NOTES
TO FINANCIAL STATEMENTS
JUNE
30, 2016 AND 2015
NOTE
1: ORGANIZATION, DESCRIPTION OF BUSINESS AND GOING CONCERN
NuState
Energy Holdings, Inc.
,
or the Company, currently is a Florida corporation that was incorporated in Nevada in October 1987.
It was formerly known as Jaguar Investments, Inc. between October 1987 and May 2003, Power2Ship, Inc. between May 2003 and November
2006, and Fittipaldi Logistics, Inc. between November 2006 and December 2007.
The
accompanying financial statements have been prepared on a going concern basis. The Company had a loss from operations of $720,000
and had net cash used in operating activities of approximately $424,000 during the year ended June 30, 2016 and had a working
capital deficit of approximately $4,500,000 and an accumulated deficit of $41,540,000 at June 30, 2016. These factors raise
substantial doubt about the Company’s ability to continue as a going concern. The Company's ability to continue as a going
concern is dependent upon its ability to obtain the necessary financing to meet its obligations and repay its liabilities arising
from normal business operations when they come due, to fund possible future acquisitions, and to generate profitable operations
in the future. Management plans to provide for the Company’s capital requirements by continuing to issue additional equity
and debt securities. The outcome of these matters cannot be predicted at this time and there are no assurances that, if achieved,
the Company will have sufficient funds to execute its business plan or generate positive operating results. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses
during the reported period. Actual results will differ from those estimates. Included in these estimates are assumptions used
in Black-Scholes-Merton derivative liability valuation methods, such as expected volatility, risk-free interest rate, and expected
dividend rate and in the valuation allowance of deferred tax assets.
Cash
and Cash Equivalents
The
Company considers all highly liquid, temporary, cash equivalents with an original maturity of three months or less when purchased,
to be cash equivalents. The Company had no cash equivalents during the years ended June 30, 2016 and 2015.
Concentration
of Credit Risks
The
Company is subject to a concentration of credit risk from cash.
The
Company’s cash account is held at a financial institution and is insured by the Federal Deposit Insurance Corporation, or
FDIC, up to $250,000. During the years ended June 30, 2016 and 2015, the Company had not reached a bank balance exceeding the
FDIC insurance limit.
Derivative
Liabilities
The
Company assessed the classification of its derivative financial instruments as of June 30, 2016 and 2015, which consist of convertible
instruments and rights to shares of the Company’s common stock, and determined that such derivatives meet the criteria for
liability classification under ASC 815.
ASC
815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments
and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a)
the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic
characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument
and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with
changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception
to this rule when the host instrument is deemed to be conventional, as described.
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO FINANCIAL STATEMENTS
JUNE
30, 2016 AND 2015
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
During
the year ended June 30, 2016 and 2015, the Company had notes payable outstanding in which the conversion rate was variable and
undeterminable. Accordingly, the Company has recognized a derivative liability in connection with such instruments. The Company
uses judgment in determining the fair value of derivative liabilities at the date of issuance and at every balance sheet thereafter
and in determining which valuation method is most appropriate for the instrument (e.g., Black-Scholes-Merton), the expected volatility,
the implied risk free interest rate, as well as the expected dividend rate, if any.
Fair
Value of Financial Instruments
The
Company accounts for assets and liabilities measured at fair value on a recurring basis, in accordance with ASC Topic 820, Fair
Value Measurements and Disclosures, or ASC 820. ASC 820 establishes a common definition for fair value to be applied to existing
generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring
fair value, and expands disclosure about such fair value measurements.
ASC
820 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 at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
|
Level 1:
|
Observable
inputs such as quoted market prices in active markets for identical assets or liabilities.
|
|
|
|
|
Level 2:
|
Observable
market-based inputs or unobservable inputs that are corroborated by market data.
|
|
|
|
|
Level 3:
|
Unobservable
inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
|
The
Company’s derivative liability is classified as Level 3 financial instrument.
Additional
Disclosures Regarding Fair Value Measurements
The
carrying value of cash, accounts payable and accrued expenses, accrued compensation, notes payable and convertible promissory
notes payable, approximate their fair value due to the short maturity of these items or the use of market interest rates.
Convertible
Instruments
The
Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated
from their host instruments) in accordance with ASC 470-20, Debt with Conversion and Other Options. Accordingly, the Company records,
when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based
upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and
the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the
related debt to their earliest date of redemption. The Company also records deemed dividends for the intrinsic value of conversion
options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment
date of the note transaction and the effective conversion price embedded in the note.
ASC
815-40, Contracts in Entity’s own Equity, generally provides that, among other things, if an event is not within the entity’s
control, such contract could require net cash settlement and shall be classified as an asset or a liability.
The
Company determines whether the instruments issued in the transactions are considered indexed to the Company’s own stock.
During fiscal years 2014 the Company’s issued convertible securities with variable conversion provisions that resulted in
derivative liabilities.
