UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2016
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission file number 000-25753
NUSTATE ENERGY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Florida | 87-0449667 | |
| (State of Incorporation) | (IRS Employer Identification No.) |
401 E. LAS OLAS BOULEVARD, SUITE 1400
FORT LAUDERDALE, FL 33301
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (954) 712-7487
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] | Smaller reporting company [X] |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the common equity voting shares of the registrant held by non-affiliates on December 31, 2015 was $746,757, at a share price of $0.75 on that date. For purposes of this calculation, an aggregate of 995,676 shares of Common Stock were held by non-affiliates of the registrant on December 31, 2015 and have been included in the number of shares of Common Stock held by affiliates.
The number of the registrant’s shares of Common Stock outstanding as of October 13, 2016: 32,654,179
In this Annual Report on Form 10-K, the terms the “Company,” “NuState,” “we,” “us” or “our” refers to Nustate Energy Holdings, Inc., unless the context indicates otherwise.
WARNING CONCERNING FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS ANNUAL REPORT CONTAIN OR MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED UTILIZING NUMEROUS ASSUMPTIONS AND OTHER FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, OUR ABILITY TO IMPLEMENT OUR BUSINESS MODEL, RAISE SUFFICIENT CAPITAL TO FUND OUR OPERATING LOSSES AND PAY OUR ONGOING OBLIGATIONS, ECONOMIC AND MARKET CONDITIONS AND FLUCTUATIONS, GOVERNMENT AND INDUSTRY REGULATION, COMPETITION, AND OTHER FACTORS. MOST OF THESE FACTORS ARE DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. YOU SHOULD CONSIDER THE AREAS OF RISK DESCRIBED IN CONNECTION WITH ANY FORWARD-LOOKING STATEMENTS THAT MAY BE MADE HEREIN. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS AND READERS SHOULD CAREFULLY REVIEW THIS ANNUAL REPORT IN ITS ENTIRETY, INCLUDING THE RISKS DESCRIBED IN PART I. DESCRIPTION OF BUSINESS - RISK FACTORS. EXCEPT FOR OUR ONGOING OBLIGATIONS TO DISCLOSE MATERIAL INFORMATION UNDER THE FEDERAL SECURITIES LAWS, WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO ANY FORWARD-LOOKING STATEMENTS, TO REPORT EVENTS OR TO REPORT THE OCCURRENCE OF UNANTICIPATED EVENTS. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS ANNUAL REPORT, AND YOU SHOULD NOT RELY ON THESE STATEMENTS WITHOUT ALSO CONSIDERING THE RISKS AND UNCERTAINTIES ASSOCIATED WITH THESE STATEMENTS AND OUR BUSINESS.
| 2 |
NUSTATE ENERGY HOLDINGS, INC.
2016 ANNUAL REPORT ON FORM 10-K
Table of Contents
| 3 |
Overview
NuState Energy Holdings, Inc. is a technology company specializing in providing pertinent, real-time information to the worldwide transportation and security industries. NuState’s proprietary software, GPSTrax, is built on an Open Architecture platform for the logistics and telematics industries.
We believe there are many opportunities to leverage and monetize our software technology by licensing it to companies that provide green technology solutions to medium and large logistics companies. In November 2014, NuState Energy Holdings, Inc. signed a definitive agreement with The Ronn Motor Group, with offices in Dalian, China and the United States, to license and market GPSTrax in China and other international markets.
NuState is launching a new GPSTrax Value-Added Reseller (VAR) Program, focusing on opportunities in consumer-based solutions such as asset tracking. The VAR Program will increase awareness, availability and support of the GPSTrax solution at a time when a growing number of companies are looking to update and optimize their solutions. We expect to generate revenues from this Program during fiscal 2017.
Our software technology provides validation and verification of fuel cost consumption reporting and fuel tax credits to logistics companies. The software also is designed to document the exact amount of reduction of harmful emissions that results from the alternative energy products. This data will enable users in certain countries to generate emissions credits that are tradable under the protocol of the Kyoto Treaty.
Through our existing relationships in the country of Suriname, NuState is evaluating several projects in the alternative renewable energy market in Suriname. NuState has been in discussions with AMPS, NV (“AMPS”), based in Paramaribo, Suriname, to enter into a license agreement with its partner, The Ronn Motor Group, in relation to the purchase of GPSTrax© for their multi-million-dollar alternative energy projects. AMPS focuses on providing engineering, procurement and construction management (EPC) services, Power Transmission & Distribution, Renewable and Conventional Energy as well as Power Management Systems to Suriname and its fellow Caribbean Community members.
Employees
At September 30, 2016, we had 2 full time employees.
Our principal offices are located at 401 E. Las Olas Boulevard, Suite 1400, Fort Lauderdale, FL 33301. Our telephone number is (954) 712-7487.
Our common stock is quoted on the OTC Pink under the symbol “NSEH”.
The common shares of our Company are considered speculative. You should carefully consider the following risks and uncertainties in addition to other information in this annual report in evaluating our Company and our business before purchasing our common shares. Our business, operating or financial condition could be harmed due to any of the following risks:
Our auditors have raised substantial doubts as to our ability to continue as a going concern.
Our financial statements have been prepared assuming we will continue as a going concern. Since inception we have experienced recurring net losses which losses caused an accumulated deficit of approximately $41.5 million as of June 30, 2016. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We currently have a working capital deficit and negative cash flow from operations, and are uncertain if and when we will be able to pay our current liabilities.
Our working capital deficit was approximately $4.5 million as of June 30, 2016. This deficit consists of $1,806 in current assets, offset by $4,500,863 in current liabilities. In addition, we had negative cash flow from operations for the year ended June 30, 2016 of approximately $424,000. We do not have any liquid or other assets that can be liquidated to pay our current liabilities while we continue to incur additional liabilities to our officer and certain service providers who are working to prepare the documents required to be filed with the Securities and Exchange Commission to enable our common shares to be registered for trading. Since we currently have limited operations, the only ways we have of paying our current liabilities are to issue our common or preferred shares to our creditors or to issue unsecured promissory notes which may include certain features such as convertibility into common or preferred shares or warrants to purchase additional common or preferred shares in the future.
We currently do not have sufficient capital to finance the anticipated recurring costs of being a publicly-traded company.
As of September 30, 2016, we had minimal cash on hand. We anticipate incurring incremental annual costs of approximately $180,000 related to being a publicly-traded company. We will need to raise additional capital to support our public-company-related activities.
| 4 |
We had $3,232,885 of convertible notes, notes payable, and accrued interest payable as of June 30, 2016, of which of this amount $2,892,885 currently past due, and do not have the funds necessary to pay these obligations.
In addition to funding our operating expenses, we need capital to pay various debt obligations totaling approximately $3.2 million as of June 30, 2016 which are either currently past due or which are due in the current fiscal year. Currently, there is $1,442,314 principal amount of the convertible notes payable which is past due, $215,241 principal of the notes payable which is past due, and $1,235,330 of accrued interest which is past due. The interest on the past due principal amounts will continue to accrue monthly at their stated rates. Holders of past due notes do not have a security interest in our assets. The existence of these obligations provides additional challenges to us in our efforts to raise capital to fund our operations.
We have $673,200 of undeclared accumulative dividends as of June 30, 2016 and we may not be able to settle this obligation in cash or stocks.
In addition to funding our operating expenses, we need capital to pay undeclared cumulative dividends totaling approximately $673,200 as of June 30, 2016. The existence of these obligations provides additional challenges to us in our efforts to raise capital to fund our operations.
In the event we consummate a transaction with a profitable company, we may not be able to utilize our net operating loss carryover which may have a negative impact on your investment.
If we enter into a combination with a business that has operating income, we cannot assure you that we will be able to utilize all or even a portion of our existing net operating loss carryover for federal or state tax purposes following such a business combination. If we are unable to make use of our existing net operating loss carryover, the tax advantages of such a combination may be limited, which could negatively impact the price of our stock and the value of your investment. These factors will substantially increase the uncertainty, and thus the risk, of investing in our shares.
Economic conditions may affect our ability to obtain financing and to complete a merger or acquisition.
Due to general economic conditions, rapid technological advances being made in some industries, and shortages of available capital, our management believes that there are numerous firms seeking even the limited additional capital which we will need. In the presence of these economic conditions, we may have difficulty raising sufficient capital to support the investigation of potential business opportunities, and to consummate a merger or acquisition. These factors substantially increase the uncertainty, and thus the risk, of investing in our shares.
There are a number of factors related to our common stock which may have an adverse effect on our shareholders.
Shareholders’ interests in our Company will be diluted and investors may suffer dilution in their net book value per share if we issue additional shares or raise funds through the sale of equity securities. In the event that we are required to issue additional shares, enter into private placements to raise financing through the sale of equity securities or acquire business interests in the future from the issuance of shares of our common stock to acquire such interests, the interests of existing shareholders in our Company will be diluted and existing shareholders may suffer dilution in their net book value per share depending on the price at which such securities are sold. If we do issue additional shares, it will cause a reduction in the proportionate ownership and voting power of all existing shareholders.
We have certain provisions in our Articles of Incorporation and Bylaws, and there are other provisions under Florida law, that may serve to make a takeover of our Company more difficult.
