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TMCNet:  LUXEYARD, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

[November 19, 2012]

LUXEYARD, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q and with conjunction with our annual report. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to future events or our future performance. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this prospectus. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.


Overview We function as an online marketplace for luxury consumer products. We source from merchants and offer products to our members through our website via a "flash sale" or "daily deal" at deep discounts to retail prices. In January 2012, we launched our website www.LuxeYard.com and began operations. We launched with the product line of home goods and furniture. On March 27, 2012, we launched our LuxeStyle vertical, consisting of apparel lines. Initially, we focused on household furnishings and goods such as furniture, lighting and bedding. As our member base and merchant selection increase, we expect to expand our offerings to include other consumer goods such as travel, gourmet food and beverages, consumer services events and gift cards. On May 1, 2012, we entered into operating agreements with Jaxon International, LLC (Jaxon) and Home Loft, Inc. to operate its Leather Groups (LG) website. Jaxon is a traditional "brick and mortar" retail location and LG is a retail web site. Subsequent to September 30, 2012, the operating agreement with Jaxon was terminated. On August 6, 2012, we entered into a Management Services Agreement with Ferris Holding Company, Inc., a Delaware corporation, DBA "Bari Leather Furniture" (Bari) to operate its Bari Leather Furniture website. Effective September 27, 2012, the operating agreement with Ferris Holding Company, Inc. was also terminated.

Each week we conduct several "flash sale" events on our website in which we feature merchandise at steep discounts to suggested retail prices. At the beginning of each event, members receive an email describing the featured products and directing them to our website to participate. We list events on the member homepage of our website and each event remains on our site for three days or longer, depending on demand and quantity offered. We also offer products in "static" events, which are available for sale until our inventory is depleted.

In addition to flash sales, we also feature a "Daily Deal" whereby we offer a single product on our website for a 24 hour period. Similar to flash sales, our members receive email notifications when deals commence, directing them to the member homepage for more details. Unlike other deal of the day models, members are not required to purchase a minimum number of products before the deal becomes active. In some cases, when our Group Buy feature is active, as more members participate in the deal, the purchase price decreases.

Members purchase products directly through our website via credit card and, in most cases, products ship directly from the merchant's location to the member.

With our Concierge Buying program, we use a platform similar to Facebook and Pinterest to determine what items are in high demand by our customers. We then source the most popular products and offer those items to or members via a sale that features special notifications and discounts for those who contributed to the process.

In April, we began a business-to-business program through which we source containers of goods and sell them to retailers via our business-to-business website [TradeYardUSA.com]. The retailers are offered products prior to the arrival of the container shipments and any unsold items from the container shipment are then offered on our website. The business-to-business program is operating under the TradeYard dba and offers flash sales to businesses and daily deals to businesses.

14 We manage the LeatherGroups web-site [LeatherGroups.com]. We also have syndicate sales events and product sales with other flash sale and daily deal websites wherein we provide goods to be sold on their websites.

Recent Developments Financing We raised approximately $1,080,000 in gross proceeds in 2011 from two separate offerings. In addition, Bridge Notes in the principal amount of approximately $217,500 were exchanged for units in the offering and $62,500 in Bridge Notes was paid out of the proceeds of the offering.

In 2012, we have raised approximately $2,915,000 in debentures and raised $3,116,500 from securities units offering (the "offering"). This amount includes Bridge Notes in the amounts of $225,000 exchanged for units in the offering.

Gross proceeds from the offering were $2,891,500. Accordingly, we had $5,806,500 in actual gross proceeds from the debentures and offering after deducting the principal amount of Bridge Notes exchanged at the closing of the offering, but before deducting any expenses incurred by the Company in connection with the offering.

Debentures During the period from January to April 2012, we entered into certain Debenture Purchase Agreements (the "Purchase Agreement") with certain investors (the "Holder" or "Holders") whereby we issued and sold to the Holders certain 10% Convertible Debentures which are convertible into shares of our common stock (collectively, the "Notes"), $0.0001 par value per share (the "Shares"), at a conversion price of $0.30 per share, subject to adjustment. The aggregate original principal amount of all Notes is $2,915,000. Based on the aggregate original principal amount sold by the Company, the minimum Shares we may be required to issue is 9,716,667.

