2.
GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
The
Company’s unaudited condensed consolidated financial statements are prepared using generally accepted accounting principles
applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course
of business. The Company has incurred significant recurring losses which have resulted in an accumulated deficit of $15,837,417,
net loss of $3,115,539 and net cash used in operations of $137,669 for the three months ended December 31, 2016 which raises substantial
doubt about the Company’s ability to continue as a going concern.
During
the three months ended December 31, 2016, the Company raised $120,000 and $26,400in cash proceeds from the issuance of convertible
promissory notes and short term notes, respectively. The Company believes that its current cash on hand will not be sufficient
to fund its projected operating requirements through February 2017.
EXOLIFESTYLE,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016
The
Company’s primary source of operating funds since inception has been cash proceeds from the private placements of common
stock and proceeds from convertible and other debt. The Company intends to raise additional capital through private placements
of debt and equity securities, but there can be no assurance that these funds will be available on terms acceptable to the Company,
or will be sufficient to enable the Company to fully complete its development activities or sustain operations. If the Company
is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables, reduce
overhead, or scale back its current business plan until sufficient additional capital is raised to support further operations.
There can be no assurance that such a plan will be successful.
Accordingly,
the accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern
and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets
and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values.
The condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
3.
DEFERRED INCOME AND CUSTOMER DEPOSITS
The
Company has received advances from customers seeking to purchase a franchise. The deposits are classified as customer deposits
until a franchise agreement is signed. Once a franchise agreement is signed the advances are nonrefundable and reclassified to
deferred income. The franchisee has the responsibility to complete the build out of the restaurant within the time designated
in the franchise agreement (generally 5 years). Once the restaurant build out is complete and is operational the Company recognizes
the franchise fee as revenues. If the franchisee fails to complete the build out within the required period the franchise fee
is forfeited and the Company recognizes the fee as income.
4.
PROPERTY AND EQUIPMENT
Property
and equipment as of December 31, 2016 and September 30, 2016 is summarized as follows:
|
|
December
31, 2016
|
|
|
September
30, 2015
|
|
Construction
in process
|
|
$
|
-
|
|
|
$
|
18,150
|
|
Equipment
|
|
|
69,300
|
|
|
|
67,997
|
|
Leasehold
improvements
|
|
|
12,232
|
|
|
|
12,232
|
|
Furniture
and fixtures
|
|
|
42,584
|
|
|
|
42,584
|
|
Subtotal
|
|
|
124,116
|
|
|
|
140,963
|
|
Less
accumulated depreciation
|
|
|
(96,382
|
)
|
|
|
(92,299
|
)
|
Property
and equipment, net
|
|
$
|
27,734
|
|
|
$
|
48,664
|
|
Depreciation
expense for the three months ended December 31, 2016 and 2015 was $4,082 and $2,831, respectively.
During
the three months ended December 31, 2016, the Company settled its outstanding proposed Shaker & Pie operating leases and construction.
As such, the Company realized a gain on settlement of $29,974.
EXOLIFESTYLE,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016
5.
INTANGIBLE ASSETS
Intangible
assets as of December 31, 2016 and September 30, 2016 are summarized as follows:
|
|
December
31, 2016
|
|
|
September
30, 2016
|
|
Franchise
and trademark rights
|
|
$
|
71,949
|
|
|
$
|
71,949
|
|
Trademark
costs
|
|
|
45,429
|
|
|
|
45,429
|
|
Website
|
|
|
43,625
|
|
|
|
43,625
|
|
Subtotal
|
|
|
161,003
|
|
|
|
161,003
|
|
Less
accumulated depreciation
|
|
|
(51,363
|
)
|
|
|
(49,893
|
)
|
Intangible
assets, net
|
|
$
|
109,640
|
|
|
$
|
111,110
|
|
Amortization
expense for the three months ended December 31, 2016 and 2015 was $1,470 and $1,470, respectively.
6.