Provisions of our articles of incorporation and bylaws may delay or prevent a takeover which may not be in the best interests of our stockholders. Provisions of our articles of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of Florida law also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation’s disinterested stockholders.
Our common stock is quoted in the over the counter market on the OTC Pink.
Our common stock is quoted on the OTC Pink. OTC Pink offers a quotation service to companies that are unable to list their securities on an exchange or for companies, such as ours, whose securities are not eligible for quotation on the OTC Bulletin Board. The requirements for quotation on the OTC Pink are considerably lower and less regulated than those of the OTC Bulletin Board or an exchange. Because our common stock is quoted on the OTC Pink, it is possible that even fewer brokers or dealers would be interested in making a market in our common stock which further adversely impacts its liquidity.
The tradability of our common stock is limited under the penny stock regulations which may cause the holders of our common stock difficulty should they wish to sell their shares.
Because the quoted price of our common stock is less than $5.00 per share, our common stock is considered a “penny stock,” and trading in our common stock is subject to the requirements of Rule 15g-9 under the Exchange Act. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction. SEC regulations also require additional disclosure in connection with any trades involving a “penny stock,” including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities and this limited liquidity will make it more difficult for an investor to sell his shares of our common stock in the secondary market should the investor wish to liquidate the investment. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.
| 5 |
Item 1B. Unresolved Staff Comments.
Not applicable.
We rent our principal executive offices from an unrelated third party on a month-to-month basis for a monthly rental of $350.
We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common shares are quoted on the OTC Pink Quotation System under the symbol “NSEH,” but trade infrequently.
The high and low bid prices of our common stock for the periods indicated below are as follows:
| Fiscal Year Ended June 30, 2016 | High | Low | ||||||
| Quarter Ended September 30, 2015 | $ | 0.1493 | * | $ | 0.1493 | * | ||
| Quarter Ended December 31, 2015 | $ | 0.1493 | * | $ | 0.0015 | * | ||
| Quarter Ended March 31, 2016 | $ | 0.1493 | * | $ | 0.0015 | * | ||
| Quarter Ended June 30, 2016 | $ | 0.1493 | * | $ | 0.0051 | * | ||
| Fiscal Year Ended June 30, 2015 | High | Low | ||||||
| Quarter Ended September 30, 2014 | $ | 2.8358 | * | $ | 0.1493 | * | ||
| Quarter Ended December 31, 2014 | $ | 4.3284 | * | $ | 0.1493 | * | ||
| Quarter Ended March 31, 2015 | $ | 0.8955 | * | $ | 0.1493 | * | ||
| Quarter Ended June 30, 2015 | $ | 0.2985 | * | $ | 0.1490 | * | ||
* close price adjusted for splits
On June 16, 2016, we effected a 1:1500 common stock reverse-split for shareholders on record as of May 31, 2016.
Stockholders
As of September 30, 2016, there were 442 stockholders of record of our Common Stock.
Dividend Policy
We have not paid any cash dividends since 2008 and do not anticipate or contemplate paying dividends in the foreseeable future, with the exception of dividends on our Series B Preferred Shares. It is the present intention of management to utilize all available funds for the development of our business. The holders of Series B Preferred Stock are entitled to receive annual dividends of 10% payable in cash or shares of our common stock, at our option.
At June 30, 2016, the Company’s undeclared cumulative dividends aggregated $673,200.
Unregistered issuance of Securities
In June 2016 the Company issued 508,750 shares of its par value common stock pursuant to a partial conversion of a convertible note, at a price of $0.004/share.
Share Repurchases
None.
| 6 |
Item 6. Selected Financial Data.
Not Applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following information should be read in conjunction with our financial statements and accompanying notes included in this Annual Report on Form 10-K.
Overview
The company was incorporated in Nevada as Jaguar Investments, Inc. during October 1987. During March 2003, a wholly owned subsidiary of the Company merged with Freight Rate, Inc., a development stage company in the logistics software business. During May 2003, the Company changed its name to Power2Ship, Inc. During October 2006, the Company merged with a newly formed, wholly owned subsidiary, Fittipaldi Logistics, Inc., a Nevada corporation, with the Company surviving but its name changed to Fittipaldi Logistics, Inc. effective November 2006. During December 2007, the Company merged with a newly formed, wholly owned subsidiary, NuState Energy Holdings, Inc., a Nevada corporation, with the Company surviving but renamed NuState Energy Holdings, Inc. effective December 2007.
On February 12, 2009, the Company filed Form 15 to terminate registration of its common stock under section 12(g) of the Securities Exchange Act of 1934 and subsequently has not submitted any filings to the Securities and Exchange Commission. During the period from February 2009 through April 2010, the Company had several changes to its officers and directors and moved its offices twice. The Company’s Chairman and President since April 2010, and its Chief Executive Officer from July 2010, is Kevin Yates. The Company’s headquarters is located at 401 E. Las Olas Boulevard, Suite 1400, Fort Lauderdale, FL 33301. Since April 2010, the Company’s current management developed, and began implementing, the following strategic plan designed to increase the Company’s shareholders’ value:
| 1. | Improve the Company’s balance sheet by reducing liabilities and regaining use of certain of its intellectual property and software, | |
| 2. | Settle litigation, | |
| 3. | Identify potential merger or acquisition candidates with whom the Company could enter into a transaction upon the Company achieving items 1 and 2 above, and | |
| 4. | License its intellectual property and software, also known as My Driver’s Seat, which it regained in April 2010. |
This strategic plan has resulted in the following material events:
Reduced Liabilities
Since filing its Form 10-Q for the quarterly period ended September 30, 2008, total liabilities have decreased by $5,187,087 or 53% from $9,687,950 on September 30, 2008 to $4,500,863 on June 30, 2016.
In August 2012, its former subsidiaries CXT and P2SI each filed a Voluntary Bankruptcy Petition and Schedules in the United States Bankruptcy Court in the District of South Carolina. On October 19, 2012, the Company was awarded the bankruptcy and has filed the proper paperwork and as a result has reduced its liabilities by $1,875,581.
Regained Use of Intellectual Property
As part of an agreement entered into with Rentar Environmental Solutions, Inc. (“Rentar”) in April 2010, the Company agreed to share with Rentar all right, title and interest in and to intellectual properties and software, My Driver’s Seat, which it had developed for the worldwide transportation and security industries and had sold in April 2008 to Rentar Logic, a Delaware corporation and an affiliate of Rentar. The intellectual property that the Company agreed to share with Rentar included a patent titled “Dynamic and Predictive Information System and Method for Shipping Assets and Transport”.
Licensing Use of Intellectual Property
NuState Energy Holdings, Inc. signed a definitive agreement with The Ronn Motor Group, with offices in Dalian, China and the United States, to license and market NuState’s IP software, GPSTrax©, for use by Ronn Motor Group’s partners in China and other international markets. On February 26, 2016, we agreed to suspend the definitive agreement with Ronn Motor Group as Ronn Motor Group is going through a corporate restructuring. On February 26, 2016 we entered into a binding Letter of Intent with MK Technologies LLC (a related party to Ronn Motor Group), in relation to the purchase of its fuel enhancement technologies and all its Assets, for total consideration of $2,000,000. $1,000,000 will be paid at closing, with the balance of the purchase price paid out in accordance with a mutually approved royalty agreement and paid consulting agreement, and $1,000,000 to be paid in stock, cash, or a combination on a mutually agreed schedule.
| 7 |
Results of Operations
Selling, General, and Administrative Expenses
For the year ended June 30, 2016, selling, general and administrative expenses were $719,868 as compared to $358,656 for the year ended June 30, 2015, an increase of $361,212 or approximately 50%. For the years ended June 30, 2016 and 2015 selling, general and administrative expenses consisted of the following:
| 2016 | 2015 | Increase/(Decrease) | % Change | |||||||||||||
| Accounting expense | $ | 100,889 | $ | 15,000 | $ | 85,889 | 85 | % | ||||||||
| Consulting fees | 195,536 | 99,841 | 95,695 | 49 | % | |||||||||||
| Salaries | 393,025 | 240,000 | 153,025 | 39 | % | |||||||||||
| Travel | - | 1,830 | (1,830 | ) | N/A | |||||||||||
| Other | 30,418 | 1,985 | 28,433 | 93 | % | |||||||||||
| $ | 719,868 | $ | 358,656 | $ | 361,212 | 50 | % | |||||||||
The increase in selling, general and administrative expenses during fiscal 2016, when compared with the prior year, is primarily due to an increase in salaries related to increased headcount and an increase in accounting expense due to costs associated with bringing our SEC filings current.
| Years ended | ||||||||
| June 30, | ||||||||
| 2016 | 2015 | |||||||
| Gain (loss) on change in fair value of derivative liabilities | $ | 189,712 | $ | 60,481 | ||||
Changes in fair value of derivative liabilities results from the changes in the fair value of the derivative liability due to the application of ASC 815, resulting in either income or expense, depending on the difference in fair value of the derivative liabilities between their measurement dates. The increase in fair value of derivative liabilities recognized during fiscal 2016 is primarily due to the increase in the market price of our common stock. The decrease in fair value of derivative liabilities recognized during fiscal 2015 is primarily due to an increase of our common stock quoted price between measurement dates and during such periods, respectively.
