Add
SVGI.OB to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| SVGI.OB > SEC Filings for SVGI.OB > Form 10-Q on 19-Nov-2008 | All Recent SEC Filings |
19-Nov-2008
Quarterly Report
Executive Overview
In 2007, we experienced significant challenges due to the unexpected contraction of our business with our largest client, Home Interiors & Gifts. In response, we attempted to accelerate the development of our in-house sales channel to home furnishings and accessory retailers. To that end, in July 2007 we hired an art sales, marketing and design company based in Seattle which brought to us an existing client base. To service and grow the Seattle group's client base, we needed to raise capital that we were unable to accomplish on terms acceptable to us. Accordingly, we terminated our contract with the Seattle group in December 2007. Separately, without sufficient resources we were forced to cease our investment in the development of TxTura. Given the challenges we were experiencing in developing sales channels and the unexpected contraction of our largest client, in December 2007, the board of directors determined that we should seek to merge with a larger art company with established sales channels which could benefit from our technology.
Liquidity and Capital Resources
We derived our primary source of funds during the nine months ended September 30, 2008 from the sale of additional equity and debt securities. Working capital as of September 30, 2008 was negative $445,666 as compared to negative working capital of $727,248 as of December 31, 2007. The cash balance at September 30, 2008 was $30,600 compared to $17,737 at December 31, 2007.
Net cash used in operating activities was $199,178 for the nine months ended September 30, 2008, as compared to $701,982 for the nine months ended September 30, 2007. During each period presented, we used net cash principally to fund our net losses.
Net cash provided by financing activities was $159,602 during the nine months ended September 30, 2008, as compared to net cash provided by financing activities of $729,737 for the nine months ended September 30, 2007. Net cash provided by financing activities during 2007 was principally related to the sale of additional debt and equity securities of $790,000. The Company also issued debt securities during the nine months ended September 30, 2008, netting proceeds of $190,000.
We have suffered recurring losses from operations and have an accumulated deficit of approximately $5,022,057 and $4,242,582 at September 30, 2008 and December 31, 2007. Additionally, as of November 14, 2008, we had cash and cash equivalents of $10,308.12 which will allow us to sustain operations for approximately two months. Primarily as a result of our recurring losses and our lack of liquidity, we have received a report from our independent auditors for our financial statements for the year ended December 31, 2007 that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern. To continue our operations and to grow our current operations and to make acquisitions, if any, under our current business model during the next twelve months, we will need to secure additional working capital, by way of equity or debt financing, or otherwise. After this twelve month period, we may need additional financing for working capital, and in the case of acquisitions for payment of seller notes and future earned cash to sellers of acquired companies. There can be no assurance that we will be able to secure sufficient financing or on terms acceptable to us. If adequate funds are not available on acceptable terms, we would need to delay, limit or eliminate some or all of our proposed operations, and we may be unable to successfully promote our products or develop new or enhanced products or prosecute acquisitions, any of which could lower our revenues and net income, if we achieve profitability in the future. If we raise additional funds through the issuance of convertible debt or equity securities, the percentage ownership of our current stockholders is likely to be diluted, unless some of our current stockholders were to invest in subsequent convertible debt or equity financings, and some of the newly issued securities may also have rights superior to those of the common stock. Additionally, if we issue or incur debt to raise funds, we may be subject to limitations on our operations.
Debt to Equity Conversion
During 2006 and 2007 we entered into convertible equity financings in which we received an aggregate of $1,333,500. The terms of the convertible instruments are discussed below. On April 30, 2008 the Company issued 22,911,979 shares of restricted common stock to holders of, Convertible notes payable and the Mandatory convertible notes payable and the Note payable in exchange for the retirement of the debt securities. (See Note 6 to the financial statements.)
Mandatory Convertible Notes. During 2007 the Company issued mandatory convertible notes payable (the "New Notes") in the aggregate principal amount of $543,500, which was outstanding as of December 31, 2007. The notes bore interest at a rate of ten percent (10%) per annum. The Company could pay interest via cash or in stock, at a 10% discount to the market price of the Company's common stock, quarterly. All principal and unpaid interest was due on August 31, 2009. We converted the Mandatory note into 7,094,434 shares of common stock.
Note Payable. The Edward Brian O'Dwyer Separate Property Trust, one of our shareholders, loaned to New Era Studios, Inc., our wholly-owned subsidiary, $280,000 in June 2006. In consideration of this loan, New Era issued a promissory note on June 23, 2006 to and in favor of the O'Dwyer trust in the principal amount of $280,000, plus 7% interest per annum on the outstanding principal, which note was amended and restated in its entirety on August 14, 2006. The amended and restated note was originally due and payable by New Era on September 23, 2006, however, this note was amended and restated on three occasions and finally was extended to December 31, 2007. As of December 31, 2007, $280,000 of this note payable was outstanding and we converted this note into 3,890,640 shares of common stock.
