As a result of the settlement, the Company recorded a gain on extinguishment of debt of $520,493 as Other Income for the quarter ended May 31, 2012, which represents the difference between the $755,320 in debt transferred to OTS and the $234,827 in OTS loan receivables cancelled in the settlement.
On June 8, 2012, OTS paid $235,000 to the Company in settlement of the full amount remaining due on the OTS loan receivable.
Nature of Operations
In January, 2012,
the Company
entered into an exclusive worldwide development and distribution license, through
our
wholly-owned subsidiary SureScreen Medical, Inc., for the development and marketing of a patent pending
”
S
ee and Treat
”
system for detecting human papilloma virus.
,
the most common sexually transmitted infection and a cause of cervical cancer, In addition to offering easy, affordable, and on-the-spot HPV diagnosis, the technology offer
ed
an important alternative to the HPV vaccine.
On February 3, 2013,
the Company
sold
the
controlling interest in SureScreen Medical, Inc., to AVM Licensing Corp., the licensor of the HPV virus treatment technology being developed by SureScreen. SureScreen is the holder of the recently granted European patent rights to the technology,
although the US Patent application has recently been denied. The Company received a combination of cash, stock and notes, secured by the assets of SureScreen, as consideration for the sale. The total value of the sale was estimated at $250,000.
The Company has learned that the purchaser has ceased business; therefore the full amount of the note has been written off as uncollectible.
In January, 2013, the Company acquired a controlling interest in Alternative Energy Partners, Inc., a mining and energy holding company whose common shares are traded on the OTCQB under the symbol AEGY. As a result of the acquisition, Novation acquired 40 million shares of common stock, then representing approximately 19 percent of the common shares issued and outstanding, and 5 million shares of Series A Convertible Preferred stock holding voting power equal to 51 percent of the total vote of all shares entitled to vote. AEGY had 2 wholly-owned subsidiaries, Clarrix Energy, LLC and SAC Acquisition Corp., and anticipates acquiring a third operating subsidiary shortly, all as previously announced by AEGY. Subsequently, in May 2013, the Company sold the controlling preferred stock interest to a third party. The purchase price of the Series A Preferred Stock was $250,000 and was paid by a promissory note payable in five installments over the next five months, with the first installment payment due in early June, 2013. Subsequently, that note was extended for one year, with the first installment payment now due on or before February 28, 2014.
F-9
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Effective January 1, 2013,
the Company
acquired a portion of an administrative consulting business formerly operated by CFOs to Go, Inc. and Matriarch Management, Inc., terminated the consulting agreements between the Company and CFOs to Go, Inc. and both the Company and AEGY, and then transferred the acquired assets and business to Novation Consulting Services, Inc., a newly formed Florida corporation formed by the Company for the purpose. The acquisition was accomplished by the assumption of debt. The assets acquired and the debts assumed in the acquisition are summarized below:
ASSETS
|
|
|
Accounts Receivable:
|
|
|
Alternative Energy Partners, Inc
|
$
|
164,546
|
BioCube, Inc.
|
|
87,600
|
Crown City Pictures, Inc.
|
|
178,650
|
Total Accounts Receivable
|
$
|
430,796
|
|
|
|
Computers, printers, server and related
|
|
20,000
|
Consulting Contract-AEGY:
|
|
100,000
|
Total assets acquired
|
$
|
550,796
|
LIABILITIES
|
|
|
Promissory Note to CF Consulting, LLC
|
$
|
55,108
|
Acquisition Note (partial)
|
|
495,688
|
Total liabilities assumed
|
$
|
550,796
|
The assets received in the acquisition were transferred to the newly formed, wholly-owned subsidiary, Novation Consulting Services, Inc., which now provides administrative, financial and legal services to us, our subsidiaries and to Alternative Energy Partners, Inc. and will offer similar services to other companies. On May 5, 2013, the Company sold the Crown City Pictures, Inc. receivable, represented by a convertible promissory note in the principal amount of $178,650, to four unrelated investors for four new convertible notes in the amount of $44,662.50 each. Two of these notes were partially paid in the year ended August 31, 2013, leaving a balance due of $96,377. Subsequently a total of $164,547 in principal has been paid on the four notes, leaving a balance due of approximately $3,000 plus interest on each note still owed to the Company as of January 15, 2014.
