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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB/A
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Period Ended
June 30, 2004 Commission File No. 0-15807
MARKETSHARE RECOVERY, INC.
--------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 31-1190725
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(State or jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
95 Broadhollow Road, Suite 101, Melville, NY 11747
-------------------------------------------- -----
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (631) 385-0007
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 [X] No [ ]
The number of shares issued and outstanding of the Registrant's Common Stock,
$0.10 par value, as of August 23, 2004 was 45,702,256.
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MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health & Leisure, Inc. and subsidiary)
INDEX TO FORM 10-QSB
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Page
PART I - FINANCIAL INFORMATION:
Item 1 - FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheet 1
Condensed Consolidated Statements of Operations 2-3
Condensed Consolidated Statements of Cash Flows 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5-12
MARKETSHARE RECOVERY, INC AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 2004
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 16,078
Accounts Receivable 3,727
Marketable securities 23,106
Due From Affiliate 6,431
Prepaid expense and other current assets 400
-----------
TOTAL CURRENT ASSETS 49,742
PROPERTY AND EQUIPMENT, Net 1,844
SECURITY DEPOSITS 4,667
-----------
TOTAL ASSETS $ 56,253
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Notes payable - stockholders $ 17,140
Loan Payable 100,000
Accrued expenses and other current liabilities 90,503
Deferred revenue 37,973
Due to stockholders 12,300
Accrued interest - stockholders 16,935
-----------
TOTAL CURRENT LIABILITIES 274,851
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred stock - $0.10 par value; 10,000,000 shares
authorized; no shares issues or outstanding --
Common stock - $0.10 par value; 50,000,000 shares
authorized; 45,702,756 shares issues and outstanding 4,570,276
Additional paid-in capital (2,690,106)
Accumulated deficit (2,098,768)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY (218,598)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 56,253
===========
See notes to unaudited condensed consolidated financial statements.
1
MARKETSHARE RECOVERY, INC AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
--------------------------------------------------------------------------------
For the Six Months Ended
June 30,
2004 2003
------------ ------------
NET REVENUES (including revenue from related party
of $7,594 and -0-, respectively) $ 228,224 $ 286,404
COST OF REVENUES (including compensatory element
of stock issuances of $40,331 and -0-, respectively) 146,214 180,947
------------ ------------
GROSS PROFIT 82,010 105,457
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 120,064 77,982
------------ ------------
OPERATING (LOSS) INCOME (38,054) 27,475
------------ ------------
OTHER INCOME (EXPENSES)
Interest expense - stockholders (6,935) --
Gain (loss) on sale of marketable securities 764 (6,871)
Unrealized loss on marketable securities (41,705) 23,715
------------ ------------
TOTAL OTHER (EXPENSES) INCOME (47,876) 16,844
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (85,930) 44,319
PROVISION FOR INCOME TAXES -- 9,000
------------ ------------
NET (LOSS) INCOME $ (85,930) $ 35,319
============ ============
Basic Net (Loss) Income Per Common Share $ -- $ 0.03
============ ============
Diluted Net (Loss) Income Per Common Share $ -- $ --
============ ============
Weighted Average Number of Common Shares
Outstanding - Basic (1) 45,622,561 1,117,203
============ ============
Weighted Average Number of Common
Shares Outstanding - Diluted (1) 45,622,561 35,367,203
============ ============
(1) Restated to reflect 1-for-10 reverse stock-split completed in August 2003.
See notes to unaudited condensed consolidated financial statements.
2
MARKETSHARE RECOVERY, INC AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
--------------------------------------------------------------------------------
For the Three Months Ended
June 30,
2004 2003
------------- -------------
NET REVENUES (including revenue from related party
of $3,797 and -0-, respectively) $ 123,261 $ 125,494
COST OF REVENUES (including compensatory element
of stock issuances of $60 and -0-, respectively) 54,783 63,837
------------- -------------
GROSS PROFIT 68,478 61,657
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 52,192 51,371
------------- -------------
OPERATING (LOSS) INCOME 16,286 10,286
------------- -------------
OTHER INCOME (EXPENSES)
Interest expense - stockholders (1,935) --
Gain (loss) on sale of marketable securities (4,514)
Unrealized loss(gain) on marketable securities (16,128) 27,523
------------- -------------
TOTAL OTHER EXPENSES (18,063) 23,009
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(LOSS) INCOME BEFORE INCOME TAXES (1,777) 33,295
PROVISION FOR INCOME TAXES -- 7,000
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NET (LOSS) INCOME $ (1,777) $ 26,295
============= =============
Basic Net (Loss) Income Per Common Share $ (0.00) $ (0.00)
============= =============
Diluted Net (Loss) Income Per Common Share $ (0.00) $ (0.00)
============= =============
Weighted Average Number of Common Shares
Outstanding - Basic (1) 45,702,672 12,135,686
============= =============
Weighted Average Number of Common
Shares Outstanding - Diluted (1) 45,702,672 354,635,686
============= =============
(1) Restated to reflect 1-for-10 reverse stock-split completed in August 2003.
