hinson Office Supply”) and Superwarehouse Business Products, Inc. (“Superwarehouse”).
On February 21, 2013, the shareholders holding a majority of the Company’s voting capital voted and authorized the Company to (i) effect a 1:30 reverse stock split of the Corporation's issued and outstanding common stock (the “Reverse Stock Split”), (ii) reduce the number of authorized shares of common stock from 200,000,000 shares to 6,666,667 shares, and (iii) reduce the number of authorized shares of preferred stock from 5,000,000 shares to 166,667 shares, both such reductions being the same ratio as the Reverse Stock Split.
All share and per share values for all periods presented in the accompanying consolidated financial statements are retroactively restated for the effect of the Reverse Stock Split.
Going Concern
The consolidated financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has a stockholders’ deficit and accumulated deficit of approximately $14,000 and $1.5 million, respectively, as of March 31, 2013, negative cash flows from operating activities and net loss of approximately $40,199 and $124,659, respectively, for the three months ended March 31, 2013. The Company anticipates further losses in the development of its business raising substantial doubt about the Company’s ability to continue as a going concern.
PROGUARD ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The ability to continue as a going concern is dependent upon the Company generating
profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company’s ability to raise additional capital through the future issuances of common stock is unknown. The obtainment of additional financing, the successful development of the Company’s contemplated plan of operations, and its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations.
The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
Basis of Presentation
The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The consolidated financial statements of the Company include the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. All adjustments (consisting of normal recurring items) necessary to present fairly the Company's financial position as of March 31, 2013, and the results of operations and cash flows for the three months ended March 31, 2013 have been included. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the full year. The accounting policies and procedures used in the preparation of these consolidated financial statements have been derived from the audited financial statements of the Company for the year ended December 31, 2012, which are contained in the Form 10-K filed on March 28, 2013 and such consolidated balance sheet as of December 31, 2012 was derived from those financial statements.
Use of Estimates and Assumptions
The preparation of the consolidated financial statements in conformity with US GAAP 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. Significant estimates made by management include, but are not limited to, the allowance for bad debts, the useful life of property and equipment, useful life and valuation of website development costs and intangible assets and valuation of stock-based grants and valuation of deferred tax assets.
Fair Value of Financial Instruments and Fair Value Measurements
The Company adopted FASB ASC 820, “Fair Value Measurements and Disclosures”, for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing US GAAP that require the use of fair value measurements which establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
|
Level 1:
|
Observable inputs such as quoted market prices in active markets for identical assets or liabilities;
|
|
Level 2:
|
Observable market-based inputs or unobservable inputs that are corroborated by market data; and
|
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
|
PROGUARD ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The carrying amounts reported in the consolidated balance sheet for accounts receivable, other receivables, prepaid expenses, accounts payable, accrued liabilities, and customer deposits approximate their estimated fair market value based on the short-term maturity of these instruments.
In addition, FASB ASC 825-10-25 “Fair Value Option” was effective for January 1, 2008. ASC 825-10-25 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when acquired to be cash equivalents. The Company places its cash with a high credit quality financial institution. The Company’ account at this institution is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. At March 31, 2013, the Company has not reached bank balances exceeding the FDIC insurance limit on interest bearing accounts. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits.
Segments
The Company’s activities are within the office products and office supplies retail industry, which is the single industry segment the Company operates. Each operating subsidiary represents an operating segment and these segments have been aggregated, as the operating units meet all of the aggregation criteria. The Company has aggregated its operating segments based on the aggregation criteria outlined in ASC 280-10, which states that two or more operating segments may be aggregated into a
single
operating
segment if aggregation is consistent with the objective and basic principles of the Statement, if the segments have similar economic characteristics, similar product, similar production processes, similar customers and similar methods of distribution. Therefore, the Company has a single operating segment for financial reporting purposes.
Revenue Recognition
The Company follows the guidance of the FASB ASC 605-10-S99 “Revenue Recognition Overall – SEC Materials”. The Company records revenue when persuasive evidence of an arrangement exists, product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Revenues consist primarily of product sales.
Revenue for office supplies sales and business-related products and equipment sales is recognized upon delivery to the customer.
Cost of Sales
The primary components of cost of sales
include the cost of the product (net of purchase discounts and rebates), distributor fees and shipping and handling costs.
Accounts Receivable
The Company has a policy of reserving for questionable accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and the potential for recovery is considered remote. As of March 31, 2013 and December 31, 2012, our allowance for doubtful accounts totaled $4,300 and $4,300, respectively. The Company did not consider it necessary to record any bad debt expense during the three months ended March 31, 2013 and 2012.
