NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Truli Media Group, Inc., a publicly traded Oklahoma Corporation formerly known as SA Recovery Corp., was incorporated on July 28, 2008 in the State of Oklahoma. In connection with the consummation of a triangular reorganization transaction on June 13, 2012 with Truli Media Group, LLC, a Delaware corporation (“Truli LLC”) formed on October 19, 2011 (date of inception), the accounting acquirer (see below), Truli Inc. changed its name to Truli Media Group, Inc. The historical financial statements are those of Truli LLC, the accounting acquirer, immediately following the consummation of the reverse merger. All references that refer to (the “Company” or “Truli Inc.” or “we” or “us” or “our”) are to Truli Media Group, Inc., the Registrant and its wholly owned subsidiaries unless otherwise differentiated.
Truli Media Group, Inc. (“Truli” or the “Company”), headquartered in Beverly Hills, California, is focused on the on-demand media and social networking markets. Truli, with a website and multi-screen platform, has commenced operations as an aggregator of family-friendly, faith-based Christian content, media, music and Internet Protocol Television (“IPTV”) programming. From its inception (October 19, 2011) through the date of these consolidated financial statements, the Company has not generated any revenues and has incurred significant expenses. The Company is in the process of raising additional debt or equity capital to support the completion of its development activities. Consequently, its operations are subject to all the risks and uncertainties inherent in the establishment of a new business enterprise, including failing to secure additional funding to operationalize the Company’s current technology.
Merger and Corporate Restructure
On June 13, 2012, Truli entered into a Reorganization Agreement (the “Reorganization Agreement") with Truli LLC, and SA Recovery Merger Subsidiary, Inc., pursuant to an Agreement and Plan of Merger. Under the terms of the Agreement, all of Truli’s LLC member interests were exchanged for 44,400,000 shares of Truli’s common stock, or approximately 74 % of the fully diluted issued and outstanding common stock of Truli.
Pursuant to the Reorganization Agreement, as part of the transaction, the members and other designees of Truli LLC acquired a controlling interest in Truli Inc. Truli was a publicly registered corporation with nominal operations immediately prior to the merger. For accounting purposes, Truli LLC was the surviving entity. The transaction is accounted for as a recapitalization of Truli LLC pursuant to which Truli LLC is treated as the surviving and continuing entity although Truli LLC is the legal acquirer. Accordingly, Truli’s historical financial statements are those of Truli LLC immediately following the consummation of the reverse acquisition.
Pursuant to the Reorganization Agreement the Company has (1) cancelled 58,976,400 shares of Truli Inc. common stock, (2) issued 44,400,000 shares of Truli’s common stock in exchange for acquisition of all of Truli LLC member interests; and (3) eliminated the accumulated deficit, including forgiveness of related party debt and record recapitalization of the Company that existed prior to the consummation of the reverse acquisition.
All references to common stock, share and per share amounts have been retroactively restated to reflect the reverse acquisition as if the transaction had taken place as of the beginning of the earliest period presented.
The total consideration paid was $-0- and the significant components of the transaction are as follows:
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Assets:
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$
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-
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Liabilities:
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Net liabilities assumed
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$
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-
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Total consideration:
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$
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-
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All share and per share data presented herein reflect the impact of stock dividend in form (forward stock split in substance) of 1:1 effective August 10, 2012 and 1.2:1 effective March 13, 2013.
Change in Fiscal Year
Effective June 13, 2012, the Company changed its fiscal year end from February 28th to March 31st as a result of the Merger to conform its fiscal year to that of Truli LLC.
Name Change
As a result of the Reorganization, the name of the Company was changed from SA Recovery Corp to Truli Media Group, Inc.
Cash and Cash Equivalents
The Company considers all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or less to be cash equivalents.
Use of 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Income Taxes
The Company follows Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) for recording the provision for income taxes. 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 expense or benefit are based on the changes in the asset or liability during 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 and relate primarily to stock based compensation basis differences. As of March 31 2014 and 2013, the Company has provided a 100% valuation against the deferred tax benefits.
