PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
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|
September 30, 2014
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ASSETS
|
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|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
347,625 |
|
|
$ |
203 |
|
| |
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $0 and $0, respectively
|
|
|
1,704 |
|
|
|
- |
|
|
Due from related parties
|
|
|
7,010 |
|
|
|
- |
|
|
Investment in marketable securities
|
|
|
45 |
|
|
|
- |
|
|
Prepaid
|
|
|
7,068 |
|
|
|
5,850 |
|
|
Other assets
|
|
|
4,770 |
|
|
|
- |
|
|
Total Current Assets
|
|
|
368,222 |
|
|
|
6,053 |
|
| |
|
|
|
|
|
|
|
|
|
Intellectual property, net
|
|
|
3,630 |
|
|
|
- |
|
|
Fixed assets, net
|
|
|
29,162 |
|
|
|
5,827 |
|
|
Total Other Assets
|
|
|
32,792 |
|
|
|
5,827 |
|
|
TOTAL ASSETS
|
|
$ |
401,014 |
|
|
$ |
11,880 |
|
| |
|
|
|
|
|
|
|
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|
LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
834,113 |
|
|
$ |
1,080,619 |
|
|
Note payable, related party
|
|
|
- |
|
|
|
20,000 |
|
|
Accrued expenses
|
|
|
162,959 |
|
|
|
- |
|
|
Total Current Liabilities
|
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|
997,072 |
|
|
|
1,100,619 |
|
| |
|
|
|
|
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|
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Non-Current Liabilities
|
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|
|
|
|
|
|
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|
Derivative liability
|
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|
145,543 |
|
|
|
1,213,336 |
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|
TOTAL LIABILITIES
|
|
|
1,142,615 |
|
|
|
2,313,955 |
|
| |
|
|
|
|
|
|
|
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Stockholders' Deficit
|
|
|
|
|
|
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|
Fuse Science, Inc. Stockholders' Deficit
|
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|
|
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|
|
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|
Preferred stock, $0.001 par value; authorized 10,000,000 shares
|
|
|
|
|
|
| Series A convertible preferred stock, $0.001 par value; 1,500,000 shares designated; 1,360,874 and 1,500,000 shares issued and outstanding, respectively |
|
|
1,361 |
|
|
|
1,500 |
|
| Series B convertible preferred stock, $0.001 par value; 3,200,000 shares designated; 3,200,000 and 0 shares issued and outstanding, respectively |
|
|
3,200 |
|
|
|
- |
|
| Series C convertible preferred stock, $0.001 par value; 3,500,000 shares designated; 3,500,000 and 0 shares issued and outstanding, respectively |
|
|
3,500 |
|
|
|
- |
|
|
Common stock: 800,000,000 authorized; $0.0001 par value
|
|
|
|
|
|
|
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80,000,000 and 233,808 shares issued and outstanding
|
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|
8,000 |
|
|
|
23 |
|
|
Additional paid in capital
|
|
|
65,420,511 |
|
|
|
50,000,750 |
|
|
Accumulated other comprehensive loss
|
|
|
(713 |
) |
|
|
- |
|
|
Accumulated deficit
|
|
|
(76,539,129 |
) |
|
|
(52,178,004 |
) |
|
Total Fuse Science, Inc. stockholders' deficit
|
|
|
(11,103,270 |
) |
|
|
(2,175,731 |
) |
|
Non-controlling interest
|
|
|
10,361,669 |
|
|
|
(126,344 |
) |
|
Total Stockholders' Deficit
|
|
|
(741,601 |
) |
|
|
(2,302,075 |
) |
| |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$ |
401,014 |
|
|
$ |
11,880 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
FUSE SCIENCE, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
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|
Three Months Ended
|
|
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Six Months Ended
|
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| |
|
March 31,
|
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|
March 31,
|
|
| |
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$ |
- |
|
|
$ |
73,099 |
|
|
$ |
- |
|
|
$ |
387,092 |
|
|
Cost of sales
|
|
|
- |
|
|
|
23,064 |
|
|
|
- |
|
|
|
174,725 |
|
|
Gross margin
|
|
|
- |
|
|
|
50,035 |
|
|
|
- |
|
|
|
212,367 |
|
| |
|
|
|
|
|
|
|
|
|
|
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|
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Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Sales and marketing
|
|
|
13,487 |
|
|
|
336,299 |
|
|
|
373,087 |
|
|
|
889,484 |
|
|
Research and development
|
|
|
- |
|
|
|
- |
|
|
|
58,320 |
|
|
|
- |
|
|
Impairment of Goodwill
|
|
|
- |
|
|
|
- |
|
|
|
21,633,882 |
|
|
|
- |
|
|
General and administrative expense
|
|
|
384,417 |
|
|
|
865,061 |
|
|
|
3,253,527 |
|
|
|
2,091,214 |
|
|
Total expenses
|
|
$ |
397,904 |
|
|
|
1,201,360 |
|
|
$ |
25,318,816 |
|
|
|
2,980,698 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from operations
|
|
|
(397,904 |
) |
|
|
(1,151,325 |
) |
|
|
(25,318,816 |
) |
|
|
(2,768,331 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
1,110 |
|
|
|
- |
|
|
|
2,392 |
|
|
|
- |
|
|
Interest expense
|
|
|
(94,985 |
) |
|
|
(66,573 |
) |
|
|
(190,046 |
) |
|
|
(460,114 |
) |
|
Dividend on Series A preferred shares
|
|
|
- |
|
|
|
- |
|
|
|
(231,631 |
) |
|
|
- |
|
|
Expense on inducement of warrant exchange
|
|
|
- |
|
|
|
(480,000 |
) |
|
|
- |
|
|
|
(650,616 |
) |
|
Expense on issuance of warrant derivative liabilities
|
|
|
- |
|
|
|
(439,428 |
) |
|
|
- |
|
|
|
(439,428 |
) |
|
Change in fair value of derivative liabilities
|
|
|
504,081 |
|
|
|
(1,105,844 |
) |
|
|
1,227,793 |
|
|
|
(3,735,868 |
) |
|
Total other income (expense)
|
|
|
410,206 |
|
|
|
(2,091,845 |
) |
|
|
808,508 |
|
|
|
(5,286,026 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) before taxes
|
|
|
12,302 |
|
|
|
(3,243,170 |
) |
|
|
(24,510,308 |
) |
|
|
(8,054,357 |
) |
| |
|
|
|
|
|
|
|
|
|
|
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|
|
|
Income tax benefit
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
12,302 |
|
|
$ |
(3,243,170 |
) |
|
|
(24,510,308 |
) |
|
$ |
(8,054,357 |
) |
|
Net loss attributable to the non-controlling interest
|
|
|
(52,283 |
) |
|
|
- |
|
|
$ |
(149,183 |
) |
|
$ |
- |
|
|
Net income (loss) attributable to Common Shareholders of Fuse Science, Inc.