PROGUARD ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventory
Inventory, which consists solely of finished goods related to the Company’s products are stated at the lower of cost or market utilizing the first-in, first-out method.
Concentrations of Credit Risk and Major Customers
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with high credit quality financial institutions. Most of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
As of March 31, 2013, 12 customers accounted for approximately 33% of total accounts receivable.
As of December 31, 2012, 20 customers accounted
for 49% of
total accounts receivable.
No single customer accounted for greater than 10% of sales of the Company for the three months ended March 31, 2013 and 2012.
Prepaid expenses and other current assets
Prepaid expenses and other current assets of $71,160 and $37,608 at March 31, 2013 and December 31, 2012, respectively, consist primarily of costs paid for future services which will occur within a year. Prepaid expenses include prepayments in cash for web marketing services, computer support services, consulting and business advisory services, rent, and prepaid insurance which are being amortized over the terms of their respective agreements.
Deposits
Deposits at March 31, 2013 and December 31, 2012 were $108,911 and $110,636, respectively, which consist of security deposits paid to third parties for office lease and credit card merchant holdbacks.
Customer Deposit
Customer deposits at March 31, 2013 and December 31, 2011 were $5,011 and $10,960, respectively, which consist of prepayments from third party customers to the Company and customer refunds. The Company will recognize the prepayments as revenue upon delivery of the products, in compliance with its revenue recognition policy.
Marketing, selling and advertising costs
Marketing, selling and advertising costs are expensed as incurred. Such expenses for the three months ended March 31, 2013 and 2012 totaled $32,468 and $42,692, respectively.
Income Taxes
The Company accounts for income taxes pursuant to the provision of ASC 740-10, “Accounting for Income Taxes” which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
PROGUARD ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company follows the provision of the ASC 740-10 related to Accounting for Uncertain Income Tax Position. When tax returns are filed, it is highly certain that some positions taken would be situated upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is most likely that not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.
The Company has adopted ASC 740-10-25 Definition of Settlement, which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion and examination by a taxing authority without being legally extinguished. For tax position considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely that not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open.
Basic and Diluted Net Loss per Share
Net loss per common share is calculated in accordance with ASC Topic 260: Earnings Per Share. Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.
Diluted loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.
The computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding as they would be anti-dilutive.
At March 31, 2013, the Company has 6,000 outstanding options and 507,326 outstanding warrants. At March 31, 2012, the Company has 6,000 outstanding options and 479,900 outstanding warrants.
Property and equipment
Property and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets, generally two to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the remaining term of the lease.
Website Development Costs
The Company recognizes the costs associated with developing a website in accordance with ASC Topic 350–50 “Website Costs”. Internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Internal and external costs incurred to develop internal–use computer software during the application development stage are capitalized. Training costs are not internal–use software development costs and, if incurred
during this stage, are expensed as incurred. These capitalized costs will be amortized based on their estimated useful life over three years from the date of service. The Company expects to place the website into service in May 2013. Payroll and other related costs directly related to the application development stage are capitalized. Ongoing updates to the website will be expensed as incurred. Website development costs as of March 31, 2013 and December 31, 2012 amounted to $139,413 and $113,238, respectively.
PROGUARD ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangible Assets
The Company records the purchase of intangible assets acquired in a business combination or pushed-down pursuant to acquisition by its parent in accordance with ASC Topic 805 “Business Combinations”.
Impairment of Long-lived Assets
The Company accounts for the impairment or disposal of long-lived assets according to FASB ASC 360 “Property, Plant and Equipment”. ASC 360 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, including the disposal of business segments and major lines of business. Long-lived assets are reviewed when facts and circumstances indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimated fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured by discounting estimated future cash
flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. The Company did not consider it necessary to record any impairment charges during the three months ended March 31, 2013 and 2012.
In accordance with ASC 350- 30-65 “Goodwill and Other Intangible Assets”, the Company assesses the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers to be important which could trigger an impairment review include the following:
|
1.
|
Significant underperformance relative to expected historical or projected future operating results;
|
|
2.
|
Significant changes in the manner of use of the acquired assets or the strategy for the overall business; and
|
|
3.
|
Significant negative industry or economic trends.
|
When the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment charge.
The Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows.
The Company did not consider it necessary to record any impairment charge on its intangible assets during the three months ended March 31, 2013 and 2012.
Employee Benefit Plan
The Company offers a SIMPLE IRA plan which was established in December 2009 for all eligible employees. Employees meeting certain eligibility requirements can participate in the plan. Under the plan, the Company matches employee contributions to the plan up to 1% of the employee’s salary. The Company made matching contributions of 1% totaling $251 and $325 during the three months ended March 31, 2013 and 2012, respectively.