See notes to unaudited condensed consolidated financial statements.
3
MARKETSHARE RECOVERY, INC AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
--------------------------------------------------------------------------------
For the Six Months Ended
June 30,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (85,930) $ 35,319
--------- ---------
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Compensatory element of stock issuances 40,331 --
Depreciation 264 --
Changes in operating assets and liabilities:
Accounts receivable (3,727) 5,432
Prepaid and other current assets (299) 0
Due to affiliate (4,931) --
Security deposits -- (4,667)
Accrued expenses and other current liabilities 63,237 53,005
Marketable securities 7,224 (74,460)
--------- ---------
TOTAL ADJUSTMENTS 102,099 (20,690)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,169 14,629
--------- ---------
CASH USED IN INVESTING ACTIVITIES
Purchase of property and equipment (2,108) --
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Note to Shareholders (107,860) $ --
Proceeds from loan payable 100,000 --
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (7,860) --
--------- ---------
NET INCREASE IN CASH 6,201 14,629
CASH - Beginning 9,877 4,697
--------- ---------
CASH - Ending $ 16,078 $ 19,326
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Income taxes $ 0 $ 978
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
Issuance of notes payable related to reverse merger $ 137,700
See notes to unaudited condensed consolidated financial statements.
4
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 1 - Basis of Financial Statement Presentation
The unaudited condensed consolidated financial statements presented are
those of MarketShare Recovery, Inc. - Delaware (formerly Health &
Leisure, Inc.) and its wholly-owned subsidiary, MarketShare Recovery,
Inc. - N.Y. ("MKSR"). Collectively, they are referred to herein as the
("Company").
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial statements
and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and disclosures required for annual
financial statements. These financial statements should be read in
conjunction with the consolidated financial statements and related
footnotes included in the Company's annual report on Form 10-KSB for the
year ended December 31, 2003.
In the opinion of the Company's management, all adjustments (consisting
of normal recurring accruals) necessary to make the presentation of the
Company's financial position as of June 30, 2004 and the results of
operations and cash flows for the six month periods ended June 30, 2004
and June 30, 2003 not misleading have been included.
The results of operations for the six-month period ended June 30, 2004
are not necessarily indicative of the results to be expected for the full
year ended December 31, 2004.
NOTE 2 - Business and Reverse Merger
Effective on June 13, 2003, Health & Leisure, Inc. ("HLLS"), a
publicly-traded Delaware corporation, and its wholly-owned subsidiary,
Venture Sum, Inc., a Delaware corporation ("Mergerco"), entered into a
Merger and Acquisition agreement with MKSR, a privately-held New York
corporation, in the business of providing on-line direct marketing
solutions for enterprises to customers through the United States.
Pursuant to the agreement, Mergerco merged with and into MKSR and MKSR
became the surviving corporation. As consideration for the merger, the
shareholders of MKSR received from HLLS 1,019,767 common shares of HLLS
and 3,425,000 shares of its voting convertible non-cumulative preferred
stock ("HLLS Preferred Stock"). 267,000 shares of the HLLS common stock
issued to the MKSR shareholders were from HLLS authorized but unissued
shares and 752,767 shares of the HLLS common stock were returned to HLLS
by the HLLS' former chief executive officer (Mr. Feldman) and then
reissued by HLLS in the merger.
5
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 2 - Business and Reverse Merger, continued
The 3,425,000 shares of HLLS Preferred Stock are convertible into
34,250,000 post reverse stock-split shares of HLLS common stock upon
approval of an increase in the shares the Company is authorized to issue.
After the issuance of common stock as described above and the conversion
of HLLS Preferred Stock, the shareholders of MKSR own approximately 94%
of HLLS. Accordingly, this transaction has been accounted for as a
reverse merger with MKSR as the acquirer of HLLS. The reverse merger was
accounted for as a recapitalization and the stockholders' equity was
retroactively restated to January 1, 2002. The historical financial
statements prior to the reverse merger are those of MarketShare Recovery,
Inc. - N.Y.