|
|
|
64,585 |
|
|
$ |
(3,243,170 |
) |
|
$ |
(24,361,125 |
) |
|
$ |
(8,054,357 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities
|
|
|
(502 |
) |
|
|
- |
|
|
|
(713 |
) |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Fuse Science, Inc. Common Shareholders
|
|
|
64,083 |
|
|
|
(3,243,170 |
) |
|
|
(24,361,838 |
) |
|
$ |
(8,054,357 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to Common Shareholders of Fuse Science, Inc. - basic and diluted
|
|
|
0.00 |
|
|
$ |
(0.08 |
) |
|
$ |
(0.42 |
) |
|
$ |
(0.21 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted
|
|
|
78,723,098 |
|
|
|
40,103,030 |
|
|
|
58,364,019 |
|
|
|
38,858,093 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
FUSE SCIENCE, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| |
|
Six Months Ended
|
|
| |
|
March 31,
|
|
| |
|
2015
|
|
|
2014
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(24,510,308 |
) |
|
$ |
(8,054,357 |
) |
|
Unrealized loss on marketable securities
|
|
|
(713 |
) |
|
|
- |
|
|
Comprehensive net loss
|
|
|
(24,511,021 |
) |
|
|
(8,054,357 |
) |
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,380 |
|
|
|
12,041 |
|
|
Stock and stock option compensation and deferred consulting
|
|
|
2,688,612 |
|
|
|
1,276,782 |
|
|
Inducement of warrant exchange
|
|
|
- |
|
|
|
650,616 |
|
|
Amortization of discounts and financing fees
|
|
|
26,666 |
|
|
|
381,731 |
|
|
Change in fair value of derivative liabilities
|
|
|
(1,227,793 |
) |
|
|
3,735,868 |
|
|
Expense on issuance of derivative liabilities
|
|
|
- |
|
|
|
439,428 |
|
|
Dividend series A convertible preferred stock
|
|
|
231,632 |
|
|
|
- |
|
|
Unrealized other comprehensive loss
|
|
|
713 |
|
|
|
- |
|
|
Loss on impairment of goodwill
|
|
|
21,633,882 |
|
|
|
- |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(426 |
) |
|
|
10,307 |
|
|
Marketable securities
|
|
|
(45 |
) |
|
|
- |
|
|
Inventory
|
|
|
- |
|
|
|
116,667 |
|
|
Prepaid expenses and other assets
|
|
|
(5,988 |
) |
|
|
(108,902 |
) |
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(281,685 |
) |
|
|
64,510 |
|
|
Accrued expenses
|
|
|
161,459 |
|
|
|
|
|
|
Related party advances
|
|
|
(7,010 |
) |
|
|
- |
|
|
Total adjustments
|
|
|
23,222,397 |
|
|
|
6,579,048 |
|
|
Net Cash Used in Operating Activities
|
|
|
(1,288,624 |
) |
|
|
(1,475,309 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(1,517 |
) |
|
|
- |
|
|
Purchase of intellectual property
|
|
|
(3,630 |
) |
|
|
(15,100 |
) |
|
Net Cash Used in Investing Activities
|
|
|
(5,147 |
) |
|
|
(15,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchased conversion rights from a shareholder
|
|
|
(25,000 |
) |
|
|
- |
|
|
Proceeds from Series B convertible preferred stock
|
|
|
1,600,000 |
|
|
|
- |
|
|
Proceeds from loans
|
|
|
- |
|
|
|
1,585,000 |
|
|
Repayments of notes payable
|
|
|
(20,000 |
) |
|
|
(125,000 |
) |
|
Proceeds from issuance of stock
|
|
|
- |
|
|
|
- |
|
|
Proceeds from warrant exercise
|
|
|
- |
|
|
|
14,691 |
|
|
Net Cash Provided By Financing Activities
|
|
|
1,555,000 |
|
|
|
1,474,691 |
|
| |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
261,229 |
|
|
|
(15,718 |
) |
|
Cash and cash equivalents, beginning of period
|
|
|
86,396 |
|
|
|
29,430 |
|
|
Cash and cash equivalents, end of period
|
|
$ |
347,625 |
|
|
$ |
13,712 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
- |
|
|
$ |
- |
|
|
Cash paid for income taxes
|
|
$ |
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
Series C Convertible Preferred stock issued in merger
|
|
$ |
10,790,367 |
|
|
$ |
- |
|
|
Beneficial conversion features on Series B convertible preferred stock
|
|
$ |
281,000 |
|
|
$ |
- |
|
|
Net assets acquired in merger
|
|
$ |
146,667 |
|
|
$ |
- |
|
|
Transfers from derivative liability to additional paid in capital
|
|
$ |
74,681 |
|
|
$ |
3,098,549 |
|
|
Discount on debt recorded as derivative liability
|
|
$ |
- |
|
|
$ |
1,025,309 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
FUSE SCIENCE, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
ORGANIZATION
Fuse Science, Inc. (“Company”) was incorporated in Nevada on September 21, 1988. Prior to 2002, the Company’s activities included, developing and marketing data communications and networking infrastructure solutions for business, government and education (which business was sold in 2002) and as a “business development company” under the Investment Company Act of 1940, from 2007 to 2009. From April 2011 through October 1, 2014, the Company’s business involved developing certain sublingual and transdermal delivery systems for bioactive agents. Since October 1, 2014, the Company has focused on two business initiatives: developing and commercializing the Company’s SkyPorts drone support technology, which enables the long distance flight required for drone-based commerce without the need for drones to return “home” every 15 minutes to recharge, and developing and commercializing the Company’s XTRAX® remote monitoring system, which is designed to measure the production of solar and other renewable energy systems and for transmission of the data via the cellular and radio frequency network.
Agreement and Plan of Reorganization with Spiral Energy Tech, Inc.
