These financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial
information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the interim period ended March 31, 2013 are not necessarily indicative of
the results that can be expected for the full year.
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
NOTE 1 – Significant Accounting
Policies and Procedures
Basis of Presentation
The accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion
of management, are necessary to present fairly the financial position of the Company as of March 31, 2013, and the results of its
operations and cash flows for the three months and three months ended March 31, 2013 and 2012. Certain information and footnote
disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S.
Securities and Exchange Commission (“the Commission”). The Company believes that the disclosures in the unaudited condensed
consolidated financial statements are adequate to ensure the information presented is not misleading. However, the unaudited condensed
consolidated financial statements included herein should be read in conjunction with the financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December 21, 2012 filed with the Commission on April
22, 2013.
The accompanying consolidated financial
statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the
United States of America.
Principles of Consolidation
The financial statements as of March
31, 2013 and for the three-months then ended include Nyxio Technologies Corporation (“NTC”) and its wholly owned subsidiary,
Nyxio Technologies, Inc. (“NTI”). All significant inter-company transactions and balances have been eliminated. NTC
and its subsidiary are collectively referred to herein as the “Company”.
Basis of presentation
The Company is in the development
stage in accordance with Accounting Standards Codification (“ASC”) Topic No. 915.
Cash and cash equivalents
The Company considers all highly
liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. At March 31, 2013 and
December 31, 2012, the Company had no cash equivalents.
Accounts receivable
Accounts receivable is reported
at the customers’ outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts
receivable.
An allowance for doubtful accounts
on accounts receivable is charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a
level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on
historical write-off percentages and information collected from individual customers. Accounts receivable are charged off against
the allowance when collectability is determined to be permanently impaired.
Inventory
Inventories are stated at the lower
of cost or market. Cost is determined on a standard cost basis that approximates the first-in, first-out (FIFO) method. Market
is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration,
and other factors in evaluating net realizable value. As of March 31, 2013 and December 31, 2012, respectively, there was no finished
goods inventory.
Fixed Assets
Property and equipment are recorded
at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are
charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation
are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period.
Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement
purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate. The estimated
useful lives for significant property and equipment categories are as follows:
Equipment
|
3-5 years
|
Furniture
|
7 years
|
The Company reviews the carrying
value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an
asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In
cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to
an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this
assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of
obsolescence, demand, competition, and other economic factors. Based on this assessment there were no impairments needed as of
March 31, 2013 or 2012. Depreciation expense for the three months ended March 31, 2013, and 2012 and for the period from July 8,
2010 (inception) to March 31, 2013, was $2,951, $2,951 and $22,636, respectively.
Revenue recognition
The Company recognizes revenue in
accordance with ASC subtopic 605-10 (formerly SEC Staff Accounting Bulletin No. 104 and 13A, “Revenue Recognition”)
net of expected cancellations and allowances. As of March 31, 2013 and 2012, the Company evaluated evidence of cancellation in
order to make a reliable estimate and determined there were no material cancellations during the years and therefore no allowances
has been made.
The Company's revenues, which do
not require any significant production, modification or customization for the Company's targeted customers and do not have multiple
elements, are recognized when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the Company's
fee is fixed and determinable; and (iv) collectability is probable.
Substantially all of the Company's
revenues are derived from the sales of
Smart TV and Tablet PC technology and products.
The Company's
clients are charged for these products on a per transaction basis. Pricing varies depending on the product sold. Revenue
is recognized in the period in which the products are sold.
Loss per share
The Company reports earnings (loss)
per share in accordance with ASC Topic 260-10, "Earnings per Share." Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss)
per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Diluted earnings (loss) per share has not been presented since the effect of the assumed exercise
or conversion of stock options, warrants, and debt to purchase common shares, would have an anti-dilutive effect. At March 31,
2013 and 2012 the Company had 10,090 and 83,333 zero potential common shares that have been excluded from the computation of diluted
net loss per share.