Pursuant to the merger, the Company's former Chief Executive Officer
cancelled all indebtedness owed by HLLS to him, except for $12,700, and
cancelled all guarantees of debt by HLLS.
In addition, as part of the merger transaction, MKSR and HLLS agreed to
pay $125,000 to H&L Concepts, Inc., a wholly-owned subsidiary of HLLS.
After the execution of the promissory note, the former Chief Executive
Officer purchased all of the outstanding shares of stock of H&L Concepts,
Inc. for nominal consideration. The parties acknowledged that most of the
trade payables and other consolidated liabilities of HLLS were
liabilities of H&L Concepts, Inc., the subsidiary of HLLS, and by selling
the stock of H&L Concepts, Inc. to Mr. Feldman it had the effect of
removing substantially all of the trade payables and liabilities from the
HLLS balance sheet and fixing the post closing liabilities of HLLS to
that set forth in the promissory note, see Note 5.
NOTE 3 - Going Concern and Management's Plans
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally
accepted in the United States of America, assuming that the Company will
continue as a going concern. For the six months ended June 30, 2004, the
Company has incurred a loss of approximately $85,900 and has a working
capital and stockholders' deficiency of approximately $220,000. These
factors raise substantial doubt about the Company's ability to continue
as a going concern. The Company's ability to continue as a going-concern
is dependent upon obtaining additional financing, restructuring its
existing liabilities, and the successful completion of its business plan.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty. No assurance can be
provided that the Company will be successful in locating additional
financing or completing its business plan.
6
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies
Principles of Consolidation
---------------------------
The unaudited condensed consolidated financial statements include the
accounts of MarketShare Recovery, Inc. - Delaware (formerly Health &
Leisure, Inc.) and its wholly-owned subsidiary, MarketShare Recovery,
Inc. - N.Y. All significant intercompany balances and transactions have
been eliminated in consolidation.
Revenue Recognition and Related Commission Expenses
---------------------------------------------------
Revenues include the sale of and/or electronic delivery of email
distribution lists. Revenues from the sale of email distribution lists
are recognized when the seller has delivered a list to the customer and
the customer has accepted the list after an up to 30-day address
replacement period. Revenues from consulting services are recognized
ratably over the period of the contract. Commissions due to sales
consultants are initially deferred and recognized ratably over the period
revenue is recognized. Deferred commission expense is netted against
deferred revenue for financial reporting purposes.
Use of Estimates
----------------
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
-------------------------
For the purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Website Development Costs
-------------------------
The Company recognizes the costs associated with developing a website in
accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use".
Relating to website development costs the Company follows the guidance
pursuant to the Emerging Issues Task Force (EITF) No. 00-2, "Accounting
for Website Development Costs". Internal costs related to the development
of website content are expensed as incurred. As of June 30, 2004, there
are no capitalized website development costs.
Advertising Costs
-----------------
Advertising costs are expensed as incurred. For the six months ended
June 30, 2004 and 2003, advertising expenses were $2,500 and $0,
respectively.
7
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Marketable Securities
---------------------
On certain engagements, the Company receives shares of common stocks of
publicly-traded corporations from its customers in lieu of cash payments
for services rendered. The fair value of the common stocks received is
reflected as revenue. Subsequently, these marketable securities are
classified as trading securities and reported at fair value with
unrealized gains or losses reported as other income (expenses) in the
statements of operations.
Loss or Earnings per Common Share
---------------------------------
The Company displays earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share".
SFAS No. 128 requires dual presentation of basic and diluted earnings per
share. Basic earnings per share include no dilution and is computed by
dividing the net income (loss) by the weighted average number of common
shares outstanding for the period. Diluted earnings per share include the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. For the
six months ended June 30, 2003, there were no potentially dilutive
securities excluded from the calculation.
Stock-Based Compensation
------------------------
The Company follows SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes accounting and reporting
standards for stock-based employee compensation plans. This statement
allows companies to choose between the fair value-based method of
accounting as defined in this statement and the intrinsic value-based
method of accounting as prescribed by Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
The Company has elected to continue to follow the accounting guidance
provided by APB 25, as permitted for stock-based compensation relative to
the Company's employees. Stock and options granted to other parties in
connection with providing goods and services to the Company are accounted
for under the fair value method as prescribed by SFAS No. 123.
