ANYTHINGIT, INC.
Statements of Cash Flows
(Unaudited)
|
|
For the
|
|
|
|
Nine months ended March 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,256,407
|
)
|
|
$
|
(941,607
|
)
|
|
Adjustments to reconcile net loss from operations to net cash used in operating activities
|
|
|
|
|
|
|
Depreciation
|
|
|
65,904
|
|
|
|
53,854
|
|
|
Amortization of debt discount
|
|
|
19,732
|
|
|
|
48,294
|
|
|
Amortization of deferred financing costs
|
|
|
4,874
|
|
|
|
27,986
|
|
|
Loss from extuinguishment of debt
|
|
|
132,357
|
|
|
|
-
|
|
|
Bad debts
|
|
|
46,728
|
|
|
|
(33,554
|
)
|
|
Gain from settlement of debt
|
|
|
(170,975
|
)
|
|
|
-
|
|
|
Stock based compensation
|
|
|
178,158
|
|
|
|
214,724
|
|
|
Change in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
452,654
|
|
|
|
74,341
|
|
|
Inventories
|
|
|
18,618
|
|
|
|
76,884
|
|
|
Prepaid expenses and other current assets
|
|
|
(7,588
|
)
|
|
|
(31,432
|
)
|
|
Accounts payable
|
|
|
177,955
|
|
|
|
(260,313
|
)
|
|
Accrued expenses
|
|
|
(8,596
|
)
|
|
|
67,691
|
|
|
Deferred rent
|
|
|
(1,293
|
)
|
|
|
16,453
|
|
|
Deferred revenue
|
|
|
8,054
|
|
|
|
8,269
|
|
|
Customer deposits
|
|
|
246,446
|
|
|
|
145,356
|
|
|
Net cash used in operating activities
|
|
|
(93,379
|
)
|
|
|
(533,054
|
)
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(11,742
|
)
|
|
|
(123,637
|
)
|
|
Decrease (increase) in restricted cash
|
|
|
30,080
|
|
|
|
(60,109
|
)
|
|
Decrease in security deposits
|
|
|
-
|
|
|
|
(4,048
|
)
|
|
Net cash (provided by) used in investing activities
|
|
|
18,338
|
|
|
|
(187,794
|
)
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of convertible notes payable
|
|
|
124,000
|
|
|
|
-
|
|
|
Advances on capital lease obligations
|
|
|
-
|
|
|
|
62,524
|
|
|
Payments on capital leases
|
|
|
(13,525
|
)
|
|
|
(19,225
|
)
|
|
Payments on notes payable
|
|
|
(5,752
|
)
|
|
|
(4,648
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
104,723
|
|
|
|
38,651
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
29,682
|
|
|
|
(682,197
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
128,723
|
|
|
|
1,009,580
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
158,405
|
|
|
|
327,383
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash payments during the year for :
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
12,284
|
|
|
$
|
5,382
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
2,063
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING:
|
|
Common stock issued to pay interest on notes
|
|
$
|
-
|
|
|
$
|
60,000
|
|
Common stock issued for conversion of debt
|
|
$
|
7,000
|
|
|
$
|
-
|
|
See accompanying notes to unaudited financial statements.
NOTE 1. – DESCRIPTION OF OUR BUSINESS.
AnythingIT, Inc. (the “Company”) is a provider of green technology solutions, managing the equipment disposition needs of the Federal government and commercial clients by buying, reselling, or recycling, in an environmentally and regulatory compliant manner, computers and other technology hardware. By delivering cost effective asset management solutions and capitalizing on our knowledge and relationships in the industry, we believe that we are able to maximize the technology dollars of our clients.
Our focus is on executing and managing secure, compliant end-of-life information technology (“IT”) asset management and disposition services. As part of our services, we provide a comprehensive asset management system or interface with our clients existing asset management systems with the goal of providing clear audit trail of the asset and enabling our clients the ability to assess shipping or disposal status, take inventory and generate settlement reports for every returned asset.
Additionally, we are focused on partnering with veterans either through providing employment opportunities directly or through our continuing support of Work Vessels For Veterans.
The Company maintains its principal office in Fair Lawn, New Jersey and has operating facilities in Fair Lawn, New Jersey and Tampa, Florida.
NOTE 2. – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Basis of Presentation
The unaudited financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation. These financial statements have not been audited.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and notes thereto for the year ended June 30, 2013 on the Company’s Annual Report on Form 10-K. The financial data for the three and nine month period presented may not necessarily reflect the results to be anticipated for the complete year ending June 30, 2014.
For the nine months ended March 31, 2014, the Company reported a net loss of approximately $1,256,000 and net cash used in operating activities of approximately $93,000. At March 31, 2014 the Company had an accumulated deficit of approximately $10,131,000. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty. There are no assurances the Company will be successful in its efforts to increase sales and report profitable operations or to continue as a going concern, in which event investors would lose their entire investment in the Company.