Bridge Financing
In February 2008 the Company issued convertible promissory notes in the
aggregate principal amount of $150,000 pursuant to a subscription agreement,
dated January 25, 2008, as amended, between Silvergraph and Thomas G. Schuster
and Antaeus Capital Partners, LLC, accredited investors. The subscription
agreement provided that the subscribers would purchase a minimum of $100,000 and
a maximum of $400,000 of 7% convertible promissory notes, due on June 30, 2008.
In April, 2008, we issued an additional $40,000 of the convertible promissory
notes to two accredited investors. We intend to use the $190,000 for debt
repayment and working capital. The Company will pay all interest due and owing
on each note by adding such amounts to the then outstanding principal balance of
each note, thereby increasing the outstanding principal balance of each note.
All the payments-in-kind shall accrue interest as though such amounts were
original principal indebtedness. The Company will not pay any principal payments
in cash prior to maturity. If the Company combines via merger, acquisition,
reverse merger or similar process with a private company doing business in the
wall art industry (the "Combination"), the outstanding principal amount of the
notes together with all accrued but unpaid interest will automatically convert
into shares of the Company's common stock at the closing of such Combination at
the conversion price, discussed below.
Each holder of a Note may convert in whole or in part the outstanding principal plus accrued but unpaid interest into the Company's common stock at a conversion price of the lower of $0.045 per share or $1.08 divided by the reverse split ratio declared by the board of directors as part of a Combination. In the event that the Company issues additional common stock, or securities convertible into common stock, at a price lower than the conversion price while these notes are outstanding, the conversion price of these notes will automatically adjust downward to such price at which the new common stock has been issued. The conversion price of the note, however, shall never be adjusted to less than $0.01 per share. Additionally, if the Company does not complete an anticipated Combination transaction with a private company by June 30, 2008 whereby the private company owns up to 90%
The notes will be secured by all of the assets of New Era Studios, Inc., our wholly-owned subsidiary, under a security agreement. Silvergraph may not prepay the notes and so long as the notes are outstanding, we must obtain written approval from the note holders for certain actions identified in the notes, including, but not limited to, the issuance of debt, acquisition or sale of a material asset and issuance of dividends to common stockholders. The security agreement will be null and void if the notes convert into a majority of Silvergraph's common stock. In addition, the holders of the notes have a right of first refusal on all equity financings contemplated by Silvergraph.
On June 30, 2008 Silvergraph and the holders of the 7% Notes due June 30, 2008 entered into a 2nd Amendment to the 7% Notes due June 30, 2008 that materially modified the Notes and extended them until August 31, 2008. If the Company does not complete a merger transaction with a private company approved by the board of directors by the maturity date whereby the private company owns up to 96% of the surviving entity, the conversion price shall automatically be reduced to the lower of (i) $0.002 or (ii) the conversion price that would cause the majority holder of the notes to own upon conversion the number of shares of common stock of the Company determined to be 51% of the outstanding common stock on a fully-diluted basis and the remaining holders of the notes to own a pro rata number of common shares of common stock of the Company. In addition, the optional conversion price was lowered from $.08 to the lower of $.045 per share of common stock or the price per share of common stock based upon the formula outlines in the amendment.
On August 31, 2008 Silvergraph and the holders of the 7% Notes due August 31, 2008 entered into a 3nd Amendment to the 7% Notes due August 31, 2008 that materially modifies the Notes according to the following:
1.
Section 3.0 of the Note entitled Prepayment. The entire section of shall be deleted and the following paragraph inserted.
Subject to Section 5(b) hereof, the Borrower may prepay the Note in cash in an amount equal to the principal and accrued interest ("Prepayment"). Other than as set forth in Section 5(a) and 5(b) hereof, the Borrower may not prepay the Note.
2.
Section 5.0(b) of the Note entitled Mandatory Conversion. The entire section shall be deleted and the following paragraphs inserted.
Simultaneous with the closing of a transaction whereby the Company combines via merger, acquisition, reverse merger or similar process with a private company ("Merger"), this Note and accrued but unpaid interest shall immediately and automatically convert into fully paid and nonassessable shares of Common Stock in accordance with the following:
(i) Should the Holder at its discretion decline Borrower's offer of Prepayment, if any, within three (3) days of receipt of written Prepayment notice from Borrower, then the conversion price shall be equal to fifty percent (50%) of the purchase price of common stock or the conversion price as the case may be paid by Investor(s) in a transaction closing simultaneously with a Merger ("Outside Investor") or in the case where a Merger is completed without a simultaneous transaction with an Outside Investor, then the conversion price shall be equal to fifty percent (50%) of four multiplied by the EBITDA of the private company for the trailing twelve month period.