Income
Taxes
The
Company accounts for income taxes pursuant to the provisions of ASC 740-10, “Accounting for Income Taxes,” which requires,
among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires
the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred
tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
The
Company follows the provisions of ASC 740-10, “Accounting for Uncertain Income Tax Positions”. When tax returns are
filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others
are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.
In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the
period during which, based on all available evidence, management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset
or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the
largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above
should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest
and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all
highly certain of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO FINANCIAL STATEMENTS
JUNE
30, 2016 AND 2015
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Income
Taxes, continued
The
Company has adopted ASC 740-10-25,
“
Definition of Settlement”
,
which provides guidance on how an entity
should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits
and provides that a tax position can be effectively settled upon the completion of an examination by a taxing authority without
being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax
benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical
merits and the statute of limitations remains open. As of June 30, 2016, the Company had not filed tax returns for the tax years
ending June 30, 2008 through 2015 and such returns, when filed, potentially will be subject to audit by the taxing authorities
for a minimum of three years beyond the filing date under the three-year statute of limitations. The Company has not accrued any
potential tax penalties associated with not filing these tax returns. Due to recurring losses, management believes such potential
tax penalties, if any, would not be material in amount.
Share-Based
Payments
The
Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation - Stock Compensation”.
Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on
the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which
is the vesting period.
The
Company has elected to use the Black-Scholes-Merton, or BSM, option-pricing model to estimate the fair value of its options, which
incorporates various subjective assumptions including volatility, risk-free interest rate, expected life, and dividend yield to
calculate the fair value of stock option awards. Compensation expense recognized in the statements of operations is based on awards
ultimately expected to vest and reflects estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Segment
Reporting
The
Company operates in one business segment which technologies are providing pertinent, real-time information to the worldwide transportation
and security industries.
Recent
Accounting Pronouncements
Recent
accounting pronouncements have been issued but deemed by management to be outside the scope of relevance to the Company.
As
an emerging growth company, we have elected to use the exemption provided for in the Jumpstart Our Business Startups Act or JOBS
Act allowing us to delay the adoption of new or revised accounting standards that have different effective dates for public and
private companies until those standards apply to private companies pursuant to Section 102(b)(1) of the Act.
Basic
and Diluted Earnings Per Share
Basic
earnings per share are calculated by dividing income available to stockholders by the weighted-average number of shares of Common
Stock outstanding during each period. Diluted earnings per share are computed using the weighted average number of shares of Common
Stock and the dilutive Common Stock share equivalents outstanding during the period. Dilutive Common Stock share equivalents consist
of shares issuable upon the exercise of stock options and warrants (calculated using the modified-treasury stock method) and conversion
of other securities such as convertible debt or convertible preferred stock. Potential common shares includable in the computation
of fully-diluted per-share results are not presented in the financial statements for the year ended June 30, 2016, as their effect
would be anti-dilutive. Share amounts reflect the 1500:1 reverse stock split which was effective as of June 16, 2016.
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO FINANCIAL STATEMENTS
JUNE
30, 2016 AND 2015
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Basic
and Diluted Earnings Per Share, continued
|
|
For
the Years ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss from
operations
|
|
$
|
(719,868
|
)
|
|
$
|
(358,656
|
)
|
Interest expense
|
|
|
(456,546
|
)
|
|
|
(310,864
|
)
|
Loss on settlement of
debt
|
|
|
(12,135
|
)
|
|
|
(339,421
|
)
|
Gain (loss) on
troubled debt restructuring
|
|
|
1,897,927
|
|
|
|
(11,928
|
)
|
Gain
(loss) on change in fair value of derivative liabilities
|
|
|
189,712
|
|
|
|
60,481
|
|
Numerator
for basic earnings per share- net income (loss)
|
|
$
|
634,090
|
|
|
$
|
(960,388
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic
