These financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial
information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the interim period ended September 30, 2012 are not necessarily indicative
of the results that can be expected for the full year.
The accompanying notes are an integral
part of these condensed consolidated financial statements
The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements
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, 2012, and the results of its operations
and cash flows for the three and nine months ended September 30, 2012 and 2011. 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, 2011 filed with the Commission on April 16, 2012.
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 September
30, 2012 and for the three and nine 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 September 30, 2012 and
December 31, 2011, 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 September 30, 2012 and December 31, 2011, finished goods inventory
was $148,724 and $154,456, respectively.
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 September 30,
2012 or 2011. Depreciation expense for the nine months ended September 30, 2012, and 2011 and for the period from July 8, 2010
(inception) to September 30, 2012, was $8,852, $3,151 and $16,734, 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 September 30, 2012 and 2011, 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 September 30, 2012 and 2011 the Company had 1,242,916 and -0- potential common shares related to
options and vested warrants and 28,247,257 and no shares underlying convertible debt, 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. See Note 8 for further details.
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 September 30, 2012 and 2011 due
to their short-term nature. See Note 9 for further details.
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 nine months ended September 30, 2011,
and the year ended December 31, 2011, 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 totaled $4,655 and $40,039 for the three months ended September 30, 2012
and 2011 and $37,930 and $51,184, respectively for the nine month period ended September 30, 2012. For the period from July 8,
2010 (inception) to September 30, 2012, the Company has incurred a total of $148,606.
Research and development
Research and development costs are expensed
as incurred. During the nine months ended September 30, 2012 and 2011 and for the period from July 8, 2010 (inception) to September
30, 2012, research and development costs were $5,628, $0 and $30,751, 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 September 30, 2012,
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 nine months ended September 30,
2012 and 2011, and the period from July 8, 2010 (inception) to September 30, 2012, the Company recorded share-based compensation
of $144,007, $-0- and $4,111,507, respectively.
Recent accounting pronouncements
Recent accounting pronouncements issued
by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have
a material impact on the Company's present or future financial statements
International Financial Reporting Standards:
In November 2008, the Securities and Exchange
Commission (“SEC”) issued for comment a proposed roadmap regarding potential use of financial statements prepared in
accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards
Board. Under the proposed roadmap, the Company would be required to prepare financial statements in accordance with IFRS in fiscal
year 2014, including comparative information also prepared under IFRS for fiscal 2013 and 2012. The Company is currently assessing
the potential impact of IFRS on its financial statements and will continue to follow the proposed roadmap for future developments.
Year-end
The Company has adopted December 31, as
its fiscal year end.
NOTE 2 - Going concern
These financial statements have been prepared
in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will
be able to meet its obligations and continue its operations for its next fiscal year. Realization values may be substantially different
from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying
values and classification of assets and liabilities should the Company be unable to continue as a going concern. The Company has
not yet achieved profitable operations and since its inception (July 8, 2010) through September 30, 2012 the Company had accumulated
losses of $6,628,312 and a working capital deficit of $841,316. 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:
|
|
September 30,
|
|
December 31,
|
|
|
2012
|
|
2011
|
Trade accounts receivable
|
|
$
|
4,924
|
|
|
$
|
386
|
|
Employee receivables
|
|
|
8,579
|
|
|
|
—
|
|
Due from related party
|
|
|
22,372
|
|
|
|
22,838
|
|
Less: Allowance for doubtful accounts
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
35,875
|
|
|
$
|
23,224
|
|
As of September 30, 2012 and December 31,
2011, 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:
|
|
September 30,
|
|
December 31,
|
|
|
2012
|
|
2011
|
Furniture and fixtures
|
|
$
|
11,612
|
|
|
$
|
11,612
|
|
Software
|
|
|
11,945
|
|
|
|
11,945
|
|
Computers and equipment
|
|
|
22,249
|
|
|
|
22,249
|
|
Less: accumulated depreciation
|
|
|
16,734
|
|
|
|
7,882
|
|
|
|
$
|
29,072
|
|
|
$
|
37,924
|
|
Depreciation for the nine months ended
September 30, 2012 and 2011 and for the period from July 8, 2010 (inception) to September 30, 2012 was $8,852, $3,151 and $16,734,
respectively.