On October 1, 2014, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with Spiral Energy Tech, Inc., a Nevada corporation (“Spiral”), and Spiral Acquisition Sub, Inc., our newly formed, wholly-owned Nevada subsidiary (“Acquisition Sub”). Upon closing of the transactions contemplated under the Merger Agreement (the “Merger”), which occurred concurrently with entering into the Merger Agreement, Acquisition Sub merged with and into Spiral, and Spiral, as the surviving entity, became a 51% majority-owned subsidiary of the Company.
At the closing of the Merger, 51% of the outstanding shares of Spiral (the “Spiral Shares”) were acquired by the Company for an aggregate of Fifteen Million (15,000,000) newly issued shares of Common Stock, par value $ 0.001 per share, of the Company, (the “Common Stock”) or, at the election of any holder of the Spiral Shares who, as a result of receiving shares of the Company’s Common Stock in connection with the Merger would hold in excess of 5% of the issued and outstanding shares of the Company’s Common Stock, shares of Series C Convertible Preferred Stock, par value $0.001 per share (the “Series C Preferred Stock”). At the closing, 3,269,808 common stock and 3,500,000 convertible Series C preferred stock were issued to the Spiral's shareholders. Series C preferred stock is convertible into 11,730,192 common shares.
At the closing of the Merger, the Company sold an aggregate of 3,200,000 shares of shares of its Series B Preferred Stock, $0.001 par value per share (the “Series B Preferred Stock”) in a private placement (the “Private Placement”) to certain investors (the “Investors”) at a per share price of $0.50 for gross proceeds to the Company of $1,600,000. Each share of Series B Preferred Stock has a stated value of $0.50 and is convertible into shares of Common Stock equal to the stated value (and all accrued but unpaid dividends) divided by a conversion price equal to the lower of (i) $2.50 and (ii) during the period commencing on the initial issuance date and ending on the first trading day following the six month anniversary of the initial issuance date that there is traded a minimum of 3,000,000 shares at a price of $0.50 or greater, twenty percent (20%) of the lowest VWAP of the Common Stock on the trading day during the twenty (20) consecutive trading days ending on the trading day immediately preceding the conversion date (subject to adjustment). The Company is prohibited from effecting the conversion of the Series B Preferred Stock to the extent that, as a result of such conversion, the holder beneficially owns more than 2.49%, in the aggregate, of the issued and outstanding shares of the Company’s Common Stock calculated immediately after giving effect to the issuance of shares of Common Stock upon the conversion of the Series B Preferred Stock.
Upon the closing of the Merger, (i) Brian Tuffin resigned as the Company’s Chief Executive Officer, interim Chief Financial Officer and all other officer positions he holds with the Company (while agreeing to serve as the Company’s Principal Executive, Financial and Accounting Officer for a period terminating with the filing of the Company’s Annual Report for the year ended September 30, 2014), (ii) Jeanne Hebert resigned as Secretary, and all other positions she holds with the Company, and (iii) simultaneously with the effectiveness of the Merger, Ezra Green was appointed as the Company’s Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer.
Effective October 27, 2014, Brian Tuffin, Richard S. Hutchings, and Reginald Hollinger resigned as directors of the Company and Ezra Green and Gelvin Stevenson were appointed as directors of the Company. On November 13, 2014, the Company appointed David Rector to its board of directors.
Assets taken over and liabilities assumed:
As per ASC 805-20, assets and liabilities were measured at fair value. The total assets acquired cash, accounts receivable, investments, and fixed assets in the acquisition were $86,193, $1,278, $1,125, $24,967 respectively and the liability assumed. Accounts payable and accrued expenses in acquisition were $37,382, and $1,500 respectively, for the net asset value of $74,681. In the acquisition process, as per ASC 805-30 goodwill computed was approximately 21 million and non-controlling interest computed was approximately 10 million.
In the merger, the Company issued to Spiral 3,269,808 common shares and 3,500,000 Series C preferred that can be converted into 11,730,192 common shares.
Goodwill and Intangibles:
Merger took place by taking over 51% of Spiral's common shares. Goodwill recognized in the merger transaction $21,633,882 (ASC 350-20). Impairment test for goodwill was performed at the quarter ending December 31, 2014. Management believes that goodwill has impairment due to the following reasons: First, the fair value of the common share of the Company during the time of merger is substantially less than the fair value of the common share of the company at December 31, 2013, and second the management believes that implied value of goodwill is zero because the products are still in the developmental stage. As a result, the management has decided to write off the entire goodwill of $21,633,882 during the quarter ended December 31, 2014.
|
2.
|
SIGNIFICANT ACCOUNTING POLICIES
|
CONSOLIDATION POLICY AND HISTORY OF BUSINESS
The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, Fuse Science, Inc. (“FSR&D”), a Delaware Corporation, FS Consumer Products Group, Inc., a Florida corporation, its 60% owned subsidiary, Ultimate Social Network, Inc. (“USN”), and its 51% owned subsidiary, Spiral. All significant intercompany balances and transactions have been eliminated in consolidation.
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein have been prepared by the Company, without audit, according to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United Stated of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The information set forth in these interim condensed consolidated financial statements for the six months ended March 31, 2015, is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading. The September 30, 2014 year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. It is suggested that these condensed consolidated financial statements be read in conjunction with these financial statements and the notes thereto included in the Company’s latest stockholder’s annual report (Form 10-K) which were prepared assuming the Company will continue as a going concern.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results could differ from these estimates.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results could differ from these estimates.
REVENUE RECOGNITION
The Company records revenue net of discounts and allowances from the sale of Enerjel™, Powerfuse™ and Electrofuse™, when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) product has been shipped or delivered, (3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.
In July 2014, the Company entered into an agreement with its major customer terminating the relationship and stipulating that any inventory previously purchased by the customer is not subject to return.
CASH CONCENTRATIONS
From time to time, the Company maintains cash with financial institutions in excess of federally insured limits.
ACCOUNTS RECEIVABLE
Accounts receivable are uncollateralized customer obligations due under normal trade terms. The carrying amount of accounts receivable may be reduced by an allowance that reflects management's best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances and based on assessment of current credit worthiness, estimates the portion, if any, of the balance that will not be collected. All accounts or portions thereof determined to be uncollectible are written off to the allowance for doubtful accounts. No allowance for doubtful accounts was recorded as of March 31, 2015 and September 30, 2014.
FIXED ASSETS
Fixed assets are recorded at cost and depreciated using the straight-line method over the estimated useful life of 3-10 years. Repairs and maintenance are charged to expense as incurred.