Interest Expense
| Years Ended | ||||||||||||
| June 30, | % | |||||||||||
| 2016 | 2015 | Change | ||||||||||
| Interest Expense | $ | 456,546 | $ | 310,864 | 46.9 | % | ||||||
Interest expense represents the stated interest of notes and convertible notes payable as well as the amortization of debt discount. The increase in interest expense during fiscal 2016 is primarily due to increased amortization of debt discount of $131,422, along with an increase in interest-bearing liabilities.
Derivative Liability Expense
| Years Ended | |||||||||||
| June 30, | % | ||||||||||
| 2016 | 2015 | Change | |||||||||
| Derivative Liability Expense | $ | 265,000 | $ | 0 | N/A | % | |||||
During fiscal 2016, the Company entered into sixteen unsecured convertible promissory note agreements totaling $265,000. These notes bear interest at rates between 8% and 14%, and are convertible into shares of common stock at a discount rate of 50% of the average 10-day closing bid price of the Company's stock. Derivative liability was recognized at the issuance dates of each note and totaled $265,000, with a corresponding charge to debt discount of $265,000 and $265,000 to derivative liability expense.
Loss on Settlement of Debt
| Years Ended | ||||||||||||
| June 30, | % | |||||||||||
| 2016 | 2015 | Change | ||||||||||
| Loss on settlement of debt | $ | (12,135 | ) | $ | (339,421 | ) | 96.4 | % | ||||
On October 9, 2014, the Company entered into a Settlement Agreement with IBC Funds, LLC (“IBC’). This agreement was approved by the Manatee County, Florida Court on October 10, 2014. Pursuant to the Settlement Agreement, the Company agreed to settle approximately $259,000 of outstanding liabilities (the “IBC Claim Amount”) by issuing IBC 572,667 shares of its common stock at a price per share equal to fifty percent of the lowest sales price of the common stock during the fifteen-day trading period preceding the request of payment. In the event the Company was delinquent on issuance of the Company’s shares upon request by IBC, the discount would be increased by five percent and by an additional five percent for each additional delinquency until all settlement shares had been received. At no time could IBC and its affiliates collectively own more than 4.99% of the outstanding shares of common stock. During October 2014, IBC paid an aggregate of $66,000 to various Company creditors. On February 12, 2015 IBC issued a letter of default to the Company. The Company issued to IBC an additional 286,247 common shares valued at $116,874.
Liquidity and Capital Resources
| Balance at June 30, | ||||||||
| 2016 | 2015 | |||||||
| Cash | $ | 1,806 | $ | 6,130 | ||||
| Accounts payable and accrued expenses | 550,308 | 440,642 | ||||||
| Accrued compensation | 190,325 | 342,000 | ||||||
| Notes, convertible notes, accrued interest, and settlement payable to ASC Recap, LLC | 3,225,047 | 4,812,946 | ||||||
| 8 |
At June 30, 2016 and 2015, 100% of our total assets consisted of cash.
We do not have any material commitments for capital expenditures.
The objective of liquidity management is to ensure that we have ready access to sufficient funds to meet commitments and effectively implement our growth strategy. Our primary sources are financing activities such as the issuance of notes payable and convertible notes payable. In the past, we have mostly relied on debt and equity financing to provide for our operating needs.
We were unable to generate sufficient funds from operations to fund our ongoing operating requirements through June 30, 2016. As of September 30, 2016 we had approximately $500 on hand. We may need to raise funds to enhance our working capital and use them for strategic purposes. If such need arises, we intend to generate proceeds from either debt or equity financing.
We intend to finance our operations using a mix of equity and debt financing. We do not anticipate incurring capital expenditures for the foreseeable future. We anticipate that we will need to raise approximately $180,000 per year in the near term to finance the recurring costs of being a publicly-traded company, and $120,000 to implement a plan of operations, with additional funding necessary to pay our outstanding obligations. In the long-term, we anticipate we will need to raise a substantial amount of capital to complete an acquisition. We are unable to quantify the resources we will need to successfully complete an acquisition. If these funds cannot be obtained, we may not be able to consummate an acquisition or merger, and our business may fail as a result.
Going Concern
The accompanying financial statements have been prepared on a going concern basis. The Company has used net cash in its operating activities of approximately $424,300 and $179,000 during the years ended June 30, 2016 and 2015, respectively, and has a working capital deficit of approximately $4.6 million and $5.9 million at June 30, 2016 and 2015, respectively. The Company’s ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, to fund possible future acquisitions, and to generate profitable operations in the future, once a merger with an operating company is consummated. Management plans may continue to provide for its capital requirements by issuing additional equity securities and debt and the Company will continue to find possible acquisition targets. The outcome of these matters cannot be predicted at this time and there are no assurances that, if achieved, the Company will have sufficient funds to execute its business plan or generate positive operating results.
| Years Ended | ||||||||
| June 30, | ||||||||
| 2016 | 2015 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | 634,090 | $ | (960,388 | ) | |||
| Non-cash Adjustments: | ||||||||
| Loss on debt settlement | 12,135 | 339,421 | ||||||
| Stock based compensation | 49,900 | - | ||||||
| Amortization of debt discount | 156,250 | 106,164 | ||||||
| (Gain) loss on change in derivative liability | (189,712 | ) | (60,481 | ) | ||||
| Derivative liability expense | 265,000 | - | ||||||
| (Gain) loss on restructuring of debt | (1,897,927 | ) | 11,928 | |||||
| Changes in assets and liabilities | ||||||||
| Accrued interest | 300,296 | 206,700 | ||||||
| Accrued compensation | 259,573 | 175,000 | ||||||
| Accounts payable and accrued expenses | (13,929 | ) | 2,721 | |||||
| Net cash used in operations | (424,324 | ) | (178,935 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of preferred stock | 85,000 | - | ||||||
| Repayment of note payable | (5,000 | ) | - | |||||
| Proceeds from issuance of short term note payable | 25,000 | - | ||||||
| Proceeds from issuance of convertible notes payable | 315,000 | 185,000 | ||||||
| Net cash provided by financing activities | 420,000 | 185,000 | ||||||
| Net variation in cash | $ | (4,323 | ) | $ | 6,065 | |||
Year ended June 30, 2016
Net cash used in operations in fiscal year 2016 increased by $245,389 or 137% from fiscal year 2015. This cash was obtained through the sale of $340,000 of convertible promissory notes and the sale of $85,000 of preferred stock.
| 9 |
Year ended June 30, 2015
Net cash used in operations in fiscal year 2015 increased by $50,029 or 38.8% from fiscal year 2014. This cash was obtained through the sale of $185,000 of convertible promissory notes.
The increase in cash used in operating activities during fiscal 2016, when compared to the prior year period, is primarily due to an increase in operating expenses during fiscal 2016.
Capital Raising Transactions
Issuance of Convertible Notes Payable
We generated proceeds of $340,000 and $185,000 during fiscal 2016 and 2015, respectively, from the issuance of convertible notes payable and promissory notes.
Other outstanding obligations at June 30, 2016
Obligations to ASC Recap
In July, 2013, certain of the Company’s creditors showed interest in selling their claims against the Company to ASC Recap, LLC (“ASC”); this group also included both current and past management of the Company. This led to the Company signing a Liability Purchase Agreement with ASC on July 23, 2013. This Agreement required the Company to issue common shares within five business days of each purchase at a 25% discount from the market price to ASC in amounts equal to the claims purchased from the Company’s creditors. In addition, under the terms of the Agreement, the Company issued a $25,000 non-interest bearing convertible promissory note to ASC, as described in Note 4.
ASC signed a series of Claim Purchase Agreements with certain creditors of the Company to purchase their claims against the Company totaling $2,531,565. These claims consisted of notes payable, convertible notes payable, vendor payables and accrued compensation to the Company’s CEO and to a related party. The Claim Purchase Agreements required ASC to settle the creditors’ claims against the Company for a total of $1,305,996. Each Claim Purchase Agreement stipulated that ASC would pay each creditor the agreed-upon amount in up to twelve (12) monthly installments.
In
January, 2014, the Company had not issued any shares to ASC as required by the agreement. As a result, ASC filed a complaint in
Leon County, Florida demanding the prescribed issuance of shares from the Company for the purchased claims. A settlement agreement
was reached on February 6, 2014, and on March 12, 2014 ASC Recap filed a motion in Leon County, Florida which forced the Company
to comply. ASC Recap was awarded a $2,531,565 judgement which was to be paid by issuing free trading common stock at a 25% discount
from the market price. In addition, on May 6, 2014, the Company issued a $125,000 non-interest bearing convertible
promissory note to ASC, as described in Note 4. Between April and June of 2014, the Company issued to ASC 322,220,000 shares of
common stock with an aggregate market value of $365,308, which reduced the recorded liability by $273,981; in July of 2014, the
Company issued 82,980,000 shares of common stock with an aggregate market value of $24,894.
On August 13, 2015 ASC Recap, LLC issued the Company a letter of default related to its agreement to settle outstanding liabilities and related accrued interest and returned approximately $2,373,000 of liabilities to their original holders, which is detailed in the table at the end of Note 6. These balances reflect the payments made by ASC to creditors prior to the default.