On December 6, 2012,
the Company
completed the acquisition of Casita de los Ninos, LLC, with an effective closing date of November 29, 2012, and Casita de los Ninos became a wholly-owned subsidiary. Casita de los Niños, LLC is a California limited liability company doing business as Immersion House
™
(
www.immersionhouse.com
) which is devoted to helping children and their families learn new languages and gain cultural experiences in those targeted languages. Casita de los Niños is the flagship company for Immersion House. Casita was launched in 2009 in Northern California (Bay Area) and focuses on teaching children Spanish through learning centers and various after school enrichment programs. The consideration for the acquisition was the issuance of one million shares of Series A convertible preferred stock having a stated value of $300,000 at inception, carrying voting power equal to 51 percent of the total voting power of all classes of stock, a dividend preference equal to $0.01 per share, and a conversion option into shares of common stock valued at the time of conversion at 1 million dollars, based on the 5 day trailing average closing price of the stock.
F-10
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
If not already converted, the preferred stock converts automatically five years after issue into shares of common stock valued at the time of conversion at two million dollars, based on the 5 day trailing average closing price of the stock
.
On June 1, 2013, the Company sold Casita de los Niños, LLC to an unrelated party, after determining that its continued inclusion in the corporate group no longer met the Company
’
s corporate direction. The sale was for a note receivable in the amount of $300,000 payable in two years at 8 percent interest. This contributed to the net loss from discontinued operations of $10,708 disclosed separately on the current year
’
s statement of operations.
Also on December 6, 2012, the Company completed the acquisition of Burgoyne Internet Services, LLC (
“
Burgoyne
”
), a Utah limited liability company, with an effective closing date of November 29, 2012. Since the effect of the change of control of the limited liability company under Utah law is a legal dissolution of the company, the acquisition has been treated as an asset acquisition by a wholly-owned subsidiary of Novation. In addition to the acquisition consideration of $200,000, the seller, ISP Holdings, LLC, a Utah limited liability company, also agreed to provide $50,000 in working capital at closing and an additional $50,000 in working capital if the median dollar value of Novation
’
s trading volume for its common stock for any consecutive 30 day period equals or exceeds $50,000 during the one year period after closing. The closing was completed on December 6, 2012 on the transfer of the initial $50,000 working capital funds, although the acquisition transaction has been treated as closing effective on November 30, 2012 for accounting purposes.
The Company issued a convertible promissory note to ISP Holdings, Inc. in the principal amount of $280,000, representing the $200,000 purchase price for Burgoyne, the initial $50,000 working capital. advance, a $15,000 original issue discount, and a $15,000 expense allowance to cover ISP Holding
’
s expenses related to the transaction. The promissory note has a term of 14 months, bears interest at 8 percent, and is convertible into common stock (subject to a maximum holding of 9.9 percent of the total common shares outstanding at any time) at $0.03 per share. The second working capital loan of $50,000, if made, will bear similar terms, except that there will be no original issue discount or expense allowance.
Burgoyne provides Internet access, emails, and related services to customers throughout the United States, primarily in areas where high speed cable and other high speed Internet access services are not readily available. Its web site is at
www.burgoyne.com
. As a result of this initial ISP acquisition, the Company plans to undertake acquisitions of other regional ISP companies in a national roll-up strategy. The Company
has already identified 5 other regional ISP companies for sale and believes that, with the added infrastructure provided by the Company, the existing operating success can grow and add to the bottom line for the Company. As part of the transaction, the Company also executed a Transition Services Agreement with ISP Holdings, LLC. under which ISP Holdings will continue to provide administrative services in managing the ISP business of Burgoyne for a nominal fee of the greater of 2 percent of revenues or $200 per month.