NOTE 5 - Related party transactions
Related party receivable
At the Company’s inception (July
8, 2010) the sole officer and shareholder contributed all the assets and liabilities distributed to him from his former limited
liability company which was dissolved on July 2, 2010. At the date of contribution, the fair value of the liabilities contributed
exceeded that of the assets by $54,438, which has been recorded as a related party receivable. The contributed assets and liabilities,
including the amount due from the related party are as follows:
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
$5,984
|
|
|
|
Inventory
|
|
|
7,877
|
|
|
|
Fixed assets, at fair value
|
|
|
12,863
|
|
|
|
Due from related party
|
|
|
54,438
|
|
|
|
Deposits held
|
|
|
2,965
|
|
|
|
Total assets contributed
|
|
|
$84,127
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
$500
|
|
|
|
Note payable
|
|
|
83,627
|
|
|
|
Total liabilities contributed
|
|
|
$84,127
|
On July 8, 2010 (inception) the Company
issued 100 shares of its common stock to its sole officer as founder’s shares in exchange for cash of $100. During the period
from inception (July 8, 2010) and December 31, 2010, the Company’s sole officer donated his services valued at $28,500 which
was recorded as a reduction on the amount due from him. In addition, the officer made cash payments totaling $5,400 as further
reductions in his related party receivable due to the Company.
During the year ended December 31, 2011,
the aforementioned officer donated additional services valued at $10,375 which has been recorded as a reduction in the officers’
receivable balance. Additionally, the Company advanced $14,516 to the officer for personal expenses and received repayment in the
amount of $1,841.
During the nine months ended September
30, 2012, the Company advanced an additional $331 and repaid $806.
As of September 30, 2012 and December 31,
2011, the amounts due from the officer totaled $22,372 and $22,838, respectively.
Merger warrants
In connection with the Company July 5,
2011 merger activities, the Company issued a warrant to purchase up to 37,500,000 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 9,375,000 for each $1,000,000 of cumulative realized revenue over the twenty-four month term.
As of September 30, 2012, 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 $0.42 per share utilizing a strike price
of $0.01, 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 9,375,000 resulting in an estimated
fair value of $3,967,500 which has been recorded as compensation in the previous year.
Employment/Consulting commitments
One June 1, 2011, the Company entered into
an Employment Agreement with its chief executive officer. The initial term of the agreement covers a three-year period commencing
on June 1, 2011 and required annual compensation payment of $24,000. On January 1, 2012, the original agreement was amended to
provide for an increase in annual compensation from the original $24,000 to $48,000 per year.
On June 1, 2011, the Company issued a Consulting
Agreement to its chief financial officer. Pursuant to the agreement, annual consulting fees of $24,000 will be paid per annum for
the term of the agreement which was to expire on March 1, 2014. In September 2011, the Company replaced the consulting agreement
with an offer of employment with annual compensation of $30,041. Employment is considered “at-will” and therefore can
be terminated at any time by either party.
Note payable to a related party
During the year ended December 31, 2011,
the Company’s chief financial officer paid certain liabilities totaling $10,578 on behalf of the Company. In October 2011,
the Company issued a promissory note for the value of the payment which bears interest at a rate of 8% per annum and matures on
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 September 30, 2012 the Company made principal payments of $14,000. The balance of these notes was
$21,258 and accrued interest totaled $1,828.
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 September
30, 2012, the note is in default.
On April 21, 2012, Chamisa Technology,
LLC assigned $81,595 of the note to an individual who further assigned portions of the debt to various entities. During the nine
months ended September 30, 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 September 30, 2012, the Company authorized the issuance of 19,936,340
shares of common stock for the conversion of $25,000 in principal and $936 of accrued interest. The fair value of the shares issued
totaled $737,873 based on the market price of the common stock on the date of conversion. The difference in the fair value of the
shares issued and the principal amount of debt and accrued interest converted totaled $711,937 and has been recorded as a financing
costs.
As of September 30, 2012 and December 31,
2011, the unpaid principal balance together with accrued interest owed to Chamisa totaled $127,360 and $195,142, respectively.
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 September 30,
2012 and December 31, 2011, the unpaid principal balance together with accrued interest totaled $125,749 and $116,669, 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 matures on February 16, 2013. The note
is convertible into shares of our common stock beginning nine months 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 record 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. On August 24, 2012, ICG elected to convert $15,000 in principal. Pursuant to the conversion
rate calculation in the Agreement, the Company issued 649,351 shares at a conversion rate of $0.0231 and recognized a loss on the
derivative in the amount of $12,922.
As of the balance sheet date, the Company
fair valued the derivative liability at $245,348 and recorded a comprehensive loss of $135,717 representing the change in fair
value. As of September 30, 2012, the unpaid principal balance was $45,245 net of discount in the amount of $139,755. Accrued interest
totaled $7,477.
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 September 30, 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. As of September 30, 2012, the Company recorded comprehensive loss on the derivative
in the amount of $19,462, recorded amortization of the debt discount in the amount of $22,000 in connection with the beneficial
conversion feature of the note. As of September 30, 2012, the unpaid principal balance net of discount totaled $31,393. The present
value interest amortized during the period ended September 30, 2012 totaled $1,074.
