Notes
to Condensed Consolidated Financial Statements
(Unaudited)
NOTE
1 – Significant Accounting Policies and Procedures
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of
September 30, 2013, and the results of its operations and cash flows for the three months and nine months ended September 30,
2013 and 2012. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted
pursuant to rules and regulations of the U.S. Securities and Exchange Commission (“the Commission”). The Company believes
that the disclosures in the unaudited condensed consolidated financial statements are adequate to ensure the information presented
is not misleading. However, the unaudited condensed consolidated financial statements included herein should be read in conjunction
with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 21, 2013 filed with the Commission on April 15, 2014.
The
accompanying consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting
principles generally accepted in the United States of America.
Principles
of Consolidation
The
financial statements as of March 31, 2014 and for the three months then ended include Nyxio Technologies Corporation (“NTC”)
and its wholly owned subsidiary, Nyxio Technologies, Inc. (“NTI”). All significant inter-company transactions and
balances have been eliminated. NTC and its subsidiary are collectively referred to herein as the “Company”.
Basis
of presentation
The
Company is in the development stage in accordance with Accounting Standards Codification (“ASC”) Topic No. 915.
Cash
and cash equivalents
The
Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.
At March 31, 2014 and December 31, 2013, the Company had no cash equivalents.
Accounts
receivable
Accounts
receivable is reported at the customers’ outstanding balances less any allowance for doubtful accounts. Interest is not
accrued on overdue accounts receivable.
An
allowance for doubtful accounts on accounts receivable is charged to operations in amounts sufficient to maintain the allowance
for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the
adequacy of the allowance based on historical write-off percentages and information collected from individual customers. Accounts
receivable are charged off against the allowance when collectability is determined to be permanently impaired.
Inventory
Inventories
are stated at the lower of cost or market. Cost is determined on a standard cost basis that approximates the first-in, first-out
(FIFO) method. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive
levels, deterioration, and other factors in evaluating net realizable value. As of March 31, 2014 and December 31, 2013, respectively,
there was no finished goods inventory.
Fixed
Assets
Property
and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements,
maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of,
the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results
of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using
the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally accelerated)
for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
Equipment 3-5
years
Furniture
7 years
The
Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate
that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment
loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by
management in performing this assessment include current operating results, trends and prospects, the manner in which the property
is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment there were
no impairments needed as of March 31, 2014 or 2013. Depreciation expense for the three months ended March 31, 2014 and 2013 and
for the period from July 8, 2010 (inception) to March 31, 2014, was $2,618, $2,951 and $33,403, respectively.
Revenue
recognition
The
Company recognizes revenue in accordance with ASC subtopic 605-10 (formerly SEC Staff Accounting Bulletin No. 104 and 13A, “Revenue
Recognition”) net of expected cancellations and allowances. As of March 31, 2014 and 2013, the Company evaluated evidence
of cancellation in order to make a reliable estimate and determined there were no material cancellations during the years and
therefore no allowances has been made.
The
Company's revenues, which do not require any significant production, modification or customization for the Company's targeted
customers and do not have multiple elements, are recognized when (i) persuasive evidence of an arrangement exists; (ii) delivery
has occurred; (iii) the Company's fee is fixed and determinable; and (iv) collectability is probable.
Substantially
all of the Company's revenues are derived from the sales of Smart TV and Tablet PC technology and products. The Company's clients
are charged for these products on a per transaction basis. Pricing varies depending on the product sold. Revenue is
recognized in the period in which the products are sold.
Loss
per share
The
Company reports earnings (loss) per share in accordance with ASC Topic 260-10, "Earnings per Share." Basic earnings
(loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common
shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator
is increased to include the number of additional common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share has not been presented since
the effect of the assumed exercise or conversion of stock options, warrants, and debt to purchase common shares, would have an
anti-dilutive effect. At March 31, 2014 and December 31, 2013 the Company had 10,090 and 10,090 potential common shares that have
been excluded from the computation of diluted net loss per share.
Income
taxes
The
Company follows ASC subtopic 740-10 for recording the provision for income taxes. ASC 740-10 requires the use of the asset and
liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are
computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted
marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses
or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely
than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce
the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance
are included in the provision for deferred income taxes in the period of change.
Deferred
income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and
tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of
assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset
or liability are classified as current or non-current depending on the periods in which the temporary differences are expected
to reverse.
Fair
Value of Financial Instruments
The
Company has financial instruments whereby the fair value of the financial instruments could be different from that recorded on
a historical basis in the accompanying balance sheets. The Company's financial instruments consist of cash, receivables, accounts
payable, accrued liabilities, and notes payable. The carrying amounts of the Company's financial instruments approximate their
fair values as of March 31, 2014 and December 31, 2013 due to their short-term nature.
Long-lived
assets
The
Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal
of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the historical cost or carrying value of an asset may no longer be appropriate. The Company
assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the
asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment
loss is recorded equal to the difference between the asset’s carrying value and its fair value or disposable value. For
the three months ended March 31, 2014 and 2013, the Company determined that none of its long-term assets were impaired.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affects the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Advertising
The
Company expenses advertising costs as incurred. The Company’s advertising expenses were $0 and $45 during the three months
ended March 31, 2014 and 2013, respectively, and $105,316 for the period from July 8, 2010 through March 31, 2014.
Research
and development
Research
and development costs are expensed as incurred. During the three months ended March 31, 2014 and 2013, and for the period from
July 8, 2010 (inception) to March 31, 2014, research and development costs were $1,722, $0 and $30,850, respectively.