8
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Stock-Based Compensation, continued
-----------------------------------
In December 2002, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of SFAS Statement No. 123". This statement
amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value-based method of accounting for
stock-based employee compensation. In addition, SFAS No.148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 also requires that those
effects be disclosed more prominently by specifying the form, content,
and location of those disclosures. The Company adopted the increased
disclosure requirements of SFAS No. 148 during the year ended December
31, 2003. The Company has no stock-based employee compensation.
NOTE 5 - Note Payable - Stockholders
At the closing of the merger, HLLS and MKSR entered into a $125,000
secured promissory note with H&L Concepts, Inc., a then wholly-owned
subsidiary of HLLS. The loan is payable in twelve equal installments of
$11,341, commencing July 2003. Interest is included in the monthly
payment at a rate of 16% per annum. In October 2003, Mr. Ray Barton and
Mr. Tim Schmidt, the Company's current executive officers and directors
purchased the promissory note from H&L Concepts, Inc. for the full value
of the note, in accordance with the terms of the note. The terms of
repayment, including the interest rate and payment schedule are the same.
During June 2003 the company repaid $107,860 in Principal. At June 30,
2004 the amount due to these stockholders and accrued interest amounted
to $17,040 and $16,935, respectively.
NOTE 6 - Loan Payable - Third Party
On May 10, 2004 a third party advanced Marketshare Recovery , Inc
$100,000 non-interest bearing, payable within one year.
9
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 7 - Stockholders' Deficiency
Preferred Stock
---------------
In June of 2003, HLLS amended its designation of preferred stock and
designated 3,425,000 shares of HLLS Preferred Stock. Each share of HLLS
Preferred Stock is automatically convertible into 10 shares of common
stock upon filing of an amendment to HLLS certificate of incorporation
authorizing a sufficient number of shares of common stock to effect such
a conversion. The HLLS Preferred Stock shall be entitled to receive when,
if and as declared by the Board of Directors dividends at 6% of its par
value per annum, payable in cash. Dividends on each share of the HLLS
Preferred Stock shall be non-cumulative and shall not accrue if not
declared. Each share of the HLLS Preferred Stock shall entitle its
holders to vote in all matters submitted to a vote of the stockholders of
the Company with the number of votes per Preferred share equal to the
number of votes available on a converted basis.
10
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 7 - Stockholders' Deficiency, continued
Preferred Stock, continued
--------------------------
As discussed in Note 2, in connection with the June 2003 merger
transaction with MKSR, 3,425,000 shares of the HLLS Preferred Stock were
issued to the stockholders of MKSR. In September 2003, these preferred
shares were converted into 34,250,000 shares of common stock.
Changes in Capital Structure
----------------------------
On August 5, 2003, HLLS filed with the Securities and Exchange Commission
a definitive information statement notifying the stockholders of the
Company that written consents from principal stockholders who
collectively hold in excess of 50% of the Company's common stock were
obtained and approved a 1 for 10 reverse split of the HLLS common stock,
to authorize up to 50,000,000 shares of HLLS common stock and to change
the name of HLLS to MarketShare Recovery, Inc.
The 1-for-10 reverse stock split became effective on August 29, 2003 and
the $12,700 of debt owed to the former Chief Executive Officer was
converted into 1,270,000 shares of common stock and the 3,425,000 shares
of HLLS Preferred Stock was converted into 34,250,000 shares of common
stock. All share and per share amounts in the consolidated financial
statements and notes thereto, were retroactively adjusted to reflect the
reverse stock split.
Stock Options
-------------
In September 2003, the Company adopted a 2003 Stock Option Plan (the
"2003 Plan"). Under the 2003 Plan, up to 15,000,000 incentive stock
options, or non-qualified stock options, could be granted to employees
and consultants. As of June 30, 2004, no options have been granted.
Common Stock Issuances
----------------------
During the six months ended June 30, 2004, the Company issued 287,650
shares of its common stock to two officers of the Company as additional
compensation valued at $40,271 charged to operations for the six months
ended June 30, 2004. The Company also issued 36,000 shares of its common
stock to HLLS in connection with the merger recorded at par value in the
statement of stockholders' deficiency. In addition the Company issued 500
shares to an individual valued at $60 charged to operations for the six
months ended June 30, 2004.
NOTE 8 - Concentrations of Credit Risk
Revenue from two customers accounted for approximately 26% and 11%,
respectively for the six months ended June 30, 2004. There were no
revenues from any customer amounting to 10% or more of the total net
revenues for the six months ended June 30, 2003.