NOTES PAYABLE
On
July 10, 2014 the Company issued a note payable with face value $50,000, non-interest bearing, due on demand. The balance as of
December 31, 2016 and September 30, 2016 was $50,000.
On
June 9, 2016, the Company issued a unsecured promissory note with a face value of $7,600 with additional borrowing of 3,800 during
the three months ended December 31, 2016. The promissory note bears interest at 8% and is due six months from advances with monthly
payments of $1,347 per month. The balance as of December 31, 2016 and September 30, 2016 was $5,756 and $3,502, respectively.
On
September 8, 2016, the Company issued a unsecured factoring agreement with a face value of $8,750, bearing an estimated interest
rate of 13% whereby the Company will remit daily a portion of their collected receivables until repaid, including interest. The
balance as of December 31, 2016 and September 30, 2016 was $-0- and $6,660, respectively.
On
December 9, 2016, the Company issued a unsecured factoring agreement with a face value of $22,600, bearing an estimated interest
rate of 15% whereby the Company will remit daily a portion of their collected receivables until repaid, including interest. The
balance as of December 31, 2016 was $18,607.
7.
CONVERTIBLE NOTES PAYABLE
Convertible
notes payable as of December 31, 2016 and September 30, 2016 is summarized as follows:
|
|
December
31, 2016
|
|
|
September
30, 2016
|
|
Notes
payable, acquired in recapitalization
|
|
$
|
18,627
|
|
|
$
|
37,991
|
|
Notes
payable, due July 27, 2020, net of unamortized debt discounts of $363,924 and $314,006, respectively
|
|
|
241,626
|
|
|
|
271,544
|
|
Note
payable, due July 20, 2020, net of unamortized debt discounts of $177,550 and $190,144, respectively
|
|
|
22,450
|
|
|
|
9,856
|
|
Note
payable, due August 5, 2020, net of unamortized debt discount of $49,927 and $53,426
|
|
|
5,628
|
|
|
|
2,129
|
|
Subtotal
|
|
|
288,331
|
|
|
|
321,520
|
|
Less
current maturities
|
|
|
(18,627
|
)
|
|
|
(37,991
|
)
|
Long
term portion
|
|
$
|
269,704
|
|
|
$
|
283,529
|
|
EXOLIFESTYLE,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016
Under
the terms of the securities purchase agreement dated July 27, 2015, the Company issued and sold an aggregate of $1,333,334 principal
amount of convertible debentures due July 27, 2020 for a price of $1,200,000. Proceeds from this debenture will be paid to the
company as follows: $140,000 upon signing with the balance payable in five consecutive monthly installments of $212,000 commencing
on September 1, 2015. The company agreed to pay interest for the first 12 months at the rate of 10% per annum on the amounts advanced
payable in cash in six equal tranches, the first of which is due on date the company closed on the financing and remainder will
be due on each of the first five monthly anniversaries of such date.
As
of December 31, 2016, the Company has received net proceeds of $597,000 under the security purchase agreement and $250,000 not
under the security purchase agreement (same terms and conditions).
The
terms of the Securities Purchase Agreement contain certain negative covenants by the company, unless consent of purchasers holding
at least 75% of the aggregate principal amount of the outstanding debentures, including prohibitions on: incurrence of certain
indebtedness and liens, amendment to our articles of incorporation or bylaws, repayment or repurchase of the company’s common
stock or debts, sell substantially all of its assets or merger with another entity, pay cash dividends or enter into any related
party transactions. The Company granted investors certain pro-rata rights of first refusal on future offerings by the company
for as long as the investor(s) beneficially own any of the debentures.