Concentration
of Business and Credit Risk
The
Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts or other foreign hedging
arrangements. The Company’s financial instruments that are exposed to concentration of credit risks consist primarily of
cash. The Company maintains its cash in bank accounts which, may at times, exceed federally-insured limits.
Financial
instruments which potentially subject the Company to concentrations of business risk consist principally of availability of suppliers.
As of March 31, 2014, the Company was dependent on approximately two vendors for 85% of product supply.
Share-Based
Compensation
The
Company accounts for stock-based payments to employees in accordance with ASC 718, “Stock Compensation” (“ASC
718”). Stock-based payments to employees include grants of stock, grants of stock options and issuance of warrants that
are recognized in the consolidated statement of operations based on their fair values at the date of grant.
The
Company accounts for stock-based payments to non-employees in accordance with ASC 718 and Topic 505-50, “Equity-Based Payments
to Non-Employees.” Stock-based payments to non-employees include grants of stock, grants of stock options and issuances
of warrants that are recognized in the consolidated statement of operations based on the value of the vested portion of the award
over the requisite service period as measured at its then-current fair value as of each financial reporting date.
The
Company calculates the fair value of option grants and warrant issuances utilizing the Black-Scholes pricing model. The amount
of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately
expected to vest. ASC 718 requires forfeitures to be estimated at the time stock options are granted and warrants are issued to
employees and non-employees, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only
the unvested portion of the surrendered stock option or warrant. The Company estimates forfeiture rates for all unvested awards
when calculating the expense for the period. In estimating the forfeiture rate, the Company monitors both stock option and warrant
exercises as well as employee termination patterns.
The
resulting stock-based compensation expense for both employee and non-employee awards is generally recognized on a straight-line
basis over the requisite service period of the award.
For
the three months ended March 31, 2014 and 2012, and the period from July 8, 2010 (inception) to March 31, 2014, the Company recorded
share-based compensation of $1,250,000, $0, and $11,149,714, respectively.
Recent
accounting pronouncements
Recent
accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are
not believed by management to have a material impact on the Company's present or future financial statements.
International
Financial Reporting Standards
In
November 2008, the Securities and Exchange Commission (“SEC”) issued for comment a proposed roadmap regarding potential
use of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued
by the International Accounting Standards Board. Under the proposed roadmap, the Company would be required to prepare financial
statements in accordance with IFRS in fiscal year 2014, including comparative information also prepared under IFRS for fiscal
2013 and 2012. The Company is currently assessing the potential impact of IFRS on its financial statements and will continue to
follow the proposed roadmap for future developments.
Year-end
The
Company has adopted December 31, as its fiscal year end.
NOTE
2 - Going concern
These
financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern,
which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization
values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments
that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue
as a going concern. The Company has not yet achieved profitable operations and since its inception (July 8, 2010) through March
31, 2014 the Company had accumulated losses of $16,421,319 and a working capital deficit of $1,461,618. Management expects to
incur further losses in the development of its business, all of which raises substantial doubt about the Company’s ability
to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate
future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising
from normal business operations when they come due.
The
Company expects to continue to incur substantial losses as it executes its business plan and does not expect to attain profitability
in the near future. Since its inception, the Company has funded operations through short-term borrowings and equity investments
in order to meet its strategic objectives. The Company's future operations are dependent upon external funding and its ability
to execute its business plan, realize sales and control expenses. Management believes that sufficient funding will be available
from additional borrowings and private placements to meet its business objectives, including anticipated cash needs for working
capital, for a reasonable period of time. However, there can be no assurance that the Company will be able to obtain sufficient
funds to continue the development of its business operation, or if obtained, upon terms favorable to the Company.
NOTE
3 - Accounts receivable
Accounts
receivable consist of the following:
|
|
|
March
31,
|
|
December 31,
|
|
|
|
2014
|
|
2013
|
|
Trade
accounts receivable
|
|
$
|
223
|
|
|
$
|
223
|
|
|
Due
from related party
|
|
|
—
|
|
|
|
—
|
|
|
Less:
Allowance for doubtful accounts
|
|
|
—
|
|
|
|
—
|
|
|
|
|
$
|
223
|
|
|
$
|
223
|
|
As
of March 31, 2014 and December 31, 2013, respectively, the Company had not established an allowance for doubtful accounts.
NOTE
4 - Property and equipment
The
following is a summary of property and equipment:
|
|
|
March
31,
|
|
December 31,
|
|
|
|
2014
|
|
2013
|
|
Furniture
and fixtures
|
|
$
|
11,912
|
|
|
$
|
11,912
|
|
|
Software
|
|
|
11,945
|
|
|
|
11,945
|
|
|
Computers
and equipment
|
|
|
22,249
|
|
|
|
22,249
|
|
|
Less:
accumulated depreciation
|
|
|
(33,403
|
)
|
|
|
(30,785
|
)
|
|
|
|
$
|
12,703
|
|
|
$
|
15,321
|
|
Depreciation
for the three months ended March 31, 2014 and 2013 and for the period from July 8, 2010 (inception) to March 31, 2014 was $2,618,
$2,951 and $33,403, respectively.
NOTE
5 - Related party transactions
Related
party receivable
At
the Company’s inception (July 8, 2010) the sole officer and shareholder contributed all the assets and liabilities distributed
to him from his former limited liability company which was dissolved on July 2, 2010. At the date of contribution, the fair value
of the liabilities contributed exceeded that of the assets by $54,438, which has been recorded as a related party receivable.