Income taxes
The Company follows ASC subtopic
740-10 for recording the provision for income taxes. ASC 740-10 requires the use of the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred tax assets and liabilities are computed based upon the difference
between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when
the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the
changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion
or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to
the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision
for deferred income taxes in the period of change.
Deferred income taxes may arise
from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different
periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to
which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified
as current or non-current depending on the periods in which the temporary differences are expected to reverse.
Fair Value of Financial Instruments
The Company has financial instruments
whereby the fair value of the financial instruments could be different from that recorded on a historical basis in the accompanying
balance sheets. The Company's financial instruments consist of cash, receivables, accounts payable, accrued liabilities, and notes
payable. The carrying amounts of the Company's financial instruments approximate their fair values as of March 31, 2013 and 2012
due to their short-term nature.
Long-lived assets
The Company accounts for its long-lived
assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC
Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate
that the historical cost or carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the
carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition.
If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference
between the asset’s carrying value and its fair value or disposable value. For the three-months ended March 31, 2013, and
the year ended December 31, 2012, the Company determined that none of its long-term assets were impaired.
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 affects 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.
Advertising
The Company expenses advertising
costs as incurred. The Company’s advertising expenses were $45 and $31,060 during the three months ended March 31, 2013 and
2012, respectively, and $148,296 for the period from July 8, 2010 through March 31, 2013.
Research and development
Research and development costs are
expensed as incurred. During the three-months ended March 31, 2013 and 2012 and for the period from July 8, 2010 (inception) to
March 31, 2013, research and development costs were $0, $20 and $30,850, respectively.
Concentration of Business and
Credit Risk
The Company has no significant off-balance
sheet risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company’s financial
instruments that are exposed to concentration of credit risks consist primarily of cash. The Company maintains its cash in bank
accounts which, may at times, exceed federally-insured limits.
Financial instruments which potentially
subject the Company to concentrations of business risk consist principally of availability of suppliers. As of March 31, 2013,
the Company was dependent on approximately two vendors for 85% of product supply.
Share-Based Compensation
The Company accounts for stock-based
payments to employees in accordance with ASC 718, “Stock Compensation” (“ASC 718”). Stock-based payments
to employees include grants of stock, grants of stock options and issuance of warrants that are recognized in the consolidated
statement of operations based on their fair values at the date of grant.
The Company accounts for stock-based
payments to non-employees in accordance with ASC 718 and Topic 505-50, “Equity-Based Payments to Non-Employees.” Stock-based
payments to non-employees include grants of stock, grants of stock options and issuances of warrants that are recognized in the
consolidated statement of operations based on the value of the vested portion of the award over the requisite service period as
measured at its then-current fair value as of each financial reporting date.
The Company calculates the fair
value of option grants and warrant issuances utilizing the Black-Scholes pricing model. The amount of stock-based compensation
recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. ASC 718 requires
forfeitures to be estimated at the time stock options are granted and warrants are issued to employees and non-employees, and revised,
if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct
from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock
option or warrant. The Company estimates forfeiture rates for all unvested awards when calculating the expense for the period.
In estimating the forfeiture rate, the Company monitors both stock option and warrant exercises as well as employee termination
patterns.
The resulting stock-based compensation
expense for both employee and non-employee awards is generally recognized on a straight-line basis over the requisite service period
of the award.
For the three-months ended March
31, 2013 and 2012, and the period from July 8, 2010 (inception) to March 31, 2013, the Company recorded share-based compensation
of $0, $0, and $4,111,507, respectively.
Recent accounting pronouncements
Recent accounting pronouncements
issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management
to have a material impact on the Company's present or future financial statements
International Financial Reporting
Standards:
In November 2008, the Securities
and Exchange Commission (“SEC”) issued for comment a proposed roadmap regarding potential use of financial statements
prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting
Standards Board. Under the proposed roadmap, the Company would be required to prepare financial statements in accordance with IFRS
in fiscal year 2014, including comparative information also prepared under IFRS for fiscal 2013 and 2012. The Company is currently
assessing the potential impact of IFRS on its financial statements and will continue to follow the proposed roadmap for future
developments.
