NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2016
(Unaudited)
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1.
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Description of Business and Basis of Presentation
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United States Basketball League,
Inc. (“USBL”) was incorporated in Delaware on May 29, 1984 as a wholly owned subsidiary of Meisenheimer Capital, Inc.
(“MCI”) for the purpose of developing and managing a professional basketball league, the United States Basketball League
(the “League”). Since the inception of the League, USBL has primarily engaged in selling franchises and managing the
League. From 1985 and up to the present time, USBL has sold a total of approximately forty active franchises (teams), a vast majority
of which were terminated for non-payment of their respective franchise obligations. The 2008, 2009, 2010, 2011, 2012, 2013, 2014,
2015 and 2016 seasons have been cancelled. At the present time, USBL does not have any definitive plans as to the scheduling of
a new season. USBL is currently in the process of exploring certain strategic alternatives, including the possible sale of the
League.
On October 30, 2014, USBL dissolved
its wholly-owned subsidiary, Meisenheimer Capital Real Estate Holdings, Inc. (“MCREH”). MCREH owned a commercial building
in Milford, Connecticut until the sale of the property on June 19, 2014.
At May 31, 2016, USBL had
negative working capital of $2,216,281, and accumulated losses of $4,900,264. These factors, as well as the Company’s
reliance on related parties (see Notes 3 and 4), raise substantial doubt as to the Company’s ability to continue as a
going concern.
The Company is making efforts
to raise equity capital, revitalize the league and market new franchises. However, there can be no assurance that the Company will
be successful in accomplishing its objectives. The financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
The accompanying unaudited financial
statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly,
they may not include all of the information and footnotes required by accounting principles generally accepted in the United States
for complete financial statements. In the opinion of management, the unaudited financial statements reflect all adjustments, which
include only normal recurring adjustments, necessary for a fair presentation. Operating results for the three-month period ended
May 31, 2016 may not necessarily be indicative of the results that may be expected for the year ending February 28, 2017. The notes
to the financial statements should be read in conjunction with the notes to the consolidated financial statements contained in
the Company’s Form 10-K for the year ended February 29, 2016.
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2.
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Summary of Significant Accounting Policies
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Fair value disclosures
–
The carrying amounts of the Company’s financial instruments, which consist of cash and cash equivalents,
accounts payable and accrued expenses, credit card obligations, and due to related parties, approximate their fair value due to
their short term nature or based upon values of comparable instruments.
Cash and cash equivalents
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The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash
equivalents.
Revenue recognition -
The
Company generally uses the accrual method of accounting in these financial statements. However, due to the uncertainty of collecting
royalty and franchise fees from the franchisees, USBL recorded these revenues upon receipt of cash consideration paid or the performance
of related services by the franchisee. Franchise fees earned in nonmonetary transactions were recorded at the fair value of the
franchise granted or the service received, based on which value was more readily determinable. Upon the granting of the franchise,
the Company had performed essentially all material conditions related to the sale.
Income taxes
-
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to
reverse. A valuation allowance has been fully provided for the deferred tax asset (approximately $1,015,000 at February 29, 2016)
attributable to the USBL net operating loss carryforward.
As of February 29, 2016, USBL
had a net operating loss carryforward of approximately $2,900,000 available to offset future taxable income. The carryforward expires
in varying amounts from 2019 to 2035. Current United States income tax laws limit the amount of loss available to offset against
future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income
may be limited.
USBL files Federal and Connecticut
income tax returns using a December 31 fiscal year. The last returns filed were for the year ended December 31, 2014.
Estimates
–
The preparation of financial statements in conformity with 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Stock-based compensation
– Stock-based compensation is accounted for at fair value in accordance with Accounting Standards Codification (“ASC”)
718, “Compensation – Stock Compensation.” No stock options were granted during 2016 and 2015 and none are outstanding
at May 31, 2016.