11
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(Formerly Health and Leisure, Inc. and subsidiary)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
NOTE 9 - Commitments and Contingencies
Lease Obligations
-----------------
Beginning January 1, 2004, the Company entered into a sub lease agreement
with 110 Media Group, Inc and Subsidiaries (formerly known as Dominix)
("110 Media Group") to share the expense of office facilities occupied by
them jointly under a lease held by the Company. The agreement includes
future minimum rental payments to be received amounting to approximately
$16,000 per annum through March 2008.
Rent expense charged to operations for the six months ended June 30, 2004
and 2003 amounted to $9,376 and $13,469, net of sub rental income from
110 Media Group amounting to $9,376 and $-0-, respectively.
NOTE 10 - Related Party Transactions
Deferred Revenue
----------------
The Company entered into a database license agreement with 110 Media
Group to use and to sublicense the use of its database for a term of ten
years. For financial reporting, revenue is recognized using the
straight-line method, based upon the estimated economic useful life of
three years. At June 30, 2004, deferred revenue was $37,973.
NOTE 11 - Terminated Proposed Merger
110 Media Group, Inc.
---------------------
On November 25, 2003 110 Media Group, Inc a Delaware corporation traded
on NASDAQ electronic bulletin board (OTEN) and the Company entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") under which 110
Media Group, subject to certain conditions, would acquire all of the
outstanding capital stock of MKSR. The parties have determined that it is
in their mutual best interest to terminate the Stock Purchase Agreement.
In March 2004, the Company entered into a database license with Jade
Entertainment Group, Inc. ("Jade"), a wholly owned subsidiary of 110
Media Group (see Note 10).
NOTE 12 - Subsequent Event
Asset Purchase Agreement
------------------------
On October 7, 2004, the Company entered into an Asset Purchase
Agreement with Palomar Enterprises, Inc. (the "Agreement"). Pursuant to
the Agreement, the Company agreed to purchase certain assets,
including certain automotive notes and contracts, a business plan and
model for an automotive financial services company and a data base of
potential customers and $150,000 in cash from Palomar in exchange for
646,117 shares of the Company's Common Stock and 1,000,000 shares of
the Company's Series A Preferred Stock. Each share of Series A
Preferred Stock will convert into 65 shares of the Company's Common
Stock.
Concurrently with the execution of the aforementioned Agreement, the
Company's officers and directors have agreed to sell to Palomar
twenty-nine million (29,000,000) shares of the Company's Common Stock
for $150,000. In the event the transactions discussed above are
consummated, Palomar Enterprises and its affiliates will own
approximately 85% of the issued and outstanding shares of the
Company's Common Stock.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS; MARKET DATA
The discussion in this 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" below. 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 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.
The following discussion and analysis should be read in conjunction with our
financial statements and the notes associated with them contained elsewhere in
this quarterly report. This discussion should not be construed to imply that the
results discussed in this quarterly report will necessarily continue into the
future or that any conclusion reached in this quarterly report will necessarily
be indicative of actual operating results in the future. The discussion
represents only the best present assessment of management.
Pursuant to an Acquisition Agreement and Plan of Merger dated June 13, 2003 (the
"Merger Agreement"), by and among Health & Leisure, Inc (the "Registrant");
Venture Sum, Inc., a Delaware corporation and a wholly owned subsidiary of
Registrant ("Mergerco"); and MarketShare Recovery, Inc., a New York corporation,
("MKSR"), Mergerco merged with and into MKSR, and MKSR became a wholly-owned
subsidiary of the Registrant. The merger became effective June 13, 2003, (the
"Effective Date,") however closing of the Agreement occurred on July 15, 2003.
Subsequently, Health & Leisure, Inc. filed an amendment to its certificate of
incorporation and thereby changed its name to MarketShare Recovery, Inc.
13
MarketShare Recovery the parent company's operating subsidiary similarly named
MarketShare Recovery, Inc. was incorporated in New York in November 2000. The
subsidiary, MarketShare Recovery, Inc. is a provider of online direct marketing
solutions for enterprises. Our solutions enable corporations to create and
deliver online direct marketing programs that drive revenue, influence behavior
and deepen customer relationships. Our solutions provide customer insight and
powerful program execution through a combination of hosted applications and
technology infrastructure.