Earnings (Loss) Per Share
The Company follows ASC 260, “Earnings Per Share” for calculating the basic and diluted earnings (loss) per share. Basic earnings (loss) per share are computed by dividing earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic 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. Common share equivalents are excluded from the diluted earnings (loss) per share computation if their effect is anti-dilutive. There were 144,854,722 and 3,738,000 outstanding common share equivalents at March 31, 2014 and 2013, respectively.
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March 31,
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March 31,
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2014
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2013
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Options
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3,738,000
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3,738,000
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Warrants
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68,939,238
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-
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Convertible notes payable
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72,177,484
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-
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144,854,722
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3,738,000
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Web-site Development Costs
The Company has elected to expense web-site development costs as incurred.
Research and Development
The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred.
Fair Value
Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying amount reported in the consolidated balance sheet for accounts payable and accrued expenses and notes payable approximates fair value because of the immediate or short-term maturity of these financial instruments.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with professional standards for “Accounting for Derivative Instruments and Hedging Activities”.
Professional standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of “Conventional Convertible Debt Instrument”.
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.
ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.
Stock-Based Compensation
The Company utilizes the Black-Scholes option-pricing model to determine fair value of options and warrants granted as stock-based compensation, which requires us to make judgments relating to the inputs required to be included in the model. In this regard, the expected volatility is based on the historical price volatility of the Company’s common stock. The dividend yield represents the Company’s anticipated cash dividend on common stock over the expected life of the stock options. The U.S. Treasury bill rate for the expected life of the stock options is utilized to determine the risk-free interest rate. The expected term of stock options represents the period of time the stock options granted are expected to be outstanding.
Reclassifications
Certain reclassifications have been made to conform the prior period data to the current presentations. These reclassifications had no effect on the reported results.
Recently Issued Accounting Pronouncements
In June of 2014 the Financial Accounting Standards Board issued Accounting Standards Update ASU 2014-10, “Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation” (“ASU 2014-10”). The amendments in ASU 2014-10 remove the definition of a development stage entity from the master glossary of the Accounting Standards Codification, thereby removing the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP. In addition, the amendments eliminate the requirements for development stage entities to (1) present inception-to-date information in the statements of income, cash flows, and shareholder equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.
The amendments also clarify that the guidance in Topic 275, Risks and Uncertainties, is applicable to entities that have not commenced planned principal operations.
The Company has elected to adopt the provisions of ASU 2014-10 for the current fiscal year ending March 31, 2014. The adoption of ASU 2014-10 did not have a significant impact on our results of operations, financial condition or cash flow.
The Company has reviewed all other recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption of any such pronouncements to have a significant impact on its results of operations, financial condition or cash flow.
NOTE 2 — NOTES PAYABLE, RELATED PARTY
The Company’s Founder and Chief Executive Officer has advanced funds to the Company in the form of an unsecured term note, aggregating $673,609 and $536,542 payable as of March 31, 2014 and 2013, respectively. The note, which may be increased as additional funds may be advanced to the Company by the Company’s Chief Executive Officer, bears interest at 4% per annum commencing from September 30, 2012. As per ASC 835-30 “Imputation of Interest’, the Company has imputed interest at 4% p.a. on the average balance of the notes payable and recorded $34,203 as interest expense and credited additional paid in capital until September 29, 2012. Since that time, the Company has accrued the interest liability. The Company charged to operations interest expense of $23,721 and $47,494 for the fiscal years ended March 31, 2014 and 2013, respectively. Accrued interest payable is $49,123 and $25,401 at March 31, 2014 and 2013, respectively.
The Company is obligated to repay the principal balance of the note along with accrued and unpaid interest payable over 36 months beginning in September 2012. No payments have been made.
Effective February 5, 2013, the Company and its founder settled a total of $1,200,000 in principal outstanding of this Note Payable into 22,153,847 (post- forward stock split) shares of common stock at $0.054 per share.