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities as of the date of the financial statements and the reported amounts of sales and expenses in the reporting period. We regularly evaluate estimates and assumptions related to allowances for doubtful accounts, inventory valuation, useful lives of property and equipment, deferred income tax asset valuation allowances, stock compensation, and valuation of stock options and warrants. We base our estimates and assumptions on current facts, historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The credit risk associated with cash equivalents is considered low due to the credit quality of the issuers of the financial instruments.
Restricted Cash
The Company maintains certain cash accounts that are restricted from general use. At
March 31, 2014
and June 30, 2013, the Company has $40,000 and $60,000, respectively, of certificate of deposit that collateralizes a letter of credit we have entered into for a facility in Tampa, Florida. Additionally, in accordance with our R2 certification we need to have a separate account to ensure a proper winding down of any facility, should that ever be necessary. As of
March 31, 2014
and June 30, 2013, the balance in that restricted account was $20,454 and $30,534, respectively.
Concentration of Credit Risk
The Company places its cash with high credit quality financial institutions. The Company’s account at this institution is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. As of March 31, 2014, the Company has not reached bank balances exceeding the FDIC insurance limit. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based on the expected collectability of its accounts receivable. The Company performs credit evaluations of significant customers and establishes an allowance for doubtful accounts based on the aging of receivables, payment performance factors, historical trends and other information. In general, the Company reserves 2% of the receivables outstanding 31 to 60 days, 5% of the receivables outstanding 61 to 90 days and 20% of the receivables outstanding more than 90 days. The Company evaluates and revises the reserve on a quarterly basis based on a review of specific accounts outstanding and our history of uncollectible accounts.
Inventories
Inventories, consisting of used computer equipment, are stated at the lower of cost or market. Cost is determined by the amount the Company pays for each specific unit in inventory. The Company reviews inventory for excess or obsolete inventory and writes-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. No allowance is necessary at March 31, 2014 and June 30, 2013.
Unprocessed inventory is shipped to the Company’s facilities and is considered to be end-of-life. The Company does not place a valuation on unprocessed inventory until it is received into the processing queue whereby it is tested and inventoried. Only after this process occurs can the Company provide final valuation in the form of purchase orders for equipment acquisitions and issue a Certificate of Indemnification confirming transfer of ownership and liability. This process usually takes between 30 to 60 days from the time of receipt at the Company’s warehouse. Due to the implementation of a new fully automated management system, we experienced certain process slowdowns during the earlier stages of fiscal 2013 that caused a buildup of orders to be processed in our operation. We resolved our process challenges and have increased throughput to targeted levels.
At March 31, 2014 and June 30, 2013 approximately 65% and 88%, respectively, of our inventory represents consigned inventory at a customer who was refurbishing the units for resale by that customer. During the second and third quarter of fiscal 2014, we partially sold this consigned inventory and we expect the remaining consigned inventory to be sold by the end of year 2014. Our ability to recoup our carrying costs of this inventory is dependent upon our customer paying us for this consigned inventory.
Property and equipment
The Company records property, equipment and leasehold improvements at historical cost. Expenditures for maintenance and repairs are recorded to expense; additions and improvements are capitalized. The Company generally provides for depreciation using the straight-line method at rates that approximate the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over remaining term of the lease of four years.
Asset Classification
|
|
Estimated Useful
Life (years)
|
|
Computers and software
|
|
|
3
|
|
Equipment
|
|
3 to 5
|
|
Furniture and fixtures
|
|
5 to 7
|
|
|
|
March 31,
2014
|
|
|
June 30,
2013
|
|
Software
|
|
$
|
214,168
|
|
|
$
|
214,168
|
|
Furniture and fixtures
|
|
|
111,297
|
|
|
|
111,297
|
|
Equipment
|
|
|
96,740
|
|
|
|
92,740
|
|
Capital leased equipment
|
|
|
202,261
|
|
|
|
202,261
|
|
Leasehold improvements
|
|
|
91,209
|
|
|
|
83,467
|
|
Less: Accumulated depreciation
|
|
|
(531,958
|
)
|
|
|
(466,054
|
)
|
Property and Equipment, net
|
|
$
|
183,717
|
|
|
$
|
237,879
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the nine month periods ended March 31, 2014 and 2013 was $65,904 and $53,854, respectively.