(ii) Should the Holder at its discretion accept Borrower's offer of Prepayment, if any, within three (3) days of receipt of written Prepayment notice from Borrower, then the Holder shall be entitled to Common Stock in amount equal to the amount of principal and accrued interest of the Note outstanding immediately preceding Prepayment divided by the purchase price of common stock or the conversion price as the case may be paid by Investor(s) in a transaction closing simultaneously with a Merger ("Outside Investor") or in the case where a Merger is completed without a simultaneous transaction with an Outside Investor, then the conversion price shall be equal to four multiplied by the EBITDA of the private company for the trailing twelve month period.
(iii) If the Borrower does not provide Holder the option of Prepayment, then the conversion price shall be equal to twenty five percent (25%) of the purchase price of common stock or the conversion price as the case may be paid by Investor(s) in a transaction closing simultaneously with a Merger ("Outside Investor") or in the case where a Merger is completed without a simultaneous transaction an with Outside Investor, then the conversion price shall be equal to twenty five percent (25%) of four multiplied by the EBITDA of the private company for the trailing twelve month period.
Upon the Mandatory Conversion, this Note shall cease to exist and all rights and obligations of the Borrower and Holder shall terminate.
3.
Section 2.0 of the Note entitled Maturity. The Maturity Date shall be extended from August 31, 2008 to October 31, 2008.
Effective October 31, 2008, the Company entered into an Amendment to Loan Transaction Agreement (the "Amendment") under the terms of which certain holders of 7% convertible promissory notes described under Note 3, agreed to extend the due date on the notes to December 15, 2008, in exchange for which the Company agreed to issue to the holders, pro rata in proportion to their Note amounts, a total of 9,000,000 shares of restricted common stock. This transaction is described in a Form 8-K filed by the Company on November 17, 2008.
Mirador Consulting, Inc. Agreement
Silvergraph entered into Consulting Agreement with Mirador Consulting, Inc., a Florida Corporation ("Mirador") that was effective as of January 10, 2008. For a term of one year, Mirador will provide consulting services in connection with management consulting, corporate finance and shareholder communications and will use it best efforts to introduce Silvergraph to various members of the financial community. In consideration for Mirador's service we will pay $1,000 per month until April 31, 2008 and $3,000 a month thereafter for the remainder of the one year term. We issued 1,000,000 shares to Mirador upon the signing of the Consulting Agreement and agreed to issue 800,000 shares to Mirador upon the closing of our combination with a private company provided the merger was completed on or before March 31, 2008. These shares are restricted and have "piggy back" registration rights. In the event that Mirador introduces Silvergraph to an institution or individual that provides funding to the Company, then we will pay five percent of the total amount of the net transaction to Mirador.
Mirador agreed to maintain the confidentiality of any material non-public information or data it might receive from Silvergraph, unless we provide written consent and approval for the disclosure. The parties agreed to indemnify each other for any damages caused by the other party and the consulting agreement may be terminated with or without cause by providing a thirty day written notification to the other party.
Revenues. Our revenues increased $17,065 or 24%, to $88,804 for the three months ended September 30, 2008, as compared to $71,739 for the three months ended September 30, 2007. The increase in revenues was due primarily to increased sales from one customer.
Gross profit. Cost of sales consists primarily of raw material and component costs, manufacturing and supervisory labor, manufacturing overhead costs and royalties.
The gross profit for the three months ended September 30, 2008 was $75,916, an increase of $85,183 or 100% as compared to a negative $9,267 for the three months ended September 30, 2007. The Company's significant increase in gross margin during the third quarter of 2008 versus 2007 was due to our efforts to contain both fixed and variable costs.
Operating expenses. Operating expenses consist of selling and marketing expenses, which are primarily salaries, commissions and promotional expenses, and general and administrative expenses, which are primarily salaries and bonuses, rent expense, depreciation and professional services such as legal and accounting fees.
Operating expenses decreased by $268,470 or 91% to $25,993 for the three months ended September 30, 2008 versus $294,463 for the three months ended September 30, 2007. The decrease in operating expenses was principally due to additional cost cutting measures enacted by the Company during 2008.
Other income (expense). Other income (expense) principally consists of interest income and expense, as well as non-operational revenues or expenses earned or incurred by us. We had no other expense during the three months ended September 30, 2008 versus other expense of $34,572 during the three months ended September 30, 2007. The decrease in the balance was due to the lack of debt modification or conversions in the quarter.