NOTE 3 — NOTES PAYABLE, OTHER
On December 1, 2012, the Company entered into Unsecured Line of Credit agreement with an investor. Pursuant to the terms of the agreement, the Company promised to pay the sum up to $500,000, or the total sums advanced, together with accrued interest at the rate of 5% per annum from the date of the advance to the maturity date, which is December 31, 2014. During the year ended March 31, 2013 the Company issued seven 5% promissory notes to the investor in total amount of $42,975. During July 2013 the Company issued two additional notes aggregating $40,000. As of March 31, 2014 and 2013, the Company had a balance outstanding of $82,975 and $42,975, respectively.
NOTE 4 — CONVERTIBLE NOTES
At March 31, 2014 and 2013 convertible notes consisted of the following:
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March 31,
2014
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March 31,
2013
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Convertible notes payable
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$
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819,506
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$
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-
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Unamortized debt discount
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(38,881
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)
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-
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Carrying amount
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$
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780,625
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$
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-
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Note issued on July 26, 2013:
On July 26, 2013, the Company entered into a securities purchase agreement (the " July 2013 Agreement") with an accredited investor (the "July 2013 Investor") pursuant to which the Investor purchased an 8% Convertible Debenture for an aggregate purchase price of $100,000 (the "July 2013 Debenture"). The July 2013 Debenture bore interest at a rate of 8% per annum and was payable upon any principal being converted on any voluntary conversion date (as to that principal amount then being converted) and the earlier of (i) July 26, 2014 or (ii) one (1) business day after the consummation of a Subsequent Financing (as defined and described in the July 2013Agreement). The July 2013 Debenture was convertible at the option of the Investor at any time into shares of the Company's common stock (the "Common Stock") at a conversion price equal to sixty-five percent (65%) of the average of the lowest three closing bid prices of the Company's Common Stock for the ten trading days immediately prior to a voluntary conversion date, subject to adjustment.
In connection with the July 2013 Agreement, the July 2013 Investor received a warrant to purchase five hundred thousand (500,000) shares of Common Stock (the “July 2013 Warrant”). The July 2013 Warrant was exercisable for a period of three years from the date of issuance at an exercise price of $0.04, subject to adjustment.
On September 10, 2013, the Company cancelled this note of $100,000, along with related accrued interest of $1,337, and issued a new convertible note of $101,337 with fixed conversion price of $0.02 per share as described below under “Notes issued on September 10, 2013”. Also, the Company cancelled the 500,000 warrants issued with the note.
Note issued on August 28, 2013:
On August 28, 2013, the Company issued an 8% convertible promissory note in the aggregate principal amount of $42,500 to an accredited investor. The note has a maturity date of May 30, 2014. The note is convertible into shares of our common stock at a conversion price of 55% of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date.
During March 2014 $10,000 principal was converted into 900,901 shares of common stock, with a value of $18,019. The Company recorded a loss on conversion of $791 during the year ended March 31, 2014.
During the year ended March 31, 2014, the Company recorded amortization of debt discount of $32,100 as interest expense.
Notes issued on September 10, 2013:
On September 10, 2013 (the “Effective Date”), the Company entered into securities purchase agreements (collectively, the “September 2013 Agreement”) with accredited investors (collectively, the “September 2013 Investors”) pursuant to which the September 2013 Investors purchased 12% Senior Convertible Debentures for aggregate gross proceeds of $501,337, which consisted of $400,000 of cash and the exchange and cancellation of an 8% convertible debenture (bearing principal and interest totaling $101,337 (collectively, the “September 2013 Debentures”). The September 2013 Debentures bear interest at a rate of 12% per annum and their principal amounts are due on September 10, 2014. The September 2013 Debentures are payable upon any principal being converted on any voluntary conversion date (as to that principal amount then being converted). The Company may pay interest due either in cash or, at its option, through an increase in the principal amount of the September 2013 Debentures then outstanding by an amount equal to the interest then due and payable. The September 2013 Debenture will be convertible at the option of the Investor at any time into shares of the Company’s Common Stock at a conversion price equal to (i) $0.02, on any conversion date through the date that is one hundred eighty (180) days from the Effective Date, subject to adjustment (the “Initial Conversion Price”) and (ii) beginning one hundred eighty one (181) days after the Effective Date, it shall be equal to the lower of (A) the Initial Conversion Price or (B) 65% of the average of the lowest three closing bid prices of the Common Stock for the ten trading days immediately prior to a conversion date, subject to adjustment.