The
debentures are convertible into shares of the company’s common stock at a conversion price initially equal to 65% of the
lowest traded price of its common stock for the twenty trading days prior to each conversion date subject to adjustment. In July
2016, the percentage was reduced (reset) from 65% to 50% of those notes under the Securities Purchase Agreement. The conversion
price of the debentures is subject to proportional adjustment in the event of stock splits, stock dividends and similar corporate
events. In addition, the conversion price is subject to adjustment if the company issues or sells shares of its common stock for
a consideration per share less than the conversion price then in effect, or issue options, warrants or other securities convertible
or exchange for shares of its common stock at a conversion or exercise price less than the conversion price of the debentures
then in effect. If either of these events should occur, the conversion price is reduced to the lowest price at which these securities
were issued or are exercisable.
At
the time of issuance and until December 31, 2015, the Company determined that the conversion provisions embedded in issued convertible
debentures did not meet the defined criteria of a derivative in such that the net settlement requirement of delivery of common
shares does not meet the “readily convertible to cash” as described in Accounting Standards Codification 815 and therefore
bifurcation was not required. There was no established market for the Company’s common stock. As of December 31, 2015, the
Company determined a market had been established for the Company’s common stock and accordingly, reclassified from equity
to liability treatment the initial previously recorded beneficial conversion feature of the conversion provision of $270,306.
The
Company determined the fair value of the embedded conversion provisions of the debentures of $2,085,898 at December 31, 2015 using
the Multinomial Lattice pricing model and the following assumptions: estimated contractual terms, a risk free interest rate of
1.76%, a dividend yield of 0%, and volatility of 56.38%. The fair value derivative liability of $2,085,898 was recorded as a liability
at December 31, 2015 and a charge to current period interest of $1,815,591 representing the excess in fair value of the liability
from the initially recorded beneficial conversion feature reclassified from equity.
During
the three months ended December 31, 2016, the Company issued an aggregate of $120,000 convertible debentures. The Company determined
the initial fair value of the embedded conversion provisions of the debentures of $327,078 at issuance date using the Multinomial
Lattice pricing model and the following assumptions: estimated contractual terms, a risk free interest rate of 0.98% to 1.54%,
a dividend yield of 0%, and volatility of 61.92% to 62.29%. The determined fair value of the derivative liability of $327,078
was charged as a debt discount up to the net proceeds of the notes with the remainder of $207,078 charged to current period operations
as non-cash interest expense.
EXOLIFESTYLE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2016
At December 31, 2016, the fair value of the
embedded conversion provisions of the debentures of $3,903,840 was determined using the Binomial Option Pricing model with the
following assumptions: dividend yield: 0%; volatility: 62.25%; risk free rate: 1.47%; and expected life: 3.55 to 3.60 years. The
Company recorded a loss on change in derivative liabilities of $2,613,475 during the three months ended December 31, 2016.
During the three months ended December 31,
2016, the Company issued an aggregate of 2,471,220 shares of its common stock in settlement of $100,000 of the outstanding convertible
notes.
For the three months ended December 31, 2016
and 2015, the Company amortized $86,174 and $13,975 of debt discount and original issuance discounts to current period operations
as interest expense, respectively.
Under the terms of a Registration Rights Agreement
entered into as part of the offering, the company agreed to file a registration statement with the Securities and Exchange Commission
within 60 days of the closing date covering the public resale of the shares of common stock underlying the debentures, and to use
its best efforts to cause the registration statement to be declared effective within 180 days from the closing date. Should the
number of shares of common stock the company is permitted to include in the initial registration statement be limited pursuant
to Rule 415 of the Securities Act of 1933, the company further agreed to file additional registration statements with the SEC to
register any remaining shares. The Company will pay all costs associated with the registration statements, other than underwriting
commissions and discounts. The parties to the Registration Rights Agreement have agreed to defer the Company’s obligation
to file a registration statement until further notice by the holders of the convertible debt.
From March 19, 2013 through October 4, 2013,
the Company entered into promissory notes for an aggregate of $65,600 in cash. The notes are unsecured, interest bearing at 10%
per annum (18% upon default), and matured from September 19, 2013 through April 4, 2014. The notes were initially convertible at
the option of the Company at a fixed price of $0.20 per share.