earnings per share-weighted average shares
|
|
|
4,087,739
|
|
|
|
1,052,898
|
|
Effect
of dilutive securities-when applicable:
|
|
|
|
|
|
|
|
|
Convertible promissory
notes
|
|
|
50,238,846
|
|
|
|
2,617,285
|
|
Preferred Stock
|
|
|
13,759
|
|
|
|
44,069
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
Denominator
for diluted earnings per share--adjusted weighted-average shares and assumed conversions
|
|
|
54,340,344
|
|
|
|
3,714,252
|
|
Earnings (loss) per share Basic:
|
|
$
|
0.15
|
|
|
$
|
(0.91
|
)
|
Earnings (loss) per share Diluted:
|
|
$
|
0.01
|
|
|
$
|
(0.91
|
)
|
The
weighted-average potentially dilutive common share equivalents outstanding at June 30, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Series
A Preferred Stock
|
|
|
9,329
|
|
|
|
-
|
|
Series
B Preferred Stock
|
|
|
4,430
|
|
|
|
1,995
|
|
Series
C Preferred Stock
|
|
|
-
|
|
|
|
22
|
|
Series
D Preferred Stock
|
|
|
-
|
|
|
|
12,667
|
|
Series
F Preferred Stock
|
|
|
-
|
|
|
|
17,130
|
|
Series
H Preferred Stock
|
|
|
-
|
|
|
|
1,864
|
|
Series
I Preferred Stock
|
|
|
-
|
|
|
|
10,000
|
|
Series
J Preferred Stock
|
|
|
-
|
|
|
|
333
|
|
Series
Y Preferred Stock
|
|
|
-
|
|
|
|
58
|
|
Convertible
notes payable
|
|
|
50,238,846
|
|
|
|
2,617,285
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
50,252,605
|
|
|
|
2,661,354
|
|
NOTE
3: DERIVATIVE LIABILITY
The
Company accounts for the embedded conversion features included in its convertible instruments as derivative liabilities. The aggregate
fair value of derivative liabilities at June 30, 2016 and 2015 amounted to $636,096 and $295,808, respectively. For the year
ended June 30, 2016, the Company recorded a gain on the change in fair value of derivative liabilities of $189,712. For the year
ended June 30, 2015, the Company recorded a gain on the change in derivative liability of $60,481. At each measurement date, the
fair value of the embedded conversion features was based on the Black-Scholes-Merton method using the following assumptions:
|
|
Year
Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Effective Exercise
price
|
|
|
0.0035
– 0.00477
|
|
|
|
0.075
|
|
Effective Market price
|
|
|
0.0073
|
|
|
|
0.15
|
|
Volatility
|
|
|
497%
- 703%
|
|
|
|
465%
|
|
Risk-free
interest
|
|
|
0.13%
|
|
|
|
0.1%
|
|
Terms
|
|
|
14
- 365 days
|
|
|
|
252
- 365 days
|
|
Expected
dividend rate
|
|
|
0%
|
|
|
|
0%
|
|
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO FINANCIAL STATEMENTS
JUNE
30, 2016 AND 2015
NOTE
3: DERIVATIVE LIABILITY, continued
Changes
in the derivative liabilities during the years ended June 30, 2016 and 2015 are as follows:
Derivative
liabilities at June 30, 2014
|
|
$
|
356,289
|
|
Gain
on change in fair value of derivative liability, recognized as other income
|
|
|
(60,481
|
)
|
Derivative liability at June 30,
2015
|
|
|
295,808
|
|
Derivative
liability expense
|
|
|
265,000
|
|
Original
discount on convertible notes payable charged to derivative liability
|
|
|
265,000
|
|
Gain
on change in fair value of derivative liability, recognized as other expense
|
|
|
(189,712
|
)
|
Derivative liabilities at June
30, 2016
|
|
$
|
636,09
6
|
|
NOTE
4: CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE
Convertible
Notes Payable
At
June 30, 2016 and June 30, 2015 convertible debentures consisted of the following:
|
|
June
30,
|
|
|
2016
|
|
|
2015
|
Convertible
notes payable
|
|
$
|
1,609,349
|
|
|
$
|
1,421,730
|
Discount
on convertible notes
|
|
|
(108,750
|
)
|
|
|
-
|
Convertible
notes payable to ASC Recap
|
|
|
147,965
|
|
|
|
150,000
|
Total
|
|
$
|
1,648,564
|
|
|
$
|
1,571,730
|
The
Company had convertible promissory notes aggregating approximately $1.6 million and $1.6 million at June 30, 2016 and June 30,
2015, respectively. The related accrued interest amounted to approximately $1,037,000 and $754,000 million at June
30, 2016 and June 30, 2015, respectively. The convertible notes payable bear interest at rates ranging from 10% to
18% per annum. The convertible notes are generally convertible, at the holders’ option, at rates ranging from $0.00125 to
$0.0267 per share. At June 30, 2016, approximately $1.6 million of convertible promissory notes had matured, are in default, and
remain unpaid.
On
July 22, 2013 and May 6, 2014, the Company issued to ASC Recap LLC (“ASC”), in connection with the Company’s
settlement with ASC of up to approximately $2.5 million in liabilities of the Company, two convertible promissory notes with principal
amounts of $25,000 and $125,000, respectively. The July 22, 2013 note matured on March 31, 2014 and remains unpaid and in default.
The May 6, 2014 note matured on May 6, 2015, is in default, and remains unpaid. The notes are convertible into the common stock
of the Company at any time at a conversion price equal to 50% of the lowest closing bid price of our common stock for the twenty
days prior to conversion.
Notes
Payable
The
Company had promissory notes aggregating $240,241 and $90,241 at June 30, 2016 and June 30, 2015, respectively. The related accrued
interest amounted to approximately $200,000 and $25,000 at June 30, 2016 and June 30, 2015, respectively. The notes payable bear
interest at rates ranging from 0% to 16% per annum and are payable monthly. All promissory notes outstanding as of June 30, 2016
have matured, are in default, and remain unpaid.