PROGUARD ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock Based Compensation
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the non-employee’s service period. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date.
Related Parties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions.
Recent Accounting Pronouncements
Accounting standards that have been issued or proposed by the FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
NOTE 2 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
Estimated
life
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation equipment
|
2 years
|
|
|
|
14,137
|
|
|
|
14,137
|
|
Furniture and fixtures
|
7 years
|
|
|
|
4,617
|
|
|
|
4,617
|
|
Leasehold improvement
|
3 years
|
|
|
|
18,266
|
|
|
|
18,266
|
|
Less: Accumulated depreciation
|
|
|
|
|
(25,240
|
)
|
|
|
(21,786
|
)
|
|
|
|
|
$
|
11,780
|
|
|
$
|
15,234
|
|
For the three months ended March 31, 2013 and 2012, depreciation expense amounted to $3,454 and $3,896, respectively.
PROGUARD ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 3 – INTANGIBLE ASSETS
Intangible assets were acquired from the acquisition by the Company’s wholly owned subsidiary, Random Source, and its subsidiaries of, Hinson Office Supply and Superwarehouse in March and October of 2011, respectively consisted of the following:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
|
$
|
991,265
|
|
|
$
|
991,265
|
|
Accumulated amortization
|
|
|
(542,545)
|
|
|
|
(459,940
|
)
|
Intangible assets, net
|
|
$
|
448,720
|
|
|
$
|
531,325
|
|
Customer lists for Hinson Office Supply, are being amortized on a straight-line basis over the estimated useful life of three years. Customer lists for Superwarehouse are amortized over the estimated useful life of three years.
The Company assesses fair market value for any impairment to the carrying values. As of March 31, 2013 and 2012 management concluded that there was no impairment to the acquired assets.
The weighted average amortization period on total is approximately 2.50 years. Amortization expense for the three months ended March 31, 2013 and 2012 was $82,605 and $82,605, respectively.
Future amortization of intangible assets, net is as follows:
2013
|
|
|
247,817
|
|
2014
|
|
|
200,903
|
|
Total
|
|
$
|
448,720
|
|
NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
|
|
|
|
|
Accounts payable - trade
|
|
|
670,298
|
|
|
|
538,474
|
|
Credit card
|
|
|
19,706
|
|
|
|
9,377
|
|
Accrued expenses
|
|
|
27,106
|
|
|
|
43,180
|
|
Accrued payroll, vacation and payroll tax
|
|
|
123,440
|
|
|
|
122,590
|
|
Sales and business tax payable
|
|
|
18,718
|
|
|
|
36,801
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
859,268
|
|
|
$
|
750,422
|
|
NOTE 5 – LOAN PAYABLE
In December 2011, the Company entered into a Business Loan and Security Agreement (the “Agreement”) with American Express Travel Related Services Company (“American Express”), Inc. and agreed to lend the Company up to a total amount of $71,000 which will be used for business purposes only. The maturity date of such loan ends 365 days after the disbursement of the initial loan which occurred on January 3, 2012. The loan included a repayment or withholding rate of 30% from American Express related sales which shall be applied to the amount of the loan.
PROGUARD ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 5 – LOAN PAYABLE (continued)
Additionally, a non-refundable fee equal to 6% of the original principal balance (the “loan fee”) of the loan and shall be payable upon the earliest of (a) the date upon which the loan is repaid in full (b) maturity date or (c) upon occurrence of event of default as defined in the Agreement. The lender has the right to accelerate the repayment of and declare immediately due and payable portion of the outstanding loan as defined in the Agreement. Upon the maturity date, the outstanding balance shall be immediately due and payable in full. Thereafter, until the outstanding balance is paid in full, the repayment rate shall be increased to 100%.
The lender also has the right to increase the repayment rate, temporarily or permanently, after the occurrence and during the continuance of an event of default. Pursuant to the Agreement, the Company has granted the lender collateral and security interest in all of the assets and rights of the Company as defined in the Agreement, except as otherwise indicated.
In July 2012, the Company entered into an amended Business Loan and Security Agreement whereby the initial loan amount has been increased to $175,000. The maturity date of such loan ends 365 days after the disbursement of this initial loan. The loan includes a repayment or withholding rate of 100% from American Express related sales which shall be applied to the amount of the loan. Additionally, a non-refundable fee equal to 0.45% of the loan amount shall be payable upon the earliest of (a) the business day immediately preceding the next disbursement date (b) the
date upon which the loan is repaid in full (c) termination date or (d) upon occurrence of event of default as defined in the agreement. In December 2012, the maximum loan amount was increased to $225,000. All other terms and conditions of the original Agreement remain in full force and effect. As of March 31, 2013 and December 31, 2012, loan payable including related fees and interest under this agreement amounted to $214,496 and $206,029, respectively.