Principles of Consolidation
The accompanying restated consolidated financial statements include the accounts of Novation Holdings, Inc. and its wholly-owned subsidiaries, Novation Consulting and Burgoyne Internet Services, LLC. All intercompany transactions and balances have been eliminated.
F-11
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the consolidated financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ materially from estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company had no cash equivalents at August 31, 2013 and 2012, respectively.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. There were no balances that exceeded the federally insured limit at August 31, 2013 and 2012, respectively.
Loss per Share
In accordance with Financial Accounting Standards Board
“
FASB
”
Accounting Standards Codification
“
ASC
”
Topic 260,
“
Earnings per Share,
”
basic earnings (loss) per share (
“
EPS
”
) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive. The computation of basic and diluted loss per share for the years ended August 31, 2013 and 2012, is equivalent since the Company has had continuing losses. The Company also has no common stock equivalents. The calculation of loss per share has been done by applying the 1 for 15 reverse split of common stock, effective November 7, 2012.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to our customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements
’
assessment of known requirements, aging of receivables, payment history, the customer
’
s current credit worthiness and the economic environment. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.
F-12
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Loans Receivable
Loans receivable are recorded at the loan amount and do not bear interest. The Company sold its interest in subsidiaries for notes receivable. Payment on loans receivable are recorded when collected by the Company. Loans receivables are written off when deemed uncollectible. Recoveries of loans receivables previously written off are recorded when received.
Accounting for Stock-Based Compensation
The Company adopted the provisions of FASB ASC 718-20, Stock Compensation
–
Awards Classified as Equity, which require companies to expense the estimated fair value of employee stock options and similar awards based on the fair value of the award on the date of grant. The cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. There have been no grants of any stock or other equity as of August 31, 2013 and 2012.
On July 1, 2011, the Company issued 333,333 post-split shares of common stock valued at $2,100,000 to the Company
’
s Chairman and CEO, with the shares originally vesting over 5 years on a proportionate basis. As of
August 31, 2011, one-fifth or 66,667 shares valued at $420,000 had vested. Mr. Gelmon conveyed two thirds of the original 333,333 post-split shares to two other parties for reasons unrelated to the Company, retaining a total of 111,111 shares. The non-vested balance at August 31, 2011 of 266,667 total shares valued at $1,680,000 had been issued but was being held in escrow for release on an annual basis each July 1. During the year ended August 31, 2012, the Company revised the vesting term to 3 years and released an additional 155,556 shares valued at $980,000. The non-vested balance of at August 31, 2012 was one-third of the original issuance or 111,111 shares valued at $700,000, of which Mr. Gelmon holds 37,037 shares to be received. In accordance with ASC 718, compensation cost related to shares issued is recognized over the vesting period with an off-setting credit to additional paid-in capital. Also, the deferred equity balance of $1,680,000 at August 31, 2011 was reclassified and netted against additional paid-in capital in the 2011 financial statements.
Non-Employee Stock Based Compensation
Share-based payment awards issued to non-employees for services rendered are recorded in accordance with ASC 505,
“
Equity
”
at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded and deducted from deferred tax assets when the deferred tax assets are not expected to be realized based on currently available evidence. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
F-13
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Management has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are well documented and supported. Additionally, management believes that no accruals for tax liabilities are necessary. Therefore, no reserves for uncertain income tax positions have been recorded.
Revenue Recognition
The Company recognizes revenue in accordance with FASB ASC 605 on revenue recognition for consulting and ISP services. Revenue from consulting and ISP services will be recognized only when persuasive evidence of a sale or arrangement with a customer exists, price if fixed and determinable, services have been performed, and collectability of the resulting receivable reasonably assured.
Cash received in advance of meeting the revenue recognition criteria described above is recorded as deferred revenue.
Fair Value of Financial Instruments
All financial instruments, including derivatives, are to be recognized on the balance sheet initially at fair value. Subsequent measurement of all financial assets and liabilities except those held-for-trading and available for sale are measured at amortized cost determined using the effective interest rate method. Held-for-trading financial assets are measured at fair value with changes in fair value recognized in earnings. Available-for-sale financial assets are measured at fair value with changes in fair value recognized in comprehensive income and reclassified to earnings when derecognized or impaired.