Earnings
(loss) per common share
– ASC 260, “Earnings Per Share”, establishes standards
for computing and presenting earnings (loss) per share (EPS). ASC 260 requires dual presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options or convertible
securities were exercised or converted into common stock. The Company did not include the 1,105,679 shares of convertible preferred
stock in its calculation of diluted loss per share for the three months ended May 31, 2016 and 2015 as the result would have been
antidilutive.
Comprehensive income
– Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but are excluded from net income (loss) as these amounts are recorded directly
as an adjustment to stockholders’ equity. Comprehensive income (loss) was equivalent to net income (loss) for all periods
presented.
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3.
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Accounts Payable and Accrued Expenses
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Accounts payable and accrued
expenses consisted of:
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May 31,
2016
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February 29,
2016
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(Unaudited)
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Legal and accounting services’ vendors
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$
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50,092
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$
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44,985
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Transfer agent and EDGAR agent
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5,837
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6,101
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Rent due Genvest, LLC (an entity controlled by the
two officers of USBL)
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99,000
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96,000
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Connecticut income taxes
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3,664
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7,954
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Accrued interest on MCREH note payable to
president of USBL
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13,562
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13,562
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Security deposit due CADCOM (an entity controlled by
the two officers of USBL)
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2,725
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2,725
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Other
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748
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1,172
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Total
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$
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175,628
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$
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172,499
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4.
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Due to Related Parties
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Due to related parties consisted
of:
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May 31,
2016
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February 29,
2016
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(Unaudited)
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USBL loans payable to Spectrum Associates, Inc. (“Spectrum”),
a corporation controlled by the two officers of USBL,
interest at 6%, due on demand
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$
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1,247,789
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$
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1,233,289
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USBL loans payable to the two officers of USBL,
interest at 6%, due on demand
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527,267
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523,917
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USBL loans payable to Daniel T. Meisenheimer, Jr. Trust, a trust
controlled by the two officers of USBL, non-interest bearing,
due on demand
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44,100
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44,100
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MCREH note payable to president of USBL, interest at 7%, due
on demand
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45,000
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45,000
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MCREH loan payable to Spectrum, non-interest
bearing, due on demand
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4,500
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4,500
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MCREH loan payable to president of USBL, non-interest
bearing, due on demand
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4,000
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4,000
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MCREH loan payable to Meisenheimer Capital, Inc. (“MCI”)
non-interest bearing, due on demand
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160,322
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160,322
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Total
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$
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2,032,978
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$
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2,015,128
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For the three months ended May 31, 2016 and 2015, interest due under the related party loans was waived by the respective lenders.
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5.
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Stockholders’ Equity
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Each share of common stock has one vote. Each share of preferred stock has five votes, is entitled to a 2% non-cumulative annual dividend, and is convertible at any time into one share of common stock.
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6.
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Related Party Transactions
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For the
three months ended May 31, 2016 and 2015, USBL included in other operating expenses rent incurred to Genvest, LLC (an entity controlled
by the two officers of USBL) totaling $3,000 and $3,000, respectively.
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7.
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Commitments and Contingencies
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Occupancy
Agreement
In
September 2007, the Company moved its office to a building owned by Genvest LLC, an organization controlled by the two
officers of USBL. Improvements to the Company’s space there were completed in February 2008. Pursuant to a verbal
agreement, the Company is to pay Genvest monthly rentals of $1,000 commencing March 2008. At May 31, 2016 and February
29, 2016, accounts payable and accrued expenses included accrued rent payable to Genvest totaling $99,000 and $96,000,
respectively.
Litigation
On
June 30, 2008, a legal action was commenced by Albany Patroons, Inc., a franchisee of USBL, against the Company in the
United States District Court for the Northern District of New York. The complaint alleged breach of contract by USBL due
to the suspension of the 2008 season and sought total damages of $285,000. On September 5, 2008, the Company answered
the complaint and asserted a counter-claim against plaintiff for breach of franchise agreement and/or memorandum of agreement.
This action was discontinued and the parties agreed to proceed with binding arbitration. To date, the plaintiff has not
proceeded with binding arbitration. The Company believes that it has a meritorious defense to the action and does not
expect the ultimate resolution of this matter to have a material adverse effect on its financial condition or results
of operations.
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