The contributed assets and liabilities, including the amount due from the related party are as follows:
|
Assets:
|
|
|
|
|
|
Cash
|
|
$
|
5,984
|
|
|
Inventory
|
|
|
7,877
|
|
|
Fixed
assets, at fair value
|
|
|
12,863
|
|
|
Due
from related party
|
|
|
54,438
|
|
|
Deposits
held
|
|
|
2,965
|
|
|
Total
assets contributed
|
|
$
|
84,127
|
|
|
Liabilities:
|
|
|
|
|
|
Accrued
liabilities
|
|
$
|
500
|
|
|
Note
payable
|
|
|
83,627
|
|
|
Total
liabilities contributed
|
|
$
|
84,127
|
|
On
July 8, 2010 (inception) the Company issued 100 shares of its common stock to its sole officer as founder’s shares in exchange
for cash of $100. During the period from inception (July 8, 2010) and December 31, 2010, the Company’s sole officer donated
his services valued at $28,500 which was recorded as a reduction on the amount due from him. In addition, the officer made cash
payments totaling $5,400 as further reductions in his related party receivable due to the Company.
During
the three months ended March 31, 2014, the president and CEO donated additional services valued at $62,500, of which $26,852 has
been recorded as a reduction in the officers’ receivable balance and $$35,648 was recorded as accrued wages.
Merger
warrants
In
connection with the Company July 5, 2011 merger activities, the Company issued a warrant to purchase up to 83,333 (post-split)
shares of the Company’s common stock at an exercise price of $0.01 per share to its chief executive officer and majority
shareholder. The warrant has a term of twenty-four months expiring on July 1, 2013 and is subject to performance conditions. The
performance conditions allow for the warrant to be exercisable in four increments of 20,833 (post-split) shares for each $1,000,000
of cumulative realized revenue over the twenty-four month term. As of December 31, 2013, performance conditions have not been
met therefore; no portion of the warrant is exercisable. On the date of grant, the estimated fair value of each warrant using
the Black-Scholes model is $189 per share utilizing a strike price of $4.50, volatility of 177%, and a risk-free rate of 4.40%.
The Company estimated the number of shares that would become exercisable throughout the twenty-four month term based on historical
activity and pro forma projections to be 20,833 (post-split) shares resulting in an estimated fair value of $3,967,500 which has
been recorded as a consulting expense during 2011.
Employment/Consulting
commitments
One
June 1, 2011, the Company entered into an Employment Agreement with its chief executive officer. The initial term of the agreement
covers a three-year period commencing on June 1, 2011 and required annual compensation payment of $24,000. On January 1, 2012,
the original agreement was amended to provide for an increase in annual compensation from the original $24,000 to $48,000 per
year. On July 18, 2013, the Company and its CEO entered into an Amended and Restated Employment agreement which increased the
CEO’s annual salary to $250,000 per annum, payable bimonthly effective July 1, 2013.
On
June 1, 2011, the Company issued a Consulting Agreement to its chief financial officer. Pursuant to the agreement, annual consulting
fees of $24,000 will be paid per annum for the term of the agreement which was to expire on March 1, 2014. In September 2011,
the Company replaced the consulting agreement with an offer of employment with annual compensation of $30,041. Employment is considered
“at-will” and therefore can be terminated at any time by either party.
During
May 2013, the board of directors approved the issuance of 50,000,000 to the Company’s president and CEO. The shares were
valued at $10,000,000, and vest over the period of two years. The Company amortized $3,229,167 for the year ended December 31,
2013. Additionally, as board of directors approved the issuance of 10,000,000 shares to the Company’s president and CEO.
The shares were valued at $2,000,000 and expensed for the year ended December 31, 2013. During December 31, 2013, the CEO returned
a net 50,000,000 shares in order to provide additional authorized shares to the Company. The Company is expected to reissue the
shares at a future date and has accordingly recorded a common stock payable of $50,000 for the par value of the shares.
During
June 2013, the Company’s CFO resigned. On June 12, 2013, this former CFO entered into a Business Consulting Agreement to
provide consulting services at a rate of $10,000 per month, payable in bi-monthly installment of $5,000 on the 15
th
and last day of the month for the term of one year. During the year ended December 31, 2013 the Company issued 25,391,606 shares
of common valued at $60,000 for the first six months of the agreement and accrued another $10,000. In addition, all prior payroll
liabilities owing from the Company to this individual were released in exchange for 1,961,803 shares of the Company’s common
stock. The stock was valued at $78,472 and satisfied $7,510 in accrued wages. The remaining value of $70,962 was recorded as additional
compensation costs for the year ended December 31, 2013.
Note
payable to a related party
During
the year ended December 31, 2011, the Company’s chief financial officer paid certain liabilities totaling $10,578 on behalf
of the Company. In October 2011, the Company issued a promissory note for the value of the payment which bears interest at a rate
of 8% per annum and matures on September 30, 2012. On January 12, 2012, this same officer provided an additional $20,000 under
the same terms, to the Company for operating expenses. As of March 31, 2014 and December 31, 2013 the note totaled $7,458 and
$8,458, respectively.