We derive our revenues from the sale of solutions that enable businesses to
proactively communicate with their customers online. Primarily, these services
have consisted of the design and execution of online direct marketing campaigns
and additional services provided by our Professional Services organization,
including the development and execution of Customer Acquisition programs.
Revenue for direct marketing and acquisition campaigns are recognized when
persuasive evidence of an arrangement exists, the campaign has been sent, the
fee is fixed or determinable and collection of the resulting receivables is
reasonably assured. Revenue generated by our professional service organization
is typically recognized as the service is provided.
Currently our ability to growand operate our existing business is being
constrained by new technologies and e-mail filtering devices installed at
internet service providers and on consumers personal computers. These programs
block our emails form reaching their final destination, which in turn is
affecting our ability to effectively market our services. These technological
obstacles have been put in place to combat spam however their effect has been
more widesrpead and has adversely affected our ability to deliver our clients
messages to our opt-in database of users. As a result, we are finding it harder
to maintain and grow our business as we are not able to deliver as many
advertisements for our clients and in turn are having difficulty in recruiting
new sales persons as well as retaining members of our existing sales force.
Our principal customers and target market are e-commerce, consumer oriented
product and service companies. We work with these customers, who are typically
engaged is selling products via the internet, by driving traffic to their
respective websites. This is accomplished through CPA and CPM campaigns, CPM
campaigns or cost per thousand campaigns are programs which generate revenues
based on service fees collected for delivering a specific pre-established number
of e-mails to prospective customers, these fees vary based on the specificity of
the demographic of the intended recipients. CPA campaigns are performance based
campaigns, the earning potential of these type of campaigns is significant and
as we expand our infrastructure we intend to allocate a certain portion of our
resources to executing these performance based campaigns.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our 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.
14
Revenue Recognition
Revenue recognition. We generate revenue from the sale of solutions that enable
businesses to proactively communicate with their customers online.
MarketShare Recovery applies the provisions of Staff Accounting Bulletin 104
"Revenue Recognition" and recognizes revenue when persuasive evidence of an
arrangement exists, the service has been delivered, the fee is fixed or
determinable and collection of the resulting receivables is reasonably assured.
Customer Marketing revenues are recognized upon sending of the campaigns.
Revenues attributable to one-time set-up fees for service initiation are
deferred and recognized ratably over the term of the client's service agreement.
Customer Acquisition revenues are derived primarily from programs that assist
clients in marketing their respective products or services. Customer Acquisition
programs fall into two general categories: CPM mailing programs and CPA campaign
programs. CPM mailing programs involve the execution and delivery of email
campaigns to a defined number of individuals based on a fixed fee per number of
e-mails delivered. The CPM, which stands for cost per thousand will vary based
on the specificity of the demographic to whom the campaign is delivered to. CPA
campaign programs are performance based campaigns which involve the execution
and delivery of email campaigns wherein we are paid either a flat fee of a
percentage of a successful sale or acquisition of a customer by one of our
clients.
We assess probability of collection based on a number of factors, including our
past transaction history with the customer and the credit-worthiness of the
customer. New customers and certain existing customers may be subject to a
credit review process which evaluates the customers' financial position and
ultimately their ability to pay according to the original terms of the
arrangement. Based on our review process, if it is determined from the outset or
during the term of an arrangement that collection of the resulting receivable is
not reasonably assured, then revenue is recognized on a cash-collected basis.
15
Results of Operations
The following table includes consolidated statements of operations data for the
six months ended June 30, 2004 and 2003 expressed as dollar amounts and as a
percentage of revenues.