In connection with the September 2013 Agreement, the September 2013 Investors collectively received warrants to purchase an aggregate of 25,066,850 shares of Common Stock (collectively, the “September 2013 Warrants”). The September 2013 Warrants are exercisable for a period of three years from the date of issuance at an exercise price of $0.05 per share, subject to adjustment. The September 2013 Investors may exercise the September 2013 Warrants on a cashless basis at any time after the date of issuance. In the event the September 2013 Investors exercise the September 2013 Warrant on a cashless basis we will not receive any proceeds.
In connection with the above $501,337 Senior Convertible Debentures, the Company made certain statements or omissions in the transaction documents that were incorrect as of the date made. Such statements or omissions resulted in an event of default under the terms of the transaction documents and the 12% Debentures. Upon such event of default: (i) the principal and accrued interest balance on the 12% Debentures increased to 150% of original face value, (ii) the interest rate increased to 18% (commencing 5 days after the event of default), and (iii) the amounts due under the 12% Debentures were accelerated and became immediately due and payable. Accordingly, the Company charged to operations loss on default of convertible note of $250,669 during the year ended March 31, 2014 and increased the principal amount of convertible debenture to $752,006.
During March 2014, the Company repaid $40,000 of principal to the note holders.
Note issued on October 2, 2013:
On October 2, 2013, the Company issued an 8% convertible promissory note in the aggregate principal amounts of $32,500 to an accredited investor. The note has a maturity date of July 5, 2014. The note is convertible into shares of common stock at a conversion price of 55% of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date.
During the year ended March 31, 2014, the Company amortized debt discount of $21,196 to current period operations as interest expense.
Note issued on November 7, 2013:
On November 7, 2013, the Company issued an 8% convertible promissory note in the aggregate principal amount of $42,500 to an accredited investor. The note has a maturity date of August 12, 2014. The note is convertible into shares of our common stock at a conversion price of 55% of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date.
During the year ended March 31, 2014, the Company amortized debt discount of $22,014 to current period operations as interest expense.
NOTE 5 – DERIVATIVES
The Company has identified certain embedded derivatives related to its convertible notes and common stock purchase warrants. Since certain of the notes are convertible into a variable number of shares or have a price reset feature, the conversion features of those debentures are recorded as derivative liabilities. Since the warrants have a price reset feature, they are recorded as derivative liabilities. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to adjust to fair value as of each subsequent balance sheet date.
Note issued on July 26, 2013:
The Company identified embedded derivatives related to the July 2013 Debenture. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the July 2013 Debenture and to adjust the fair value as of each subsequent balance sheet date. At the inception of the July 2013 Debenture, the Company determined a fair value of $155,502 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 0.11%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 288%; and (4) an expected life of 1 year.
The initial fair value of the embedded debt derivative of $155,502 was allocated as a debt discount up to the proceeds of the note ($100,000) with the remainder ($55,502) charged to operations as interest expense.
On September 10, 2013, the Company cancelled this note of $100,000, along with related accrued interest of $1,337, and issued a new convertible note of $101,337 with fixed conversion price of $0.02 per share as described above under “Notes issued on September 10, 2013”. Also, the Company cancelled the 500,000 warrants issued with the note. Accordingly, the Company extinguished the derivative liability on this note and reclassified the balance of $155,502 to additional paid in capital.