Year-end
The Company has adopted December
31, as its fiscal year end.
NOTE 2 - Going concern
These financial statements have
been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the
Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization values may be substantially
different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary
to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern.
The Company has not yet achieved profitable operations and since its inception (July 8, 2010) through March 31, 2013 the Company
had accumulated losses of $7,423,596 and a working capital deficit of $1,236,029. Management expects to incur further losses in
the development of its business, all of which raises 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 its ability to generate future profitable
operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business
operations when they come due.
The Company expects to continue
to incur substantial losses as it executes its business plan and does not expect to attain profitability in the near future. Since
its inception, the Company has funded operations through short-term borrowings and equity investments in order to meet its strategic
objectives. The Company's future operations are dependent upon external funding and its ability to execute its business plan, realize
sales and control expenses. Management believes that sufficient funding will be available from additional borrowings and private
placements to meet its business objectives, including anticipated cash needs for working capital, for a reasonable period of time.
However, there can be no assurance that the Company will be able to obtain sufficient funds to continue the development of its
business operation, or if obtained, upon terms favorable to the Company.
NOTE 3 - Accounts receivable
Accounts receivable consist of the
following:
|
|
March 31,
|
|
December 31,
|
|
|
2012
|
|
2012
|
Trade accounts receivable
|
|
$
|
223
|
|
|
$
|
223
|
|
Due from related party
|
|
|
20,487
|
|
|
|
27,177
|
|
Less: Allowance for doubtful accounts
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
20,710
|
|
|
$
|
27,400
|
|
As of March 31, 2013 and December
31, 2012, respectively, the Company had not established an allowance for doubtful accounts.
NOTE 4 - Property and equipment
The following is a summary of property
and equipment:
|
|
March 31,
|
|
December 31,
|
|
|
2013
|
|
2012
|
Furniture and fixtures
|
|
$
|
11,612
|
|
|
$
|
11,612
|
|
Software
|
|
|
11,945
|
|
|
|
11,945
|
|
Computers and equipment
|
|
|
22,249
|
|
|
|
22,249
|
|
Less: accumulated depreciation
|
|
|
(22,636
|
)
|
|
|
(19,685
|
)
|
|
|
$
|
23,170
|
|
|
$
|
26,121
|
|
Depreciation for the three-months
ended March 31, 2013 and 2012 and for the period from July 8, 2010 (inception) to March 31, 2013 was $2,951, $2,951 and $22,636,
respectively.
NOTE 5 - Related party transactions
Related party receivable
At the Company’s inception
(July 8, 2010) the sole officer and shareholder contributed all the assets and liabilities distributed to him from his former limited
liability company which was dissolved on July 2, 2010. At the date of contribution, the fair value of the liabilities contributed
exceeded that of the assets by $54,438, which has been recorded as a related party receivable. The contributed assets and liabilities,
including the amount due from the related party are as follows:
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,984
|
|
|
|
|
|
Inventory
|
|
|
7,877
|
|
|
|
|
|
Fixed assets, at fair value
|
|
|
12,863
|
|
|
|
|
|
Due from related party
|
|
|
54,438
|
|
|
|
|
|
Deposits held
|
|
|
2,965
|
|
|
|
|
|
Total assets contributed
|
|
$
|
84,127
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
500
|
|
|
|
|
|
Note payable
|
|
|
83,627
|
|
|
|
|
|
Total liabilities contributed
|
|
$
|
84,127
|
On July 8, 2010 (inception) the
Company issued 100 shares of its common stock to its sole officer as founder’s shares in exchange for cash of $100. During
the period from inception (July 8, 2010) and December 31, 2010, the Company’s sole officer donated his services valued at
$28,500 which was recorded as a reduction on the amount due from him. In addition, the officer made cash payments totaling $5,400
as further reductions in his related party receivable due to the Company.
During the year ended December 31,
2011, the aforementioned officer donated additional services valued at $10,375 which has been recorded as a reduction in the officers’
receivable balance. Additionally, the Company advanced $14,516 to the officer for personal expenses and received repayment in the
amount of $1,841.