NOTE
6 - Notes payable
Chamisa
Technology, LLC
On
July 8, 2010, the Company’s chief executive officer and majority shareholder contributed a note payable in the amount of
$83,627 which originated from his previously dissolved limited liability company. The note balance represented cash advances of
$81,595 and previously accrued interest of $2,032. During the period from inception (July 8, 2010) through December 31, 2010,
the Company received additional advances of $64,491 and $18,000 during the year ended December 31, 2011. No formal agreement pertaining
to the advances had previously been documented, however pursuant to a verbal agreement between the parties, the balance was due
on demand and bears interest at a rate of 12% per annum. March 5, 2012, the Company formalized and acknowledged its liability
to Chamisa Technology, LLC in the form of a promissory note. The promissory note is unsecured bears interest at a rate of 12%
per annum, and matures on August 31, 2012. Pursuant to the new promissory note, the Company is required to make monthly principal
and interest payments through maturity. As of March 31, 2014, the note is in default.
On
April 21, 2012, Chamisa Technology, LLC assigned $81,595 of the note to an individual who further assigned portions of the debt
to various entities. During the year ended December 31, 2012, the original assignee agreed to forgive $56,595 of the debt in exchange
for immediate conversion rights at a conversion rate of $0.001. During the period ended December 31, 2012, the Company authorized
the issuance of 98 (post-split) shares of common stock for the conversion of $25,000 in principal and $936 of accrued interest.
The fair value of the shares issued totaled $737,873 based on the market price of the common stock on the date of conversion.
The difference in the fair value of the shares issued and the principal amount of debt and accrued interest converted totaled
$711,937 and has been recorded as a financing costs.
On
May 1, 2013, Chamisa Technology, LLC assigned the outstanding note to an affiliate who further assigned portions of the debt to
various entities. During the year ended December 31, 2013, the Company authorized the issuance of 19,400,000 shares of common
stock for the conversion of $19,400 in principal. The fair value of the shares issued totaled $336,863 based on the market price
of the common stock on the various dates of conversion. The difference in the fair value of the shares issued and the principal
amount of debt and accrued interest converted totaled $317,463 and has been recorded as a financing costs.
On
December 1, 2013, Chamisa Technology, LLC assigned $65,123 of the note to an individual who further assigned portions of the debt
to various entities. During the year ended December 31, 2013, the original assignee agreed to forgive $21,500 of the debt in exchange
for immediate conversion rights at a conversion rate of $0.001. As of December 31, 2013, the Company recognized an interest expense
of $43,623 from BCF related to the conversion and gain on settlement of debt of $21,500.
As
of March 31, 2014 and December 31, 2013, the unpaid principal balance together with accrued interest totaled $102,733 and $100,606,
respectively. The Company is still negotiating additional terms as it relates to this note.
Coach
Capital LLC
On
September 30, 2011, the Company issued a promissory note in the amount of $111,000 to Coach Capital, LLC. The note is unsecured,
due on demand and bears interest at a rate of 10% per annum. In the event of default, the interest rate will immediately escalate
to 30% per annum. As of March 31, 2014 and December 31, 2013, the unpaid principal balance together with accrued interest totaled
$146,008 and $142,418, respectively.
ICG
USA, LLC
On
February 16, 2012, the Company entered into a Securities Purchase Agreement with ICG USA, LLC (“ICG”) and issued a
Convertible Promissory Note in the amount of $200,000. The note is unsecure, bears interest at a rate of 6% interest per annum,
and is due on demand. The note is convertible into shares of the Company’s common stock beginning year after the date of
issuance and was convertible on August 16, 2012. Pursuant to the terms of the Agreement, the note is convertible at a rate equal
to a 45% discount to the average of the three lowest closing trade prices in the preceding thirty trading days. On the date the
note became convertible; the Company valued the benefit of conversion at $309,631 and recorded a discount of $200,000 and a derivative
liability with a corresponding comprehensive loss in the amount of $109,631. The discount related to the conversion value will
be amortized over the remaining term of the note utilizing the interest method of accretion. During the year ended December 31,
2012, ICG elected to convert $32,743 in principal. Pursuant to the conversion rate calculation in the Agreement, the Company issued
13,634 (post-split) shares at an average conversion rate of $2.40 and recognized a loss on the derivative in the amount of $23,340.
During
the three months ended March 31, 2014, ICG assigned $122,500 in principal to three other entities. As discussed below, the Company
issued new convertible note agreements with those entities. The Company recorded a loss on the derivative in the amount of $168,198
for the three months ended March 31, 2014 pursuant to the transfers.
As
of the March 31, 2014, the Company fair valued the derivative liability at $69,170 and recorded a comprehensive gain of $$216,493
representing the change in fair value. As of March 31, 2014, the unpaid principal balance was $44,757, net of discount in the
amount of $0. Accrued interest totaled $43,749.
JMJ
Financial
On
May 7, 2012, the Company issued a Convertible Promissory Note to JMJ Financial (“JMJ”) in the amount of $275,000.
Pursuant to the terms of the note, a 10% original issue discount is included and is due in one year. The Note does not bear interest
if paid in full within 90 days. Thereafter, a one-time interest charge of 5% shall be applied to the principal sum. The Note is
convertible to common stock in whole or in part at conversion price equal to the lesser of $0.06 per share or 65% of the lowest
trading price in the 25 trading days prior to the conversion. As of December 31, 2012, JMJ has funded $55,000 of the note which
includes an original issue discount in the amount of $5,000. The Company has computed the present value of the amount funded at
$52,731 as a result of its non-interest bearing terms. Additionally, the Company recorded a discount in the amount of $44,270
in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the interest
method of accretion over the one year term of the note. Further, the Company has recognized a derivative asset resulting from
the variable change in conversion rate in relation to the change in market price of the Company’s common stock. During the
year ended December 31, 2012, JMJ elected to convert $7,735 in principal. Pursuant to the conversion rate calculation in the Agreement,
the Company issued 11,666 (post-split) shares at an average conversion rate of $1.51 and recognized a loss on the derivative in
the amount of $7,665.