Note issued on August 28, 2013:
The Company identified embedded derivatives related to the convertible promissory notes entered into on August 28, 2013. These embedded derivatives included certain conversion features. At the inception of the convertible promissory note, the Company determined a fair value of $69,488 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 0.11%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 280%; and (4) an expected life of 0.75 year.
The initial fair value of the embedded debt derivative of $69,488 was allocated as a debt discount up to the proceeds of the note ($42,500) with the remainder ($26,988) charged to operations as interest expense.
During March 2014 $10,000 of principal was converted into 900,901 shares of common stock. The derivative liability was reduced by $10,537 as a result of this conversion.
During the year ended March 31, 2014 we recorded additions to our derivative conversion liabilities related to the conversion feature attributable to interest accrued during the period. These additions aggregated $2,046 which has been charged to interest expense.
During the year ended March 31, 2014, the Company recorded $24,809 of income related to the change in the fair value of the derivative.
The fair value of the remaining embedded derivative was $36,188 at March 31, 2014, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.046%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 254%; and (4) an expected life of 0.17 year.
Notes issued on September 10, 2013:
The Company identified embedded derivatives related to the September 2013 Debentures, resulting from the price reset features of these instruments. At the inception of the convertible promissory note, the Company determined a fair value of $1,086,647 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 0.122%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 195%; and (4) an expected life of 1 year.
The initial fair value of the embedded debt derivative of $1,086,647 was allocated as a debt discount up to the proceeds of the note ($501,337) with the remainder ($585,310) charged to operations as interest expense.
During March 2014, the Company repaid $40,000 of principal to the note holders. As a result, $44,057 of derivative liability was reclassified to paid-in capital.
During the year ended March 31, 2014, the Company recorded $244,273 of income related to the change in the fair value of the derivative.
The fair value of the remaining embedded derivative was $798,317 at March 31, 2014, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.081%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 288%; and (4) an expected life of 0.4375 year.
Debt Warrants issued on September 10, 2013:
The Company issued 25,066,850 warrants in conjunction with debt incurred in September 2013. The warrants had an initial exercise price of $0.05 per shares and a term of three years. The Company identified embedded derivatives related to these 25,066,850 September 2013 Warrants, resulting from the price reset features of these instruments. As a result, we have classified these instruments as derivative liabilities in the financial statements. At issue, we have recorded a warrant liability of $796,471, with a corresponding charge to interest expense. The value of the warrant liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 171%; and (4) an expected life of 3 years.
The warrants issued with the September debentures have been adjusted due to the subsequent issuance of debt. As a result, those warrants now total 62,667,125 with an exercise price of $0.02. The Company has also recorded an expense of $1,416,749 due to the increase in the fair value of the warrants as a result of the modifications.
During the year ended March 31, 2014, the Company recorded $1,173,551 of income related to the change in the fair value of the derivative.
The fair value of the embedded derivative was $1,039,670 at March 31, 2014, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 228%; and (4) an expected life of 2.438 years.
Compensation Warrants issued on September 10, 2013:
During September 2013 the Company granted 2,506,685 warrants as compensation for consulting services. The warrants had an initial exercise price of $0.05 per shares and a term of three years. The Company identified embedded derivatives related to these 2,506,685 September 2013 Compensation Warrants, resulting from the price reset features of these instruments. As a result, we have classified these instruments as derivative liabilities in the financial statements. At issue, we have recorded a warrant liability of $79,647, with a corresponding charge to consulting fees. The value of the warrant liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 171%; and (4) an expected life of 3 years.
The compensation warrants have been adjusted due to the subsequent issuance of debt. As a result, those warrants now total 6,266,713 with an exercise price of $0.02. The Company has recorded an expense of $141,675 due to the increase in the fair value of the warrants as a result of the modifications.
During the year ended March 31, 2014, the Company recorded $117,355 of income related to the change in the fair value of the derivative.
The fair value of the embedded derivative was $103,967 at March 31, 2014, determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 228%; and (4) an expected life of 2.438 years.