Nine months ended September 30, 2008 and 2007 (all amounts for these periods are unaudited)
Revenues. Our revenues decreased $45,598 or 28%, to $119,657 for the nine months ended September 30, 2008, as compared to $165,255 for the nine months ended September 30, 2007. The decrease in revenues was due primarily to the lack of orders by our largest customer.
Gross profit. Cost of sales consists primarily of raw material and component costs, manufacturing and supervisory labor, manufacturing overhead costs and royalties.
The gross profit for the nine months ended September 30, 2008 was $95,291, an increase of $153,528 or 260% as compared to a gross loss of $58,237 for the nine months ended September 30, 2007. The gross profit for the nine months ended September 30, 2008 represented 80% of revenue for that same period as compared to the gross loss for the nine months ended September 30, 2007 which represented negative gross margin of 35% of revenue for that same period. The Company's significant negative gross margin during the first nine months of 2007 was due to the lack of capitalization of normal fixed manufacturing costs.
Operating expenses. Operating expenses consist of selling and marketing expenses, which are primarily salaries, commissions and promotional expenses, and general and administrative expenses, which are primarily salaries and bonuses, rent expense, depreciation and professional services such as legal and accounting fees.
Operating expenses decreased by $432,779 or 48% to $463,296 for the nine months ended September 30, 2008 versus $896,075 for the nine months ended September 30, 2007. The decrease in operating expenses was principally due to additional cost cutting measures enacted by the Company during 2008.
Other income (expense). Other income (expense) principally consists of interest income and expense, as well as non-operational revenues or expenses earned or incurred by us. We had other expenses of $411,470 during the nine months ended September 30, 2008 versus other expense of $574,899 during the nine months ended September 30, 2007. The significant charges were due to additional interest expense, related to a beneficial conversion feature, recognized from the issuance of convertible notes payable during the nine months ended September 30, 2007, and from the modification of the conversion rates for outstanding debt during the quarter ended September 30, 2008.
Warrant
As of the date of this report, in addition to the outstanding warrants related to the convertible notes, we have an outstanding warrant to purchase a total of 488,170 shares of common stock, at a weighted average exercise price of $0.139 per share. New Era issued this warrant, which is to expire on January 26, 2011, to our former chief financial officer, Gary Freeman on June 12, 2006. This warrant contains anti-dilution provisions providing for adjustments of the exercise price and the number of shares of common stock underlying the warrant, registration rights and piggy-back registration rights. In addition, under the warrant we may cancel Mr. Freeman's right to exercise up to 50% of the shares of our common stock in the event that he or Bandari Beach Lim & Cleland LLP, of which Mr. Freeman is a partner, cancels a letter of understanding between Bandari and New Era for reasons not involving nonpayment of fees to Bandari, material adverse alteration of Mr. Freeman's duties as chief financial officer, breach, fraud or other designated reasons. Our right to cancel up to 50% of Mr. Freeman's exercise rights underlying the warrant decreased ratably each month beginning July 1, 2006 and ending June 30, 2007, accordingly we no longer have the ability to cancel any percentage of Mr. Freeman's exercise rights.
Inflation and Seasonality
Inflation has not been material to us during the past five years. Although seasonality has not historically been material, we believe that as our business expands, seasonality will begin to affect our quarterly results of operations.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of the Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below. On a regular basis, we review the accounting policies we use in reporting our financial results.
A critical accounting policy is one that is both material to the presentation of our combined financial statements and requires us to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes:
·
we have to make assumptions about matters that are highly uncertain at the time of the estimate; and
·
different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on the our financial condition or results of operations.
We cannot make estimates and assumptions about future events or determine their effects with certainty. We base our estimates on historical experience and on various other assumptions that we believe to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as we obtain
We believe that the following are our critical accounting policies:
Revenue Recognition
We recognize revenue from gross product sales, including freight charges, and revenues from the license of products, in compliance with Staff Accounting Bulletin No. 101 and No. 104 which require that:
·
title and risk of loss have passed to the customer;
·
there is persuasive evidence of an arrangement;
·
delivery has occurred or services have been rendered;
·
the sales price is fixed and determinable;
·
collectibility is reasonably assured; and
·
customer acceptance criteria, if any, have been successfully demonstrated.
Accounts Receivable
We extend credit to our customers. We generally do not require collateral. We provide for credit losses in the consolidated financial statements based on our evaluation of historical and current industry trends. Although we expect to fully collect amounts due, actual collections may differ from estimated amounts.
Inventories
We state inventories at the lower of cost or market. We determine cost on a
standard cost basis which approximates the first-in, first-out (FIFO) method.
We give appropriate consideration to obsolescence, excessive levels,
deterioration and other factors in evaluating net realizable value.
|
|