Revenue Recognition
The Company is an equipment recycler. The Company generates sales from services that are provided on recycled equipment or for the sale of used equipment. The customers who are providing the equipment are referred to as upstream customers. The Company charges services fees for data wiping, auditing, inventory management and logistics. If the equipment being provided by the upstream customer still has a value, the Company will credit the customer for the equipment purchased, which is an offset to the service fees. If the equipment is worth more than the service fees, the result is a credit memo that is booked into accounts receivable, with the net credit memos reclassified to customer deposits at each quarter end. The Company sells the equipment to a downstream customer, primarily a wholesaler. If the equipment is not valuable in its current form, the Company will sell the equipment either to a refurbisher or a demanufacturer, depending on where the Company can realize the greatest value for the equipment.
For product sales, the Company recognizes revenue at the time products are shipped and title is transferred, which is in accordance with the stated shipping terms. Revenue is recognized in accordance with these shipping terms so long as a purchase order, electronic, written or phone commitment has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectability is deemed probable. If uncertainties exist regarding customer acceptance or collectability, revenue is recognized when those uncertainties have been resolved. The Company provides a limited as-is warranty on some of its products. The Company analyzes its estimated warranty costs and provides an allowance as necessary, based on experience. At March 31, 2014 and June 30, 2013, a warranty reserve was not considered necessary.
The Company is party to brokered transactions whereby an upstream customer provides product to the Company if the parameters of the transactions can be satisfied. Based upon the upstream customer parameters and the nature of the risk and control of the transaction by the Company these sales may be recorded on a gross or net basis.
Service fees are recognized once the lot of equipment has been received, audited, inventoried, data wiped and the equipment has been valued and the results reported to the upstream customer. In those circumstances where the Company disposes of the upstream customer’s product, or purchases the product from the upstream customer for resale, revenue is recognized as a “product sale” described above.
Shipping and Handling Costs
Shipping costs paid to carriers for logistics that we arrange are included in cost of sales, whereas the corresponding amounts that we charge to customers for shipping that we arrange is included in net sales.
Cost of Sales
Cost of sales includes cost of equipment, testing, freight, warehouse salaries, and technicians.
Earnings Per Share
The Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
260
,
Earnings Per Share
. Basic earnings (loss) per share is based on the weighted effect of all common shares issued and outstanding and is calculated by dividing net income (loss) available to common stockholders by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares, if any, that would be issued assuming conversion of all potentially dilutive securities outstanding.
Shares potentially issuable were as follows:
|
|
March 31,
2014
|
|
|
March 31,
2013
|
|
Stock Options
|
|
|
5,565,005
|
|
|
|
3,478,339
|
|
Warrants
|
|
|
-
|
|
|
|
5,110,876
|
|
Convertible Notes
|
|
|
12,154,716
|
|
|
|
1,715,984
|
|
|
|
|
17,719,721
|
|
|
|
10,305,199
|
|
For the nine months ended March 31, 2014 and 2013 the Company reported a net loss. The impact of additional shares would be anti-dilutive, and, as such, the basic and diluted shares are the same for those periods.
Income Taxes
Under the asset and liability method prescribed under ASC 740,
Income Taxes
, The Company uses the liability method of accounting for income taxes. The liability method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts on the financial statements. The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.
The Company recognizes the financial statement benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in an examination. For tax positions meeting a "more-likely-than-not" threshold, the amount recognized in the financial statements is the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting the threshold, no financial statement benefit is recognized. As of March 31, 2014 and 2013, the Company has had no uncertain tax positions. The Company recognizes interest and penalties, if any, related to uncertain tax positions as general and administrative expenses. The Company currently has no federal or state tax examinations nor has it had any federal or state examinations since its inception. The Company's 2012, 2011 and 2010 tax years may still be subject to federal and state tax examination.
Share-Based Payments
The Company recognizes share-based compensation expense in connection with our share-based awards, net of an estimated forfeiture rate and therefore only recognizes compensation cost for those awards expected to vest over the service period of the award. The Company accounts for the grant of stock and option awards to employees in accordance with ASC Topic 718,
Compensation – Stock Compensation
. ASC 718 requires companies to recognize in the statement of operations the grant-date fair value of warrants and stock options and other equity based compensation. The Company utilizes a Black-Scholes option pricing model to estimate the fair value of our stock options. Calculating share-based compensation expense requires the input of highly subjective judgment and assumptions, including estimates of expected life of the award, stock price volatility, forfeiture rates and risk-free interest rates. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, our share-based compensation expense could be materially different in the future.
The Company accounts for non-employee share-based awards in accordance with ASC Topic 505-50,
Equity Based Payments to Non-Employees
. The Company estimates the fair value of stock options by using the Black-Scholes option pricing model.
For the nine months ended March 31, 2014 and 2013, total stock-based compensation was $178,158 and $214,724, respectively.