Securities On May 24, 2012, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with several investors whereby the Company sold units consisting of (i) 8,904,287 shares of its 8% Convertible Preferred Stock common stock (the "Shares"), (ii) Series C warrants to purchase 8,904,287 shares of its common stock which have a five-year term and an initial per share exercise price of $0.50, subject to adjustment (the "Series C Warrants"), (iii) Series D warrants to purchase 4,452,143 shares of common stock which have a 90 day term from the effectiveness of the Form S-1 filed with the SEC on June 18, 2012 and an initial per share exercise price of $0.35, subject to adjustment (the "Series D Warrants"), and (iv) 4,452,144 Series E warrants which have a five-year term and an initial per share exercise price of $0.50, subject to adjustment and exercise of the Series D Warrants (the "Series E Warrants"). The price per unit was $0.35 for an aggregate purchase price of $3,116,500.

The Series D warrants expired effective August 22, 2012. As the Series E warrants were subject to adjustment and exercise of the D warrants, the Series E warrants were forfeited when the Series D warrants expired.

Increase in Authorized Shares Effective May 2, 2012, the Company filed a Certificate of Amendment to its Articles of Incorporation to increase the total number of authorized shares to five hundred fifty million (550,000,000) shares of which five hundred million (500,000,000) shares shall be common stock, par value $0.0001, and fifty million (50,000,000) shares shall be blank check preferred stock, par value $0.0001. The Amendment was declared effective as of May 2, 2012.

Operating Agreements On May 1, 2012, the Company entered into an operating agreement with Jaxon International, LLC, a California Limited Liability Company ("Jaxon"). Jaxon is owned by the wife of the Company's CEO and Director. Subsequent to September 30, 2012, the operating agreement with Jaxon was terminated.

On May 1, 2012, the Company entered into an operating agreement with HomeLoft, Inc. to operate its LeatherGroups (LG) web site. HomeLoft is owned by the Company's Chief Operating Officer.

15 On August 6, 2012 the Company entered a Management Services Agreement with Ferris Holding Company, Inc., a Delaware corporation, DBA "Bari Leather Furniture" (Bari) to operate its Bari Leather Furniture website. Effective September 27, 2012, the operating agreement with Ferris Holding Company, Inc.

was terminated.

Plan of Operation We have successfully launched our web site and our home furnishings and apparel divisions. Additionally, we have experienced growth in membership, which were 732,149 on November 15, 2012. We are focused on strengthening our relationships with vendors/suppliers and forming strategic alliances with other web-based merchants who act as distribution partners. During the next twelve months, we expect to take the following steps in connection with the further development of our business and the implementation of our plan of operations: ¨ Continue scaling our marketing campaign to attract a high volume of quality members to our website. Marketing initiatives consist of search engine optimization, social media marketing, referral and affiliate marketing programs, pay-per-click search and display advertising and public relations; ¨ Expand upon our member relations and communication activities, with email retention and activation campaigns, additional editorial content and celebrity Trendsetter involvement that will increase our site traffic and build our brand; ¨ Continue to improve upon the ability for our website to deliver a high-quality consumer ecommerce experience, the hallmark of which is access to luxury products at affordable prices for our members; ¨ Identify and partner with more merchants whose products we want to feature on our website. We believe featuring a variety of merchants makes our marketplace more attractive to members; ¨ Expand our product offering to include additional vertical market segments, which may include travel, gourmet food and beverages, consumer services, events and gift cards; ¨ Establish new domestic and international syndication partnerships with companies whose existing customer base can extend the distribution of our products; ¨ Build on the momentum of our Concierge Buying and Group Buy features, which currently differentiate us and we believe hold tremendous value as consumers increasingly leverage their collective buying power to identify, share and pay for products at the intersection of social, mobile and ecommerce technologies; and ¨ Expand our business-to-business operation into a key market differentiator and one that will scale on the basis of our ability to source products for thousands of smaller vendors.