An analysis of the settlement liability due to ASC is as follows:
| Total creditor claims purchased by ASC - as ratified by the settlement agreement dated February 6, 2014 | $ | 2,531,565 | ||||||
| Reduction of liability by shares issued between April and June 2014: | ||||||||
| Market value of 322,220,000 common shares issued | $ | 365,308 | ||||||
| Less 25% discount as per settlement agreement | (91,327 | ) | (273,981 | ) | ||||
| Cash Payments and adjustments | (50,599 | ) | ||||||
| Liability after issuances of shares, cash payments, and adjustments | 2,206,985 | |||||||
| Add back the previous reduction of liability by shares issued in consideration of ASC waiving its right to additional shares under the settlement agreement | 273,981 | |||||||
| Liability as of June 30, 2014 agreed to by the Company and ASC | 2,480,966 | |||||||
| Increase in recorded liability by the market value of 82,980,000 common shares issued during July 2014 | 24,894 | |||||||
| Carrying value of settlement liability due to ASC at June 30, 2014 | 2,505,860 | |||||||
| Reduction of liability by shares issued in September 2014: | ||||||||
| Cash payments and adjustments | (133,347 | ) | ||||||
| Carrying value of settlement liability due to ASC at June 30, 2015 | $ | 2,372,513 | ||||||
| Transfer of liability due to ASC to Original debt-holders | (2,372,513 | ) | ||||||
| Carrying value of settlement liability due to ASC at June 20, 2016 | $ | - |
| 10 |
The transfer of liability due to ASC Recap consisted of the following:
| Notes payable | $ | 902,146 | ||
| Accounts payable and accrued liabilities | 90,360 | |||
| Accrued salaries | 702,924 | |||
| Loss on settlement of ASC liability | (12,135 | ) | ||
| Accrued interest payable | 689,218 | |||
| $ | 2,372,513 |
Convertible Notes Payable
The Company had convertible promissory notes aggregating approximately $1.6 million and $1.4 million outstanding at June 30, 2016 and 2015, respectively. The accrued interest amounted to approximately $1,037,000 and $754,000 at June 30, 2016 and 2015, respectively. The Convertible Notes Payable bear interest at rates ranging between 10% and 18% per annum. Interest is generally payable monthly. The Convertible Notes Payable are generally convertible at rates ranging between $1.875 and $0.75 per share, at the holders’ option. At June 30, 2016, all convertible promissory notes have matured.
| Balance at | Balance at | |||||||
| June 30, 2016 | June 30, 2015 | |||||||
| Convertible Notes Payable | $ | 1,609,349 | $ | 1,421,730 | ||||
| Discount on convertible notes | (108,750 | ) | - | |||||
| Notes Payable, net of discount | $ | 1,500,599 | $ | 1,421,730 | ||||
Additionally, upon conversion, the holders of $192,000 of convertible promissory notes are also entitled to 12,800,000 warrants, exercisable at a rate of $37.50. The warrants expire 3 years from the date of issuance.
Notes Payable
The Company had promissory notes aggregating approximately $240,000 at June 30, 2016 and $90,000 at June 30, 2015. The related accrued interest amounted to approximately $199,590 and $24,500 at June 30, 2016 and 2015, respectively. The notes payable bear interest at rates ranging between 8% and 16% per annum. Interest is generally payable monthly. All promissory notes have matured as of June 30, 2016.
Warrants
As of June 30, 2016, we had no outstanding warrants.
Derivative Liability
The Corporation recognizes all derivative financial instruments on its balance sheet at fair value. As of June 30, 2016 the Company had $452,965 in notes that are convertible into the Company’s common stock, and which contained certain ratchet provisions that reduce the conversion price of the notes. In accordance with ASC 815 the Company determined that the note the conversion features with provisions that reduce the exercise price of the notes did not qualify for a scope exception under ASC 815 as they were determined not to be indexed to the Company’s stock.
Derivatives are required to be recorded on the balance sheet at fair value (see Note 3). These derivatives, including embedded derivatives in the Company’s structured borrowings, are separately valued and accounted for on the Company’s balance sheet. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Climate Change
Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.
| 11 |
Critical Accounting Policies
The Company’s critical accounting policies are as follows:
Convertible Instruments - The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815.
ASC 815 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 in accordance with EITF 00-19. 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 subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional (as that term is described).
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 the provisions of ASC 470 20 “Debt with Conversion Options” 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.
The Company believes the certain conversion features embedded in convertible notes payable are not clearly and closely related to the economic characteristics of the Company’s stock price. Accordingly, the Company has recognized derivative liabilities in connection with such instruments. The Company uses judgment in determining the fair value of derivative liabilities at the date of issuance at every balance sheet thereafter. The Company uses judgment in determining which valuation is most appropriate for the instrument (e.g., Black Scholes), the expected volatility, the implied risk free interest rate, as well as the expected dividend rate.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is included in Item 15 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer, who at June 30, 2016 was also our principal executive and financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based upon that evaluation, our Chief Executive Officer concluded that, as of June 30, 2016, our disclosure controls and procedures were not effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our Chief Executive Officer to allow timely decisions regarding required disclosure.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2016. In making this assessment, our management used criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Over Financial Reporting – Guidance for Smaller Public Companies.
During our assessment of the design and the effectiveness of internal control over financial reporting as of June 30, 2016, management identified the following material weaknesses:
| ● | While we have processes in place, there are no formal written policies and procedures related to certain financial reporting processes; | |
| ● | There is no formal documentation in which management specified financial reporting objectives to enable the identification of risks, including fraud risks; | |
| ● | Our Board of Directors consisted of only one member and we lack the resources and personnel to implement proper segregation of duties or other risk mitigation systems. |
A material weakness is “a significant deficiency, or a combination of significant deficiencies, that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected by us in a timely manner.” A significant deficiency, is a deficiency or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.
| 12 |
We intend to gradually improve our internal control over financial reporting to the extent that we can allocate resources to such improvements. We intend to prioritize the design of our internal control over financial reporting starting with our control environment and risk assessments and ending with control activities, information and communication activities, and monitoring activities. Although we believe the time to adapt in the next year will help position us to provide improved internal control functions into the future, in the interim, these changes caused control deficiencies, which in the aggregate resulted in a material weakness. Due to the existence of these material weaknesses, our management, including our Chief Executive Officer, concluded that our internal control over financial reporting was not effective as of June 30, 2016.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the SEC that permit smaller reporting companies to provide only the management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fiscal quarter ended June 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
| 13 |
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth the names, ages and principal position of our executive officers and directors as of June 30, 2016:
| Name | Age | Position | ||
| Kevin Yates | 51 | Chairman of the Board and Chief Executive Officer | ||
| Kathleen Roberton | 57 | Former Chief Executive Officer (resigned on July 8, 2016) |
Business Experience
Mr. Kevin Yates has served as Chairman of the Company’s Board of Directors since April 2010 and as the Company’s Chief Executive Officer, Treasurer and Secretary since July 2010. Mr. Yates formally served as Chief Operating Officer of the company in 2006-2007.
For the past nine years, Mr. Yates has served as President and Director of PocketMD. Mr. Yates has also served as Director of Mobile Software Team, LLC from August 2008 through July 2012, and C3I Services, LLC from July 2012 to present.
Mr. Yates’ devotes approximately 90% of his time to the business and affairs of our company. Mr. Yates experience in working with public companies’ operational strategy and market plan makes him an asset to the Company.
There are no family relationships among our directors or executive officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that our executive officers, directors and persons who own more than ten percent of a registered class of our equity securities file reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the SEC. Such executive officers, directors and ten percent stockholders are also required by the SEC rules to furnish to us copies of all Section 16(a) reports that they file. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons that they were not required to file a Form 5, we believe that, during the fiscal year ended June 30, 2013, our executive officers, directors and ten percent stockholders complied with all Section 16(a) filing requirements applicable to such persons.
Code of Ethics
We have adopted a Code of Ethics and Business Conduct to provide guiding principles to our principal executive officer, principal financial officer, and principal accounting officer or controller of our company in the performance of their duties. Our Code of Ethics and Business Conduct also strongly recommends that all directors and employees of our company comply with the code in the performance of their duties. Our Code of Ethics and Business Conduct provides that the basic principle that governs all of our officers, directors and employees is that our business should be carried on with loyalty to the interest of our stockholders, customers, suppliers, fellow employees, strategic partners and other business associates. We believe that the philosophy and operating style of our management are essential to the establishment of a proper corporate environment for the conduct of our business.
Generally, our Code of Ethics and Business Conduct provides guidelines regarding:
| ● | conflicts of interest, | |
| ● | financial reporting responsibilities, | |
| ● | insider trading, | |
| ● | inappropriate and irregular conduct, | |
| ● | political contributions, and | |
| ● | compliance with laws. |
A copy of our Code of Ethics has been filed with the Securities and Exchange Commission as an exhibit to this annual report. We will provide a copy, without charge, to any person desiring a copy of the Code of Ethics, by written request to us at our principal offices.