Transactions
The
Company generated proceeds of $315,000 from the issuance of convertible promissory notes with interest rates of 18% during fiscal
2016, and $25,000 from the issuance of a short term note payable, with an interest rate of 0% during fiscal 2016.
The
Company generated proceeds of $185,000 from the issuance of convertible promissory notes with interest rates of 18% during fiscal
2015.
The
Company recognized interest expense of approximately $292,000 and $311,000 during fiscal 2016 and 2015, respectively.
Gain
on Troubled Debt Restructuring
During
fiscal 2016, the Company entered transactions with noteholders and other vendors to settle amounts owed through the issuance of
the Company’s preferred stock in exchange for amounts owed. The table below summarizes the gain realized from this troubled
debt restructuring.
|
|
Year
Ended
|
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Exchange
of outstanding Series B preferred shares for Series A preferred shares
|
|
$
|
(2,917
|
)
|
|
|
-
|
|
Exchange
of outstanding Series C preferred shares for Series A preferred shares
|
|
|
(37
|
)
|
|
|
-
|
|
Exchange
of outstanding Series I preferred shares for Series A preferred shares
|
|
|
300
|
|
|
|
-
|
|
Exchange
of outstanding Series J preferred shares for Series A preferred shares
|
|
|
(20
|
)
|
|
|
-
|
|
Exchange
of outstanding Series Y preferred shares for Series A preferred shares
|
|
|
(339
|
)
|
|
|
-
|
|
Exchange
of convertible notes payable for shares of Series A convertible preferred stock
|
|
|
1,504,865
|
|
|
|
-
|
|
Issuance
of Series F and Series H preferred stock in exchange for accrued compensation
|
|
|
396,075
|
|
|
|
-
|
|
Gain
on restructure of troubled convertible notes
|
|
|
-
|
|
|
|
(11,928
|
)
|
|
|
$
|
1,897,927
|
|
|
$
|
(
11,928
|
)
|
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO FINANCIAL STATEMENTS
JUNE
30, 2016 AND 2015
NOTE
5: OBLIGATIONS TO ASC RECAP, LLC
In
July, 2013, certain of the Company’s creditors showed interest in selling their claims against the Company to ASC Recap,
LLC (“ASC”); this group also included both current and past management of the Company. This led to the Company signing
a Liability Purchase Agreement with ASC on July 23, 2013. This Agreement required the Company to issue common shares within five
business days of each purchase at a 25% discount from the market price to ASC in amounts equal to the claims purchased from the
Company’s creditors. In addition, under the terms of the Agreement, the Company issued a $25,000 non-interest bearing convertible
promissory note to ASC, as described in Note 4.
ASC
signed a series of Claim Purchase Agreements with certain creditors of the Company to purchase their claims against the Company
totaling $2,531,565. These claims consisted of notes payable, convertible notes payable, vendor payables and accrued compensation
to the Company’s CEO and to a related party. The Claim Purchase Agreements required ASC to settle the creditors’ claims
against the Company for a total of $1,305,996. Each Claim Purchase Agreement stipulated that ASC would pay each creditor the agreed-upon
amount in up to twelve (12) monthly installments.
In
January, 2014, the Company had not issued any shares to ASC as required by the agreement. As a result, ASC filed a complaint in
Leon County, Florida demanding the prescribed issuance of shares from the Company for the purchased claims. A settlement agreement
was reached on February 6, 2014, and on March 12, 2014 ASC Recap filed a motion in Leon County, Florida which forced the Company
to comply. ASC Recap was awarded a $2,531,565 judgement which was to be paid by issuing free trading common stock at a 25% discount
from the market price
.
In addition, on May 6, 2014, the Company issued a $125,000 non-interest bearing convertible
promissory note to ASC, as described in Note 4. Between April and June of 2014, the Company issued to ASC 322,220,000 shares of
common stock with an aggregate market value of $365,308, which reduced the recorded liability by $273,981; in July of 2014, the
Company issued 82,980,000 shares of common stock with an aggregate market value of $24,894 (see Note 6).