The carrying amounts of the Company
’
s other short-term financial instruments, including accounts payable and accrued liabilities, approximate fair value due to the relatively short period to maturity for these instruments. The Company does not utilize financial derivatives or other contracts to manage commodity price risks. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
The fair value of the Company's financial assets and liabilities reflects the Company's estimate of amounts that it would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from sources independent from the Company) and to minimize the use of unobservable inputs (the Company's assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
F-14
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date and includes those financial instruments that are valued using models or other valuation methodologies.
Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management
’
s best estimate of fair value.
Derivative Financial Instruments
The Company evaluates embedded conversion features within convertible debt under ASC 815
“
Derivatives and Hedging
”
to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. The Company uses a Binomial pricing model to estimate the fair value of convertible debt conversion features at the end of each applicable reporting period. Changes in the fair value of these derivatives during each reporting period are included in the consolidated statement of operation. Inputs into the Binomial pricing model require estimates, including such items as estimated volatility of the Company
’
s stock, risk-free interest rate and the estimated life of the financial instruments being fair valued.
If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20
“
Debt with Conversion and Other Options
”
for consideration of any beneficial conversion feature.
Investments in Subsidiaries
In January, 2013, we acquired a controlling interest in Alternative Energy Partners, Inc., a mining and energy holding company whose common shares are traded on the OTCQB under the symbol AEGY. As a result of the acquisition, we acquired 40 million shares of common stock, representing approximately 19 percent of the common shares issued and outstanding, and 1 million shares of Series A Convertible Preferred stock holding voting power equal to 51 percent of the total vote of all shares entitled to vote. AEGY currently has 2 wholly-owned subsidiaries, Clarrix Energy, LLC and SAC Acquisition Corp., and anticipated acquiring a third operating subsidiary shortly, all as previously announced by AEGY. Subsequently, in May 2013, we sold the controlling preferred stock interest to a third party. The purchase price of the Series A Preferred Stock was $250,000 and was paid by a promissory note payable in five installments over the next five months, with the first installment payment due in early June, 2013. Subsequently, that note was extended for one year, with the first installment payment now due on or before February 28, 2014.
We have retained the 40,000,000 common shares, acquired at a cost of $28,000. The valuation of this stock at August 31, 2013 was $52,000, based on the August 30, 2013 closing price of $0.0013 per share and we have recorded a gain on investment in that amount as of August 31, 2013.
Recently Issued Accounting Pronouncements
In September 2011, the FASB issued an amendment to Topic 350, Intangibles
—
Goodwill and Other, which simplifies how entities test goodwill for impairment.
F-15
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Previous guidance under Topic 350 required an entity to test goodwill for impairment using a two-step process on at least an annual basis. First, the fair value of a reporting unit was calculated and compared to its carrying amount, including goodwill.
Second, if the fair value of a reporting unit was less than its carrying amount, the amount of impairment loss, if any, was required to be measured. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the entity to determine that it is more likely than not that its fair value is less than its carrying amount. If after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two-step impairment test is unnecessary. If the entity concludes otherwise, then it is required to test goodwill for impairment under the two-step process as described under paragraphs 350-20-35-4 and 350-20-35-9 under Topic 350. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this update did not have a material impact on the consolidated financial statements and related disclosures.
Effective January 2012, the Company adopted ASU No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 is intended to increase the prominence of items reported in other comprehensive income and to facilitate convergence of accounting guidance in this area with that of the IASB. The amendments require that all non-owner changes in shareholders
’
equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the provisions of ASU 2011-05 that require the presentation of reclassification adjustments on the face of both the statement of income and statement of other comprehensive income. Amendments under ASU 2011-05 that were not deferred under ASU 2011-12 will be applied retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this update did not have a material impact on the consolidated financial statements and related disclosures.