Committees of the Board of Directors
Our Board of Directors has not yet established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee. We plan to expand our Board in the future and we will seek to establish an Audit Committee and a Compensation Committee, but this will depend on our ability to attract and retain new directors. The typical functions of such committees are currently being undertaken by the entire Board as a whole. Our Board currently consists of only one member, Mr. Yates.
| 14 |
Audit Committee Financial Expert
Currently no member of our Board is an audit committee financial expert. We do not currently have the resources to recruit a Board member who would also be a financial expert. We may start our recruiting process for such Board member during fiscal 2016 if our financial position improves.
Item 11. Executive Compensation.
The following table sets forth, for the last two completed fiscal years, all compensation paid, distributed or accrued for services rendered to us by (i) all individuals serving as our principal executive officer or acting in a similar capacity during the last completed fiscal year, regardless of compensation level; (ii) our two most highly compensated executive officers other than the principal executive officer who were serving as executive officers at the end of the last completed fiscal year and whose total compensation exceeded $100,000; and (iii) up to two additional individuals for whom disclosure would have been provided pursuant to (ii) above but for the fact that the individual was not serving as our executive officer at the end of the last completed fiscal year:
Summary Compensation Table
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards | Option Awards ($) (1) | Non-Equity Incentive Plan Compensation ($) | Non-Qualified Deferred Compensation Earnings | All Other Compensation ($)(1) (2) | Total ($) | |||||||||||||||||||||||||||
| Kevin Yates, | 2016 | 240,000 | - | - | - | - | - | 105,050 | 345,050 | |||||||||||||||||||||||||||
| Chief Financial Officer | 2015 | 240,000 | - | - | - | - | - | 97,841 | 337,841 | |||||||||||||||||||||||||||
| Kathleen Roberton | 2016 | 103,125 | - | 49,900 | - | - | - | 42,500 | 195,525 | |||||||||||||||||||||||||||
| Chief Executive Officer | 2015 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| (1) | Other compensation for Mr. Yates during fiscal 2016 and 2015 represented funds paid to C3I Services, LLC, a related party by means of common ownership and management to the Company. The related parties provided assistance to Mr. Yates in his duties. | |
| (2) | Other compensation for Ms. Roberton during fiscal 2016 represented funds paid to Hippocrates Management, LLC, a related party by means of common ownership and management to the Company. The related party provided assistance to Ms. Roberton in her duties. |
Employment Agreements
Kevin Yates’ employment agreement
On May 6, 2010, we entered in an executive employment agreement with Kevin Yates, as our President. The agreement provides for the following, among other things:
| ● | Base annual salary of $240,000; | |
| ● | Base salary may increase from time to time with the approval of our Compensation Committee; | |
| ● | Grant of options convertible in 60,000,000 shares of our common stock and exercisable at $0.0025 per share; | |
| ● | Termination clause: upon death, retirement or permanent disability of Kevin Yates, or at any time by us, or upon thirty-day notice by Kevin Yates | |
| ● | If the employment is terminated by Kevin Yates for good reason, as defined, or by us, other than for cause, as defined, death, retirement or permanent disability of Kevin Yates, Kevin Yates is entitled to two years base salary (currently, the equivalent of $480,000) and unpaid bonuses or incentive compensation, if any. |
On April 1, 2012, we entered in a consulting agreement with C3I Services, LLC (‘C3I Services”). Kevin Yates, our Chairman of the Board is also a managing member of C3i Services, LLC. The agreement provides for the following, among other things:
| ● | Base annual consulting fee of $120,000; | |
| ● | Termination clause: the earliest of July 1, 2013 the date we become a reporting company, or upon 30-day written notice by each party. C3I Services used proceeds from the consulting agreement to pay certain of our operating expenses. This agreement has been informally renewed on a year-to-year basis, through December 31, 2016. |
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. Our directors and executive officers may receive stock options at the discretion of our Board in the future.
| 15 |
Outstanding Equity Awards at Fiscal Year-End
There are no outstanding equity awards held as of June 30, 2016 by our Executive Officers and Directors.
Director Compensation
Our Board of Directors is comprised of Mr. Yates, who is also an executive officer of our company, and does not receive any compensation specifically for his Board services.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.
At October 13, 2016 we had 32,654,179 shares of our Common Stock issued and outstanding. The following table sets forth information regarding the beneficial ownership of our Common Stock as of September 30, 2016 by:
| ● | each person known by us to be the beneficial owner of more than 5% of our Common Stock; |
| ● | our director; |
| ● | each of our executive officers named in the compensation tables in Item 11; and |
| ● | all of our executive officers and director as a group. |
| COMMON STOCK | ||||||||||||
| AMOUNT
OF BENEFICIAL | % OF | % OF VOTING | ||||||||||
| NAME | OWNERSHIP | CLASS | CONTROL (1) | |||||||||
| Kevin Yates | 23,410,000 | 71.7 | % | 71.7 | % | |||||||
| (1) | Percent of Voting Control is based upon the number of issued and outstanding shares of our common stock on September 29, 2016. On that date we had 32,654,179 outstanding shares of common stock with one vote per share. |
The following table sets forth securities authorized for issuance under any equity compensation plans approved by our stockholders as well as any equity compensation plans not approved by our stockholder as of June 30, 2016.
| Plan category | Number
of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number
of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||
| Equity compensation plans approved by security holders | ||||||||||||
| 2012 Employee Stock Compensation Plan | 0 | 0 | 0 | |||||||||
| Equity compensation plans not approved by security holders | 0 | 0 | 0 | |||||||||
| Total | 0 | 0 | 0 | |||||||||
Item 13. Certain Relationship and Related Party Transactions, and Director Independence.
Other than compensation arrangements, we describe below, transactions during our last fiscal year, to which we were a party, in which:
| ● | The amounts involved exceeded or will exceed the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years; and | |
| ● | Any of our directors, executive officers, or holders of more than 5% of our common stock, or any member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest. |
Common Stock
During fiscal 2016 we issued shares of our common stock as follows:
| ● | On October 14, 2015, Ms. Roberton was issued 332,667 shares of common stock valued at $49,900, or $0.15 per share as a performance bonus pursuant to her employment agreement. |
| 16 |
| ● | On October 9, 2015, we issued 3,333,333 shares of our common stock, twenty-six shares of Series F preferred stock, with a stated value of $5,000 and a par value of $0.001 per share, and three shares of Series H Preferred Stock, with a stated value of $1,000 and a par value of $0.001 per share, to the Company’s current Chairman of the Board in consideration for his forgiveness of $633,000 in accrued compensation. Subsequently, in October 2015, these Series F and Series H preferred shares were exchanged for 532,000 shares of Series A preferred stock. Holders of Series A preferred shares are restricted from converting their shares to common stock for two years (the “Lock-Up Period”). After the Lock-Up Period, they may convert up to one percent of their Series A preferred shares into common shares on a one for one basis each month for four years (the “Leak-Out Period”). However, the conversion price automatically reduces by 86% to $0.035 per share if our common stock is below $0.10 per share. At the end of the Leak-Out Period, up to all of the remaining Series A preferred shares may be converted to common stock at the shareholders’ discretion. |
Preferred Stock
| ● | On February 18, 2016 a holder of a short term note was issued 220,000 shares of Series A preferred stock valued based on the as-converted market price of $22, in exchange for principal in the amount of $100,000, and accrued interest in the amount of $103,022. The exchange resulted in a gain on extinguishment of debt of $203,000. | |
| ● | On October 14, 2015 a former Chairman of the Board of the Company was issued 80 shares of Series F preferred stock with a stated value of $5,000 and a par value $0.001 per share, and 12 shares of Series H preferred stock, with a stated value of $1,000 and a par value $0.001 per share in consideration for his forgiveness of $412,000 in accrued compensation, resulting in a gain on extinguishment of debt of $396,075. Subsequently, in October 2015, these Series F and Series H shares were exchanged for 1,648,000 shares of Series A preferred stock. | |
| ● | On October 28, 2015, preferred shareholders representing a majority of each series of our outstanding preferred stock, voted to cancel all their shares of preferred stock in exchange for 11,181,340 shares of newly designated Series A preferred stock. The number of shares of newly issued Series A preferred stock issued to each preferred shareholder was calculated by dividing the total stated value of their preferred shares by $0.25. The holders of the Series A preferred shares are restricted from converting their shares to common stock for two years (the “Lock-Up Period”). After the Lock-Up Period, they may convert up to one percent of their Series A preferred shares into common shares on a one for one basis each month for four years (the “Leak-Out Period”). However, the conversion price automatically reduces by 86% to $0.035 per share if our common stock is below $0.10 per share. At the end of the Leak-Out Period, up to all of the remaining Series A preferred shares may be converted to common stock at the shareholders’ discretion. |
| Class | Shares
Cancelled | Shares
of Series A Issued | ||||||
| Series B | (149,600 | ) | 2,992,000 | |||||
| Series C | (332 | ) | 39,840 | |||||
| Series D | (19 | ) | 1,900,000 | |||||
| Series F | (234 | ) | 4,689,500 | |||||
| Series H | (85 | ) | 340,000 | |||||
| Series I | (30,000 | ) | 1,200,000 | |||||
| Series J | (2 | ) | 20,000 | |||||
| Total | 11,181,340 | |||||||
| ● | On October 28, 2015 the 87,000 shares of Series Y preferred stock, owned by the Company’s former Chairman of the Board, were exchanged for 87,000 shares of Series A preferred stock. These shares of Series A preferred stock were valued at their fair market value of $8.70. | |
| ● | In November, 2015, we sold 40,000 shares of Series A preferred stock to one investor for $10,000 and sold 100,000 shares of Series B preferred stock to another investor for $25,000. | |
| ● | In February, 2016, a former employee was issued 20,000 of Series A Preferred stock, valued at $2, in consideration for his forgiveness of $75,715 in accrued compensation, resulting in a gain on extinguishment of debt of $75,713. |
During fiscal 2015 we issued shares of our common stock as follows:
| ● | In July of 2014, the Company issued 55,320 shares of common stock with an aggregate value of $24,894 to ASC Recap. | |
| ● | On October 9, 2014, we entered into a Settlement Agreement with IBC Funds, LLC (“IBC’). This agreement was approved by the Manatee County, Florida Court on October 10, 2014. Pursuant to the Settlement Agreement, the Company agreed to settle approximately $259,000 of outstanding liabilities (the “IBC Claim Amount”) by issuing IBC 572,667 shares of its common stock at a price per share equal to fifty percent of the lowest sales price of the common stock during the fifteen-day trading period preceding the request of payment. In the event the Company was delinquent on issuance of the Company’s shares upon request by IBC, the discount would be increased by five percent and by an additional five percent for each additional delinquency until all settlement shares had been received. At no time could IBC and its affiliates collectively own more than 4.99% of the outstanding shares of common stock. During October 2014, IBC paid an aggregate of $66,000 to various Company creditors. On February 12, 2015 IBC issued a letter of default to the Company. The Company issued to IBC an additional 286,247 common shares valued at $116,874. |
Director Independence
Our sole director is not considered “independent” within the meaning of meaning of Rule 5605 of the NASDAQ Marketplace Rules.