Financial Instruments
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06
, Fair Value Measurements and Disclosures
(Topic 820), “
Improving Disclosures about Fair Value Measurements
” (“ASU No. 2010-06”). ASU No. 2010-06 requires new disclosures about significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for such transfers and in the reconciliation for Level 3 fair value measurements, the requirement to disclose separately information about purchases, sales, issuances and settlements. The Company adopted the provisions of ASU No. 2010-06 on January 1, 2010, except for disclosures about purchases, sales, issuances and settlements in the reconciliation for Level 3 fair value measurements. Those disclosures were effective for financial statements issued for fiscal years beginning after December 15, 2010. The impact of its adoption on the Company’s financial statements was not material.
Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, and customer deposits are reflected in the balance sheets at cost, which approximates fair value because of the short-term maturity of these instruments.
Advertising
Advertising costs are charged to operations when incurred. During the nine months ended March 31, 2014 and 2013, the Company incurred approximately $2,800 and $14,000, respectively in advertising expense.
Reclassifications
Certain prior period balances have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on previously reported results of operations or stockholders’ equity. The Company did not deem any of these reclassifications to be material.
New Accounting Standards
The Company has adopted all recently issued accounting pronouncements. The adoption of the accounting pronouncements, including those not yet effective, is not anticipated to have a material effect on the financial position or results of operations of the Company.
NOTE 3. – ACCOUNTS RECEIVABLE.
Accounts receivable consisted of the following:
|
|
March 31,
2014
|
|
|
June 30,
2013
|
|
Accounts Receivable
|
|
$
|
158,297
|
|
|
$
|
622,872
|
|
Less: Allowance for doubtful accounts
|
|
|
(82,256
|
)
|
|
|
(47,449
|
)
|
Accounts receivable, net
|
|
$
|
76,041
|
|
|
$
|
575,423
|
|
NOTE 4. – INVENTORIES.
Inventories consisted of finished goods at March 31, 2014 and June 30, 2013. At March 31, 2014 and June 30, 2013, the balance is $249,145 and $267,763, respectively. From time to time we consign inventory to customers who refurbish and sell the used equipment. At March 31, 2014 and June 30, 2013, we had approximately $163,000 and $236,000 of used equipment on consignment at a customers’ facility, respectively.
NOTE 5. – CAPITAL LEASE OBLIGATIONS.
The Company has entered into several capital lease obligations to purchase equipment for operations. The Company has the option to purchase the equipment at the end of the lease agreement for one dollar. The underlying assets and related depreciation were included in the appropriate fixed asset category and related accumulated depreciation account.
Property and equipment includes the following amounts for leases that have been capitalized as of March 31, 2014 and June 30, 2013:
|
|
Useful Life (Years)
|
|
|
March 31,
2014
|
|
|
June 30,
2013
|
|
Equipment
|
|
|
3 - 5
|
|
|
$
|
123,047
|
|
|
$
|
123,047
|
|
Software
|
|
|
5
|
|
|
|
79,214
|
|
|
|
79,214
|
|
|
|
|
|
|
|
|
202,261
|
|
|
|
202,261
|
|
Less: Accumulated Depreciation
|
|
|
|
|
|
|
(160,796
|
)
|
|
|
(145,166
|
)
|
Capital Leased Equipment, net
|
|
|
|
|
|
$
|
41,465
|
|
|
$
|
57,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future minimum payments required under capital leases at March 31, 2014, are as follows:
|
|
March 31,
2014
|
|
|
|
|
|
FY 2014
|
|
$
|
5,414
|
|
FY 2015
|
|
|
21,656
|
|
FY 2016
|
|
|
17,472
|
|
FY 2017
|
|
|
4,062
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
Total future payments
|
|
|
48,604
|
|
Less: Amount representing interest
|
|
|
4,243
|
|
|
|
|
|
|
Present value of future minimum payments
|
|
|
44,361
|
|
Less: Current portion
|
|
|
18,676
|
|
|
|
|
|
|
Long term portion
|
|
$
|
25,685
|
|
|
|
|
|
|
NOTE 6. – RELATED PARTY TRANSACTIONS.
Amounts outstanding under a loan and line of credit from a bank (see Note 8) are personally guaranteed by officers of the Company.
NOTE 7. – ACCRUED EXPENSES.
Accrued expenses represent obligations that apply to the reported period and have not been billed by the provider or paid by the Company.