FAIR VALUE MEASUREMENTS
Fair value is defined as the price that the Company would receive to sell an investment or pay to transfer a liability in a timely transaction with an independent counter-party in the principal market or in the absence of a principal market, the most advantageous market for the investment or liability. A three-tier hierarchy is established to distinguish between (1) inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances (unobservable inputs); and establishes a classification of fair value measurements for disclosure purposes.
The hierarchy is summarized in the three broad levels listed below:
|
Level 1
|
-
|
quoted prices in active markets for identical assets and liabilities
|
|
Level 2
|
-
|
other significant observable inputs (including quoted prices for similar assets and liabilities, interest rates, credit risk, etc.)
|
|
Level 3
|
-
|
significant unobservable inputs (including the Company’s own assumptions in determining the fair value of assets and liabilities).
|
In accordance with Accounting Standards Codification (“ASC”) 815, the Company’s warrant derivative liability is measured at fair value on a recurring basis, and is a level 3 measurement in the three-tier fair value hierarchy.
There were no transfers between the levels of the fair value hierarchy during the six months ended March 31, 2015 and years ended September 30, 2014.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating the fair values of each class of financial instruments disclosed herein:
Derivative Liability - These financial instruments are carried at fair value.
Notes Payable - Based upon the interest rates, current economic conditions, risk characteristics, collateral and other factors, the carrying amount of these financial instruments approximate market value (level 2 measurement).
DERIVATIVE LIABILITY
The Company issued warrants to purchase the Company’s common stock in connection with the issuance of convertible debt, which contain certain price protection provisions that reduce the exercise price of the warrants in certain circumstances. The Company also issued Series A Convertible Preferred Stock which contains price protection provisions that reduce the conversion price of the preferred stock in certain circumstances. The Company also issued Series B Convertible Preferred Stock which contains price protection provisions that reduce the conversion price of the preferred stock in certain circumstances The Company determined that the warrants and preferred stocks did not qualify for a scope exception under ASC 815 as they were determined not to be indexed to the Company’s stock and accordingly are accounted for as derivatives and are recorded on the balance sheet at fair value with the changes in the fair value recognized in the consolidated statement of operations.
INTELLECTUAL PROPERTY
Intellectual property is amortized on a straight-line basis over its estimated economic life of 15 years and evaluated for impairment whenever events or changes in business circumstances indicated that the carrying value of the intellectual property may not be recoverable.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets and intangible assets for impairment whenever events change or if circumstances indicate that the carrying amount of any assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the asset.
INCOME TAXES
The Company accounts for income taxes under the liability method whereby deferred tax assets and liabilities are provided for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Deferred tax assets, net of a valuation allowance, are recorded when management believes it is more likely than not that the tax benefits will be realized. Realization of the deferred tax assets is dependent upon generating sufficient taxable income in the future. The amount of deferred tax asset considered realizable could change in the near term if estimates of future taxable income are modified.
The Company assesses its tax positions in accordance with "Accounting for Uncertainties in Income Taxes" as prescribed by the Accounting Standards Codification, which provides guidance for financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a tax return for open tax years (generally a period of three years from the later of each return's due date or the date filed) that remain subject to examination by the Company's major tax jurisdictions. Generally, the Company is no longer subject to income tax examinations by major taxing authorities for years before September 30, 2011.
The Company assesses its tax positions and determines whether it has any material unrecognized liabilities for uncertain tax positions. The Company records these liabilities to the extent it deems them more likely than not to be incurred. Interest and penalties related to uncertain tax positions, if any, would be classified as a component of income tax expense in the accompanying consolidated statements of income.
The Company believes that it does not have any significant uncertain tax positions requiring recognition or measurement in the accompanying consolidated financial statements.
MARKETING, ADVERTISING AND PROMOTION COSTS
Marketing, advertising and promotion costs are charged to operations as incurred and are included in sales and marketing expenses in the accompanying unaudited condensed consolidated statements of operations. The amounts charged for the six months ended March 31, 2015 and 2014 were approximately $373,087 and $889,484, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
The Company follows ASC 730-10, “Research and Development,” and expenses research and development costs when incurred. Accordingly, third-party research and development costs incurred, include designing, prototyping and testing of product, are expensed when the contracted work has been performed or milestone results have been achieved. Indirect costs related to research and developments are allocated based on percentage usage to the research and development. During March 31, 2015 and 2014 the Company incurred research and development costs of $58,320 and $0, respectively.
NON-CONTROLLING INTEREST
Non-controlling interest in the Company’s unaudited condensed consolidated financial statements represents the 40% interest not owned by the Company in USN, and 49% interest not owned by the Company in Spiral. USN had no operations during the twelve months ended September 30, 2014 and the six months ended March 31, 2015. Spiral reported a loss of $304,455 for the six months ended March 31, 2015.
CONCENTRATION OF CREDIT RISK
Under the Company’s legacy business, one customer accounted for approximately 96% of the Company's net sales for the year ended September 30, 2014.
STOCK-BASED COMPENSATION
The Company accounts for stock options granted to employees and directors using the accounting guidance in ASC 718 “Stock Compensation” (“ASC 718”) and for stock options granted to consultants and endorsers using the accounting guidance included in ASC 505-50 “Equity-Based Payments to Non-Employees” (“ASC 505-50”). In accordance with ASC 718, we estimate the fair value of service based options and performance based options on the date of grant, using the Black-Scholes pricing model. In accordance with ASC 505-50, we estimate the fair value of service based options and performance based options at each reporting period until a measurement date is reached using the Black-Scholes pricing model.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s options would have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models may not necessarily provide a reliable single measure of the fair value of the Company’s options, although they provide the best estimate currently.
NET INCOME (LOSS) PER SHARE
The Company’s loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted losses per share reflects the potential dilution that could occur if stock options and or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the losses of the Company. All outstanding options and warrants are not included in the calculation of diluted loss per share as their effect would be antidilutive.