Note issued on October 2, 2013:
The Company identified embedded derivatives related to the convertible promissory notes entered into on October 2, 2013. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date. At the inception of the convertible promissory note, the Company determined a fair value of $47,967 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 0.08%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 196%; and (4) an expected life of 0.75 year.
The initial fair value of the embedded debt derivative of $47,967 was allocated as a debt discount up to the proceeds of the note ($32,500) with remained ($15,467) charged to operations as interest expense.
During the year ended March 31, 2014 we recorded additions to our derivative conversion liabilities related to the conversion feature attributable to interest accrued during the period. These additions aggregated $1,473 which has been charged to interest expense.
During the year ended March 31, 2014, the Company recorded $10,883 of income related to the change in the fair value of the derivative.
The fair value of the described embedded derivative of $38,557 at March 31, 2014 was determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.046%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 255%; and (4) an expected life of 0.25 year.
Note issued on November 7, 2013:
The Company identified embedded derivatives related to the convertible promissory notes entered into on November 7, 2013. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date. At the inception of the convertible promissory note, the Company determined a fair value of $62,445 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions: (1) risk free interest rate of 0.10%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 193%; and (4) an expected life of 0.75 year.
The initial fair value of the embedded debt derivative of $62,445 was allocated as a debt discount up to the proceeds of the note ($42,500) with remained ($19,945) charged to operations as interest expense.
During the year ended March 31, 2014 we recorded additions to our derivative conversion liabilities related to the conversion feature attributable to interest accrued during the period. These additions aggregated $1,812 which has been charged to interest expense.
During the year ended March 31, 2014, the Company recorded $5,522 of income related to the change in the fair value of the derivative.
The fair value of the described embedded derivative of $58,735 at March 31, 2014 was determined using the Black Scholes Model with the following assumptions: (1) risk free interest rate of 0.066%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 296%; and (4) an expected life of 0.375 year.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
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 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.
Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following items as of March 31, 2014:
|
|
|
|
|
|
Fair Value Measurements at
March 31, 2014 using:
|
|
|
|
|
March 31,
2014
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and Warrant Derivative Liabilities
|
|
$
|
2,075,434
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
2,075,434
|
|
The debt derivative liabilities is measured at fair value using quoted market prices and estimated volatility factors based on historical prices for the Company’s common stock and are classified within Level 3 of the valuation hierarchy.
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of March 31, 2014:
|
|
|
Debt Derivative
Liability
|
|
|
Balance, March 31, 2013
|
|
$
|
-
|
|
|
Additions
|
|
|
3,861,922
|
|
|
Extinguished derivative liability
|
|
|
(210,095
|
)
|
|
Change in fair value of derivative liabilities
|
|
|
(1,576,393
|
)
|
|
Balance, March 31, 2014
|
|
$
|
2,075,434
|
|
NOTE 7 — GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has not yet established any sources of revenue to cover its operating expenses. As shown in the accompanying consolidated financial statements, the Company has not generated any revenue for the period from October 19, 2011 (date of inception) through March 31, 2014. The Company has recurring net losses, an accumulated deficit of $6,113,957 and a working capital deficit (current liabilities exceeded current assets) at March 31, 2014 of $3,968,606. Additionally, current economic conditions in the United States and globally create significant challenges attaining sufficient funding.
The Company’s ability to continue existence is dependent upon commencing its planned operations, management’s ability to develop and achieve profitable operations and/or upon obtaining additional financing to carry out its planned business. The Company intends to fund its business development, acquisition endeavors and operations through equity and debt financing arrangements. The Company is dependent upon its Managing Member and Founder to provide financing for working capital purposes. However, there can be no assurance that these arrangements will be sufficient to fund its ongoing capital expenditures, working capital, and other cash requirements. The outcome of these matters cannot be predicted at this time. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might necessary should the Company be unable to continue as a going concern.