During
January and February 2013, JMJ elected to convert $5,858 in principal. Pursuant to the conversion rate calculation in the Agreement,
the Company issued 16,022 (post-split) shares at an average conversion rate of $0.37 and recognized a loss on the derivative in
the amount of $5,689.
During
April 2013, JMJ advanced an additional $5,400 to the Company.
During
June 2013, JMJ elected to convert $5,330 in principal. Pursuant to the conversion rate calculation in the Agreement, the Company
issued 100,000 shares at a conversion rate of $0.053 and recognized a loss on the derivative in the amount of $3,670.
During
July 2013, JMJ elected to convert $6,500 in principal. Pursuant to the conversion rate calculation in the Agreement, the Company
issued 325,000 shares at a conversion rate of $0.02 and recognized a loss on the derivative in the amount of $5,850.
During
August 2013, JMJ elected to convert $13,000 in principal. Pursuant to the conversion rate calculation in the Agreement, the Company
issued 2,600,000 shares at a conversion rate ranging from $0.003 to $0.01 and recognized a gain on the derivative in the amount
of $650.
During
October 2013, JMJ elected to convert $3,575 in principal. Pursuant to the conversion rate calculation in the Agreement, the Company
issued 5,500,000 shares at a conversion rate of $0.00065 and recognized a loss on the derivative in the amount of $3,025.
During
November 2013, JMJ elected to convert $1,885 in principal. Pursuant to the conversion rate calculation in the Agreement, the Company
issued 5,800,000 shares at a conversion rate of $0.000325 and recognized a loss on the derivative in the amount of $2,175.
During
the three months ended March 31, 2014, JMJ elected to convert the remaining $16,517 in principal. Pursuant to the conversion rate
calculation in the Agreement, the Company issued 39,845,000 shares at conversion rates ranging from of $0.0004 to $0.0005 and
recognized a loss on the derivative in the amount of $14,625.
Asher
Enterprises
During
the year ended December 31, 2012, the Company issued three Convertible Promissory Notes to Asher Enterprises, Inc. (“Asher”)
in the amount of $63,000, $37,500 and $40,000, respectively. The notes bears interest at a rate of 8% per annum, are unsecured
and mature on March 8, April 12, 2013 and August 13, 2013. The Notes are convertible into common stock in whole or in part at
a variable conversion price equal to a 39% discount to the 10-day average trading price prior to the conversion date. The Company
recorded a discount in the amount of $117,779 in connection with the initial valuation of the beneficial conversion feature of
the notes to be amortized utilizing the interest method of accretion over the term of the notes. During the year ended December
31, 2012, Asher elected to convert $5,700 in principal. Pursuant to the conversion rate calculation in the Agreement, the Company
issued 14,305 (post-split) shares at an average conversion rate of $2.51 and recognized a loss on the derivative in the amount
of $25. During the year ended December 31, 2013, the Company incurred $51,550 in penalty interest on these notes due to default.
The penalty interest was added to the principal of these notes.
During
the year ended December 31, 2013, the Company issued seven Convertible Promissory Notes to Asher totaling $152,250. The notes
bears interest at a rate of 8% per annum, are unsecured and mature on from November 1, 2013 through June 20, 2014. The notes are
convertible into common stock in whole or in part at a variable conversion price equal to a 45% discount to the average of the
lowest 3 trading prices in the 10-day trading period prior to the conversion date. The Company recorded discounts in the amount
of $131,387 in connection with the initial valuation of the beneficial conversion feature of the notes to be amortized utilizing
the interest method of accretion over the term of the note.
During
January and March 2013, the Company elected to convert $31,700 in principal. Pursuant to the conversion rate calculation in the
Agreement, the Company issued 78,654 (post-split) shares at a conversion rate ranging from $0.36 to $0.44 and recognized a loss
on the derivative in the amount of $40,724.
During
April and May 2013, the Company elected to convert $13,000 in principal. Pursuant to the conversion rate calculation in the Agreement,
the Company issued 201,842 shares at a conversion rate ranging from $0.06 to $0.11 and recognized a loss on the derivative in
the amount of $28,933.
During
July and September 2013, the Company elected to convert $59,600 in principal and $2,520 in accrued interest. Pursuant to the conversion
rate calculation in the Agreement, the Company issued 11,331,517 shares at a conversion rate ranging from $0.0011 to $0.0122 and
recognized a loss on the derivative in the amount of $142,186.
During
October 2013, the Company elected to convert $30,450 in principal and $3,000 in accrued interest. Pursuant to the conversion rate
calculation in the Agreement, the Company issued 35,774,642 shares at a conversion rate ranging from $0.00068 to $0.00087 and
recognized a loss on the derivative in the amount of $28,997.
During
November 2013, the Company elected to convert $23,370 in principal. Pursuant to the conversion rate calculation in the Agreement,
the Company issued 63,455,501 shares at a conversion rate ranging from $0.00028 to $0.00055 and recognized a loss on the derivative
in the amount of $26,034.