Six Months Six Months
Ended June 30 Ended June 30
2004 2003 2004 2003
--------- --------- ------ ------
% %
Revenues
Net Revenue $ 228,224 $ 286,404 100.00 100.00
--------- --------- ------ ------
Total Net Revenue 228,224 286,404 100.00 100.00
Cost of Revenue
Officer Compensation 40,331 0 18.00 0
Salesmen Commissions 105,883 180,947 46.00 63.00
--------- --------- ------ ------
Total cost of revenues 146,214 180,947 64.00 63.00
--------- --------- ------ ------
Operating Expenses
Selling, general and
administrative 119,800 77,982 52.00 27.00
Depreciation 264 0 0.00 0.00
--------- --------- ------ ------
Total operating expenses 120,064 77,982 52.00 27.00
--------- --------- ------ ------
Operating Loss (38,054) 27,475
Other Income (Expense)
Interest (6,935) 0 (3.00) 00.00
Gain on sale of marketable
securities 764 (6,871) 0.00 (2.00)
Unrealized Loss/gain on
marketable sec (41,705) 23,715 (18.00) 8.00
--------- --------- ------ ------
Total Other Expenses (47,876) 16,844 (21.00) 6.00
--------- --------- ------ ------
(Loss Income Before Taxes) (85,930) 44,319 (38.00) 15.00
--------- --------- ------ ------
Provision For Income Taxes 0 9,000 0.00 3.00
--------- --------- ------ ------
Net (Loss) Income $ (85,930) $ 35,319
========= =========
16
Comparison of Six Month Periods Ended June 30, 2004 and 2003
Our net revenues decreased by 20% from $286,404 for the six months ended June
30, 2003 to $228,224 for the six months ended June 30, 2004. The decrease in
revenues is due to our reduced outside sales force consisting of experienced
salesmen with proven sales experience. Cost of revenues as a percent of net
revenues increased from 63% of net revenues for the six months ended June 30,
2003 to 64% of net revenues for the six months ended June 30, 2004. The decrease
in cost of revenues is due to lower commission rates paid to the outside sales
force.
Selling, general and administrative expenses increased by 54% from $77,982 for
the six months ended June 30, 2003 to $119,800 for the six months ended June
30,2004 this increase is due to professional fees incurred in connection with
Marketshare Recovery being a publicly held company.
Other (expenses) income increased by 384% from $16,844 for the six months ended
June 30, 2003 to $(47,876) for the six months ended June 30, 2004. This increase
is attributed to interest accrued on amounts due to shareholders in connection
with the acquisition as well as unrealized losses on marketable securities held
for trading purposes.
Comparison of Quarters Ended June 30, 2004 and 2003
Our net revenue decreased by 2% from $125,494 for the three months ended June
30, 2003 to $123,261 for the three months ended June 30, 2004. The decrease in
revenues is due to our reduced outside sales force consisting of experienced
salesmen with proven sales experience. Cost of revenues as a percent of net
revenues decreased from 51% of net revenues for the three months ended June 30,
2003 to 45% for net revenues for the three months ended June 30, 2004. The
decrease in cost of revenues is due to lower commission rates paid to the
outside sales force.
Selling, general and administrative expenses increased by 2% from $51,371 for
the three months ended June 30, 2003 to $52,192 for the three months ended June
30, 2004. This increase is due to professional fees incurred in connection with
MarketShare Recovery being a publicly held company.
Other (expenses) income increased by 179% from $23,009 for the three months
ended June 30, 2003 to $(18,063) for the three months ended June 30, 2004. This
increase is attributed to accrued on amounts due to shareholders in connection
with the acquisition as well as unrealized losses on marketable securities held
for trading purposes.
17
Liquidity and Capital Resources
Cash provided by operating activities during the six months ended June 30, 2004
amounted to $16,169 compared to $14,629 during the six months ended June
30, 2003. The increase in cash is due to more services being performed.
Cash used in operating activities increased due to professional fees incurred in
connection with Marketshare Recovery becoming a publicly traded company and for
commissions paid to outside sales consultants; for bringing new clientele to the
company for promotion and marketing services.
Cash used in investing activities during the six months ended June 30,2004
amounted to $2,108 compared to $0 during the six months ended June 30,2003. The
company purchased computer equipment necessary for expanding our direct
marketing capabilities in order to meet customer demands.
Cash used in financing activities during the six months ended June 30, 2004
Amounted to 7,860 compared to $0 during the six months ended June 30, 2003.
The company received an advance from a third party to secure the public shell of
Marketshare Recovery. In addition the company repaid amounts due to shareholders
who guaranteed a $125,000 secured promissory note with H&L concepts.
Beginning in 2004 the Company has expanded the manner in which the Company can
accept payment from customers, previously we only accepted cash, like cash
instruments and company check however, We can now accept payment by all major
credit cards, by phone and have implemented an auto-draft system which is a
billing system which allows us to directly debit funds from customers bank
accounts. We anticipate that these additional payment options will allow us to
sell our customers additional services and up-sell and cross-promote our
different product offerings by allowing our customers the ability to extend
their payment options, establish recurring billing. Although there can be no
assurance, we feel that these additional payment options should positively
impact revenues and cash flow.