The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company
’
s financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company
’
s financials properly reflect the change.
NOTE 2. GOING CONCERN
As reflected in the accompanying financial statements, the Company has a net loss of $1,697,669 and net cash used in operations of $381,828 for the year ended August 31, 2013; and negative working capital of $830,999 and an accumulated deficit of $10,964,112 at August 31, 2013.
The accompanying consolidated financial statements of the Company have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has suffered recurring losses and continues to seek additional funds through debt or equity issuance. Its ability to continue as a going concern is dependent upon achieving profitable operations and generating positive cash flows.
F-16
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
|
|
NOTE 2.
|
GOING CONCERN (Continued)
|
There can be no assurances that the Company will be able to achieve profitable operations or obtain additional funding. These factors create substantial doubt about the Company
’
s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainty.
Management intends to raise financing through private or public equity financing or other means and interests that it deems necessary to provide the Company with the ability to continue in existence.
NOTE 3.
INCOME TAXES
The Company accounts for income taxes in accordance with accounting standards for Accounting for Income Taxes which require the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and tax credit carry-forwards. Additionally, the standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.
The Company accounts for income taxes in accordance with accounting standards for Accounting for Income Taxes which require the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and tax credit carry-forwards. Additionally, the standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.
The following is a schedule of deferred tax assets as of August 31, 2013, and August 31, 2012:
|
|
|
|
|
|
|
August 31, 2013
|
|
August 31, 2012
|
Net operating loss
|
$
|
10,964,112
|
$
|
9,266,443
|
Future tax benefit at 34%
|
|
3,719,638
|
|
3,150,591
|
Less: Valuation allowance
|
|
(3,719,638)
|
|
(3,150,591)
|
Net deferred tax asset
|
$
|
--
|
$
|
--
|
The valuation allowance changed by approximately $569,047 during the year ended August 31, 2013.
Under Sections 382 and 269 of the Internal Revenue Code, following an
“
ownership change,
”
special limitations (
“
Section 382 Limitations
”
) apply to the use by a corporation of its net operating loss, or NOL, carry-forwards arising before the ownership change and various other carry-forwards of tax attributes (referred to collectively as the
‘
Applicable Tax Attributes
’
). The Company had NOL carry-forwards due to historical losses of Stanford of approximately $368,374 at August 31, 2011.
The Company has adopted the provisions of FASB ASC 740-10-25. As a result of its implementation, the Company performed a comprehensive review of its uncertain tax positions in accordance with recognition and measurement standards established by FASB ASC 740-10-25. In this regard, an uncertain tax position represents the Company
’
s expected treatment of a tax position taken in a prepared and filed tax return, or expected to be taken in a tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. The Company does not expect any reasonably possible material changes to the estimated amount of liability associated with uncertain tax positions through August 31, 2013. The Company
’
s continuing policy is to recognize accrued interest and penalties related to income tax matters in income tax expense.
F-17
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
NOTE 4. SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
For the purposes of these financial statements, parties are considered to be related if one party has the ability, directly or indirectly, to control the party or exercise significant influence over the other party in making financial and operating decisions, or vice versa, or where the Company and the party are subject to common control or common significant influence. Related parties may be individuals or other entities.
Michael Gelmon, who serves the Company as CEO, is paid as a consultant to the Company at the rate of $10,000 per month, commencing July 1, 2012. Mr. Gelmon is a Canadian citizen and resident.
NOTE 5. DISCONTINUED OPERATIONS
On June 1, 2013, we sold Casita de los Niños, LLC to an unrelated party, after determining that its continued inclusion in our corporate group no longer met our corporate direction. The sale was for a note receivable in the amount of $300,000 payable in two years at 8 percent interest. This contributed to the net loss from discontinued operations of $10,708 disclosed separately on the current year
’
s statement of operations.
|
|
NOTE 6.
|
STOCKHOLDERS
’
DEFICIT
|
The Company is authorized to issue 2,500,000,000 shares of common stock, par value $0.001 per share and 5 million shares of preferred stock, par value $0.001.