An
analysis of the settlement liability due to ASC is as follows:
Total creditor
claims purchased by ASC - as ratified by the settlement agreement dated February 6, 2014
|
|
|
|
|
|
$
|
2,531,565
|
|
|
|
|
|
|
|
|
|
|
Reduction of liability
by shares issued between April and June 2014:
|
|
|
|
|
|
|
|
|
Market value of 322,220,000 common shares issued
|
|
$
|
365,308
|
|
|
|
|
|
Less
25% discount as per settlement agreement
|
|
|
(91,327
|
)
|
|
|
(273,981
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Payments and adjustments
|
|
|
|
|
|
|
(50,599
|
)
|
|
|
|
|
|
|
|
|
|
Liability after issuances
of shares, cash payments, and adjustments
|
|
|
|
|
|
|
2,206,985
|
|
|
|
|
|
|
|
|
|
|
Add
back the previous reduction of liability by shares issued in consideration of ASC waiving its right to additional shares under
the settlement agreement
|
|
|
|
|
|
|
273,981
|
|
|
|
|
|
|
|
|
|
|
Liability as of June 30,
2014 agreed to by the Company and ASC
|
|
|
|
|
|
|
2,480,966
|
|
|
|
|
|
|
|
|
|
|
Increase
in recorded liability by the market value of 82,980,000 common shares issued during July 2014
|
|
|
|
|
|
|
24,894
|
|
|
|
|
|
|
|
|
|
|
Carrying value of settlement
liability due to ASC at June 30, 2014
|
|
|
|
|
|
|
2,505,860
|
|
|
|
|
|
|
|
|
|
|
Reduction of liability
by shares issued in September 2014:
|
|
|
|
|
|
|
|
|
Cash
payments and adjustments
|
|
|
|
|
|
|
(133,347
|
)
|
Carrying value of settlement
liability due to ASC at June 30, 2015
|
|
|
|
|
|
$
|
2,372,513
|
|
|
|
|
|
|
|
|
|
|
Transfer
of liability due to ASC to Original debt-holders
|
|
|
|
|
|
|
(2,372,513
|
)
|
Carrying
value of settlement liability due to ASC at June 30, 2016
|
|
|
|
|
|
$
|
-
|
|
The
transfer of liability due to ASC Recap consisted of the following:
Notes
payable
|
|
$
|
907,500
|
|
Accounts
payable and accrued liabilities
|
|
|
85,006
|
|
Accrued
salaries
|
|
|
702,895
|
|
Loss
on settlement of ASC liability
|
|
|
(12,135
|
)
|
Accrued
interest payable
|
|
|
689,247
|
|
|
|
$
|
2,372,513
|
|
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO FINANCIAL STATEMENTS
JUNE
30, 2016 AND 2015
NOTE
5: OBLIGATIONS TO ASC RECAP, LLC, continued
The
Company ceased issuing shares upon discovering that ASC had failed to make its first payment to the creditors on time, did not
give verifiable reports to the creditors, or make regular monthly payments as specified in the Claim Purchase Agreement. A provision
in each Claim Purchase Agreement stipulated that the “Purchaser (ASC) shall not be obligated to pay any portion of the purchase
price in the event of a Default by the Company.” On August 13, 2015 ASC served the Company with a Notice of Default, which
per the Agreement, returns the unpaid balance owed to the creditors of the Company.
NOTE
6: SETTLEMENT WITH IBC FUNDS, LLC
On
October 9, 2014, we entered into a Settlement Agreement with IBC Funds, LLC (“IBC’). This agreement was approved by
the Manatee County, Florida Court on October 10, 2014. Pursuant to the Settlement Agreement, the Company agreed to settle approximately
$259,000 of outstanding accounts payable and accrued expenses (the “IBC Claim Amount”) by issuing IBC 858,814 shares
of its common stock at a price per share equal to fifty percent of the lowest sales price of the common stock during the fifteen-day
trading period preceding the request of payment. In the event the Company was delinquent on issuance of the Company’s shares
upon request by IBC, the discount would be increased by five percent and by an additional five percent for each additional delinquency
until all settlement shares had been received. At no time could IBC and its affiliates collectively own more than 4.99% of the
outstanding shares of common stock. During October 2014, IBC paid an aggregate of $66,000 to various Company creditors. On February
12, 2015 IBC issued a letter of default to the Company.
NOTE
7: STOCKHOLDERS’ DEFICIT
Common
Stock
At
June 30, 2016 the Company had 13,333,000 authorized common shares. On July 20, 2016 the Company increased its authorized common
shares to 250,000,000.
A
summary of the issuance of shares of Common Stock, related consideration and fair value of transaction, for the year ended June
30, 2015 was as follows:
|
|
Number
of shares
of
common stock
|
|
|
Fair
Value
at
Issuance
|
|
Fair
Value
at
Issuance
(per
share)
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common shares to IBC (see Note 6)
|
|
|
572,667
|
|
|
$
|
331,000
|
|
$
|
0.578
|
|
Issuance of common shares
to IBC (see Note 6)
|
|
|
286,247
|
|
|
$
|
116,874
|
|
$
|
0.408
|
|
Issuances in to partially
satisfy settlement payable to ASC Recap, LLC
|
|
|
55,320
|
|
|
$
|
24,894
|
|
$
|
4.50
|
|
Issuances
of Common Stock During 2016
During
fiscal 2016 we issued shares of our common stock as follows:
|
●
|
On
October 14, 2015, Ms. Roberton was issued 332,667 shares of common stock valued at $49,900, or $0.15 per share as a performance
bonus pursuant to her employment agreement.
|
|
|
|
|
●
|
On
October 9, 2015, we issued 3,333,333 shares of our common stock, twenty-six shares of Series F preferred stock, with a stated
value of $5,000 and a par value of $0.001 per share, and three shares of Series H Preferred Stock, with a stated value of
$1,000 and a par value of $0.001 per share, to the Company’s current Chairman of the Board in consideration for his
forgiveness of $633,000 in accrued compensation. Subsequently, in October 2015, these Series F and Series H preferred shares
were exchanged for 532,000 shares of Series A preferred stock. Holders of Series A preferred shares are restricted
from converting their shares to common stock for two years (the “Lock-Up Period”).