NOTE 6 – NOTES PAYABLE
On March 9, 2011, the Company acquired 100% of the outstanding stock of Hinson Office Supply for $262,000. The stock purchase agreement calls for a $100,000 cash down payment with the balance of $162,000 payable in equal monthly installments of $4,640, fully amortized over thirty-six months with interest accruing at a rate of 2% per annum and matures on April 9, 2014. Promissory notes were issued to the former shareholders of Hinson Office Supply. The agreement calls for the last installment payment to be waived should the Company make all payments in a timely fashion. As of March 31, 2013 and December 31, 2012, principal balance on these notes amounted to $51,041 and $64,558, respectively. As of March 31, 2013 and December 31, 2012, accrued interest on these notes amounted to $0.
Notes payable – short and long term portion consisted of the following:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Total notes payable
|
|
$
|
51,041
|
|
|
$
|
64,558
|
|
Less: current portion
|
|
|
51,041
|
|
|
|
55,681
|
|
Long term portion
|
|
$
|
-
|
|
|
$
|
8,877
|
|
NOTE 7 – STOCKHOLDERS’ DEFICIT
On February 21, 2013, the shareholders holding a majority of the Company’s voting capital voted and authorized the Company to (i) effect a 1:30 reverse stock split of the Corporation's issued and outstanding common stock (the “Reverse Stock Split”), (ii) reduce the number of authorized shares of common stock from 200,000,000 shares to 6,666,667 shares, and (iii) reduce the number of authorized shares of preferred stock from 5,000,000 shares to 166,667 shares, both such reductions being the same ratio as the Reverse Stock Split.
All share and per share values for all periods presented in the accompanying consolidated financial statements are retroactively restated for the effect of the Reverse Stock Split.
PROGUARD ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 7 – STOCKHOLDERS’ DEFICIT (continued)
Preferred Stock
The Company is authorized to issue up to 166,667 shares of preferred stock, $.001 par value per share. Our board of directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of preferred stock in series, and by filing a certificate pursuant to the applicable law of the state of Florida, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. No shares of preferred stock have been issued or are outstanding as of March 31, 2013 and December 31, 2012.
Common Stock
The Company is authorized to issue up to 6,666,667 shares of common stock, $.001 par value per share. As of March 31, 2013 and December 31, 2012, the Company had 4,320,603 shares and 4,245,603 shares outstanding, respectively. Holders are entitled to one vote for each share of common stock (or its equivalent).
On February 25, 2013, the Company entered into a 6 month consulting agreement in connection with investor relations services. In consideration for the consulting services, the Company shall pay a monthly cash fee of $4,000 beginning March 1, 2013 through August 2013 and shall issue 75,000 shares of the Company’s common stock upon execution and valued these common shares at the fair market value based on quoted market price on the date of grant approximately $0.015 per share or $33,750. For the three months ended March 31, 2013, the Company recognized stock based consulting expense of $5,625 and prepaid expense of $28,125 to be amortized over the terms of the agreement.
Common Stock Options
Information related to options granted under the 2010 Equity Compensation Plan and activity for the three months ended March 31, 2013 is as follows:
|
|
Number
of
Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Balance at
December 31, 2012
|
|
|
6,000
|
|
|
$
|
3.00
|
|
|
|
2.42
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding at March 31, 2013
|
|
|
6,000
|
|
|
$
|
3.00
|
|
|
|
2.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period
|
|
|
6,000
|
|
|
$
|
-
|
|
|
|
|
|
Options expected to vest
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the period
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
Stock options outstanding as disclosed in the above table have no intrinsic value at the end of the period March 31, 2013.
PROGUARD ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 7 – STOCKHOLDERS’ DEFICIT (continued)
Common Stock Warrants
A summary of the status of the Company's outstanding stock warrants as of March 31, 2013 and changes during the period then ended is as follows:
|
|
Number of
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Balance at
December 31, 2012
|
|
|
507,326
|
|
|
$
|
8.70
|
|
|
|
1.45
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at March 31, 2013
|
|
|
507,326
|
|
|
$
|
8.70
|
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at March 31, 2013
|
|
|
507,326
|
|
|
$
|
8.70
|
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the three months ended March 31, 2013
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
NOTE 8 – RELATED PARTY TRANSACTIONS
From time to time the Company enters into transactions with Computer Nerds International, Inc. (“Computer Nerds”), a company owned by certain of the Company’s Officers, including:
●
|
The Company purchased inventories and products for sale from Computer Nerds totaling approximately $
1,839,000
and $
2,652,000
during
the three months ended March 31, 2013 and 2012
, respectively. The Company’s sales to Computer Nerds totaling approximately $
87
and $300
during
the three months ended March 31, 2013 and 2012
, respectively. Accounts payable to Computer Nerds as of March 31, 2013 and December 31, 2012, was $360,249 and $321,347, respectively, and were reflected as accounts payable – related party in the accompanying consolidated balance sheets.