NOTE 8- SHAREHOLDERS EQUITY AND CONTROL
Common stock
The Company is authorized to issue 495,000,000 shares of common stock, par value $0.001 per share. As of March 31, 2014 and 2013 the Company had 94,151,666 and 83,651,493 shares of common stock issued and outstanding, respectively.
Effective August 10, 2012 the Company completed a one share for each existing share stock dividend of its common stock, Per Paragraph 25-3 of "ASC 505-20 Stock Dividend and Stock Split", since the issuance of additional shares on account of 1:1 stock dividend is at least 20% or 25% of the number of previously outstanding shares, transaction has been accounted for as a "Forward Stock Split of 1:1".
Effective March 13, 2013, the Company completed a 1.2 share for each existing share stock dividend of its common stock, Per Paragraph 25-3 of "ASC 505-20 Stock Dividend and Stock Split", since the issuance of additional shares on account of 1.2:1 stock dividend is at least 20% or 25% of the number of previously outstanding shares, transaction has been accounted for as a "Forward Stock Split of 1.2:1".
All references in the accompanying consolidated financial statements and notes thereto have been retroactively restated to reflect the August 10, 2012 and March 13, 2013 stock dividend in substance as a stock split.
On February 5, 2013, the Company and its founder settled total of $1,200,000 in outstanding of this Note Payable together with accrued interest into 22,153,847 shares of common stock at $0.054 per share.
On February 8, 2013, the Company entered into a Consulting agreement pursuant to which the Company issued and deliver 1,200,000 shares of its common stock valued at $0.067 per share.
During the year ended March 31, 2014, the Company issued 9,599,272 shares of its common stock for services valued at $349,125.
During March 2014 the Company issued 900,901 shares of common stock, valued at $18,019, upon conversion of $10,000 of debt.
Common stock to be issued
During the year ended March 31, 2014, the Company charged to operations $16,250 as fair value of 596,921 common shares to be issued to a consultant for services rendered.
Preferred stock
The Company is authorized to issue 5,000,000 shares of $0.0001 par value preferred stock. As of March 31, 2014 and 2013, the Company has no shares of preferred stock issued and outstanding.
NOTE 9 - STOCK OPTIONS AND WARRANTS
Stock options
On December 17, 2012, the Company granted 3,738,000 options with an exercise price of $0.17 per share.
The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees and consultants under a stock option plan at March 31, 2014:
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Exercise
Prices ($)
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
Weighted
Average
Exercise
Price ($)
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
|
$
|
0.17
|
|
3,738,000
|
|
3.69
|
|
$
|
0.17
|
|
2,298,000
|
|
$
|
0.17
|
|
The stock option activity for the year ended March 31, 2014 is as follows:
|
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
|
Outstanding at March 31, 2013
|
|
|
3,738,000
|
|
|
$
|
0.17
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired or canceled
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at March 31, 2014
|
|
|
3,738,000
|
|
|
$
|
0.17
|
|
Stock-based compensation expense related to vested options was $33,751 and $163,661 during the years ended March 31, 2014 and 2013, respectively. The Company determined the value of share-based compensation for options vesting during the year ended March 31, 2014 using the Black-Scholes fair value option-pricing model with the following weighted average assumptions: risk-free interest rate of 1.625%, volatility of 199%, expected lives of 4.25 years, and dividend yield of 0%.