At August 31, 2012, there were 30,094,500 shares of common stock issued and outstanding. During the year ended August 31, 2013 and 2012, the Company issued Company stock as follows:
On September 2, 2011, the Company issued 26,087 shares of common stock for services rendered under consulting agreements.
On October 13, 2011, the Company issued 266,667, shares of common stock for services rendered under consulting agreements.
On November 8, 2011, the Company converted $50,000 of notes into 177,778 shares of common stock.
On November 17, 2011, the Company converted $50,000 of notes into 322,061 shares of common stock.
On November 29, 2011, the Company converted $60,000 of notes into 592,593 shares of common stock.
In December 2011, the Company converted $101,000 of notes into 1,216,508 shares of common stock.
In December 2011, the Company issued 2,415,459 shares of common stock for $250,000 of consulting fees.
In January 2012, the Company converted $243,870 of notes into 27,356,116 shares of common stock.
In February 2012, the Company converted $379,345 of notes into 1,823,741 shares of common stock.
In March 2012, the Company converted $95,619 of notes into 3,944,259 shares of common stock.
In April 2012, the Company converted $91,350 of notes into 1,135,714 shares of common stock.
F-18
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
|
|
NOTE 6.
|
STOCKHOLDERS
’
EQUITY (DEFICIT) (Continued)
|
In May 2012, the Company converted $75,924 of notes into 1,462,714 shares of common stock.
In June 2012, the Company converted $13,000 of notes into 293,785 shares of common stock.
In July 2012, the Company converted $53,000 of notes into 1,038,793 shares of common stock.
In August 2012, the Company converted $72,970 of notes into 2,143,097 shares of common stock.
In September, 2012 we issued a total of 737,780 common shares converting $16,670 in principal amounts of loans and accrued interest representing 50 percent of the low price for the shares during a three day trading period.
In October, 2012 we issued a total of 2,284,848 common shares on conversions totaling $36,400 in principal amounts of loans and accrued interest representing 50 percent of the low price for the shares during a three day trading period.
In December, 2012 we issued a total of 3,011,094 common shares converting $42,378 in principal amounts of loans representing 60 percent of the low price for the shares during a three day trading period.
In December, 2012 we issued a total of 600,000 common shares for consulting expenses.
In January 2013, we issued a total of 2,564,102 common shares converting $17,991 in principal amounts of loans, representing 50 percent of the low price for the shares during a three day trading period.
In January 2013, we issued a total of 500,000 common shares for advertising expenses per contract.
In February 2013, we issued a total of 8,523,913 common shares converting $22,700 in principal amounts of loans, representing 50 percent of the low price for the shares during a three day trading period.
In March, 2013 we issued a total of 13,764,832 common shares on conversions totaling $16,886 in principal amounts of loans and accrued interest, representing 50 percent of the low price for the shares during a three day trading period.
In April, 2013 we issued a total of 19,176,623 common shares on conversions totaling $22,845 in principal amounts of loans and accrued interest, representing 50 percent of the low price for the shares during a three day trading period.
In May, 2013 we issued a total of 56,571,681 common shares on conversions totaling $45,304 in principal amounts of loans, representing 50 percent of the low price for the shares during a three day trading period.
In June, 2013 we issued a total of 142,647,383 common shares on conversions totaling $76,630 in principal amounts of loans, representing 50 percent of the low price for the shares during a three day trading period.
In July, 2013 we issued a total of 229,523,241 common shares on conversions totaling $94,430 in principal amounts of loans, representing 50 percent of the low price for the shares during a three day trading period.
As a result of these transactions, there were 509,999,997 common shares outstanding at August 31, 2013.
F-19
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
NOTE 7. IMPAIRMENT AND UNCOLLECTIBLE LOSSES.
Due to lack of separate valuations by an independent party, the Company has written off as impaired the $20,000 in computers and office equipment and the $100,000 in contract acquisition acquired in the acquisition of the administrative services business transferred to Novation Consulting Services, Inc. in January 2013.