| 17 |
Item 14. Principal Accountant Fees and Services
The following table summarizes the fees of D’Arelli Pruzansky, P.A., our independent registered public accounting firm billed for each of the last two fiscal years for audit services and other services:
| Fee Category | 2016 | 2015 | ||||||
| Audit Fees (1) | $ | 30,000 | $ | 15,000 | ||||
| Audit Related Fees | - | - | ||||||
| Tax Fees (2) | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total Fees | $ | 30,000 | $ | 15,000 | ||||
(1) Consists of fees for professional services rendered in connection with the financial statements included in our Annual Report on Form 10-K and quarterly reports on Form 10-Q.
(2) Consists of fees relating to any tax compliance and tax planning.
We do not have an Audit Committee. Our Board of Directors pre-approves all auditing services and permissible non-audit services provided to us by our independent registered public accounting firm. All fees listed above were pre-approved in accordance with this policy.
| 18 |
Item 15. Exhibits and Financial Statement Schedules
a. Index to Financial Statements and Financial Statement Schedules
| Page | |
| Report of Independent Registered Public Accounting Firm | F-2 |
| Balance Sheets as of June 30, 2016 and 2015 | F-3 |
| Statements of Operations for each of the two years in the period ended June 30, 2016 | F-4 |
| Statements of Changes in Stockholders’ Deficit for each of the two years in the period ended June 30, 2016 | F-5 |
| Statements of Cash Flows for each of the two years in the period ended June 30, 2016 | F-8 |
| Notes to Financial Statements | F-9 - F-22 |
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, or are inapplicable, and therefore have been omitted.
b. Exhibits
| Exhibit No. | Description of Exhibit | |
| 2.1 | Merger Agreement Between Jaguar Investments, Inc., Freight Rate, Inc., and Jag2 Corporation (1) | |
| 2.2 | Agreement and Plan of Merger Between Fittipaldi Logistics, Inc. and State Petroleum Distributors, Inc. (30) | |
| 3.1 | Articles of Incorporation (2) | |
| 3.2 | Certificate of Amendment to Articles of Incorporation (3) | |
| 3.3 | Certificate of Amendment to the Articles of Incorporation (4) | |
| 3.4 | Certificate of Voting Powers, Designations, Preferences and Rights to Series B Convertible Preferred Stock (10) | |
| 3.5 | Certificate of Voting Powers, Designations, Preferences and Rights to Series C Convertible Preferred Stock (10) | |
| 3.6 | Certificate of Voting Powers, Designations, Preferences and Rights to Series Y Preferred Stock (5) | |
| 3.7 | Certificate of Correction of Certificate of Voting Powers, Designations, Preferences and Right to Series Y Preferred Stock (5) | |
| 3.8 | Certificate of Amendment to Articles of Incorporation Increasing Authorized Shares of Common Stock to 250,000,000 filed on August 13, 2004 (9) | |
| 3.9 | Certificate of Voting Powers, Designations, Preferences and Rights to Preferred Stock of Series X Convertible Preferred Stock (5) | |
| 3.10 | Bylaws (2) | |
| 3.11 | Amended Bylaws dated March 31, 2003 (5) | |
| 3.12 | Certificate to Set Forth Designations, Preferences and Rights to Series D Convertible Preferred Stock (23) | |
| 3.13 | Certificate to Set Forth Designations, Preferences and Rights to Series E Convertible Preferred Stock (29) | |
| 3.14 | Certificate to Set Forth Designations, Preferences and Rights to Series F Convertible Preferred Stock (29) | |
| 3.15 | Certificate to Set Forth Designations, Preferences and Rights to Series G Convertible Preferred Stock (29) | |
| 3.16 | Certificate to Set Forth Designations, Preferences and Rights to Series H Convertible Preferred Stock (29) | |
| 3.17 | Certificate to Set Forth Designations, Preferences and Rights to Series I Convertible Preferred Stock (29) | |
| 3.18 | Certificate to Set Forth Designations, Preferences and Rights to Series J Convertible Preferred Stock (35) | |
| 4.1 | Form of Common Stock Purchase Warrant to Newbridge Securities Corporation for Business Advisory Agreement (10) | |
| 4.2 | Form of 14.25% secured convertible debenture (35) | |
| 4.3 | $100,000 principal amount promissory note pursuant to settlement agreement with Stokes Logistics Consulting, LLC (35) |
| 19 |
| 4.4 | $100,000 principal amount 8% secured convertible promissory note (35) | |
| 4.5 | Letter of agreement dated February 8, 2008 evidencing $25,000 principal promissory note to Canberra Financial Services II, Inc. (35) | |
| 4.6 | $14,000 principal 12.5% promissory note for services (35) | |
| 4.7 | Form of unsecured promissory note (35) | |
| 4.8 | Form of non-plan option agreement (10) | |
| 4.9 | Form of common stock purchase warrant (10) | |
| 4.10 | Form of Common Stock Purchase Warrant re: 14.25% secured convertible debentures (10) | |
| 4.11 | Form of Common Stock Purchase Warrant issued to Newbridge Securities Corporation as Placement Agent for 14.25% secured convertible debentures (10) | |
| 4.12 | Form of Series C 10% unsecured convertible debenture (20) | |
| 4.13 | Form of Warrant for Series C 10% unsecured convertible debenture offering (35) | |
| 4.14 | Form of Series D 8% unsecured convertible debenture (35) | |
| 4.15 | Form of 10% convertible debenture (35) | |
| 4.16 | Form of Warrant for Series D 8% unsecured convertible debenture (22) | |
| 4.17 | Articles of Merger between Power2Ship, Inc. and Fittipaldi Logistics, Inc. (25) | |
| 4.18 | Form of Term Sheet for Purchase of Outstanding Debentures (Version 2) (28) | |
| 4.19 | Form of Term Sheet for Purchase of Outstanding Debentures (Version 1) (28) | |
| 4.20 | Form of Non-Plan Stock Option Agreement for Employees (29) | |
| 4.21 | Form of Non-Plan Stock Options Agreement for Executives (29) | |
| 4.22 | Articles of Merger between Fittipaldi Logistics, Inc. and NuState Energy Holdings, Inc. (31) | |
| 4.23 | $10,000 principal amount 12% convertible promissory note (35) | |
| 4.24 | $5,000 principal amount 12% convertible promissory note (35) | |
| 4.25 | $25,000 principal amount 12% convertible promissory note (35) | |
| 4.26 | $25,000 principal amount 12% convertible promissory note (35) | |
| 4.27 | $20,000 principal amount 12% convertible promissory note (35) | |
| 4.28 | $20,000 principal amount 12% convertible promissory note (35) | |
| 4.29 | $5,000 principal amount 12% convertible promissory note (35) | |
| 4.30 | $20,000 principal amount 12% convertible promissory note (35) | |
| 4.31 | $25,000 principal amount 12% convertible promissory note (35) | |
| 4.32 | $25,000 principal amount 18% convertible promissory note (35) | |
| 4.33 | $12,000 principal amount 12% convertible promissory note (35) | |
| 4.34 | $10,000 principal amount 12% convertible promissory note (35) | |
| 4.35 | $20,000 principal amount 12% convertible promissory note (35) | |
| 4.36 | $18,000 principal 12.5% promissory note for services (35) | |
| 4.37 | $30,000 principal amount 12% convertible promissory note (35) | |
| 20 |
| 4.38 | $15,000 principal amount 12% convertible promissory note (35) | |
| 4.39 | $10,000 principal amount 12% convertible promissory note (35) | |
| 4.40 | $25,000 principal amount 18% convertible promissory note (35) | |
| 4.41 | $25,000 principal amount 18% convertible promissory note (35) | |
| 4.42 | $15,000 principal amount 12% convertible promissory note (35) | |
| 4.43 | $25,000 principal amount 12% convertible promissory note (35) | |
| 4.44 | $10,000 principal amount 12% convertible promissory note (35) | |
| 4.45 | $25,000 principal amount 12% convertible promissory note (35) | |
| 4.46 | $10,000 principal amount 12% convertible promissory note (35) | |
| 10.1 | Securities Purchase Agreement (6) | |
| 10.2 | Investor Registration Rights Agreement (6) | |