As of March 31, 2013 and December
31, 2012, the amounts due from the officer totaled $20,487 and $27,177, respectively.
Merger warrants
In connection with the Company July
5, 2011 merger activities, the Company issued a warrant to purchase up to 83,333 (post-split) shares of the Company’s common
stock at an exercise price of $0.01 per share to its chief executive officer and majority shareholder. The warrant has a term of
twenty-four months expiring on July 1, 2013 and is subject to performance conditions. The performance conditions allow for the
warrant to be exercisable in four increments of 20,833 (post-split) shares for each $1,000,000 of cumulative realized revenue over
the twenty-four month term. As of March 31, 2013, performance conditions have not been met therefore; no portion of the warrant
is exercisable. On the date of grant, the estimated fair value of each warrant using the Black-Scholes model is $189 per share
utilizing a strike price of $4.50, volatility of 177%, and a risk-free rate of 4.40%. The Company estimated the number of shares
that would become exercisable throughout the twenty-four month term based on historical activity and pro forma projections to be
20,833 (post-split) shares resulting in an estimated fair value of $3,967,500 which has been recorded as a consulting expense during
2011.
Employment/Consulting commitments
One June 1, 2011, the Company entered
into an Employment Agreement with its chief executive officer. The initial term of the agreement covers a three-year period commencing
on June 1, 2011 and required annual compensation payment of $24,000. On January 1, 2012, the original agreement was amended to
provide for an increase in annual compensation from the original $24,000 to $48,000 per year.
On June 1, 2011, the Company issued
a Consulting Agreement to its chief financial officer. Pursuant to the agreement, annual consulting fees of $24,000 will be paid
per annum for the term of the agreement which was to expire on March 1, 2014. In September 2011, the Company replaced the consulting
agreement with an offer of employment with annual compensation of $30,041. Employment is considered “at-will” and therefore
can be terminated at any time by either party.
Note payable to a related party
During the year ended December 31,
2011, the Company’s chief financial officer paid certain liabilities totaling $10,578 on behalf of the Company. In October
2011, the Company issued a promissory note for the value of the payment which bears interest at a rate of 8% per annum and matures
on June 30, 2012. On January 12, 2012, this same officer provided an additional $20,000 under the same terms, to the Company for
operating expenses. As of March 31, 2013 the unpaid balance totaled $8,458 and with accrued interest of $2,318.
NOTE 6 - Notes payable
Chamisa Technology, LLC
On July 8, 2010, the Company’s chief
executive officer and majority shareholder contributed a note payable in the amount of $83,627 which originated from his previously
dissolved limited liability company. The note balance represented cash advances of $81,595 and previously accrued interest of $2,032.
During the period from inception (July 8, 2010) through December 31, 2010, the Company received additional advances of $64,491
and $18,000 during the year ended December 31, 2011. No formal agreement pertaining to the advances had previously been documented,
however pursuant to a verbal agreement between the parties, the balance was due on demand and bears interest at a rate of 12% per
annum. March 5, 2012, the Company formalized and acknowledged its liability to Chamisa Technology, LLC in the form of a promissory
note. The promissory note is unsecured bears interest at a rate of 12% per annum, and matures on August 31, 2012. Pursuant to the
new promissory note, the Company is required to make monthly principal and interest payments through maturity. As of December 31,
2012, the note is in default.
On April 21, 2012, Chamisa Technology,
LLC assigned $81,595 of the note to an individual who further assigned portions of the debt to various entities. During the year
ended December 31, 2012, the original assignee agreed to forgive $56,595 of the debt in exchange for immediate conversion rights
at a conversion rate of $0.001. During the period ended December 31, 2012, the Company authorized the issuance of 98 (post-split)
shares of common stock for the conversion of $25,000 in principal and $936 of accrued interest. The fair value of the shares issued
totaled $737,873 based on the market price of the common stock on the date of conversion. The difference in the fair value of the
shares issued and the principal amount of debt and accrued interest converted totaled $711,937 and has been recorded as a financing
costs.