The Company also has taken an impairment loss for the $164,547 paid for the acquisition of a controlling interest in Crown City Pictures, as there is no assurance that the planned acquisitions and funding of that company will be successful.
The Company has written of receivables of $87,600 owed by BioCube, Inc. and the $250,000 note due for the sale of SureScreen Medical as uncollectible.
NOTE 8. NOTES PAYABLE
* The Company analyzed the conversion option for derivative accounting consideration under ASC 815-15 "Derivatives and Hedging" and determined that the instrument should be classified as liabilities once the conversion option became effective after 180 days due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
The following is a summary of notes payable at August 31, 2013 and August 31, 2012:
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|
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Description
|
August 31, 2013
|
August 31, 2012
|
Asher Enterprises, Inc.*
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|
|
On April 25, 2012, the Company issued its promissory note in the amount of $37,500 to an unrelated third party for additional working capital. The note is due on January 30, 2013 and carries interest at 8 percent per annum, payable at maturity. The note is convertible into common stock of the Company after six months, at the election of the Holder, at 51 percent of the average of the three lowest closing bid prices of the common stock for the ten trading days prior to the date of the election to convert. The note was fully converted to common stock as of August 31, 2013.
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-
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37,500
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Asher Enterprises, Inc.*
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|
|
On March 12, 2012, the Company issued its promissory note in the amount of $35,000 to an unrelated third party for additional working capital. The note is due on December 14, 2012 and carries interest at 8 percent per annum, payable at maturity. The note is convertible into common stock of the Company after six months, at the election of the Holder, at 50 percent of the average of the three lowest closing bid prices of the common stock for the ten trading days prior to the date of the election to convert. The note was fully converted to common stock as of August 31, 2013.
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-
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35,000
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F-20
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
NOTE 8. NOTES PAYABLE (continued)
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|
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Description
|
August 31, 2013
|
August 31, 2012
|
Asher Enterprises, Inc.*
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|
|
On January 20, 2012, the Company issued its promissory note in the amount of $40,000 to an unrelated third party for additional working capital. The note was due on October 23, 2012 and carried interest at 8 percent per annum, payable at maturity. The note was convertible into common stock of the Company after six months, at the election of the Holder, at 50 percent of the average of the three lowest closing bid prices of the common stock for the ten trading days prior to the date of the election to convert. The carrying amount of the debt discount was $0 and $8,288, respectively. The note was fully converted to common stock as of August 31, 2013.
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-
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6,712
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Common Stock LLC *
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On January 20, 2012, the Company issued its promissory note in the amount of $20,000 to an unrelated third party for additional working capital. The note was due on October 31, 2012 and carried interest at 6 percent per annum, payable at maturity. The note is convertible into common stock of the Company after six months, at the election of the Holder, at 60 percent of the average of the three lowest closing bid prices of the common stock for the ten trading days prior to the date of the election to convert. The note was fully converted to common stock as of August 31, 2013.
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-
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5,507
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Common Stock LLC *
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On March 19, 2012, the Company issued its promissory note in the amount of $20,000 to an unrelated third party for additional working capital. The note is due on December 19, 2012 and carries interest at 6 percent per annum, payable at maturity. The note was convertible into common stock of the Company after six months, at the election of the Holder, at 60 percent of the average of the three lowest closing bid prices of the common stock for the ten trading days prior to the date of the election to convert. The note was fully converted to common stock as of August 31, 2013.
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-
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20,000
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Common Stock LLC
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On May 2, 2012, the Company issued its promissory note in the amount of $20,000 to an unrelated third party for additional working capital. The note is due on February 8, 2013 and carries interest at 6 percent per annum, payable at maturity. The note was convertible into common stock of the Company after six months, at the election of the Holder, at 60 percent of the average of the three lowest closing bid prices of the common stock for the ten trading days prior to the date of the election to convert. The carrying amount of the debt discount was $4,603 and $0, respectively. The Company converted $15,336 into shares.