| 10.3 | 2001 Employee Stock Compensation Plan (3) | |
| 10.4 | Employment Agreement with Richard Hersh (8) | |
| 10.5 | Form of Intellectual Property Assignment Agreement between Power2Ship, Inc. and each of Richard Hersh, Michael J. Darden and John Urbanowicz (10) | |
| 10.6 | Security Agreements for 14.25% secured convertible debentures (10) | |
| 10.7 | Registration Rights Agreement for 14.25% secured convertible debentures (10) | |
| 10.8 | Asset Purchase Agreement with GFC, Inc. (14) | |
| 10.9 | Mutual Agreement with Commodity Express Transportation, Inc. (15) | |
| 10.10 | Asset Purchase Agreement with GFC, Inc. (16) | |
| 10.11 | Form of Unsecured Promissory Note (13) | |
| 10.12 | Separation and Severance Agreement with Richard Hersh (23) | |
| 10.13 | Consulting Agreement with Richard Hersh (23) | |
| 10.14 | Consulting Agreement with David S. Brooks and S. Kevin Yates (as amended) (23) | |
| 10.15 | Software Transaction Agreement Between NuState Energy Holdings, Inc., Rentar Environmental Solutions, Inc. and the organizers of a new company to be formed (33) | |
| 10.16 | Capital Contribution Agreement Between Rentar Logic, Inc., Rentar Environmental Solutions, Inc. and NuState Energy Holdings, Inc. (33) | |
| 10.17 | Rentar Logic, Inc. Shareholders Agreement (33) | |
| 10.18 | Voting Trust Agreement Between Rentar Logic, Inc., Rentar Environmental Solutions, Inc. and NuState Energy Holdings, Inc. (33) | |
| 10.19 | NuState/Rentar Agreement April 2010 (35) | |
| 10.20 | Employment Agreement with Kevin Yates (35) | |
| 10.21 | Consulting Agreement with Will Williams (35) | |
| 10.22 | Consulting Agreement with Mobile Software Team, LLC (35) | |
| 10.23 | Consulting Agreement with C3i Sports, LLC (35) | |
| 14.1 | Code of Ethics (11) | |
| 21.1 | Subsidiaries of Registrant (20) | |
| 31.1 | Section 302 Certificate of Chief Executive Officer.* | |
| 31.2 | Section 302 Certificate of Principal Financial Officer.* | |
| 101. | The following materials from the Company’s Annual Report on Form 10-K for the year ended June 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows, and (iv) related notes to these financial statements.** |
| 21 |
| * | Filed herewith. |
| ** | Furnished herewith. |
| (1) | Incorporated by reference to Current Report on Form 8-K filed on March 26, 2003. |
| (2) | Incorporated by reference to registration statement on Form 10-SB, as amended. |
| (3) | Incorporated by reference to definitive Schedule 14C Information Statement filed on February 2, 2001. |
| (4) | Incorporated by reference to definitive Schedule 14C Information Statement filed on April 22, 2003. |
| (5) | Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 2002. |
| (6) | Incorporated by reference to Current Report on Form 8-K filed on July 8, 2004. |
| (7) | Incorporated by reference to Current Report on Form 8-K filed on January 3, 2002. |
| (8) | Incorporated by reference to Quarterly Report on Form 10-QSB for the period ended March 31, 2003. |
| (9) | Incorporated by reference to Preliminary Information Statement on Schedule 14C filed on July 8, 2004. |
| (10) | Incorporated by reference to registration statement on Form SB-2, SEC File No. 333-118792, filed on September 3, 2004. |
| (11) | Incorporated by reference to Amendment No. 1 to registration statement the Form SB-2, SEC File No. 333-118792, filed on October 20, 2004. |
| (12) | Incorporated by reference to Amendment No. 3 to the registration statement on Form SB-2, SEC File No. 333-118792, filed on December 15, 2004. |
| (13) | Incorporated by reference to Quarterly Report on Form 10-QSB for the period ended December 31, 2004 filed on February 14, 2005. |
| (14) | Incorporated by reference to Current Report on Form 8-K/A filed on February 25, 2005. |
| (15) | Incorporated by reference to Current Report on Form 8-K filed on March 25, 2005. |
| (16) | Incorporated by reference to Current Report on Form 8-K filed on March 28, 2005. |
| (17) | Incorporated by reference to Quarterly Report on Form 10-QSB for the period ended March 31, 2005. |
| (18) | Incorporated by reference to Current Report on Form 8-K filed on June 3, 2005. |
| (19) | Incorporated by reference to Current Report on Form 8-K filed on July 28, 2005. |
| (20) | Incorporated by reference to registration statement on Form SB-2, SEC File No. 333-131832 filed on February 14, 2006. |
| (21) | Incorporated by reference to Current Report on Form 8-K filed on February 17, 2006. |
| (22) | Incorporated by reference to Amendment No. 1 to registration statement the Form SB-2, SEC File No. 333-131832 filed on May 5, 2006. |
| (23) | Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended June 30, 2006 filed on October 13, 2006. |
| (24) | Incorporated by reference to Current Report on Form 8-K filed on October 17, 2006. |
| (25) | Incorporated by reference to Current Report on Form 8-K filed on October 24, 2006. |
| (26) | Incorporated by reference to Current Report on Form 8-K filed on January 26, 2007. |
| 22 |
| (27) | Incorporated by reference to Current Report on Form 8-K filed on April 30, 2007. |
| (28) | Incorporated by reference to Current Report on Form 8-K filed on July 25, 2007. |
| (29) | Incorporated by reference to Annual Report on Form 10-KSB filed on October 15, 2007. |
| (30) | Incorporated by reference to Current Report on Form 8-K filed on November 15, 2007. |
| (31) | Incorporated by reference to Current Report on Form 8-K filed on December 31, 2007. |
| (32) | Incorporated by reference to Current Report on Form 8-K filed on March 25, 2008. |
| (33) | Incorporated by reference to Current Report on Form 8-K filed on June 13, 2008. |
| (34) | Incorporated by reference to Current Report on Form 8-K filed on October 16, 2008. |
| (35) | Incorporated by reference to Registration Statement on Form 10-12G/A filed on June 14, 2013. |
| 23 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NUSTATE ENERGY HOLDINGS, INC.
| By: | /S/ Kevin Yates | |
| Kevin Yates | ||
| Chief Executive Officer |
Date: October 13, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | |||
| By: | /S/ Kevin Yates | Chief Executive Officer | October 13, 2016 | ||
| By: | /S/ Mark B. Lucky | Chief Financial Officer | October 13, 2016 | ||
| 24 |
TABLE OF CONTENTS
| Reports of Independent Registered Public Accounting Firm | F-2 |
| Financial Statements: | |
| Balance Sheets | F-3 |
| Statements of Operations | F-4 |
| Statements of Changes in Stockholders’ Deficit | F-5 |
| Statements of Cash Flows | F-8 |
| Notes to Financial Statements | F-9 - F-22 |
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
NuState Energy Holdings, Inc.
We have audited the accompanying balance sheets of NuState Energy Holdings, Inc. as of June 30, 2016 and 2015 and the related statements of operations and changes in stockholders’ deficit, and cash flows for each of the two years in the period ended June 30, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NuState Energy Holdings, Inc. as of June 30, 2016 and 2015 and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2016 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company had a loss from operations of approximately $720,000 and cash used in operations of approximately $424,000 for the year ended of June 30, 2016. The Company had a working capital deficit of approximately $4,500,000 and an accumulated deficit of approximately $41,541,000 at June 30, 2016. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /s/ D’Arelli Pruzansky, P.A. | |
| Certified Public Accountants |
Coconut Creek, Florida
October 13, 2016
5489
Wiles Road, Suite 303 Coconut Creek, FL 33073 Phone
754 205.6417 Fax 754 205.6419
| F-2 |
NUSTATE ENERGY HOLDINGS, INC.