As of March 31, 2013 and December
31, 2012, the unpaid principal balance together with accrued interest totaled $133,825 and $131,220, respectively.
Coach Capital LLC
On June 30, 2011, the Company issued
a promissory note in the amount of $111,000 to Coach Capital, LLC. The note is unsecured, due on demand and bears interest at a
rate of 10% per annum. In the event of default, the interest rate will immediately escalate to 30% per annum. As of March 31, 2013
and December 31, 2012, the unpaid principal balance together with accrued interest totaled $132,169 and $128,919, respectively.
ICG USA, LLC
On February 16, 2012, the Company entered
into a Securities Purchase Agreement with ICG USA, LLC (“ICG”) and issued a Convertible Promissory Note in the amount
of $200,000. The note is unsecure, bears interest at a rate of 6% interest per annum, and is due on demand. The note is convertible
into shares of the Company’s common stock beginning year after the date of issuance and was convertible on August 16, 2012.
Pursuant to the terms of the Agreement, the note is convertible at a rate equal to a 45% discount to the average of the three lowest
closing trade prices in the preceding thirty trading days. On the date the note became convertible; the Company valued the benefit
of conversion at $309,631 and recorded a discount of $200,000 and a derivative liability with a corresponding comprehensive loss
in the amount of $109,631. The discount related to the conversion value will be amortized over the remaining term of the note utilizing
the interest method of accretion. During the year ended December 31, 2012, ICG elected to convert $32,743 in principal. Pursuant
to the conversion rate calculation in the Agreement, the Company issued 13,634 (post-split) shares at an average conversion rate
of $2.40 and recognized a loss on the derivative in the amount of $23,340.
As of the March 31, 2013, the Company fair
valued the derivative liability at $136,847 and recorded a comprehensive income of $7,410 representing the change in fair value.
As of March 31, 2013, the unpaid principal balance was $167,257 net of discount in the amount of $0. Accrued interest totaled $13,794.
JMJ Financial
On May 7, 2012, the Company issued a Convertible
Promissory Note to JMJ Financial (“JMJ”) in the amount of $275,000. Pursuant to the terms of the note, a 10% original
issue discount is included and is due in one year. The Note does not bear interest if paid in full within 90 days. Thereafter,
a one-time interest charge of 5% shall be applied to the principal sum. The Note is convertible to common stock in whole or in
part at conversion price equal to the lesser of $0.06 per share or 65% of the lowest trading price in the 25 trading days prior
to the conversion. As of December 31, 2012, JMJ has funded $55,000 of the note which includes an original issue discount in the
amount of $5,000. The Company has computed the present value of the amount funded at $52,731 as a result of its non-interest bearing
terms. Additionally, the Company recorded a discount in the amount of $44,270 in connection with the initial valuation of the beneficial
conversion feature of the note to be amortized utilizing the interest method of accretion over the one year term of the note. Further,
the Company has recognized a derivative asset resulting from the variable change in conversion rate in relation to the change in
market price of the Company’s common stock. During the year ended December 31, 2012, JMJ elected to convert $7,735 in principal.
Pursuant to the conversion rate calculation in the Agreement, the Company issued 11,666 (post-split) shares at an average conversion
rate of $1.51 and recognized a loss on the derivative in the amount of $7,665.
As of the March 31, 2013, the Company fair
valued the derivative liability at $25,450 and recorded a comprehensive income of $5,588 representing the change in fair value.
As of March 31, 2013, the unpaid principal balance was $33,150 net of discount in the amount of $5,575. Accrued interest totaled
$2,244.