After
the Lock-Up Period, they may convert
up to one percent of their Series A preferred shares into common shares on a one
for one basis each month for four years (the “Leak-Out Period”). However, the conversion price automatically reduces
by 86% to $0.035 per share i
f our common stock is below $0.10 per share.
At the
end of the Leak-Out Period, up to all of the remaining Series A preferred shares may be converted to common stock at the shareholders’
discretion.
|
Preferred
Stock
Series
A and B issued and outstanding shares of the Company’s preferred stock have a par value of $0.001. The Companies preferred
shares Series C, D, F, H. I. J. and Y were exchanged for shares of Series A preferred stock in November, 2015. These classes of
shares were subsequently cancelled. Issued and outstanding shares of Series C, D, F, H. I. J. and Y of the Company’s preferred
stock had a par value of $0.01 per share. All classes rank(ed) prior to any class or series of the Company’s common stock
as to the distribution of assets upon liquidation, dissolution or winding up of the Company or as to the payment of dividends.
All preferred stock shall have no voting rights except if the subject of such vote would reduce the amount payable to the holders
of preferred stock upon liquidation or dissolution of the company and cancel and modify the conversion rights of the holders of
preferred stock as defined in the certificate of designations of the respective series of preferred stock.
On
October 14, 2015 a former Chairman of the Board of the Company was issued 80 shares of Series F preferred stock with a stated
value of $5,000 and a par value $0.001 per share, and 12 shares of Series H preferred stock, with a stated value of $1,000 and
a par value $0.001 per share in consideration for his forgiveness of $412,000 in accrued compensation. Subsequently, in October
2015, these Series F and Series H shares were exchanged for 1,648,000 shares of Series A preferred stock.
On
October 28, 2015, preferred shareholders representing a majority of each series of our outstanding preferred stock, voted to cancel
all their shares of preferred stock in exchange for 11,181,340 shares of newly designated Series A preferred stock. The number
of shares of newly issued Series A preferred stock issued to each preferred shareholder was calculated by dividing the total stated
value of their preferred shares by $0.25. The holders of the Series A preferred shares are restricted from converting their shares
to common stock for two years (the “Lock-Up Period”). After the Lock-Up Period, they may convert up to one percent
of their Series A preferred shares into common shares on a one for one basis each month for four years (the “Leak-Out Period”).
However, the conversion price automatically reduces by 86% to $0.035 per share if our common stock is below $0.10 per share. At
the end of the Leak-Out Period, up to all of the remaining Series A preferred shares may be converted to common stock at the shareholders’
discretion.
Class
|
|
Shares
Cancelled
|
|
|
Shares
of Series A Issued
|
|
Series
B
|
|
|
(149,600
|
)
|
|
|
2,992,000
|
|
Series
C
|
|
|
(332
|
)
|
|
|
39,840
|
|
Series
D
|
|
|
(19
|
)
|
|
|
1,900,000
|
|
Series
F
|
|
|
(234
|
)
|
|
|
4,689,500
|
|
Series
H
|
|
|
(85
|
)
|
|
|
340,000
|
|
Series
I
|
|
|
(30,000
|
)
|
|
|
1,200,000
|
|
Series
J
|
|
|
(2
|
)
|
|
|
20,000
|
|
Total
|
|
|
|
|
|
|
11,181,340
|
|
On
October 28, 2015 the 87,000 shares of Series Y preferred stock, owned by the Company’s former Chairman of the Board, were
exchanged for 87,000 shares of Series A preferred stock. These shares of Series A preferred stock were valued at their fair market
value of $8.70.
In
November, 2015, we sold 40,000 shares of Series A preferred stock to one investor for $10,000 and sold 100,000 shares of Series
B preferred stock to another investor for $25,000.
See
Note 5 for Series B preferred stock issued in exchange for convertible notes payable and accrued interest.
Series
A Preferred Stock
The
Series A Preferred Stock has a stated value of $0.25 per share. Each one share of Series A Preferred Stock is convertible into
one (1) share of Common Stock. In the event the Common Stock price per share is lower than $0.10 (ten cents) per share then the
Conversion shall be set at $0.035 per share. The Common Stock shares are governed by Lock-Up/Leak-Out Agreements.