The following is a reconciliation of the numerator and denominator used for the computation of basic and diluted net loss per common shares:
| |
|
Three Months Ended
|
|
| |
|
March 31,
|
|
| |
|
2015
|
|
|
2014
|
|
| |
|
|
|
|
|
|
|
Net income (loss) available to stockholders of Fuse Science, Inc.
|
|
$ |
64,585 |
|
|
$ |
(3,243,170 |
) |
| |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares – basic and diluted
|
|
|
78,723,098 |
|
|
|
40,103,030 |
|
| |
|
|
|
|
|
|
|
|
|
Net income (loss) per common share - basic and diluted
|
|
$ |
0.00 |
|
|
$ |
(0.08 |
) |
| |
|
Six Months Ended
|
|
| |
|
March 31,
|
|
| |
|
2015
|
|
|
2014
|
|
| |
|
|
|
|
|
|
|
Net loss available to stockholders of Fuse Science, Inc.
|
|
$ |
(24,361,125 |
) |
|
$ |
(8,054,357 |
) |
| |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares – basic and diluted
|
|
|
58,364,019 |
|
|
|
38,858,093 |
|
| |
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
|
$ |
(0.42 |
) |
|
$ |
(0.21 |
) |
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments are to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. We do not expect the adoption of ASU 2015-03 to have a material effect on our financial position, results of operations or cash flows.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification and improves current U.S. GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (“VIE”), and changing consolidation conclusions for companies in several industries that typically make use of limited partnerships or VIEs. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We do not expect the adoption of ASU 2015-02 to have a material effect on our financial position, results of operations or cash flows.
In January 2015, the FASB issued ASU No. 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” This ASU eliminates from U.S. GAAP the concept of extraordinary items. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. We do not expect the adoption of ASU 2015-01 to have a material effect on our financial position, results of operations or cash flows.
In November 2014, the FASB issued ASU No. 2014-17, “Business Combinations (Topic 805): Pushdown Accounting.” This ASU provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. ASU 2014-17 was effective on November 18, 2014. The adoption of ASU 2014-17 did not have any effect on our financial position, results of operations or cash flows.
In November 2014, the FASB issued ASU 2014-16, “Derivatives and Hedging (Topic 815).” ASU 2014-16 addresses whether the host contract in a hybrid financial instrument issued in the form of a share should be accounted for as debt or equity. ASU 2014-16 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We do not currently have issued, nor are we investors in, hybrid financial instruments. Accordingly, we do not expect the adoption of ASU 2014-16 to have any effect on our financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40)". ASU 2014-15 provides guidance related to management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosure. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for interim and annual periods thereafter. Early application is permitted. We do not expect the adoption of ASU 2014-15 to have a material effect on our financial position, results of operations or cash flows.
In June 2014, the FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We do not expect the adoption of ASU 2014-12 to have a material effect on our financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. We are still evaluating the effect of the adoption of ASU 2014-09. On April 1, 2015, the FASB voted to propose to defer the effective date of the new revenue recognition standard by one year.
In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) and Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 amends the definition for what types of asset disposals are to be considered discontinued operations, as well as amending the required disclosures for discontinued operations and assets held for sale. ASU 2014-08 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2014. The adoption of ASU 2014-08 did not have any effect on our financial position, results of operations or cash flows.
Recent accounting pronouncements issued by the FASB and the SEC did not or are not believed by management to have a material impact on the Company's present or future unaudited condensed consolidated financial statements.
The Company has not established sources of revenue sufficient to fund the development of the business, projected operating expenses and commitments for the next twelve months and may be unable to obtain sufficient debt or equity financing. The Company has incurred net losses since inception, At March 31, 2015, current assets were $368,222 and current liabilities were $997,072. Further, at March 31, 2015, the accumulated deficit amounted to $76,539,129. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. No adjustments have been made as a result of this uncertainty.
The Company has taken several steps to address its liquidity requirements. In addition to reducing the amount of operating expenses that it incurs on a monthly basis, the Company has negotiated with its creditors to settle obligations at less than stated amounts.
The Company will continue its evaluation of strategic alternatives that may be available to advance the direction of the Company. 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.
There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all. In the event we are unable to continue as a going concern, we may elect or be required to seek protection from our creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy. To date, management has not considered this alternative, nor does management view it as a likely occurrence.
The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
Fixed Assets consisted of the following at March 31, 2015 and September 30, 2014:
| |
|
March 31, 2015
|
|
|
September 30, 2014
|
|
|
Equipment
|
|
$
|
29,898
|
|
|
$
|
-
|
|
|
Website
|
|
|
13,750
|
|
|
|
13,750
|
|
|
Intangible assets
|
|
|
3,630
|
|
|
|
|
-
|
|
Fixed assets
|
|
|
47,278
|
|
|
|
13,750
|
|
|
Less: Accumulated depreciation
|
|
|
(14,486
|
) |
|
|
(7,923
|
) |
|
Fixed assets (net)
|
|
$
|
32,792
|
|
|
$
|
5,827
|
|
Depreciation and amortization expense amounted to $2,380 and $12,041 for the six months ended March 31, 2015 and 2014, respectively.
The Company had the following notes payable at March 31, 2015 and September 30, 2014.
| |
|
March 31,
|
|
|
September 30,
|
|
| |
|
2015
|
|
|
2014
|
|
|
Note payable (“July 2014 Note”)
|
|
$
|
-
|
|
|
$
|
20,000
|
|
| |
|
$
|
-
|
|
|
$
|
20,000
|
|
| |
|
March 31,
|
|
|
September 30,
|
|
| |
|
2015
|
|
|
2014
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
20,000
|
|
|
Long term
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
20,000
|
|
July 2014 Note:
In October 2014, the Company repaid $20,000 to the stockholder.
January 2014 Notes
On January 3, 2014, the Company entered into a securities purchase agreement (the “January 2014 Purchase Agreement”) with two investors pursuant to which the Company issued and sold 12% senior secured convertible notes in the aggregate original principal amount of $1,000,000 (the “January 2014 Notes”) and warrants to purchase up to 467,243 (including 26,250 to the placement agent) shares of our common stock (the “January 2014 Warrants”). The indebtedness evidenced by the Notes bears interest at 12% per year, and accrues and is payable together with principal on January 2, 2019. The Notes may be converted, at the option of the holder, into the Company’s common stock, at any time following issuance at an initial conversion price (the “Fixed Conversion Price”) of $4.00 per share (subject to adjustment as provided in the Note). From and after the sixth month anniversary of the issuance of the Notes, the conversion price of the Notes will be equal to the lower of (i) the Fixed Conversion Price and (ii) sixty percent of the lowest weighted average price our common stock on any trading day for the sixty trading days immediately preceding any conversion of the Senior Notes (the “Alternative conversion Price,” and together with the Fixed Conversion Price, the “Conversion Price”). The Conversion Price is also subject to anti-dilution adjustments as provided for the Senior Notes. The Notes are secured by a first lien on substantially all of Fuse’s assets pursuant to a pledge and security agreement among the parties.