Asher Enterprises
During the year ended December 31, 2012,
the Company issued three Convertible Promissory Notes to Asher Enterprises, Inc. (“Asher”) in the amount of $63,000,
$37,500 and $40,000, respectively. The notes bears interest at a rate of 8% per annum, are unsecured and mature on March 8, April
12, 2013 and August 13, 2013. The Notes are convertible into common stock in whole or in part at a variable conversion price equal
to a 39% discount to the 10-day average trading price prior to the conversion date. The Company recorded a discount in the amount
of $117,779 in connection with the initial valuation of the beneficial conversion feature of the notes to be amortized utilizing
the interest method of accretion over the term of the notes. Further, the Company has recognized a derivative liability in the
amount of $146,161 resulting from the variable change in conversion rate in relation to the change in market price of the Company’s
common stock. During the year ended December 31, 2012, Asher elected to convert $5,700 in principal. Pursuant to the conversion
rate calculation in the Agreement, the Company issued 14,305 (post-split) shares at an average conversion rate of $2.51 and recognized
a loss on the derivative in the amount of $25.
During the three months ended March 31,
2013, the Company issued one Convertible Promissory Note to Asher in the amount of $37,500. The note bears interest at a rate of
8% per annum, is unsecured and matures on November 1, 2013. The note is convertible into common stock in whole or in part at a
variable conversion price equal to a 45% discount to the 10-day average trading price prior to the conversion date. The Company
recorded a discount in the amount of $37,500 in connection with the initial valuation of the beneficial conversion feature of the
note to be amortized utilizing the interest method of accretion over the term of the note. Further, the Company has recognized
a derivative liability in the amount of $30,682 resulting from the variable change in conversion rate in relation to the change
in market price of the Company’s common stock.
During the three months ended March 31,
2013, the Company elected to convert $31,700 in principal. Pursuant to the conversion rate calculation in the Agreement, the Company
issued 78,654 (post-split) shares at a conversion rate ranging from $0.36 to $0.44 and recognized a gain on the derivative in the
amount of $40,724.
As of the March 31, 2013, the Company fair
valued the derivative at $16,147 and recorded a comprehensive loss of $72,300 representing the change in fair value. As of March
31, 2013, the unpaid principal balance was $88,453 net of discount in the amount of $52,147. Accrued interest totaled $7,698.
Continental Equities, LLC
On September 20, 2012, The Company issued
a Convertible Promissory Note to Continental Equities, LLC (“Continental”) in the amount of $35,000. The note bears
interest at a rate of 8% per annum, is unsecured and matures on May 15, 2013. The Note is convertible into common stock in whole
or in part at a variable conversion price equal to a 42.5% discount to the lowest three average thirty day trading prices prior
to the conversion date. The Company recorded a discount in the amount of $35,000 in connection with the initial valuation of the
beneficial conversion feature of the notes to be amortized utilizing the interest method of accretion over the term of the notes.
Further, the Company has recognized a derivative liability in the amount of $1,437 resulting from the variable change in conversion
rate in relation to the change in market price of the Company’s common stock.
As of December 31, 2012, the Company fair
valued the derivative liability at $28,869 and recorded a comprehensive loss of $1,556 representing the change in fair value. As
of March 31, 2013, the principal balance owed to Continental totaled $28,354 net of discount of $6,646. Accrued interest totaled
$1,493.
NOTE 7 – Commitments
Lease agreements
In June 2011, the Company entered
into a two-year lease agreement for additional office space commencing July 1, 2011 and expiring December 31, 2013. Pursuant to
the terms of the lease agreement, the monthly rate will increase to $4,175 with an additional increase at the anniversary date
to $4,300. In addition, the Company has increased its security deposit to $4,836. During the three months ended March 31, 2013,
the Company terminated all leases for office space.
Consulting agreements
On March 25, 2013, the Company entered
into a one year consulting agreement with Big H. Production, Ltd. for services related to business development and potential mergers
and acquisitions. Pursuant to the terms of the agreement, the consultant will receive monthly compensation as follows: months one
and two – $10,000 per month; months three and four –$4,000 per month; months five through twelve – $3,000 per
month, for a total compensation over the twelve month period of $52,000.
NOTE 8- Income taxes
Deferred income tax assets and
liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
The effective tax rate on the net loss before income taxes
differs from the U.S. statutory rate as follows:
|
|
2013
|
|
2012
|
U.S. Statutory rate
|
|
|
35
|
|
|
|
%
|
|
|
|
35
|
|
|
|
%
|
|
Valuation allowance
|
|
|
(35
|
)
|
|
|
%
|
|
|
|
(35
|
)
|
|
|
%
|
|
Effective tax rate
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
The net change in the valuation
for the three months ended March 31, 2013 was an increase in valuation of $75,041.