At March 31, 2014 and June 30, 2013, accrued expenses consisted of the following:
|
|
March 31,
2014
|
|
|
June 30,
2013
|
|
Accrued interest
|
|
$
|
75,869
|
|
|
$
|
29,753
|
|
Wages and vacation
|
|
|
49,141
|
|
|
|
82,118
|
|
Commissions and bonuses
|
|
|
12,836
|
|
|
|
49,328
|
|
Professional fees
|
|
|
32,943
|
|
|
|
37,500
|
|
Other
|
|
|
40,000
|
|
|
|
20,686
|
|
|
|
$
|
210,789
|
|
|
$
|
219,385
|
|
NOTE 8. – NOTES PAYABLE.
|
|
March 31,
2014
|
|
|
June 30,
2013
|
|
|
|
|
|
|
|
|
Loan payable to TD Bank maturing in October 2028 payable with varying monthly installments including interest at approximately 5.25% per annum, secured by all assets of the Company
|
|
$
|
28,099
|
|
|
$
|
30,297
|
|
Line of Credit to American Express with varying monthly installments including interest at approximately 9.49% per annum, secured by all assets of the Company
|
|
|
28,426
|
|
|
|
31,981
|
|
|
|
|
|
|
|
|
|
|
Promissory note of $60,000 payable at 12 consecutive monthly installments starting
in February 2014
|
|
|
50,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
8% Convertible Promissory notes aggregating to $164,000 principal net of debt discount of $144,267 and $0 at March 31, 2014 and June 30, 2013, respectively
|
|
|
19,733
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
12% Convertible Promissory notes net of debt discount of $0 at March 31, 2014 and June 30, 2013
|
|
|
493,000
|
|
|
|
500,000
|
|
|
|
|
619,258
|
|
|
|
562,278
|
|
Less : Current portion
|
|
|
593,992
|
|
|
|
35,036
|
|
|
|
$
|
25,266
|
|
|
$
|
527,242
|
|
Loan Payable – TD Bank
On July 2, 2001 the Company entered into a loan agreement for the principal amount of $100,000, maturing in October 2028 payable with varying monthly installments including interest at approximately 5.25% per annum, secured by all assets of the Company.
Line of Credit Payable – American Express
The Company obtained a business capital line from American Express in the amount of $63,200. The line is payable in varying monthly installments including interest at approximately 9.49% per annum. The line is secured by all assets of the Company.
Promissory Note – Settlement of Accounts Payable
On February 24, 2014, the Company entered into a settlement agreement with a certain vendor pursuant to which the Company has fully settled an outstanding balance to the vendor amounting to $230,975 by issuing a promissory note of $60,000 payable in 12 monthly consecutive installments starting on February 28, 2014. Consequently, during the nine months ended March 31, 2014, the Company recognized a gain from settlement of accounts payable of $170,975. The Company shall be liable for the entire balance plus 10% interest from September 2013 and certain collection cost upon a default in payment by the Company. At March 31, 2014, the principal amount of this promissory note amounted to $50,000.
12% Convertible Promissory Notes
In January 2011 and February 2011 the Company issued and sold $550,000 principal amount 12% convertible promissory notes in a private offering resulting in net proceeds of $495,000 after $55,000 fee paid to placement agent. The notes are unsecured and pay interest at 12% per annum, in arrears, in shares of our common stock valued at $0.30 per share. The notes matured on December 31, 2013, provided, however, that in our sole option we may extend the maturity date until December 31, 2014 if the note is not converted by December 31, 2013. The Company has exercised its option to extend the maturity date from December 31, 2013 to December 31, 2014 while all terms and conditions remain the same. The notes are convertible at any time at the option of the holder into shares of our common stock at a conversion price of $0.30 per share. At any time that the closing price of our common stock on any exchange on which it might be listed or in the over the counter market equals or exceeds $0.60 per share for 20 consecutive trading days, we have the right to convert the notes into shares of our common stock at a conversion price of $0.30 per share. The conversion price of the notes is subject to proportional adjustment in the event of stock splits, dividends, recapitalizations and similar corporate events.
On March 5, 2014, the Company issued 7,000,000 shares of common stock to four recipients upon the assignment and cancellation of $7,000 of principal debt
due under one of the Company’s 12% convertible promissory note which matures on December 31, 2014. The Company’s note holder assigned $7,000 of the note to third parties and the note was cancelled in exchange for common stock at a price of $0.001 per share. The Company accounted for the reduction of the conversion price from $0.30 to $0.001 per share and such conversion under ASC 470-20-40 “Debt with Conversion and Other Options” and accordingly recorded loss from extinguishment of debt of $132,357 which is equal to the fair value of shares issued in excess of the fair value issuable pursuant to the original conversion terms.
Presently, the principal amounts of these notes are convertible into an aggregate of 1,643,333 shares of our common stock. At March 31, 2014 and June 30, 2013, the Company had $74,678 and $29,753, respectively in accrued interest on the notes. At March 31, 2014 and June 30, 2013, the principal amounts of these notes amounted to $493,000 and $500,000, respectively.