Under the terms of the Warrants, the Holders are entitled to exercise the Warrants for a period of five (5) years from issuance at a price of $5.18 per share (subject to adjustment as provided in the Warrant). As of March 31, 2015, the exercise price of the January 2014 warrants was reduced to $0.0008 per share due to price protection provisions contained in the warrant agreement. The January 2014 warrants have been accounted for as derivatives (See Note 6).
In recording the transaction, the Company recorded a discount for the full face value of the Notes and recorded a derivative liability at fair value for the warrants and the debt conversion feature of $1,617,629, resulting in an expense of $604,504 upon recording the derivative liability. The discount is amortized over the life of the notes using the interest method.
The fair value of the warrants and the debt conversion feature on the issue date was estimated using the Black-Scholes valuation model with the following assumptions:
| Expected term |
|
18 months – 5 years |
| Expected average volatility |
|
117.00 – 140.00% |
| Expected dividend yield |
|
0% |
| Risk-free interest rate |
|
.26% |
In connection with these transactions, Fuse paid a placement agent fee of $43,400 and issued to the placement agent and their respective designees, placement agent warrants to purchase 7% of the number of shares of common stock that are issuable pursuant to the Notes and Warrants.
On August 27, 2014, the January 2014 Notes and accrued interest there thereon converted into shares of Series A Convertible Preferred Stock (See Note 6).
|
6.
|
DERIVATIVE LIABILITIES
|
WARRANT DERIVATIVE LIABILITY
The Company has warrants issued in connection with its convertible notes payable with price protection provisions that allow for the reduction in the exercise price of the warrants in the event the Company subsequently issues stock or securities convertible into stock at a price lower than the exercise price of the warrants. Simultaneously with any reduction to the exercise price, the number of shares of common stock that may be purchased upon exercise of each of these warrants shall be increased or decreased proportionately, so that after such adjustment the aggregate exercise price payable for the adjusted number of warrants shall be the same as the aggregate exercise price in effect immediately prior to such adjustment. The Company accounted for its warrants with price protection in accordance with FASB ASC Topic 815.
The Company’s derivative warrant instruments have been measured at fair value at March 31, 2015 and September 30, 2014 using the Black-Scholes model, which approximates a binomial or lattice model. The liability is revalued at each reporting period and changes in fair value are recognized currently in the consolidated statements of operations. The initial recognition and subsequent changes in fair value of the warrant derivative liability have no effect on the Company’s cash flows.
The fair value of the warrants at March 31, 2015 and September 30, 2014 was $1,354 and $241,336, respectively, which is reported on the consolidated balance sheet under the caption “Derivative Liabilities”.
Fair Value Assumptions Used in Accounting for Warrant Derivative Liabilities
The Company has determined its warrant derivative liabilities to be a Level 3 fair value measurement and has used the Black-Scholes pricing model to calculate the fair value as of March 31, 2015. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The key inputs used in the March 31, 2015 and September 30, 2014 fair value calculations were as follows:
| |
|
March 31, 2015
|
|
|
September 30, 2014
|
|
|
Stock Price
|
|
$ |
0.0021 |
|
|
$ |
0.80 |
|
|
Volatility
|
|
|
130%-145 |
% |
|
|
130%-145 |
% |
|
Strike Price
|
|
$ |
0.0008 |
|
|
$ |
0.30 |
|
|
Risk-free Rate
|
|
|
0.26 |
% |
|
|
0.13 |
% |
|
Dividend Rate
|
|
|
0 |
% |
|
|
0 |
% |
|
Expected Life
|
|
12 months – 16 months
|
|
|
12 months – 16 months
|
|
SERIES A CONVERTIBLE PREFERRED STOCK
The Company’s Series A Convertible Preferred Stock contains price protection provisions that allow for the reduction in the conversion price of the preferred stock into common stock. The Company accounted for its preferred stock with price protection in accordance with FASB ASC Topic 815.
The Company’s derivative preferred stock instruments have been measured at fair value at issuance on August 27, 2014, September 30, 2014 and at March 31, 2015, based on a market approach method utilizing level 2 inputs which include the following considerations:
|
·
|
The trading price of a share of common stock of the Company at the pricing dates
|
|
·
|
The Company’s market capitalization based on the publicly traded value of the Company’s common stock
|
|
·
|
The value of the exchange consideration
|
|
·
|
The value of publically traded shells
|
|
·
|
The sale by the Company of other preferred shares
|
The fair value of the preferred shares at March 31, 2015 and September 30, 2014 was $137,757 and $972,000, respectively, and is included in the unaudited condensed consolidated balance sheet under the caption “Derivative liabilities”.
SERIES B CONVERTIBLE PREFERRED STOCK
The Company’s Series B Convertible Preferred Stock contains price protection provisions that allow for the reduction in the conversion price of the preferred stock into common stock. The Company accounted for its preferred stock with price protection in accordance with FASB ASC Topic 815.
The Company’s derivative preferred stock instruments have been measured at fair value at issuance on October 03, 2014 and on March 31, 2015, using the Black-Scholes model, which approximates a binomial or lattice model. The liability is revalued at each reporting period and changes in fair value are recognized currently in the consolidated statements of operations. The initial recognition and subsequent changes in fair value of the derivative liability have no effect on the Company’s cash flows.
The fair value of the preferred shares at March 31, 2015 and October 3, 2014 was $6,400 and $160,000, respectively, and is included in the consolidated balance sheet under the caption “Derivative liabilities”.
At March 31, 2015, the estimated fair values of the liabilities measured on a recurring basis are as follows:
| |
|
Fair Value Measurements at March 31, 2015
|
| |
|
Balance at
March 31, 2015
|
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Warrant derivative liabilities
|
|
$
|
1,354
|
|
|
$ |
|
-
|
|
$
|
-
|
|
$
|
1,354
|
|
Series A convertible preferred stock
|
|
|
137,757
|
|
|
|
-
|
|
|
|
137,757
|
|
|
-
|
|
Series B convertible preferred stock
|
|
|
6,400
|
|
|
|
-
|
|
|
|
|
|
|
6,400
|
| |
|
|
145,511
|
|
|
|
-
|
|
|
|
137,757
|
|
|
7,754
|
The following tables present the activity for liabilities measured at estimated fair value using unobservable inputs for the six months ended March 31, 2015:
| |
|
Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
|
|
| |
|
Derivative Liabilities
|
|
|
Beginning balance at September 30, 2014
|
|
$
|
241,336
|
|
|
Issuance of Series B derivative liabilities
|
|
|
160,000
|
|
|
Changes in estimated fair value
|
|
|
(393,582
|
) |
|
Ending balance at March 31, 2015
|
|
$
|
7,754
|
|
| |
|
Fair Value Measurements Using
Significant Unobservable Inputs (Level 2)
|
|
| |
|
Derivative Liabilities
|
|
|
Beginning balance at September 30, 2014
|
|
$
|
972,000
|
|
|
Changes in estimated fair value
|
|
|
(834,243
|
) |
|
Ending balance at March 31, 2015
|
|
$
|
137,757
|
|
|
7.