In connection with the recapitalization, the
holders of convertible debt in the original principal amount of $65,600 agreed as part of the merger to limit the number of shares
convertible pursuant to such debt and accrued interest into 40,000,000 shares of our common stock.
During the three months ended December 31,
2016, the Company has issued an aggregate of 12,641,736 shares of its common stock in settlement of $19,363 of promissory notes.
8. DERIVATIVE LIABILITIES
As described in Note 7, the Company issued
convertible notes that contain conversion features and reset provision. The accounting treatment of derivative financial instruments
requires that the Company record fair value of the derivatives as of the inception date and to fair value as of each subsequent
reporting date.
9. STOCKHOLDERS’ DEFICIT
Preferred stock
The Company is authorized to issue 20,000,000
shares of $0.0001 par value preferred stock as of December 31, 2016 and September 30, 2016. As of December 31, 2016, the Company
has designated and sold 2,000,000 shares of Series A Preferred Stock.
Each share of Series A Preferred Stock is entitled
to 125 votes on all matters submitted to a vote to the stockholders of the Company, does not have conversion, dividend or distribution
upon liquidation rights.
EXOLIFESTYLE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2016
Common stock
The Company is authorized to issue 500,000,000
shares of $0.0001 par value common stock as of December 31, 2016 and September 30, 2016. As of December 31, 2016 and September
30, 2016, the Company had 97,415,411 and 82,302,455 common shares issued and outstanding.
During the three months ended December 31,
2016, the Company has issued an aggregate of 12,641,736 shares of its common stock in settlement of $19,363 of promissory notes.
During the three months ended December 31,
2016, the Company issued an aggregate of 2,471,220 shares of its common stock in settlement of $100,000 of the outstanding convertible
notes.
Warrants
The following table summarizes information
with respect to outstanding warrants to purchase common stock of the Company, all of which were exercisable, at December 31, 2016:
Exercise
|
|
|
Number
|
|
|
Expiration
|
|
Price
|
|
|
Outstanding
|
|
|
Date
|
|
$
|
0.25
|
|
|
|
13,797,242
|
|
|
|
July 2018
|
|
In Connection with the merger agreement, the
Company issued an aggregate of 13,797,242 warrants to acquire the Company’s common stock at $0.25 per share for a period
of three years. 11,411,512 warrants were issued as part of the exchange consideration to acquire 100% of the common stock of Pizza
Fusion and 2,385,730 shares were issued in exchange for previously issued and outstanding warrants of Pizza Fusion Holdings, Inc.
A summary of the warrant activity for the three
months ended December 31, 2016:
|
|
|
|
|
Weighted-
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
Outstanding at September 30, 2016
|
|
|
13,797,242
|
|
|
$
|
0.25
|
|
|
|
1.75
|
|
|
$
|
-
|
|
Grants
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,2016
|
|
|
13,797,242
|
|
|
$
|
0.25
|
|
|
|
1.50
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2016
|
|
|
13,797,242
|
|
|
$
|
0.25
|
|
|
|
1.50
|
|
|
$
|
-
|
|
Exercisable at December 31, 2016
|
|
|
13,797,242
|
|
|
$
|
0.25
|
|
|
|
1.50
|
|
|
$
|
-
|
|
The aggregate intrinsic value in the preceding
tables represents the total pretax intrinsic value, based on warrants with an exercise price less than the Company’s management
estimated market stock price as of December 31, 2016, which would have been received by the warrant holders had those warrant holders
exercised their warrants as of that date.
EXOLIFESTYLE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2016
10. COMMITMENTS AND CONTINGENCIES
Debt assumption/indemnification
In connection with the merger on July 1, 2015,
previous officers of PF Hospitality Group, Inc. assumed and indemnified the Company for an aggregate of $590,990 outstanding debt,
all of which was considered old, unidentified and considered due by the previous management.
Litigation
The Company is subject at times to legal proceedings
and claims, which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur,
the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position,
results of operations or liquidity. There was no outstanding litigation as of December 31, 2016.