8% Convertible Promissory Notes
Between January 2014 and February 2014, the Company issued convertible promissory notes in an aggregate amount of $85,500. The notes bear interest at 8% per annum and mature in October 2014 and November 2014. The Company paid debt issuance cost of $5,500 and finder’s fee of $16,000 in connection with these notes payable which are being amortized over the term of the notes. The notes are convertible at the option of the holder into shares of common stock beginning on the date which is 180 days after the date of the notes, at a conversion price equal to 58% of the average of three lowest trading prices during the 10 trading day period of the Company’s common stock prior to the date of conversion. On March 13, 2014 the Company and the note holder entered into an amended agreement to modify the floor conversion price to $0.00009. During the first 180 days following the date of the note the Company has the right to prepay the principal and accrued but unpaid interest due under the note, together with any other amounts that the Company may owe the holder under the terms of the note, at a graduating premium ranging from 115% to 145%. After this initial 180 day period, the Company does not have a right to prepay the note.
In March 2014, the Company issued convertible promissory note of $78,500. The note bears interest at 8% per annum and matures in December 2014. The Company paid debt issuance cost of $3,500 and finder’s fee of $15,000 in connection with this note payable and is being amortized over the term of the note. The note is convertible at the option of the holder into shares of common stock beginning on the date which is 180 days after the date of the notes, at a conversion price equal to 53% of the average of three lowest trading prices during the 10 trading day period of the Company’s common stock prior to the date of conversion. The floor conversion price is $0.00009 per share.
During the first 180 days following the date of the note the Company has the right to prepay the principal and accrued but unpaid interest due under the note, together with any other amounts that the Company may owe the holder under the terms of the note, at a graduating premium ranging from 110% to 145%. After this initial 180 day period, the Company does not have a right to prepay the note.
The Company evaluated whether or not the convertible promissory notes contain embedded conversion features, which meet the definition of derivatives under ASC 815-15 “Accounting for Derivative Instruments and Hedging Activities” and related interpretations. The Company concluded that since the convertible promissory notes have floor conversion prices, the convertible promissory notes were not considered derivatives.
Debt Discounts
In connection with the 12% convertible promissory notes offering, we issued the purchasers Series C Warrants to purchase an aggregate of 733,335 shares of our common stock at an exercise price of $0.45 per share. The exercise price of the Series C warrant is subject to adjustment in the event of stock splits, dividends, recapitalizations and similar corporate events. In accordance with ASC 470, the Company has analyzed the beneficial nature of the conversion terms and determined that a beneficial conversion feature (BCF) existed as of February 10, 2011. The Company calculated the value of the BCF using the intrinsic method as stipulated in ASC 470. Based on the stock price on the day of commitment, the discount as agreed to in the note, and the number of convertible shares, and the value of the warrants included in the units, the total discount was valued at $165,579. In accordance with ASC 470, the Company amortized the BCF and relative fair value of the warrants over the two year term of the note.
In connection with the 8% convertible promissory notes, the convertible notes were considered to have an embedded beneficial conversion feature (BCF) because the effective conversion price was less than the fair value of the Company’s common stock in accordance with ASC 470-20-25. Therefore the portion of proceeds allocated to the convertible notes of $164,000 was determined to be the value of the beneficial conversion feature and was recorded as a debt discount and is being amortized over the term of the notes.
For the nine months ended March 31, 2014 and 2013 the Company recognized $19,732 and $48,294, respectively of amortization of debt discount. As of March 31, 2014 and June 30, 2013 the discount had a carrying value of $144,267 and $0, respectively.
For the nine months ending March 31, 2014 and 2013, the Company recognized $4,874 and $27,986 of amortization of deferred financing cost, respectively. At March 31, 2014 and June 30, 2013, deferred financing cost amounted to $35,126 and $0.
NOTE 9. – STOCKHOLDERS’ EQUITY.
Our authorized capital stock consists of 200,000,000 shares of common stock, $0.01 par value per share, and 5,000,000 shares of preferred stock, par value $0.01 per share. As of March 31, 2014 and June 30, 2013, there are 44,224,113 and 36,670,238 shares of common stock issued and outstanding, respectively. There are no shares of preferred stock issued and outstanding.
On March 1, 2014, the board of directors of the Company voted in favor of an amendment to restate the Articles of Incorporation in order to (i) to reduce the par value of the Company’s common stock from $0.01 per share to $0.001 per share and (ii) to increase the authorized number of shares of common stock from 200 million to 3 billion shares (the “Amendment”). The Amendment requires an approval from the stockholders’ of the Company. As such, the financial statements do not reflect the results of the Amendment
Common stock
Holders of common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of common stock do not have cumulative voting rights. Holders of common stock are entitled to share in all dividends that the Board of Directors, in its discretion, declares from legally available funds. In the event of our liquidation, dissolution or winding up, subject to the preferences of any shares of our preferred stock which may then be outstanding, each outstanding share entitles its holder to participate in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions for the common stock. The rights of the holders of common stock are subject to any rights that may be fixed for holders of preferred stock, when and if any preferred stock is authorized and issued. All outstanding shares of common stock are duly authorized, validly issued, fully paid and non-assessable.