|
CONVERTIBLE DEBT EXCHANGE
|
On August 27, 2014, the Company entered into a series of exchange agreements with certain holders of the January 2014 Notes, the November 2013 Notes and other debt in the principal amount of $1,697,000. Pursuant to the exchange agreements the holders exchanged the debt plus accrued interest of approximately $160,000 for 1,500,000 shares of Series A Convertible Preferred Stock. As of March 31, 2015, Series A Convertible preferred Stock outstanding is 1,360,874.
The Company recorded no income tax benefit or expense for the losses for the Six Months Ended March 31, 2015 and 2014, since management has determined that the realization is not assured and has created a valuation allowance for the full amount of deferred tax assets.
|
9.
|
STOCKHOLDERS’ EQUITY (DEFICIT)
|
Preferred stock
At March 31, 2015, the Company had 10,000,000 shares authorized and 1,360,874 of Series A Convertible Preferred Stock issued and outstanding; 3,200,000 shares authorized and outstanding of Series B Convertible Preferred Stock; and 3,500,000 shares authorized and outstanding of Series C Convertible Preferred Stock.
Series A Convertible Preferred Stock
At March 31, 2015, the company had 1,500,000 Series A convertible preferred shares (“Series A Preferred Stock”) authorized. At March 31, 2015 and September 30, 2014, the Company had 1,360,874 and 1,500,000 shares of Series A Preferred Stock outstanding. The Series A Preferred Stock is accounted for as a derivative (See Note 6).
Each share of Series A Preferred Stock has a stated value of $2.00 and is convertible into shares of common stock equal to the stated value (and all accrued but unpaid dividends) divided by a conversion price equal to the lower of (i) $0.02 and (ii) twenty percent (20%) of the lowest dollar volume weighted average price, as defined (“VWAP”) of the common stock on the trading day during the twenty (20) consecutive trading days ending on the trading day immediately preceding the conversion date (subject to adjustment). The Series A Preferred Stock accrues dividends at a rate of 12% per annum, payable quarterly in arrears in cash or in kind, subject to certain conditions being met. The Series A Preferred Stock contains a seven year “make-whole” provision such that if the Series A Preferred Stock is converted prior to the seventh anniversary of the date of original issuance, the holder will be entitled to receive the remaining amount of dividends that would accrued from the of the conversion until such seven year anniversary. The Company is prohibited from effecting the conversion of the Series A Preferred Stock to the extent that, as a result of such conversion, the holder beneficially owns more than 2.49%, in the aggregate, of the issued and outstanding shares of the Company’s common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series A Preferred Stock.
Dividends related to Series A Preferred Stock at March 31, 2015 amounted to $231,632. Undeclared dividends related to Series A preferred as of March 31, 2015 and September 30, 2014 amounted to approximately $163,000 and $30,000, respectively and is included under “Accrued Expenses” in the balance sheet.
Series B Convertible Preferred Stock
The company had 3,200,000 Series B convertible preferred shares “Series B Preferred Stock” authorized and issued and outstanding at March 31, 2015. The Series B Preferred Stock is accounted for as a derivative (See Note 6).
Each share of Series B Preferred Stock has a stated value of $0.50 and is convertible into shares of common stock equal to the stated value (and all accrued but unpaid dividends) divided by a conversion price equal to the lower of (i) $2.50 and (ii) during the period commencing on the Initial Issuance Date and ending on the first Trading Day following the six (6) month anniversary of the Initial Issuance Date that there is traded a minimum of 3,000,000 shares at a price of $0.50 or greater, twenty percent (20%) of the lowest VWAP of the Common Stock on the Trading Day during the twenty (20) consecutive Trading Days ending on the Trading Day immediately preceding the Conversion Date, subject to adjustment as provided herein.
Series C Convertible Preferred Stock
The company had 3,500,000 Series C convertible preferred shares “Series C Preferred Stock” authorized and issued and outstanding at March 31, 2015.
Each share of Series C Preferred Stock has a stated value of $0.001 and is convertible into 3.3514834 shares of the Corporation’s common stock (the “Common Stock”) for each one (1) share of Series C Preferred Stock surrendered.
Common stock
At March 31, 2015 and September 30, 2014, the Company had 80,000,000 shares authorized and 80,000,000 and 233,808 shares issued and outstanding, respectively, of its $0.0001 par value common stock.
On March 19, 2014 the holders of the Company’s outstanding voting capital approved an amendment to the Company’s Articles of Incorporation to increase the number of shares of common stock authorized to be issued by the Company from 40,000,000 to 80,000,000.
On August 22, 2014, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation to effect a 1-for-200 reverse split of the Company’s issued and outstanding common stock.
On December 9, 2014, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada which (i) effected a 1-for-10 reverse stock split of the Company’s common stock; (ii) reduced the number of shares of common stock authorized for issuance by the company from 800,000,000 to 80,000,000, and (iii) reduced the par value of the Company’s common stock from $0.001 per share to $0.0001 per share. FINRA confirmed the effectiveness of the reverse stock split on January 27, 2015. All share numbers in the accompanying unaudited condensed consolidated financial statements and notes thereof have been retrospectively restated to reflect this split.
Transactions during the Six Months Ended March 31, 2015
Common Stock
During the Six Months Ended March 31, 2015, the Company issued 734,895 shares of common stock to athletes and marketing consultants as per termination agreement valued at approximately $316,739; the Company issued 676,000 shares of common stock to the management as per termination agreement valued at approximately $2,230,800; the Company issued 69,818,787 shares of common stock in Preferred Series A conversion value at approximately $9,211,461; the Company issued 3,269,808 shares of common stock at the merger value at approximately $10,790,367, and 1,252 Series A Convertible Preferred Stock was converted to 5,266,702 common shares.
|
10.
|
INCENTIVE STOCK PLANS
|
2014 Equity Incentive Plan
On September 30, 2014, the Company adopted its 2014 Equity Incentive Plan (“2014 Plan”) and reserved 1,030,000 shares of Common Stock for issuance thereunder. The purpose of the 2014 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward selected employees and other eligible persons. The 2014 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors and consultants. Pursuant to the terms of the 2014 Plan, either the Board or a board committee is authorized to administer the plan, including by determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Unless earlier terminated by the Board, the 2014 Plan shall terminate at the close of business on September 30, 2024.