11. RELATED PARTY TRANSACTIONS
The Company’s current and former officers
and stockholders advance funds to the Company for travel related and working capital purposes. As of December 31, 2016 and September
30, 2016, there were no related party advances outstanding.
As of December 31, 2016 and September 30, 2016,
accrued compensation due officers and executives included in accounts payable was $828,896 and $796,496, respectively.
12. FAIR VALUE MEASUREMENTS
ASC 825-10 defines fair value as the price
that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded
at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions
that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk
of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be
used to measure fair value:
●
|
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
|
●
|
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
|
|
|
●
|
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and are unobservable.
|
EXOLIFESTYLE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2016
Items recorded or measured at fair value on
a recurring basis in the accompanying unaudited condensed consolidated financial statements consisted of the following items as
of December 31, 2016:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Long-term investments
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Total
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Derivative liabilities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
3,903,840
|
|
|
$
|
3,903,840
|
|
Total
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
3,903,840
|
|
|
$
|
3,903,840
|
|
The table below sets forth a summary of changes
in the fair value of the Company’s Level 3 financial liabilities (derivative liability) for the three months ended December
31, 2016.
Three months ended December 31, 2016:
|
|
Derivative
Liabilities
|
|
Balance, October 1, 2016
|
|
$
|
1,043,479
|
|
|
|
|
|
|
Transfers in: from equity the initial beneficial conversion feature From initial fair value of derivative liability upon debenture issuance
|
|
|
120,000
|
|
|
|
|
|
|
Transfers out: upon payoff or conversion of debentures
|
|
|
(80,192
|
)
|
|
|
|
|
|
Adjustment to interest expense the excess of fair value of fair value of derivative liabilities
|
|
|
207,078
|
|
|
|
|
|
|
Mark-to-market at December 31, 2016:
|
|
|
2,613,475
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
3,903,840
|
|
|
|
|
|
|
Net loss for the period included in earnings relating to the liabilities held at December 31, 2016
|
|
$
|
(3,903,840
|
)
|
Level 3 Liabilities were comprised of our bifurcated
convertible debt features on our convertible notes (see Note 7).
13. SUBSEQUENT EVENTS
Common stock
In February 2017, the Company issued an aggregate
of 7,032,135 shares of its common stock in settlement of $17,977 of convertible debentures.
Preferred stock
On January 5, 2017, the Company filed an amendment
to its Articles of Incorporation (the “Amendment”) with the Secretary of State of the State of Nevada to increase the
number of authorized shares of Series A Stock from 2,000,000 shares to 12,000,000 shares. The Amendment and its filing were approved
by the Company’s board of directors on January 3, 2017. Pursuant to the provisions of the Articles of Incorporation of the
Company, the Amendment does not require the approval of, or any vote of, the Company’s shareholders.
The other terms, conditions and designations
of the Series A Stock did not change.
On January 10, 2017, the Company issued to
each of Randy Romano, the Company’s President, and Vaughan Dugan, the Company’s Chief Executive Officer, 5,000,000
shares of Series A Preferred Stock of the Company (the “Series A Stock”) in return for the payment to the Company from
each of Randy Romano and Vaughan Dugan of $500.00.
Options
On January 10, 2017, the Company entered into
an option agreement with Sloan McComb, pursuant to which the Company granted to Ms. McComb an option to acquire 5,000,000 shares
of the common stock of the Company at an exercise price of $0.02 per share. The option to acquire the shares of Common Stock vests
as to 50% of the shares of Common Stock (2,500,000 shares) on July 10, 2017, and as to the remaining 50% of the shares of Common
Stock (2,500,000 shares) on January 10, 2018. The option period expires on January 10, 2027.
ITEM 2 – MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
We are a management firm which creates and
cultivates innovative lifestyle brands within the retail industry featuring functional sports apparel brands under our EXO:EXO
line of branded products. In addition, we founded the all-natural and organic pizza franchise, Pizza Fusion with locations in selected
markets in the United States, Saudi Arabia, and the United Arab Emirates.