The Company determined the value of share-based compensation for options vesting during the fiscal year ended March 31, 2013 using the Black-Scholes fair value option-pricing model with the following weighted average assumptions; risk-free interest rates of 0.74% – 0.77%, volatility of 249% - 270%, expected lives of 4.75 - 5 years, and dividend yield of 0%
Warrants
The following table summarizes the changes in warrants outstanding and related prices for the shares of the Company’s common stock issued at March 31, 2014:
|
Exercise
Price
|
|
Number
Outstanding
|
|
Warrants
Outstanding
Weighted Average
Remaining
Contractual
Life
(years)
|
|
Weighted
Average
Exercise price
|
|
Number
Exercisable
|
|
Warrants
Exercisable
Weighted
Average
Exercise Price
|
|
|
$
|
0.01-0.02
|
|
68,939,238
|
|
2.4
|
|
$
|
0.02
|
|
68,939,238
|
|
$
|
0.02
|
|
Transactions involving the Company’s warrant issuance are summarized as follows:
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Price Per
Share
|
|
|
Outstanding at March 31, 2013
|
|
|
-
|
|
|
$
|
-
|
|
|
Issued
|
|
|
28,078,935
|
|
|
|
0.05
|
|
|
Modifications
|
|
|
41,360,303
|
|
|
|
0.02
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired or cancelled
|
|
|
(500,000
|
)
|
|
|
(0.04
|
)
|
|
Outstanding at March 31, 2014
|
|
|
68,939,238
|
|
|
$
|
0.02
|
|
During the year ended March 31, 2014, the Company issued 2,512,085 warrants with exercise prices of $0.01-$0.05 vesting over 1-3 years for services rendered. The fair value of $80,231 has been charged to operations during the year ended March 31, 2014 (see note 5, Compensation Warrants).
During the year ended March 31, 2014, the Company issued 25,066,850 warrants with an exercise price of $0.05 vesting over 3 years (see note 5, Debt Warrants).
NOTE 10 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of March 31, 2014 and 2013, accounts payable and accrued liabilities for the period ending are comprised of the following:
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Legal and professional fees payable
|
|
$
|
133,534
|
|
|
$
|
78,074
|
|
|
Consulting fees payable
|
|
|
52,500
|
|
|
|
10,200
|
|
|
Advertising and promotion payable
|
|
|
-
|
|
|
|
13,926
|
|
|
Accrued interest
|
|
|
82,551
|
|
|
|
532
|
|
|
Other payables
|
|
|
42,504
|
|
|
|
13,325
|
|
|
|
|
$
|
311,089
|
|
|
$
|
116,057
|
|
NOTE 11 – INCOME TAXES
The Company has had losses to date, and therefore has paid no income taxes. There is no temporary timing difference in the recognition of income and expenses for financial reporting and tax purposes, and there is no permanent difference. The Company follows Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes include, but not limited to, accounting for intangibles, debt discounts associated with convertible debt, equity based compensation and depreciation and amortization.
At March 31, 2014, the Company has available for federal income tax purposes a net operating loss carry forward of approximately $2,665,000, which expires in the year 2034, that may be used to offset future taxable income. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company; it is more likely than not that the benefits will not be realized. Based upon the change in ownership rules under section 382 of the Internal Revenue Code of 1986, if in the future the Company issues common stock or additional equity instruments convertible in common shares which result in an ownership change exceeding the 50% limitation threshold imposed by that section, all of the Company’s net operating losses carry forwards may be significantly limited as to the amount of use in a particular years. All or portion of the remaining valuation allowance may be reduced in future years based on an assessment of earnings sufficient to fully utilize these potential tax benefits.
At March 31, 2014 and 2013, the significant components of the deferred tax assets (liabilities) are summarized below:
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carryover
|
|
$
|
1,086,000
|
|
|
$
|
557,000
|
|
|
Valuation allowance
|
|
|
(1,086,000
|
)
|
|
|
(557,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate
|
|
|
(35
|
)%
|
|
|
(35
|
)%
|
|
State income taxes, net of federal taxes
|
|
|
(6
|
)%
|
|
|
(6
|
)%
|
|
Valuation allowance
|
|
|
41
|
%
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
The Company has not filed its tax returns for prior years and is in the process of bringing its filings current.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims from time to time 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 consolidated financial position, results of operations or liquidity.
NOTE 13 – SUBSEQUENT EVENTS
During April and May 2014 the Company paid $40,000 of principal on the September 2013 notes and $6,000 of penalty was forgiven.
During April 2014 $15,000 of principal of the note issued on August 28, 2013 was converted into 2,000,000 shares of common stock.