Series
B Preferred Stock
Prior
to cancellation, the Series B Preferred Stock had a stated value of $5.00 per share. Each share of Series B Preferred Stock was
convertible into 20 shares of the Company’s common stock. In addition, the holders of the preferred stock were entitled
to receive annual cumulative dividends of 10% payable in cash or shares of the Company’s common stock, at the Company’s
option. At June 30, 2016, the Company had not declared the payment of cumulative dividends aggregating approximately $673,200.
Series
C Preferred Stock
Prior
to cancellation, the Series C Preferred Stock had a stated value of $30.00 per share. Each share of Series C Preferred Stock was
convertible into 100 shares of the Company’s common stock.
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO FINANCIAL STATEMENTS
JUNE
30, 2016 AND 2015
NOTE
7: STOCKHOLDERS’ DEFICIT, continued
Preferred
Stock, continued
Series
D Preferred Stock
Prior
to cancellation, the Series D Preferred Stock had a stated value of $25,000 per share. Each share of the Series D Preferred Stock
was convertible into 1,000,000 shares of the Company’s common stock. In addition, the holders of the Series D Preferred
Stock were entitled to receive a participation interest in the annual net profits generated from any future business activities
undertaken by the Company in Brazil.
Series
F Preferred Stock
Prior
to cancellation, the Series F Preferred Stock had a stated value of $5,000 per share. Each share of Series F Preferred Stock was
convertible into 200,000 shares of the Company’s common stock.
Series
H Preferred Stock
Prior
to cancellation, the Series H Preferred Stock had a stated value of $1,000 per share. Each share of Series H Preferred Stock was
convertible into the greater of a) $0.025 per share or b) 100% of the average of the three lowest closing bid prices for the ten
trading days immediately preceding the Company’s receipt of a notice of conversion.
Series
I Preferred Stock
Prior
to cancellation, the Series I Preferred Stock had a stated value of $10.00 per share. Each share of Series I Preferred Stock was
convertible into 500 shares of the Company’s common stock.
Series
J Preferred Stock
Prior
to cancellation, the Series J Preferred Stock had a stated value of $2,500 per share. Each share of the Series J Preferred Stock
was convertible into the Company’s common shares using a conversion price equal to 50% of the average closing price of the
Company’s common stock for the ten trading days immediately preceding the conversion date, although in no instance less
than $0.01 per share or greater than $0.03 per share.
Series
Y Preferred Stock
Prior
to cancellation, the Series Y Preferred Stock had a stated value and par value of $0.01 and had no liquidity preference. Each
share of Series Y Preferred Stock had 203 votes per share and had the right to vote with the common shareholders in all matters.
The shares were convertible into one share of the Company’s common stock at the holder’s option subject to an adjustment
upon issuing dividends or distributions payable in common stock and reverse or forward stock split. The shares were held by a
former Chairman of the Board of the Company.
Warrants
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
Weighted
Average
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Price
per Share
|
|
|
Contractual
Term
|
|
Outstanding at June 30, 2014
|
|
|
45,047,293
|
|
|
$
|
0.025
|
|
|
|
1.48
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeitures
|
|
|
(45,047,293
|
)
|
|
|
0.025
|
|
|
|
|
|
Outstanding at June 30, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeitures
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO FINANCIAL STATEMENTS
JUNE
30, 2016 AND 2015
NOTE
7: STOCKHOLDERS’ DEFICIT, continued
Options
In
January 2001, The Company adopted the 2001 Employee Compensation Plan, or the Plan. The Plan provided for stock compensation through
awards of shares of the Company’s common stock.
The
Company’s board of directors may appoint a Compensation Committee to administer the Plan. In the absence of such appointment,
the board of directors is responsible for the administration of the Plan. The Company did not appoint a Compensation Committee
to administer the Plan. The board of directors has the sole power to award shares of common stock under the Plan, as well as determine
those individuals eligible to receive an award of Plan shares. Awards of shares under the Plan may be made as compensation for
services rendered, directly or in lieu of other compensation payable, as a bonus in recognition of past services or performance
or may be sold to an employee.
The
maximum number of shares which may be awarded under the plan is 5,000,000. Awards were generally granted to:
●
|
executive
officers, officers and directors (including advisory and other special directors) of the Company;
|
|
|
●
|
full-time
and part-time employees of the Company;
|
|
|
●
|
natural
persons engaged by the Company as consultants, advisors or agents; and
|
|
|
●
|
a
lawyer, law firm, accountant or accounting firm, or other professional or professional firm engaged by the Company.
|
Grants
to employees may be made for cash, property, services rendered or other forms of payment constituting lawful consideration under
applicable law. Shares awarded, other than for services rendered, may not be sold at less than the fair value of our common stock
on the date of grant.
The
plan terminated in January 2011. The board of directors has absolute discretion to amend the plan with the exception that the
board had no authority to extend the term of the plan, to increase the number of shares subject to award under the plan or to
amend the definition of “Employee” under the plan.
The
Company generally recognizes its share-based payments over the vesting period for which such payments are made.