EXO:EXO
Through our wholly owned subsidiary EXO:EXO,
Inc., (EXO) which we acquired on December 16, 2015, we design and produce compression knee sleeves and other functional sports
gear products utilized in weightlifting, CrossFit, powerlifting, Olympic weightlifting, endurance training, boot camps, circuit
training programs, and strength training protocols. The brand is currently offered in national fitness retailers and sold through
major online stores globally.
As part of our plans to expand the core EXO
product lines, on April 5, 2016 we announced the relaunch of EXO’s consumer facing website,
www.exosleeve.com
, featuring
a full portfolio of athletic sleeves, knee and wrist wraps, workout apparel and product information that offers consumers a more
user-engaging manner. In an effort to rapidly expand the brand, EXO has also established several wholesale relationships with on-line
retailers such as Rogue Fitness and WOD Superstore.
While building EXO’s retail and business-to-business
business to grow our wholesale sales channel, EXO has also been developing a new active wear line to include workout shorts, tops,
tanks, leggings and sports bras, which are all now available on our updated, consumer-friendly website.
EXO has a strong foothold as the brand of choice
for numerous elite functional fitness athletes including Christmas Abbott CrossFit Games Competitor, Olympic Weightlifter, and
first female NASCAR Pit Crew member, Noah Ohlsen, and Brooke Ence elite CrossFit Games athletes. Expanding upon its popularity
among elite athletes, on April 7, 2016 we announced that 2016 NFL Atlanta Falcon first round draft pick Keanu Neal signed a non-binding
memorandum of understanding to become a brand ambassador for EXO’s Athletic Brand division.
Looking towards the future, we are evaluating
options for in-house fulfillment and logistics processes and fully expect that EXO will drive solid opportunities for expansion.
Our management believes that leveraging the infrastructure and operations teams will lead to further acquisitions of undervalued
brands in need of our managerial talent and cost control procedures.
Pizza Fusion Operations
Pizza Fusion was incorporated under the laws
of the State of Florida on November 6, 2006. This company franchises restaurants emphasizing the preparation of food with high
quality organic and fresh ingredients for pizza and other menu items. Management has made the determination that its Pizza Fusion
hospitality operations are not aligned with the company’s fitness apparel operations.
As of December 31, 2016, we franchised a total
of 11 Pizza Fusion locations (six in the U.S., two in United Arab Emirates and three in Saudi Arabia). We have seen a reduction
of four of the seven locations in Saudi Arabia as a result of weakening demand stemming from reductions in discretionary spending
due to continued world-wide reductions in the price of and demand for crude oil. Royalty income was $17,162 for the three months
ended December 31, 2016, a reduction of $12,915 from the same period in 2015. As a result of these factors, management believes
that its resources can be better utilized in its other businesses and is currently evaluating strategic alternatives for its franchise
operations including the partial or full sale of its interest in this business. Presently we do not have a timetable for when or
if this business will be sold.
Results of Operations
Three months Ended December 31, 2016
Compared to Three Months Ended December 31, 2015
Total Revenue
. For three months
ended December 31 2016, total revenue increased by $164,149 to $196,393 compared to $32,244 in the same period in fiscal 2015.
The increase in revenue for the three months ended December 31, 2016 was primarily related to a $177,064 increase in sales from
EXO which we acquired in December 2015, partially offset by a reduction of approximately $12,915 in royalty income due to the closure
of five Pizza Fusion locations in Saudi Arabia.
Cost of sales.
Cost of sales
was $105,804 or 59% of related sales for the three months ended December 31, 2016 giving us a gross profit from sales of $73,427
or 41% as compared to a cost of sales of $498 (22%) and a gross profit of $1,669 (77%) for the same period last year. In 2016,
we are focusing more towards wholesale with higher volumes, but lower margins.