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59
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20,000
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F-21
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
NOTE 8. NOTES PAYABLE (continued)
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Description
|
August 31, 2013
|
August 31, 2012
|
Asher Enterprises, Inc.*
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|
On April 23, 2012, the Company issued its promissory note in the amount of $27,500 to an unrelated third party for additional working capital. The note is due on January 8, 2014 and carries interest at 8 percent per annum, payable at maturity. The note is convertible into common stock of the Company after six months, at the election of the Holder, at 51 percent of the average of the three lowest closing bid prices of the common stock for the ten trading days prior to the date of the election to convert. The note was fully outstanding as of August 31, 2013.
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27,500
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-
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Panache Group *
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On January 10, 2012, the Company issued its promissory note in the amount of $50,000 to an unrelated third party for additional working capital. The note is due on January 10, 2013 and carries interest at 10 percent per annum, payable at maturity. The note was immediately convertible into common stock of the Company, at the election of the Holder, at 75 percent of the average of the three lowest closing bid prices of the common stock for the ten trading days prior to the date of the election to convert. The carrying amount of the debt discount was $0 and $3,580, respectively. This note had been fully converted to common stock as of August 31, 2013.
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-
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6,100
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JMJ Financial *
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|
|
On October 3, 2012, the Company issued its promissory note in the amount of $56,000 to an unrelated third party for additional working capital. The note is due on October 3, 2013and carries an initial charge of 5 percent interest. The note is convertible into common stock of the Company after three months, at the election of the Holder, at $0.006 or 70 percent of the lowest closing trading price of the common stock for the twenty-five trading days prior to the date of the election to convert. The Note was issued at a discount of $6,000, which has been fully amortized at August 31, 2013. This note was fully converted to common stock at August 31, 2013.
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-
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50,500
|
F-22
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
NOTE 8. NOTES PAYABLE (continued)
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|
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Description
|
August 31, 2013
|
August 31, 2012
|
JMJ Financial *
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|
|
On October 3, 2012, the Company issued its promissory note in the amount of $56,000 to an unrelated third party for additional working capital. The note is due on October 3, 2013 and an initial charge of 5 percent interest. The note is convertible into common stock of the Company after three months, at the election of the Holder, at $0.006 or 70 percent of the lowest closing trading price of the common stock for the twenty-five trading days prior to the date of the election to convert. The Note was issued with an original issue discount of $6,000, of which $546 unamortized portion remains at August 31, 2013. The carrying amount of the debt discount was $2,057and $0, respectively. $2,551 had been converted into common stock as of August 31, 2013.
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53,646
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-
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WHC Capital, LLC *
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On June 21, 2013, the Company issued its promissory note in the amount of $25,000 to an unrelated third party for additional working capital. The note is due on May 1, 2014 and carries interest at 10 percent per annum, payable at maturity. The note was immediately convertible into common stock of the Company, at the election of the Holder, at 50 percent of the average of the three lowest intra-day trading prices of the common stock for the ten trading days prior to the date of the election to convert. The carrying amount of the debt discount was $16,663 and $0, respectively. $13,337 had been converted to common stock as of August 31, 2013.
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-
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-
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WHC Capital, LLC *
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On July 11, 2013, the Company issued its promissory note in the amount of $25,000 to an unrelated third party for additional working capital. The note is due on July 11, 2014 and carries interest at 5 percent per annum, payable at maturity. The note was immediately convertible into common stock of the Company, at the election of the Holder, at 50 percent of the average of the three lowest intra-day trading prices of the common stock for the ten trading days prior to the date of the election to convert. The carrying amount of the debt discount was $25,000 and $0, respectively.
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-
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-
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Indian River Financial Services, LLC*
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On March 23, 2013, the Company issued its promissory note in the amount of $19,525 to an unrelated third party for additional working capital. The note is due on March 31, 2015. The note is convertible into common stock of the Company after six months, at the election of the Holder, at $0.0013.
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19,525
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-
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F-23
NOVATION HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2013 and 2012 (Restated)
NOTE 8. NOTES PAYABLE (continued)