On September 18, 2013 our board of directors approved the issuance of an aggregate of 553,875 shares of our common stock valued at $22,155, based on the quoted trading price on the grant date, to our three executive officers as payment of fiscal 2013 bonuses due each of them under the terms of their employment agreements. The shares, which were issued under our 2010 Equity Compensation Plan, were valued at fair market value and issued in lieu of a cash bonus.
On March 5, 2014, the Company issued 7,000,000 shares of common stock to four recipients upon the assignment and cancellation of $7,000 of principal debt
due under the Company’s 12% convertible promissory note which matures on December 31, 2014 (see Note 8).
Preferred stock
Our Board of Directors, without further stockholder approval, may issue preferred stock in one or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the shares of each series. The rights, preferences, limitations and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. Our Board of Directors may authorize the issuance of preferred stock, which ranks senior to our common stock for the payment of dividends and the distribution of assets on liquidation. In addition, our Board of Directors can fix limitations and restrictions, if any, upon the payment of dividends on our common stock to be effective while any shares of preferred stock are outstanding. The rights granted to the holders of any series of preferred stock could adversely affect the voting power of the holders of common stock and issuance of preferred stock may delay, defer or prevent a change in our control.
NOTE 10. STOCK OPTIONS AND WARRANTS.
Common Stock Purchase Warrants
A summary of the status of the Company's outstanding stock warrants as of March 31, 2014 and changes during the period then ended is as follows:
|
|
Number of
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013
|
|
|
5,110,876
|
|
|
$
|
0.56
|
|
|
|
0.41
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(5,110,876)
|
|
|
|
0.56
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at March 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at March 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the nine months ended March 31, 2014
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
Stock Option Plans
2010 Equity Compensation Plan
On June 28, 2010, our Board of Directors authorized our 2010 Equity Compensation Plan covering 12,000,000 shares of common stock. The plan was approved by our stockholders on June 28, 2010. The purpose of the plan is to enable us to offer to our employees, officers, directors and consultants whose past, present and/or potential contributions to our company have been or will be important to our success, an opportunity to acquire a proprietary interest in our company. The 2010 Equity Compensation Plan is administered by our Board of Directors. Plan options may either be (i) incentive stock options (ISOs), (ii) non-qualified options (NSOs), (iii) awards of our common stock or (iv) rights to make direct purchases of our common stock which may be subject to certain restrictions. Any option granted under the 2010 Equity Compensation Plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant, but the exercise price of any ISO granted to an eligible employee owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant. The plan further provides that with respect to ISOs the aggregate fair market value of the common stock underlying the options which are exercisable by any option holder during any calendar year cannot exceed $100,000. The term of each plan option and the manner in which it
may be exercised is determined by the Board of Directors or the compensation committee, provided that no option may be exercisable more than 10 years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than five years after the date of the grant.
In the event of any stock split of our outstanding common stock, the Board of Directors in its discretion may elect to maintain the stated amount of shares reserved under the plan without giving effect to such stock split. Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted.
On December 20, 2011, the Company issued 1,941,670 non-qualified five year options and 401,668 five year incentive stock options under the 2010 equity compensation plan. The options were issued at $0.30 the fair market value at the date of grant. The Company used the Black-Scholes option pricing model to value the stock options. Included in the assumptions of this calculation, the Company used a risk-free rate of 0.88% (based on the US Treasury note yield), five year maturity, volatility of 84.0% (based on the daily historical performance of a comparable Company’s stock), and a strike price of $0.30.
On December 22, 2011, as part of an employment agreement with our former Chief Financial Officer, the Company granted to her under its 2010 Equity Compensation Plan incentive stock options to purchase an aggregate of 550,000 shares of the Company’s common stock at an exercise price of $0.36, vesting as follows: options to purchase 183,334 shares vested on December 22, 2011, options to purchase an additional 183,333 shares vest on December 22, 2012; and options to purchase the remaining 183,333 shares vest on December 22, 2013. The Company used the Black-Scholes option pricing model to value the stock options. Included in the assumptions of this calculation, the Company used a risk-free rate of 0.91%, (based on the US Treasury note yield), five year maturity, volatility of 84.0% (based on the daily historical performance of a comparable Company’s stock), and a strike price of $0.36. The 550,000 options fully vested on December 2, 2013 pursuant to the Resignation and Transition Services Agreement.