Total Operating Expenses
. For
three months ended December 31, 2016, total operating expenses increased 68.0% to $295,218 compared to $175,413 for same period
in fiscal 2015. Our payroll, selling, general and administrative expenses and depreciation increased by $89,114 due to our acquisition
of EXO subsidiary in fiscal 2016 as compared to 2015.
Loss on change in fair value of derivative
liabilities.
During fiscal 2015 and 2016, we issued convertible notes with an embedded derivative, all requiring us to
fair value the derivatives each reporting period and mark to market as a non-cash adjustment to our current period operations.
This resulted in a loss of $2,613,475 and $-0- on change in fair value of derivative liabilities for the three months ended December
31, 2016 and 2015, respectively.
Interest expense
. Interest expense
for the three months ended December 31, 2016 and 2015 was $327,409 and $1,834,202. Included in the interest was non cash amortization
of debt discounts and non-cash related to our issued convertible notes of $293,252 for the three months ended December 31, 2016
as compared to $1,829,567 for the same period last year.
Net Loss
. As a result of the
above, the net loss for three months ended December 31, 2016 increased $1,137,669, or 57.5 %, to $3,115,539 compared to $1,977,870
in the same period, last year.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to
generate adequate amounts of cash to meet its needs for cash requirements.
Three Months Ended December 31, 2016
Compared to Three Months Ended December 31, 2015
As of December 31, 2016, our working capital
deficit amounted to $1,164,818, an increase of $47,762 as compared to working capital deficit of $1,117,056 as of September 30,
2016. This increase is primarily a result of a $1,060 reduction in total current assets and by a $46,702 increase in current liabilities.
Working capital at December 31, 2016 included primarily cash and cash equivalents of $42,454, accounts and royalty receivables
of $40,972, inventory of $164,673, vendor deposits of $3,000 and prepaid and other current assets of $11,928, offset by accounts
payable and accrued liabilities of $1,092,994, advances of $205,861, customer deposits of $6,000, deferred revenue of $30,000,
convertible notes payable of $18,627 and $74,363 of notes payable.
Cash used in operating activities of $137,669
during three months ended December 31,2016 was primarily attributable to a net loss of $3,115,539, partially offset by non-cash
interest of $207,078, depreciation and amortization of $91,726, loss on change in derivative liability of $2,613,475 and changes
in operating assets and liabilities of $95,565.
Cash used in investing activities was $1,302
during three months ended December 31, 2016 comprised purchases of property and equipment.
Cash provided by financing activities of $134,201
during three months ended December 31, 2016 was attributable to proceeds from issuance of convertible notes of $120,000, $26,400
from issuance of notes payable, net with repayments of $12,199. Cash provided by financing activities of $150,000 during three
months ended December 31 2015 was attributable to proceeds from convertible notes and advances of $150,000 and $12,500, respectively.
Capital Resources
We expect to incur a minimum of $500,000 in
expenses during the next twelve months of operations as we expand our EXO operations.. We estimate that this will be comprised
of approximately $300,000 towards inventory and marketing costs and approximately $200,000 will be needed for general overhead
expenses such as for corporate legal and accounting fees, office overhead and general working capital.
We have not determined the amount of funds
needed to finance our growth plans. In the event we run into cost overruns or lower than anticipated revenues, we will have to
raise the funds to pay for these expenses. We potentially will have to issue debt or equity, or enter into a strategic arrangement
with other third parties.
We currently have no agreements, arrangements
or understandings with any person to obtain funds through bank loans, lines of credit or any other sources. There can be no assurance
that additional capital will be available to us. Since we have no other such arrangements or plans currently in effect, our inability
to raise funds for the above purposes that exceed our current working capital will have a severe negative impact on our ability
to remain a viable company.