Asher Enterprises
On June 6, and July 10, 2012, the Company
issued two Convertible Promissory Notes to Asher Enterprises, Inc. (“Asher”) in the amount of $63,000 and $37,500,
respectively. The notes bears interest at a rate of 8% per annum, are unsecured and mature on March 8, and April 12, 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 $77,779 in connection with
the initial valuation of the beneficial conversion feature of the notes to be amortized utilizing the interest method of accretion
over the term of the notes. Further, the Company has recognized a derivative liability in the amount of $120,587 resulting from
the variable change in conversion rate in relation to the change in market price of the Company’s common stock. As of September
30, 2012, the Company recorded a comprehensive loss on the derivatives in the amount of $32,834, and recorded amortization of the
debt discounts in the amount of $36,903 in connection with the beneficial conversion features of the notes. As of September 30,
2012, the principal balance owed to Asher for these two notes totaled $36,903 net of discounts of $63,597.
Continental Equities, LLC
On September 20, 2012, The Company issued
a Convertible Promissory Note to Continental Equities, LLC (“Continental”) in the amount of $35,000. The note bears
interest at a rate of 8% per annum, is unsecured and matures on May 15, 2013. The Note is convertible into common stock in whole
or in part at a variable conversion price equal to a 42.5% discount to the lowest three average thirty day trading prices prior
to the conversion date. The Company recorded a discount in the amount of $35,000 in connection with the initial valuation of the
beneficial conversion feature of the notes to be amortized utilizing the interest method of accretion over the term of the notes.
Further, the Company has recognized a derivative liability in the amount of $1,437 resulting from the variable change in conversion
rate in relation to the change in market price of the Company’s common stock. As of September 30, 2012, the Company recorded
a comprehensive loss on the derivatives in the amount of $41,441, and amortization of the debt discounts in the amount of $1,477
in connection with the beneficial conversion features of the note. As of September 30, 2012, the principal balance owed to Continental
totaled $1,477 net of discount of $33,523.
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 September 30, 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. As of September 30, 2012 and 2011, the Company has recorded
rent expense of $54,416 and $42,016, respectively.
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:
|
|
2012
|
|
2011
|
U.S. Statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Valuation allowance
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
Effective tax rate
|
|
|
—
|
|
|
|
—
|
|
The net change in the valuation for the
nine months ended September 30, 2012 was an approximate increase in valuation of $521,000.
The Company has a net operating loss carryover
of approximately $2,630,000 available to offset future income for income tax reporting purposes, which will expire in various years
through 2031, if not previously utilized. However, the Company’s ability to use the carryover net operating loss may be substantially
limited or eliminated pursuant to Internal Revenue Code Section 382.
We had no material unrecognized income
tax assets or liabilities as of September 30, 2012. Our policy regarding income tax interest and penalties is to expense those
items as general and administrative expense but to identify them for tax purposes. During the nine-months ended September 30, 2012
and 2011, there were no income tax, or related interest and penalty items in the income statement, or as a liability on the balance
sheet. We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are subject to U.S. federal
or state income tax examination by tax authorities for years beginning at our inception of July 8, 2010 through current. We are
not currently involved in any income tax examinations.
NOTE 9 - Fair value measurement
The Company adopted ASC Topic 820-10 at
the beginning of 2009 to measure the fair value of certain of its financial assets required to be measured on a recurring basis.
The adoption of ASC Topic 820-10 did not impact the Company’s financial condition or results of operations. ASC Topic 820-10
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs
in the principal market for the asset or liability. The three levels of the fair value hierarchy under ASC Topic 820-10 are described
below:
Level I
– Valuations
based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.
Level II
– Valuations
based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities
in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially
the full term of the assets or liabilities.
Level III
– Valuations
based on inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or
liability.
The following table presents a reconciliation
of all assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011:
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Fair Value
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
|
—
|
|
|
|
(233,788
|
)
|
|
|
—
|
|
|
(233,788)
|
|
|
|
|
|
Convertible debt, net
|
|
|
|
—
|
|
|
|
(104,018
|
)
|
|
|
—
|
|
|
(104,018)
|
|
|
|
|
|
Derivative liabilities
|
|
|
|
—
|
|
|
|
(443,671
|
)
|
|
|
—
|
|
|
(443,671)
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
(771,477
|
)
|
|
$
|
—
|
|
|
$(771,477)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
|
—
|
|
|
|
(294,125
|
)
|
|
|
—
|
|
|
(294,125)
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
(294,125
|
)
|
|
$
|
—
|
|
|
$(294,125))
|
NOTE 10 – Shareholders’
equity
Recapitalization
Effective June 14, 2011, the Company effectuated
a 1-for-1.65 reverse stock split together with a corresponding reduction from 200,000,000 to 121,212,122 in the number of authorized
shares of the common stock, with a par value of $0.001.