During
December 2013, the Company elected to convert $26,240 in principal. Pursuant to the conversion rate calculation in the Agreement,
the Company issued 99,661,141 shares at a conversion rate ranging from $0.00024 to $0.00029 and recognized a loss on the derivative
in the amount of $55,154.
During
the three months ended March 31, 2014, Asher elected to convert $74,990 in principal and $2,900 in accrued interest. Pursuant
to the conversion rate calculation in the Agreements, the Company issued 267,713,089 shares at conversion rates ranging from $0.0002
to $0.00037 and recognized a loss on the derivative in the amount of $124,227. Additionally, for the converted notes Asher waived
accrued interest totaling $9,244, recorded as a gain on debt settlement for the three months ended March 31, 2014.
As
of the March 31, 2014, the Company fair valued the derivative liability related to these notes at $35,399 and recorded a comprehensive
gain of $117,324 representing the change in fair value. As of March 31, 2014, the unpaid principal balance was $79,209, net of
discount in the amount of $18,791. Accrued interest totaled $5,069.
Continental
Equities, LLC
On
September 20, 2012, The Company issued a Convertible Promissory Note to Continental Equities, LLC (“Continental”)
in the amount of $35,000. The note bears interest at a rate of 8% per annum, is unsecured and matured on May 15, 2013. The Note
is convertible into common stock in whole or in part at a variable conversion price equal to a 42.5% discount to the lowest three
average thirty day trading prices prior to the conversion date. The Company recorded a discount in the amount of $35,000 in connection
with the initial valuation of the beneficial conversion feature of the notes to be amortized utilizing the interest method of
accretion over the term of the notes. Further, the Company has recognized a derivative liability in the amount of $1,437 resulting
from the variable change in conversion rate in relation to the change in market price of the Company’s common stock.
On
May 20, 2013, The Company issued a Convertible Promissory Note to Continental Equities, LLC (“Continental”) in the
amount of $13,000. The note bears interest at a rate of 8% per annum, is unsecured and matures on May 31, 2014. The Note is convertible
into common stock in whole or in part at a variable conversion price equal to a 42.5% discount to the lowest three average thirty
day trading prices prior to the conversion date. The Company recorded a discount in the amount of $13,000 in connection with the
initial valuation of the beneficial conversion feature of the notes to be amortized utilizing the interest method of accretion
over the term of the notes. Further, the Company has recognized a derivative liability in the amount of $92,915 resulting from
the variable change in conversion rate in relation to the change in market price of the Company’s common stock.
During
September 2013, the Company elected to convert $12,499 in principal. Pursuant to the conversion rate calculation in the Agreement,
the Company issued 8,571,500 shares at a conversion rate ranging from $0.0009 to $0.002 and recognized a loss on the derivative
in the amount of $23,880.
During
October 2013, the Company elected to convert $7,136 in principal. Pursuant to the conversion rate calculation in the Agreement,
the Company issued 10,137,806 shares at a conversion rate ranging from $0.0007 to $0.0008 and recognized a loss on the derivative
in the amount of $7,885.
During
November 2013, the Company elected to convert $6,745 in principal. Pursuant to the conversion rate calculation in the Agreement,
the Company issued 13,695,814 shares at a conversion rate ranging from $0.0004 to $0.0006 and recognized a loss on the derivative
in the amount of $2,640.
During
December 2013, Tide Pool Ventures Corporation (“Tide Pool”) purchased the remaining balance of the note.
During
the three months ended March 31, 2014, Tide Pool elected to convert the remaining balance of $21,620. Pursuant to the conversion
rate calculation in the Agreement, the Company issued 105,385,200 shares at a conversion rate ranging from $0.0002 to $0.0003
and recognized a loss on the derivative in the amount of $35,659. Additionally, Tide Pool waived the prior accrued interest on
the note totaling $4,088 recorded as a gain on debt settlement for the three months ended March 31, 2014.
Tide
Pool Ventures Corporation
On
December 10, 2013, the Company issued a Convertible Promissory Note to Tide Pool in the amount of $11,500. The note bears interest
at a rate of 9.875% per annum, is unsecured and matures on December 31, 2014. The Note is convertible into common stock in whole
or in part at a variable conversion price equal to a 30% discount to the lowest volume weighted average price of the five trading
days prior to the conversion date. The Company recorded a discount in the amount of $11,500 in connection with the initial valuation
of the beneficial conversion feature of the notes to be amortized utilizing the interest method of accretion over the term of
the notes.
On
February 20, 2014, ICG assigned $27,500 in principal to Tide Pool and the Company issued a new Convertible Promissory Note agreement.
The note bears interest at a rate of 10% per annum, is unsecured and matures on February 20, 2015. The Note is convertible into
common stock in whole or in part at a variable conversion price equal to a 50% discount to the lowest three average thirty day
trading prices prior to the conversion date. The Company recorded a discount in the amount of $27,500 in connection with the initial
valuation of the beneficial conversion feature of the notes to be amortized utilizing the interest method of accretion over the
term of the notes.
On
February 20, 2014, Company issued a Convertible Promissory Note to Tide Pool in the amount of $22,250. The note bears interest
at a rate of 10% per annum, is unsecured and matures on February 20, 2015. The Note is convertible into common stock in whole
or in part at a variable conversion price equal to a 40% discount to the lowest three average thirty day trading prices prior
to the conversion date. The Company recorded a discount in the amount of $22,250 in connection with the initial valuation of the
beneficial conversion feature of the notes to be amortized utilizing the interest method of accretion over the term of the notes.