|
Additionally, on October 25, 2011, the Company, through its subsidiary, Superwarehouse, entered into a Distribution Agreement (the “Computer Nerds Agreement”) with Computer Nerds whereby the Company appoints
Computer Nerds as its non-exclusive distributor of the Company’s products in order to market, promote, distribute, and sell the product to its customers, directly or indirectly and shall include all products, territories, geographies, customers and markets without restriction. The initial term of the Computer Nerds Agreement began on October 25, 2011 and shall end on December 31, 2012. The term shall automatically renew for a one year period on each subsequent anniversary date of the effective date. The Company may give written notice of its intent to terminate this agreement at anytime. Pursuant to the Computer Nerds Agreement, Computer Nerds agrees to charge the Company its cost plus 2% distributor fee.
On July 30, 2012, the Company, through its subsidiary, Superwarehouse, entered into an Amended Distribution Agreement (the “Amended Agreement”) with Computer Nerds whereby the Company extended the term up to March 31, 2013. The term automatically renewed on a month to month basis and may be terminated within 30 days. Pursuant to the Amended Agreement, effective August 1, 2012, the distributor fee will be lowered to 1.5% from 2%. All other terms and conditions of the original agreement remain in full force and effect.
PROGUARD ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 8 – RELATED PARTY TRANSACTIONS (continued)
The Company paid approximately $28,815 and $52,000 of the distributor fee during the three months ended March 31, 2013 and 2012 respectively.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Consulting Contracts
In July 2011, the Company entered into a 4 year Rebate Agreement (the “Rebate Agreement”) with a distributor. The Company received a one-time advance rebate allowance of $375,000 and marketing allowance of $25,000 whereby the Company will purchase at least 90% of the Company’s monthly purchase requirements of products for sale from such distributor. Pursuant to the Rebate Agreement, the Company is also eligible to receive volume cash discounts, volume flat rebates, marketing rebate and annual growth rebates as defined in the Rebate Agreement. The allowance is subject to a repayment claw back provision upon the occurrence of either (i) the acquisition of the Company by a third party including the sale of all or substantially all of the Company’s equity or assets, a merger, or transaction resulting in a change of control or (ii) the Company does not honor its purchase commitments for 2 or 3 consecutive months in a 12 month period. If a repayment claw back occurs, the Company shall pay back the unearned portion of any discounts, rebates and allowances paid by the distributor.
The Company recorded the advance rebate and marketing allowance as deferred discount as reflected in the accompanying consolidated balance sheets. The Company amortizes the advance rebate to cost of sales and amortizes the advance marketing allowance to expense over the term of the Rebate Agreement. Deferred discount- short term at March 31, 2013 and December 31, 2012 was $100,000 and will be amortized within a year. Deferred discount- long term at March 31, 2013 and December 31, 2012 was $125,000 and $150,000, respectively, and will be amortized over the remaining term of the agreement beyond one year period.
Operating Lease
A lease agreement was signed for office and warehousing space located in Broward County, Florida with an initial term commencing on June 1, 2011 and expiring on July 31, 2014. Such office space consists of approximately 6,962 square feet and serves as the corporate headquarters of the Company and its subsidiary, Hinson Office Supply. There are no minimum, contingent or sublease arrangements in the lease. Future minimum rental payments required under this operating lease are as follows:
●
|
Period ending December 31, 2013
|
|
$
|
39,886
|
|
Included in the lease is a $10,345 credit against rent due for work performed by the Company for leasehold improvements to office and warehousing space. This is not reflected in the numbers above.
In September 2012, the Company entered into a lease agreement for an office and warehousing space located in San Diego, California for a period of 12 months which will serve as the headquarters of the Company’s subsidiary, Superwarehouse. The term shall commence on October 1, 2012 and ends on September 30, 2013. The monthly base rent shall be $963. Future minimum rental payments required under this operating lease are as follows:
●
|
Period ending December 31, 2013
|
|
$
|
5,778
|
|
Rent expense was $17,767 and $24,079 for the three months ended March 31, 2013 and 2012, respectively.