Effective November 2, 2009, the Company
amended its articles of incorporation to increase its authorized capital to 200,000,000 shares of common stock.
On August 10, 2009, the Company reverse
split its issued common shares on the basis of one new share for one hundred old shares, and reduced its authorized capital from
600,000,000 to 6,000,000 shares of common stock.
On January 16, 2009, the Company forward
split its issued common shares on the basis of two and one half new shares for one old share.
On January 4, 2008, the Company forward
split its issued common shares on the basis of four new shares for one old share. The Company increased its authorized share capital
from 150 million to 600 million shares.
The number of shares referred to in these
financial statements has been restated to give retroactive effect on all stock splits.
Preferred stock
On March 22, 2012, after receiving approval
of a majority of our outstanding common stock, the Company amended its Articles of Incorporation to designate 1,500 shares of blank
check preferred stock, and on March 26, 2012, filed a Certificate of Designations of Preferences, Rights and Limitations to authorize
the issuance of shares of Series A Preferred Stock.
Socius CG II Ltd.
On February 21, 2012, the Company entered
into a Securities Purchase Agreement with Socius CG II, Ltd. Pursuant to the terms and subject to the conditions of this agreement,
the Company, at its sole discretion, has the ability to demand that Socius purchase up to a total of $5 million of redeemable Series
“A” Preferred Stock for a period of two years from the date of closing. As of March 31, 2012, no Series A Preferred
Stock has been issued.
Common stock issuances
On January 12, 2009, the Company issued
225,000 shares of its common stock to Trussnet Capital Partners (Cayman) Ltd. for all of the issued
and outstanding shares of LED Power Group, Inc. pursuant to a merger agreement and underlying assignment agreement. Under the terms
of the agreements, the Company has acquired the license to exclusive rights of certain intellectual property in relation to the
production of LED products. The shares were valued at fair market on the day of the agreements, being $0.92 per share. Effective
August 23, 2010, 225,000 shares that had been issued to Trussnet in connection to the license agreement
returned to treasury
and cancelled
.
On September 24, 2009, the Company issued
1,000,000 shares of common stock in exchange for cash proceeds of $10,000 or $0.01 per share.
On December 10, 2009, the Company issued
an additional 23,904,015 shares of common stock pursuant to conversion of $227,515 in demand notes payable and $11,525 in accrued
interest.
On April 1, 2011, the Company issued 452,312
shares of common stock pursuant to the conversion of $19,000 in advances, $188,374 in demand notes payable and $16,520 in accrued
interest. The Company erroneously issued 29,588 shares of common stock in excess of the 452,312 shares of common stock in relation
to the conversion of the debt. These shares were returned to treasury and cancelled on August 5, 2011.
During the year ended December 31, 2011,
the Company sold 1,975,000 shares of its common stock for cash proceeds totaling $987,500. As of March 31, 2012, the shares are
unissued.
During the nine-months ended September
30, 2012, the Company sold 1,750,000 shares of its common stock for cash proceeds totaling $175,000.
During the nine-months ended September
30, 2012, the Company issued a total of 20,585,690 shares of common stock in connection with the conversion of $40,936 in debt
and financing costs of $710,881.
During the nine-months ended September
30, 2012, the Company issued 2,700,000 shares for consulting services to two individuals fair valued at $92,500.
Warrants and options
On March 26, 2012, the shareholders’
of the Company approved the Company’s 2012 Equity Incentive Plan. Pursuant to the plan, on June 15, 2012 the Company granted
a total of 2,291,664 options to its senior management team. The option have a term of 10 years, are exercisable at an average weight
of $0.09 per share and vest in four increments of 25% each with the first vesting to occur on grant and the remaining to vest over
the subsequent three-year period. The company has valued the grant utilizing the Black-Scholes Model and assumptions as follows:
risk-free interest rate 2.29%; and volatility 205%. As of September 30, 2012, the Company recorded compensation expense of $51,507
in connection with the grant.
NOTE 11 - Subsequent events
On October 31, 2012, the Company designated
100 shares of its preferred stock as $0.01 par value Class B Convertible preferred. Holders of Class B Convertible Preferred Stock
will participate on an equal basis per-share with holders of common stock in any distribution upon winding up, dissolution, or
liquidation. Holders of Class B Convertible Preferred Stock are entitled to vote together with the holders of our common stock
on all matters submitted to shareholders at a rate of one million (1,000,000) votes for each share held. Holders of Class B Convertible
Preferred Stock are also entitled, at their option, to convert their shares into shares of our common stock on a 1 for 1 basis.
On October 31, 2012, the Company issued
all 100 shares of Class B preferred to its CEO for services to the Company.