Throughout 2003 and for the six months ended June 30, 2004 the company has made
significant upgrades to its database and emailing technology. We have greatly
increased capacity and can process and execute campaigns faster and more
efficiently. In addition We now have the ability to evaluate the overall success
of our campaigns by tracking how many people viewed the campaign. We can also
generate detailed reports to show the customer how successful the campaign was,
how many ads and emails were sent and received by the intended recipients and
whether the campaign generated leads, sales or impressions. Our upgrades have
also improved our ability to sort and analyze data to generate customized
reports for our customers.
In view of our accumulated deficit and recurring losses, our auditors have added
an explanatory paragraph to their report on our financial statements stating
18
that 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
video and website 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.
19
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, if we
are able to successfully address the material weaknesses in our internal
accounting controls as discussed below, 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.
Our board of directors were advised by Marcum & Kliegman, LLP, our independent
registered public accounting firm, that during their performance of review
procedures related to Marketshare Recovery's unaudited interim financial
statements for the quarter ended June 30, 2004 Marcum & Kliegman LLP identified
two material weaknesses, as defined in Public Company Accounting Oversight Board
Standard No. 2, in our internal control over financial reporting as follows:
o Insufficiently skilled personnel compounded by a lack of human
resources and expected near-term significant turnover within our
accounting and financial reporting function. Also, we must improve
controls surrounding adequate monitoring and oversight of the work
performed by accounting and financial reporting personnel.
o Insufficient analysis, documentation and review of the selection
and application of generally accepted accounting principles to
significant non-routine transactions, including the preparation of
financial statement disclosures relating thereto.
These material weaknesses result in deficiencies in the processes, procedures
and competencies within our accounting and financial reporting function and
contributed to post-closing adjustments and delays in the completion and filing
of our June 30, 2004 Form 10-QSB.
20
We have assigned a high priority to the short-term and long-term improvement of
our internal control over financial reporting. Actions to address the material
weaknesses described above that we will undertake, or have undertaken, include
the following among others:
o We periodically review staffing of our accounting and financial
reporting functions to ensure appropriate staffing and supervision
of those functions. In January 2004, we hired a new controller. In
August 2004, based on an evaluation of our existing accounting
resources, management developed a plan to restructure the
accounting and financial reporting function. This plan includes
both the addition of new resources and the replacement of certain
existing resources. At that time, we began recruiting efforts for
various positions within our accounting department. In September
2004, and after details of the restructuring plan became known to
members of our accounting staff, our controller announced his
resignation. In September 2004, we hired an outside consultant as
a replacement.
o During the third quarter of 2004, we will continue our internal
control review process to remediate the internal control material
weaknesses identified above by Marcum & Kliegman LLP.
Other than regarding the material weaknesses discussed above, there have been no
changes in our internal control over financial reporting during the period
covered by this report that significantly affect our control environment.
In addition to the matters discussed above, the independent registered public
accounting firm responsible for the audit of Marketshare's financial statements
as of and for the year ending December 31, 2005 must attest to and issue a
report on management's assessment of the design and operational effectiveness of
our internal control over financial reporting. Although we intend to conduct a
rigorous review of our internal control over financial reporting to help achieve
compliance with the Section 404 requirements of the Sarbanes-Oxley Act, if our
independent registered public accounting firm is not satisfied with our internal
control over financial reporting or with the level at which it is documented,
designed, operated or reviewed, they may decline to attest to management's
assessment or may issue a qualified report identifying either a significant
deficiency or a material weakness in our internal controls. This could result in
significant additional expenditures responding to the Section 404 internal
control audit, a diversion of management attention and potentially an adverse
reaction to our common stock in the financial markets.
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.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Chief Executive Officer's Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following reports have been filed on Form 8-K during the quarter ended
June 30, 2004.
On April 1, 2004, MarketShare filed a current report on Form 8-K to announce
that the Compay terminated an acquisition agreement with Dominix, Inc.
Attached to the 8-k filing are: the Termination Agreement between the Company
and Dominix, Inc.; the Database License Agreement between Jade Entertainment
Group, Inc. and MarketShare Recovery, Inc. (NY); the Memorandum of
Understanding between Jade Entertainment Group, Inc. and MarketShare
Recovery, Inc. (NY) relating to Suite 101, 95 Broadhollow Road, Melville, New
York; and the Press Release announcing the termination of the Agreement to
sell the Company's operating subsidiary, MarketShare Recovery, Inc. a
New York corporation.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MARKETSHARE RECOVERY, INC.
Date: October 15, 2004
---------------------------
Raymond Barton,
Chief Executive Officer
Date: October 15, 2004
---------------------------
Timothy Schmidt,
Chief Financial Officer