On March 7, 2012, the Company entered into an employment agreement with our former Chief Financial Officer. As part of the agreement the Company granted to her under its 2010 Equity Compensation Plan incentive stock options to purchase an aggregate of 666,667 shares of the Company’s common stock at an exercise price of $0.15 , vesting as follows: options to purchase 166,667 shares vested on March 7, 2013, options to purchase an additional 166,667 shares vest on March 7, 2014; options to purchase an additional 166,667 shares vest on March 7, 2015; and options to purchase the remaining 166,666 shares vest on March 7, 2016. The Company used the Black-Scholes option pricing model to value the stock options. Included in the assumptions of this calculation, the Company used a risk-free rate of 0.85%, (based on the US Treasury note yield), five year maturity, volatility of 84.0% (based on the daily historical performance of a comparable Company’s stock), and a strike price of $0.15. The 666,667 options fully vested on December 2, 2013 pursuant to the Resignation and Transition Services Agreement.
On June 12, 2013, the Company issued 50,000 non-qualified five year options and 2,000,000 five year incentive stock options under the Plan. The non-qualified options were issued at $0.03 the fair market value at the date of grant and the incentive stock options were issued at $0.033, which is 110% of the fair market value at the date of grant. The Company used the Black-Scholes option pricing model to value the stock options. Included in the assumptions of this calculation, the Company used a risk-free rate of 1.11% (based on the US Treasury note yield), five year maturity, volatility of 339.1%, and a strike price of $0.03 and $0.033, respectively.
On December 2, 2013, the Company executed a Resignation and Transition Services Agreement with our former Chief Financial Officer (the “former CFO”) whereby both parties agreed to terminate the employment agreement of the former CFO. The former CFO has resigned as an employee and member of the Board of Directors of the Company and has agreed to provide transition services to the Company. Pursuant to the Resignation and Transition Services Agreement, the former CFO is entitled to a cash compensation of $40,000 payable at the rate of $1,250 per week for 32 weeks and all unvested options granted to the former CFO immediately vested and shall remain exercisable through their original expiration date. The Company has recognized and included the $40,000 cash compensation in accrued expenses as of March 31, 2014 (see Note 7).
On March 6, 2014, the Company granted 50,000 five year incentive stock options under the Plan to purchase shares of common stock at approximately $0.05 per share. These options were valued on the grant date at approximately $0.05 per option using a Black-Scholes option pricing model with the following assumptions: stock price of approximately $0.05 per share, volatility of 262%, expected term of 5 years, and a risk free interest rate of 1.57%.
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Value
|
|
|
Exercise Price
|
|
|
Fair Value
|
|
Outstanding at June 30, 2013
|
|
|
5,525,005
|
|
|
$
|
1,043,001
|
|
|
$
|
0.19
|
|
|
|
-
|
|
Granted
|
|
|
50,000
|
|
|
|
2,475
|
|
|
|
0.05
|
|
|
|
0.05
|
|
Forfeited
|
|
|
(10,000)
|
|
|
|
-
|
|
|
|
0.30
|
|
|
|
-
|
|
Outstanding at March 31, 2014
|
|
|
5,565,005
|
|
|
$
|
1,042,476
|
|
|
$
|
0.19
|
|
|
|
-
|
|
For the nine months ending March 31, 2014 and 2013, total stock-based compensation related to the options was $156,003 and $212,324, respectively. The total intrinsic value of stock options outstanding and exercisable as of March 31, 2014 and June 30, 2013 was $0.
NOTE 11. COMMITMENTS AND CONTINGENCIES.
On December 23, 2013, the Company entered into a consulting agreement whereby such consultant intends to provide advisory services and introduce acquisition or potential mergers partners, investors or financing sources. The Company shall pay a fee equal to 20% of the consideration received by the Company upon the closing of any such transaction. During the nine months ended March 31, 2014, the Company paid finders fee for a total of $31,000 to such consultant in connection with the issuance of the 8% convertible notes (see Note 8).
NOTE 12. SUBSEQUENT EVENTS.
On April 9, 2014 the Company appointed Federico Garza-Bueron to serve as a director of the Company. Upon his appointment to the board of directors, the Company granted him non-incentive options to purchase 1,500,000 shares of the Company’s common stock under the 2010 Equity Compensation Plan at an exercise price of $0.06 per share. The options, which vested 250,000 shares upon grant and the balance in arrears quarterly until April 30, 2015, may be exercised at Mr. Garza-Bueron’s option on a cashless basis. These options were valued on the grant date at approximately $0.04 per option using a Black-Scholes option pricing model with the following assumptions: stock price of approximately $0.04 per share, volatility of 260%, expected term of 5 years, and a risk free interest rate of 1.65%.
On March 18, 2014 the Company announced in a press release that it is exploring entry into the legal Marijuana industry with an emphasis on supporting the underserved employment and staffing opportunities that are in demand. To date, the Company has not entered into any binding agreements or made any formal decision regarding any of the foregoing.
On May 1, 2014, the Company entered into a consulting agreement whereby the consultant shall provide management consulting, business advisory, strategic planning and investor relations services. As compensation for such services, the Company shall pay $6,666 per month. Both parties can terminate this agreement by providing fifteen days written notice.