Off-Balance Sheet Arrangements
As of December 31, 2016, EXOlifestyles, Inc.
did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction,
agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation
arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred
to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Auditor’s Opinion Expresses Doubt
About the Company’s Ability to Continue as a “Going Concern”
The independent auditor’s report on our
September 30, 2016 consolidated financial statements states that the Company’s historical losses and accumulated deficiency
raise substantial doubts about the Company’s ability to continue as a going concern, due to the losses incurred and deficiency.
If we are unable to develop our business, we will have to reduce, discontinue operations or cease to exist, which would be detrimental
to the value of the Company’s common stock. We can make no assurances that our business operations will develop and provide
us with significant cash to continue operations.
In order to continue as a going concern, we
will need, among other things, additional capital resources. Management’s plan is to obtain such resources for our capital
needs by obtaining capital from management and significant shareholders sufficient to meet its operating expenses and planned expansion
and seeking equity and/or debt financing. However, management cannot provide any assurances that we will be successful in accomplishing
any of our plans.
Our ability to continue as a going concern
is dependent upon our ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other
sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that
might be necessary if we were unable to continue as a going concern.
Critical Accounting Policies
We have identified the following policies below
as critical to its business and results of operations. Our reported results are impacted by the application of the following accounting
policies, certain of which require management to make subjective or complex judgments. These judgments involve making estimates
about the effect of matters that are inherently uncertain and may significantly impact quarterly or annual results of operations.
For all of these policies, management cautions that future events rarely develop exactly as expected, and the best estimates routinely
require adjustment. Specific risks associated with these critical accounting policies are described in the following paragraphs.
Estimates.
The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Impairment of Long-Lived Assets.
The
Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may
not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived
assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows.
If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss
based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or the fair value less costs to sell.
Fair value of Financial Instruments.
The
fair value of cash and cash equivalents, royalties receivable, prepaid expenses and other assets, accounts payable and accrued
liabilities, deferred income, approximates the carrying amount of these financial instruments due to their short-term nature. The
fair value of long-term debt, which approximates its carrying value, is based on current rates at which we could borrow funds with
similar remaining maturities.
Derivative Liability.
The Company accounts
for derivatives in accordance with ASC 815, which establishes accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires
recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for
changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types
of relationships designated are based on the exposures hedged. At December 31, 2016 and September 30, 2016, the Company did not
have any derivative instruments that were designated as hedges.
Stock-based Compensation.
The Company
follows the provisions of ASC 718 which requires all share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based on their fair values. The Company uses the Black-Scholes pricing model for
determining the fair value of stock-based compensation.
Revenue Recognition
Revenue is recognized
when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, all obligations have been performed
pursuant to the terms of the agreement, the sales price is fixed or determinable, and collectability is reasonably assured.
Royalty and franchise
income
In connection with its franchising operations,
the Company receives initial franchise fees, area development fees, franchise deposits and royalties which are based on sales at
franchised restaurants.
Franchise fees, which are typically received
prior to completion of the revenue of the revenue recognition process, are deferred when received. Such fees are recognized as
income when substantially all services to be performed by the Company and conditions related to the sale of the franchise have
been performed or satisfied, which generally occurs when the franchised restaurant commences operations.
Development agreements require the developer
to open a specified number of restaurants in the development area within a specified time period or the agreements may be cancelled
by the Company. Fees from development agreements are deferred when received and recognized as income as restaurants in the development
area commence operations on a pro rata basis to the minimum number of restaurants required to be open.
Deferred franchise fees and development fees
are classified as current or long term in the financial statements based on the projected opening date of the restaurants. Royalty
fees, which are based upon a percentage of franchise sales, are made by the franchisee.
Sales
Sales are generated from an online process
either through a web site or through third party providers such as Amazon. Collections are received at the point of sales.
During the three months ended December 31,
2016, sales were comprised of sports products from the Company’s wholly owned subsidiary, EXO.
Recent Accounting Pronouncements
We implemented all new accounting standards
that are in effect and that may impact its consolidated financial statements. We do not believe that there are any other new accounting
pronouncements that have been issued that might have a material impact on the consolidated financial position or results of operations.