The
Company had no outstanding options or option activity between July 1, 2013 and June 30, 2016
The
total compensation cost related to non-vested awards not yet recognized amounted to $0 at June 30, 2016 and 2015. There was no
intrinsic value as of June 30, 2016. The Company’s policy is to issue shares pursuant to the exercise of stock options from
its available authorized but unissued shares of common stock. It does not issue shares pursuant to the exercise of stock options
from its treasury shares.
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO FINANCIAL STATEMENTS
JUNE
30, 2016 AND 2015
NOTE
8: INCOME TAXES
The
Company has not filed its corporate tax returns since fiscal 2007.
Due
to recurring losses, the Company’s tax provision for the years ended June 30, 2016 and 2015 was $0.
A
summary of our deferred tax is as follows:
|
|
June
30, 2016
|
|
|
June
30, 2015
|
|
Tax benefit
of net operating loss carry forward
|
|
$
|
10,364,000
|
|
|
$
|
10,698,000
|
|
Less:
valuation allowance
|
|
|
(10,364,000
|
)
|
|
|
(10,698,000
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of June 30, 2016, the Company had unused net operating loss carry forwards of approximately $26.9 million available to reduce
future federal taxable income. Net operating loss carryforwards expire through fiscal years ending 2036. During the year ended
June 30, 2016 the Company utilized net operating loss carryforwards of approximately $866,000 to reduce current taxable income.
Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after
a change in control (generally a greater than 50% change in ownership).
The
Company’s ability to offset future taxable income, if any, with tax net operating loss carryforwards may be limited due
to the non-filing of tax returns and the impact of the statute of limitations on the Company’s ability to claim such benefits.
Furthermore, changes in ownership may result in limitations under Internal Revenue Code Section 382. Due to these limitations,
and other considerations, management has established full valuation allowances on deferred tax assets relating to net operating
loss carryforward, as the realization of any future benefits from these assets is uncertain.
The
valuation allowance at June 30, 2016 and 2015 was $10,364,300 and $10,698,000, respectively. The change in the valuation allowance
during the year ended June 30, 2016 was a decrease of approximately $334,000. The change in the valuation allowance during the
year ended June 30, 2015 was an increase of $222,000.
The
table below summarizes the differences between our effective tax rate and the statutory federal rate as follows for fiscal 2016
and 2015. The effective tax rate is 35% Federal and 3.6% for State after Federal income tax (benefit):
|
|
2016
|
|
|
2015
|
|
Computed “expected”
income tax (benefit)
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
State income taxes, net
of federal income tax (benefit)
|
|
|
3.6
|
%
|
|
|
(3.6
|
)%
|
|
|
|
|
|
|
|
|
|
Permanent
differences
|
|
|
14.1
|
%
|
|
|
23.0
|
%
|
Subtotal
|
|
|
52.7
|
%
|
|
|
(15.6
|
)%
|
Change
in valuation allowance
|
|
|
(52.7
|
)%
|
|
|
15.6
|
%
|
Provision
for income taxes
|
|
|
—
|
%
|
|
|
—
|
%
|
NOTE
9: RELATED PARTY TRANSACTIONS
During
fiscal 2016 and 2015, the Company incurred expenses of $97,841 and $110,400, respectively, to a related party by means of common
ownership and management with the Company as compensation to our Chairman of the Board and Chief Financial Officer.
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO FINANCIAL STATEMENTS
JUNE
30, 2016 AND 2015
NOTE
10: SUBSEQUENT EVENTS
On
July 8, 2016 Kathleen Roberton resigned her position as Chief Executive Officer and member of the Board of Directors of NuState
Energy Holdings, Inc.
On
July 8, 2016 Mr. Kevin Yates, the current Chairman of the Board, was named as Chief Executive Officer.
On
July 20, 2016, the Company adopted Articles of Amendment to its Articles of Incorporation to increase the number of authorized
shares of Common Stock from 13,333,333 shares to 250,000,000 shares.
On
August 15, 2016 the Company’s Board of Directors appointed Mark B. Lucky as the Company’s interim Chief Financial
Officer.
On
August 15, 2016 the Company issued 20,000,000 shares of its common stock to its CEO, Kevin Yates, as compensation. The shares
were valued at $0.03 per share, the market price of the common stock on the date of issuance. The recipient were accredited investors
and the issuances were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section
4(2) of that act.
On
August 15, 2016 the Company issued 5,000,000 shares of its common stock to its newly appointed CFO, Mark Lucky, as compensation.
The shares were valued at $0.03 per share, the market price of the common stock on the date of issuance. The recipient were accredited
investors and the issuances were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided
by Section 4(2) of that act.
On
August 15, 2016 the Company issued 2,000,000 shares of its common stock to its former CEO, Kathleen Roberton, pursuant to a settlement
agreement, for unpaid wages. Per agreement, the shares were valued at $0.04 per share. The recipient were accredited investors
and the issuances were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section
4(2) of that act.