2011 Incentive Stock Plan
Our 2011 Incentive Stock Plan, which was adopted by our board of directors in October 2011 and ratified by our shareholders in December 2011, provides for equity incentives to be granted to our employees, executive officers or directors or to key advisers or consultants. Equity incentives may be in the form of stock options with an exercise price not less than the fair market value of the underlying shares as determined pursuant to the 2011 Incentive Stock Plan, restricted stock awards, other stock based awards, or any combination of the foregoing. The 2011 Incentive Stock Plan currently is administered by the board of directors. During 2013, the Company amended the terms of the plan and increased the number of shares available under the plan to 15% of the Company’s issued and outstanding common stock as of January 1 of each year.
2011 Endorsers Incentive Stock Plan
Our 2011 Endorsers Incentive Stock Plan, which was adopted by our board of directors in October 2011, provides for equity incentives to be granted to athletic and other celebrities who endorse our present and planned products. Equity incentives may be in the form of stock options with an exercise price not less than the fair market value of the underlying shares as determined pursuant to the 2011 Endorsers Incentive Stock Plan, restricted stock awards, other stock based awards, or any combination of the foregoing. The 2011 Endorsers Incentive Stock Plan currently is administered by the board of directors. 6,000,000 shares of our common stock are reserved for issuance pursuant to the exercise of awards under the 2011 Endorsers Incentive Stock Plan.
On October 17, 2011, the Board of Directors of the Company approved the Double Eagle Holdings, Ltd. 2011 Incentive Stock Plan ("Plan"). The maximum number of shares authorized and available under the Plan is 2,000,000 shares and the Plan was approved on December 8, 2011 by written consent of a majority of the Company's shareholders. Under the terms of the Plan, the options expire after 5 years. The Company has reserved 20,000,000 shares of common stock for the grant of qualified incentive options or non-qualified options to employees and directors of the Company or its parents or subsidiaries, and to non-employee directors, consultants and advisors and other persons who may perform significant services for or on behalf of the Company under the Plan. Prices for incentive stock options must provide for an exercise price of not less than 100% of the fair market value of the common stock on the date the options are granted unless the eligible employee owns more than 10% of the Company's common stock for which the exercise price must be at least 110% of such fair market value.
Total compensation cost for share based payment arrangements amounted to approximately $131,500 for the six month periods ended March 31, 2015 and 2014, respectively.
A summary of this activity during the six months ended March 31, 2015 is as follows:
|
|
|
|
|
|
Weighted-Average Remaining
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
$0.08
|
|
|
233,319
|
|
|
|
4.25
|
|
|
|
233,319
|
|
The fair value of each option on the date of grant is estimated using the Black-Scholes option valuation model. The following weighted-average assumptions were used for options granted during the Six Months Ended March 31, 2015:
| |
|
Six months ended March 31, 2015
|
|
| |
|
|
|
|
Expected term
|
|
5 years
|
|
|
Expected average volatility
|
|
|
0.46 |
% |
|
Expected dividend yield
|
|
|
0 |
% |
|
Risk-free interest rate
|
|
|
1.49 |
% |
|
Expected annual forfeiture rate
|
|
|
0 |
% |
The fair value of each option on the date of grant is estimated using the Black-Scholes option valuation model. The following weighted-average assumptions were used for options granted during the Year ended September 30, 2014:
| |
|
Year Ended September 30, 2014
|
|
| |
|
|
|
|
Expected term
|
|
1-3 years
|
|
|
Expected average volatility
|
|
|
100%-140 |
% |
|
Expected dividend yield
|
|
|
0 |
% |
|
Risk-free interest rate
|
|
|
.25%-1.38 |
% |
|
Expected annual forfeiture rate
|
|
|
0 |
% |
At March 31, 2015, the Company had the following common stock equivalents from convertible debt and the detachable warrants issued with the convertible debt, which are not included in the information above.
| |
|
Price
|
|
|
| |
|
|
|
|
|
Detachable warrants
|
|
$
|
0.0008
|
|
8,203
|
|
Detachable warrants
|
|
$
|
0.0008
|
|
40,125
|
|
Detachable warrants
|
|
$
|
0.0008
|
|
12,915
|
|
Detachable warrants
|
|
$
|
0.0008
|
|
6,472
|
| |
|
|
|
|
67,715
|
At September 30, 2014, the Company had the following common stock equivalents from convertible debt and the detachable warrants issued with the convertible debt, which are not included in the information above.
| |
|
Price
|
|
|
| |
|
|
|
|
|
Detachable warrants
|
|
$
|
0.0007
|
|
8,203
|
|
Detachable warrants
|
|
$
|
0.0007
|
|
40,125
|
|
Detachable warrants
|
|
$
|
0.0007
|
|
12,915
|
|
Detachable warrants
|
|
$
|
0.0007
|
|
6,472
|
| |
|
|
|
|
67,715
|
11. COMMITMENTS AND CONTINGENCIES
Insufficient Capital: As of the date of the filing of this Form 10-Q, the Company had no remaining authorized and unissued shares of its common stock. So long as the Company has no common stock available for issuance, under the terms of the Series A Certificate of Designation, in the event Series A holders tender Series A shares for conversion, the Company would owe such holders an amount equal to the product of (a) the undeliverable shares of common stock and (b) the closing price per share of the common stock on the day preceding the delivery of the conversion notice. Based on the number of Series A shares presently outstanding, such amount could be substantial. The Company intends to take action to increase the shares of common stock available for issuance under its Articles of Incorporation.
The Company’s board of directors has approved a resolution authorizing an amendment to the Company’s Articles of Incorporation that will have the effect of increasing shares of common stock available for issuance, and has drafted a preliminary proxy statement in preparation for presenting such corporate action to shareholders for approval.
12. SUBSEQUENT EVENT
Management has evaluated subsequent events through the date these financial statements were available to be issued. Based on our evaluation no other events have occurred that require disclosure.