During
March 2014, the Company elected to convert $9,500 in principal. Pursuant to the conversion rate calculation in the Agreement,
the Company issued 31,666,667 shares at a conversion rate of 0.0003 and recognized a loss on the derivative in the amount of $6,333.
As
of the March 31, 2014, the Company fair valued the derivative liability related to these notes at $93,620 and recorded a comprehensive
loss of $88,691 representing the change in fair value. As of March 31, 2014, the unpaid principal balance was $7,798, net of discount
in the amount of $43,952. Accrued interest totaled $808.
WHC
Capital, LLC, Series Bravo
On
February 5, 2014, ICG assigned $20,000 in principal to WHC Capital, LLC, Series Bravo (“WHC”) and the Company issued
a new Convertible Promissory Note agreement. The note bears interest at a rate of 6% per annum, is unsecured and matures on February
5, 2015. The Note is convertible into common stock in whole or in part at a variable conversion price equal to a 45% discount
to the lowest three average thirty day trading prices prior to the conversion date. The Company recorded a discount in the amount
of $20,000 in connection with the initial valuation of the beneficial conversion feature of the notes to be amortized utilizing
the interest method of accretion over the term of the notes.
On
February 7, 2014, Company issued a Convertible Promissory Note to WHC in the amount of $10,000. The note bears interest at a rate
of 10% per annum, is unsecured and matures on February 20, 2015. The Note is convertible into common stock in whole or in part
at a variable conversion price equal to a 40% discount to the lowest three average thirty day trading prices prior to the conversion
date. The Company recorded a discount in the amount of $10,000 in connection with the initial valuation of the beneficial conversion
feature of the notes to be amortized utilizing the interest method of accretion over the term of the notes.
During
February 2014, the Company elected to convert $14,157 in principal. Pursuant to the conversion rate calculation in the Agreement,
the Company issued 64,348,000 shares at a conversion rate of 0.0002 and recognized a loss on the derivative in the amount of $37,487.
As
of the March 31, 2014, the Company fair valued the derivative liability related to these notes at $46,364 and recorded a comprehensive
loss of $46,364 representing the change in fair value. As of March 31, 2014, the unpaid principal balance was $2,288, net of discount
in the amount of $13,555. Accrued interest totaled $160.
LG
Capital Funding, LLC
On
March 11, 2014, ICG assigned $75,000 in principal to LG Capital Funding, LLC (“LG Capital”) and the Company issued
a new Convertible Promissory Note agreement. The note bears interest at a rate of 8% per annum, is unsecured and matures on March
11, 2015. The Note is convertible into common stock in whole or in part at a variable conversion price equal to a 50% discount
to the lowest closing bid price in the five day trading prices prior to the conversion date. The Company recorded a discount in
the amount of $75,000 in connection with the initial valuation of the beneficial conversion feature of the notes to be amortized
utilizing the interest method of accretion over the term of the notes.
On
March 11, 2014, Company issued a Convertible Promissory Note to Tide Pool in the amount of $37,875. The note bears interest at
a rate of 8% per annum, is unsecured and matures on March 11, 2015. The Note is convertible into common stock in whole or in part
at a variable conversion price equal to a 50% discount to the lowest closing bid price in the five day trading prices prior to
the conversion date. The Company recorded a discount in the amount of $37,875 in connection with the initial valuation of the
beneficial conversion feature of the notes to be amortized utilizing the interest method of accretion over the term of the notes.
As
of the March 31, 2014, the Company fair valued the derivative liability related to these notes at $112,875 and recorded a comprehensive
loss of $112,875 representing the change in fair value. As of March 31, 2014, the unpaid principal balance was $6,185, net of
discount in the amount of $106,690. Accrued interest totaled $495.
NOTE
7 – Commitments
Lease
agreements
In
June 2011, the Company entered into a two-year lease agreement for additional office space commencing July 1, 2011 and expiring
December 31, 2013. Pursuant to the terms of the lease agreement, the monthly rate will increase to $4,175 with an additional increase
at the anniversary date to $4,300. In addition, the Company has increased its security deposit to $4,836. During the year ended
December 31, 2013, the Company terminated all leases for office space.
Consulting
agreements
During
May 2013, the Company entered into several Business Consulting Agreements with various individual to provide consulting services
at a combined total of $20,000 per month, payable in bi-monthly installment of $10,000 on the 15
th
and last day of
the month. During June 2013, the Company issued 357,144 shares of stock to these individuals for the first bi-monthly payment.
During July and August 2013, the Company issued an additional 1,727,959 shares for the 2
nd
and 3
rd
bi-monthly
payments, and accrued the remaining payments.
NOTE
8- Income taxes
Deferred
income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and liabilities.
The
effective tax rate on the net loss before income taxes differs from the U.S. statutory rate as follows:
|
|
|
|
2014
|
|
2013
|
|
U.S.
Statutory rate
|
|
|
|
34
|
%
|
|
|
34
|
%
|
|
Valuation
allowance
|
|
|
|
(34
|
)%
|
|
|
(34)
|
%
|
|
Effective
tax rate
|
|
|
|
—
|
|
|
|
—
|
|
The
net change in the valuation for the three months ended March 31, 2014 was an increase in valuation of $637,060.
The
Company has a net operating loss carryover of approximately $16,421,000 available to offset future income for income tax reporting
purposes, which will expire in various years through 2032, if not previously utilized. However, the Company’s ability to
use the carryover net operating loss may be substantially limited or eliminated pursuant to Internal Revenue Code Section 382.