¨ Expand our buying power with the addition of like-kind website alliances through operating agreements and/or acquisitions.

As two of the operational agreements we entered into were terminated, our revenue decreased and our projected growth has declined. Over the next twelve months, we expect to grow steadily while improving profitability. We anticipate that we will need additional financing in the next twelve months to improve operations and facilitate our growth. We have implemented cost savings measures to reduce our overhead, including reduction in staff and reduction in facilities. We intend to pursue our strategy of establishing alliances through operating agreements and/or acquisitions with the targeted companies that will increase our revenue and at the same time reduce our cost of obtaining merchandise because we will be able to obtain greater discounts with larger orders. We will also be able to leverage our infrastructure and obtain economies of scale and replicate our technology across the various verticals.

Results of Operations For the nine months ended September 30, 2012, we had revenues of $1,435,433 compared to revenue of $0 for the period from inception to September 30, 2011.

For the three month period ended September, 30, 2012 our revenue was $574,381 representing a 19% quarter-to-quarter decrease. The decrease is mainly brought about by the termination of our operating agreements with Jaxon and Ferris Holding Company and our decreased sales from our website in the third quarter.

Our net profit for the nine months ended September 30, 2012 was $6,210,080 and for the three month period ended September 30, 2012 was $3,592,066 compared to a $47,544 loss for the period from inception to September 30, 2011. The income was primarily from a gain on our complex derivatives of $19,550,862 for the nine month period ended September 30, 2012 and a gain of $6,051,937 for the three month period ended September 30, 2012. These gains were triggered by a drop in the market value of our common shares. Operating loss for the nine month period ended September 30, 2012 was $13,289,725 and for the three month period ended September 30, 2012 was $3,613,370. A contributing factor to this loss was the fair market value of the 343,894 restricted shares issued for services provided by our CEO and various vendors in the amount of $98,049 and 5,752,072 restricted shares valuing $5,867,967 for the three and nine months ended September 30, 2012, respectively. Our other significant expenses were payroll of $1 Million for the three month and $2.3 Million for the nine month periods ended September 30, 2012 and marketing of $141,000 for the three month and $717,055 for nine month periods ended September 30, 2012. As of September 30, 2012, we had total current assets of $802,922 and total current liabilities of $4,784,865 compared to total current assets of $326,842 and total current liabilities of $390,091 at December 31, 2011.

16 The Company recognized revenue and cost of goods sold for operating the Jaxon retail store. The Company paid a monthly overhead allocation of $45,000 to cover Jason's fixed operating expenses. During the nine months ended September 30, 2012, the Company recorded $457,968 of sales and $236,944 of cost of goods sold for the Jaxon store. An overhead allocation of $180,000 was paid to Jaxon during the period.

The Company paid a $50,000 non-refundable deposit to HomeLoft. For operating the web-site, the Company receives all of the revenue for products that it sells and recognizes the cost of goods sold. During the nine months ended September 30, 2012, the Company recorded $172,067 of sales and $47,720 of cost of goods sold for the LG.

Liquidity and Capital Resources As of September 30, 2012 we had cash of $448,474 compared to cash of $154,400, on December 31, 2011. Our primary uses of cash were for marketing expenses, employee compensation, and working capital. The main sources of cash were from the proceeds from the private offering of its securities, from the issuances of debt in the form of debentures and from the settlement of a lawsuit filed by the Company and Amir Mireskandari, the chairman of the Board of Directors (Mireskandari v. Gann), against certain shareholders of the Company. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term: ¨ An increase in working capital requirements, ¨ Our plans to acquire additional web-sites and compatible businesses ¨ Infrastructure Improvements ¨ Addition of administrative and sales personnel as the business grows, ¨ Increases in advertising, public relations and sales promotions as we commence operations, ¨ Development of new members and market initiation, and ¨ The cost of being a public company and the continued increase in costs due to governmental compliance activities.

The following summarizes the key components of the Company's cash flows for the nine months 2012 and for fiscal 2011:

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