The Company has a net operating
loss carryover of approximately $7,521,274 available to offset future income for income tax reporting purposes, which will expire
in various years through 2031, if not previously utilized. However, the Company’s ability to use the carryover net operating
loss may be substantially limited or eliminated pursuant to Internal Revenue Code Section 382.
We had no material unrecognized
income tax assets or liabilities as of March 31, 2013. Our policy regarding income tax interest and penalties is to expense those
items as general and administrative expense but to identify them for tax purposes. During the three-months ended March 31, 2013
and 2012, there were no income tax, or related interest and penalty items in the income statement, or as a liability on the balance
sheet. We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are subject to U.S. federal
or state income tax examination by tax authorities for years beginning at our inception of July 8, 2010 through current. We are
not currently involved in any income tax examinations.
NOTE 9 - Fair value measurement
The Company adopted ASC Topic 820-10
at the beginning of 2009 to measure the fair value of certain of its financial assets required to be measured on a recurring basis.
The adoption of ASC Topic 820-10 did not impact the Company’s financial condition or results of operations. ASC Topic 820-10
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs
in the principal market for the asset or liability. The three levels of the fair value hierarchy under ASC Topic 820-10 are described
below:
Level I
– Valuations
based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.
Level II
– Valuations
based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities
in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially
the full term of the assets or liabilities.
Level III
– Valuations
based on inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or
liability.
The following table presents a reconciliation
of all assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012:
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Fair Value
|
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
—
|
|
|
$
|
(220,998
|
)
|
|
$
|
—
|
|
|
$
|
(220,998
|
)
|
Convertible debt, net
|
|
|
—
|
|
|
|
(319,459
|
)
|
|
|
(319,459
|
)
|
|
|
|
|
Derivative Liabilities
|
|
|
—
|
|
|
|
(175,019
|
)
|
|
|
—
|
|
|
|
(175,019
|
)
|
|
|
$
|
—
|
|
|
$
|
(715,476
|
)
|
|
$
|
—
|
|
|
$
|
(715,476
|
)
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
—
|
|
|
$
|
(220,998
|
)
|
|
$
|
—
|
|
|
$
|
(220,998
|
)
|
Convertible debt, net
|
|
|
—
|
|
|
|
(233,296
|
)
|
|
|
(233,296
|
)
|
|
|
|
|
Derivative Liabilities
|
|
|
—
|
|
|
|
(264,648
|
)
|
|
|
—
|
|
|
|
(264,648
|
)
|
|
|
$
|
—
|
|
|
$
|
(718,942
|
)
|
|
$
|
—
|
|
|
$
|
(718,942
|
)
|
NOTE 10 – Shareholders’
(deficit)
Common stock issuances
On March 19, 2013, the Company effectuated
a 1-for-450 reverse stock split and all common stock transactions have been retrospectively restated. In connection with the reverse
split, 45 shares of common stock were issued to existing holders for rounding.
During the three months ended March
31, 2013, the Company issued a total of 94,676 (post-split) shares of common stock in connection with the conversion of $37,558
in convertible debt.
NOTE 11 - Subsequent events
Subsequent to March 31, 2013, the Company
issued 27,322 shares of common stock in connection with the conversion of $3,000 in convertible debt.
During April 2013, the Company issued a
Convertible Promissory Note to Asher in the amount of $41,500. The note bears interest at a rate of 8% per annum, is unsecured
and matures on January 16, 2014. The note is convertible into common stock in whole or in part at a variable conversion price equal
to a 45% discount to the 10-day average trading price prior to the conversion date.
On May 10, 2013, the Company issued a total
of 60,000,000 shares of common stock to our President and CEO, as incentive compensation and the acquisition of certain intellectual
property. The shares issued are subject to forfeiture in event of resignation or dismissal within the next two (2) years. Prior
to vesting, the shares issued may not be transferred or encumbered.