The
Company had no material unrecognized income tax assets or liabilities as of March 31, 2014. The Company’s policy regarding
income tax interest and penalties is to expense those items as general and administrative expense but to identify them for tax
purposes. During the three months ended March 31, 2014 and 2013, there were no income tax, or related interest and penalty items
in the income statement, or as a liability on the balance sheet. We file income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The Company is subject to U.S. federal or state income tax examination by tax authorities for years
beginning at our inception of July 8, 2010 through current. The Company is not currently involved in any income tax examinations.
NOTE
9 - Fair value measurement
The
Company adopted ASC Topic 820-10 at the beginning of 2009 to measure the fair value of certain of its financial assets required
to be measured on a recurring basis. The adoption of ASC Topic 820-10 did not impact the Company’s financial condition or
results of operations. ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC
Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell
the asset or transfer the liability occurs in the principal market for the asset or liability. The three levels of the fair value
hierarchy under ASC Topic 820-10 are described below:
Level
I
– Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has
the ability to access.
Level
II
– Valuations based on quoted prices for similar assets and liabilities in active markets, quoted prices for
identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by
observable data for substantially the full term of the assets or liabilities.
Level
III
– Valuations based on inputs that are supportable by little or no market activity and that are significant
to the fair value of the asset or liability.
The
following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis as of March
31, 2014 and December 31, 2013:
|
|
|
Level
I
|
|
Level
II
|
|
Level
III
|
|
Fair
Value
|
|
March
31, 2014
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
—
|
|
$
|
(179,088
|
)
|
|
$
|
—
|
|
|
$
|
(179,088
|
)
|
|
|
Convertible
debt, net
|
|
|
—
|
|
|
(140,237
|
)
|
|
|
|
|
|
|
(328,361
|
)
|
|
|
Derivative
Liabilities
|
|
|
—
|
|
|
(357,427
|
)
|
|
|
—
|
|
|
|
(357,427
|
)
|
|
|
|
|
$
|
—
|
|
$
|
(676,752
|
)
|
|
$
|
—
|
|
|
$
|
(676,752
|
)
|
|
|
December
31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
—
|
|
$
|
(180,088
|
)
|
|
$
|
—
|
|
|
$
|
(180,088
|
)
|
|
|
Convertible
debt, net
|
|
|
—
|
|
|
(328,361
|
)
|
|
|
|
|
|
|
(328,361
|
)
|
|
|
Derivative
Liabilities
|
|
|
—
|
|
|
(505,647
|
)
|
|
|
—
|
|
|
|
(505,647
|
)
|
|
|
|
|
$
|
—
|
|
$
|
(1,014,096
|
)
|
|
$
|
—
|
|
|
$
|
(1,014,096
|
)
|
NOTE
10 – Shareholders’ equity
Common
stock issuances
During
the three months ended March 31, 2013, the Company issued a total of 94,676 (post-split) shares of common stock in connection
with the conversion of $37,558 in convertible debt.
During
the three months ended June 30, 2013, the Company issued a total of 3,301,842 shares of common stock in connection with the conversion
of $21,330 in debt. Additionally, the Company recorded finance costs pursuant to these issuances totaling $243,000.
During
the three months ended September 30, 2013, the Company issued a total of 30,009,620 shares of common stock in connection with
the conversion of $99,519 in debt, including accrued interest of $2,520. Additionally, the Company recorded finance costs pursuant
to these issuances totaling $63,770.
During
the three months ended December 31, 2013, the Company issued a total of 248,822,386 shares of common stock in connection with
the conversion of $113,401 in debt, including accrued interest of $3,000. Additionally, the Company recorded finance costs pursuant
to these issuances totaling $10,693.
During
the year ended December 31, 2013, the Company issued 41,521,023 shares of common stock pursuant to consulting services valued
at $488,080.
During
June 2013, the Company incorrectly issued 100,000 shares and is expecting their return.
During
May 2013, the Company issued 60,000,000 shares of common stock to the Company’s president and CEO valued at $12,000,000,
of which the Company expensed $2,729,167 for the year ended December 31, 2013. Additionally, the CEO temporarily returned 50,000,000
shares to provide additional outstanding shares to the company, which was recorded as a common stock payable totaling $50,000.
During
June 2013, the Company issued 1,961,803 shares of common stock to the Company’s former CFO in satisfaction of accrued wages
totaling $7,510. The remaining value of $70,962 was recorded as compensation for the year ended December 31, 2013.
Effective
March 20, 2013, the Company performed a 1 for 450 reverse split of its common stock.
Effective
December 9, 2013, the Company amended its articles to increase the authorized shares to 1,000,000,000.
Effective
March 21, 2014 the Company amended its articles to increase the authorized shares to 5,000,000,000.
During
the three months ended March 31, 2014, the Company issued a total of 558,890,789 shares of common stock in connection with the
conversion of $143,228 in debt, including accrued interest of $2,900.
NOTE
11 - Subsequent events
During
April 2014, Tide Pool assumed the rights to and additional $60,000 of the ICG note and the Company issued a new convertible note.
The note accrues interest at 10% per annum and matures February 20, 2015. Further, Tide Pool may convert all or any amount of
the principal at a rate equal to 50% discount to the lowest three average thirty day trading prices prior to the conversion date.
Subsequent
to December 31, 2013, the Company issued 865,301,569 shares of common stock in connection with the conversion of $152,684 in debt,
including accrued interest of $4,163.