| June 30, | ||||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 1,806 | $ | 6,130 | ||||
| Total current assets | 1,806 | 6,130 | ||||||
| Total assets | $ | 1,806 | $ | 6,130 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 550,308 | $ | 440,642 | ||||
| Accrued compensation | 190,325 | 342,000 | ||||||
| Accrued interest | 1,235,330 | 778,462 | ||||||
| Settlement due to ASC Recap LLC | - | 2,372,513 | ||||||
| Convertible notes payable to ASC Recap LLC | 147,965 | 150,000 | ||||||
Convertible notes payable, net of discount of $108,750 and $0, respectively |
1,500,599 | 1,421,730 | ||||||
| Notes payable | 240,240 | 90,241 | ||||||
| Derivative liabilities | 636,096 | 295,808 | ||||||
| Total current liabilities | 4,500,863 | 5,891,396 | ||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock | ||||||||
| Series A ($0.001 par value; 20,000,000 shares authorized, 13,992,340 and 0 shares issued and outstanding as of June 30, 2016 and 2015, respectively) | 13,992 | - | ||||||
Series B ($0.001 par value 30,000,000 shares authorized, 1,327,640 and 149,600 and shares issued and outstanding as of June 30, 2016 and 2015, respectively) |
1,328 | 150 | ||||||
Series C ($0.01 par value; 0 and 20,000 shares authorized, 0 and 332 shares issued and outstanding as of June 30, 2016 and 2015, respectively) |
- | 3 | ||||||
| Series D ($0.01 par value; 0 and 40 shares authorized, 0 and 19 shares issued and outstanding as of June 30, 2016 and 2015, respectively) | - | - | ||||||
| Series E ($0.01 par value; 0 and 1,600 shares authorized, no shares issued and outstanding as of June 30, 2016 and 2015) | - | - | ||||||
| Series F ($0.01 par value; 0 and 500 shares authorized, 0 and 128 shares issued and outstanding as of June 30, 2016 and 2015, respectively) | - | 1 | ||||||
| Series G ($0.01 par value; 0 and 6 shares authorized, no shares issued and outstanding as of June 30, 2016 and 2015) | - | - | ||||||
| Series H ($0.01 par value; 0 and 1,600 shares authorized, 0 and 70 shares issued and outstanding as of June 30, 2016 and 2015, respectively) | - | 1 | ||||||
| Series I ($0.01 par value; 0 and 100,000 shares authorized, 0 and 30,000 shares issued and outstanding as of June 30, 2016 and 2015, respectively) | - | 300 | ||||||
| Series J ($0.01 par value; 0 and 80 shares authorized, 0 and 2 shares issued and outstanding as of June 30, 2016 and 2015, respectively) | - | - | ||||||
| Series Y ($0.01 par value; 0 and 87,000 shares authorized, 0 and 87,000 shares issued and outstanding as of June 30, 2016 and 2015, respectively) | - | 870 | ||||||
| Common stock, $0.0001 par value, 250,000,000 shares authorized: 5,654,179 shares and 1,451,303 shares issued and outstanding at June 30, 2016 and 2015, respectively (See Note 7) | 565 | 145 | ||||||
| Additional paid in capital | 37,025,805 | 36,281,971 | ||||||
| Accumulated deficit | (41,540,747 | ) | (42,174,837 | ) | ||||
| Total stockholders’ deficit | (4,499,057 | ) | (5,891,396 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 1,806 | $ | 6,130 | ||||
* Common stock figures reflect the 1:1500 reverse common stock split effective June 16, 2016 on a retroactive basis.
See accompanying notes to financial statements.
| F-3 |
NUSTATE ENERGY HOLDINGS, INC.
| FOR THE YEAR ENDED | ||||||||
| June 30, 2016 | June 30, 2015 | |||||||
| Net revenues | $ | - | $ | - | ||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 719,868 | 358,656 | ||||||
| Total operating expenses | 719,868 | 358,656 | ||||||
| Loss from operations | (719,868 | ) | (358,656 | ) | ||||
| Other income (expense) | ||||||||
| Gain (loss) on change in fair value of derivative liabilities | 189,712 | 60,481 | ||||||
| Derivative liability expense | (265,000 | ) | - | |||||
| Interest expense | (456,546 | ) | (310,864 | ) | ||||
| Gain (loss) on restructuring of debt | 1,897,927 | (11,928 | ) | |||||
| Loss on debt settlement | (12,135 | ) | (339,421 | ) | ||||
| Total other income (expense) | 1,353,958 | (601,732 | ) | |||||
| Net income (loss) | $ | 634,090 | $ | (960,388 | ) | |||
| WEIGHTED AVERAGE COMMON SHARES | ||||||||
| Basic | 4,087,739 | 1,052,898 | ||||||
| Diluted | 54,340,344 | 1,052,898 | ||||||
| NET (LOSS) INCOME PER COMMON SHARE –BASIC: | $ | 0.15 | $ | (0.91 | ) | |||
| NET (LOSS) INCOME PER COMMON SHARE –DILUTED: | $ | 0.01 | $ | (0.91 | ) | |||
* Common stock figures reflect the 1:1500 reverse common stock split effective June 16, 2016 on a retroactive basis.
See accompanying notes to financial statements.
| F-4 |
NUSTATE ENERGY HOLDINGS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
| Preferred Stock - | Preferred Stock - | Preferred Stock - | Preferred Stock - | Preferred Stock - | Preferred Stock - | Preferred Stock - | Preferred Stock - | Preferred Stock - | Common | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Series C | Series D | Series F | Series H | Series I | Series J | Series Y | Stock | Additional | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $0.001 Par Value | $0.001 Par Value | $0.01 Par Value | $0.01 Par Value | $0.01 Par Value | $0.01 Par Value | $0.01 Par Value | $0.01 Par Value | $0.01 Par Value | $0.0001 Par Value | Paid-in | Accumulated | Stockholders' | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2014 | 149,600 | $ | 150 | 332 | $ | 3 | 19 | $ | 0 | 128 | $ | 1 | 70 | $ | 1 | 30,000 | $ | 300 | 2 | $ | 0 | 87,000 | $ | 870 | 537,069 | $ | 54 | $ | 35,815,424 | $ | (41,214,449 | ) | $ | (5,397,647 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock to IBC | 858,914 | 86 | 441,659 | 441,745 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock to partially satisfy payable to ASC Recap, LLC | 55,320 | 6 | 24,888 | 0 | 24,894 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income for the year ended June 30, 2015 | (960,388 | ) | (960,388 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30,2015 | 149,600 | $ | 150 | 332 | $ | 3 | 19 | $ | 0 | 128 | $ | 1 | 70 | $ | 1 | 30,000 | $ | 300 | 2 | $ | 0 | 87,000 | $ | 870 | 1,451,303 | $ | 145 | $ | 36,281,972 | $ | (42,174,837 | ) | $ | (5,891,396 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued as compensation | 332,667 | 33 | 49,867 | 49,900 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in exchange for accrued comp | 106 | 0 | 15 | 0 | 3,361,459 | 336 | 638,264 | 638,600 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares exchanged for Series A | 11,181,340 | 11,181 | (149,600 | ) | (150 | ) | (332 | ) | (3 | ) | (19 | ) | (0 | ) | (234 | ) | (1 | ) | (85 | ) | (1 | ) | (30,000 | ) | (300 | ) | (2 | ) | 0 | (4,408 | ) | 0 | 6,318 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in exchange for cash | 40,000 | 40 | 200,000 | 200 | 84,760 | 0 | 85,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in exchange for Series Y | 87,000 | 87 | 0 | (87,000 | ) | (870 | ) | 783 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for notes payable | 2,684,000 | 2,684 | 1,127,640 | 1,128 | 508,750 | 51 | (25,431 | ) | (21,569 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjust for change in par value | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income for the year ended June 30, 2016 | 634,090 | 634,090 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2016 | 13,992,340 | $ | 13,992 | 1,327,640 | $ | 1,328 | 0 | $ | 0 | 0 | $ | (0 | ) | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | 5,654,179 | $ | 565 | $ | 37,025,805 | $ | (41,540,747 | ) | $ | (4,499,056 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
* Common stock figures reflect the 1:1500 reverse common stock split effective June 16, 2016 on a retroactive basis.
See accompanying notes to financial statements.
| F-5 |
NUSTATE ENERGY HOLDINGS, INC.
| FOR THE YEAR | FOR THE YEAR | |||||||
| ENDED | ENDED | |||||||
| June 30, 2016 | June 30, 2015 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | 634,090 | $ | (960,388 | ) | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Amortization of debt discount | 156,250 | 106,164 | ||||||
| Stock based compensation | 49,900 | - | ||||||
| (Gain) on restructuring of debt | (1,897,927 | ) | 11,928 | |||||
| (Gain) loss on change in fair value of derivative liabilities | (189,712 | ) | (60,481 | ) | ||||
| Derivative liability expense | 265,000 | - | ||||||
| Loss on debt settlement | 12,135 | 339,421 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts payable and accrued expenses | (13,929 | ) | 2,721 | |||||
| Accrued compensation | 259,573 | 175,000 | ||||||
| Accrued interest | 300,296 | 206,700 | ||||||
| Net cash used in operating activities | (424,324 | ) | (178,935 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayment of notes payable | (5,000 | ) | - | |||||
| Proceed from sale of preferred stock | 85,000 | - | ||||||
| Proceeds from short term note payable | 25,000 | - | ||||||
| Proceeds from convertible notes payable | 315,000 | 185,000 | ||||||
| Net cash provided by financing activities | 420,000 | 185,000 | ||||||
| Net increase (decrease) in cash | (4,324 | ) | 6,065 | |||||
| Cash at beginning of year | 6,130 | 65 | ||||||
| Cash at end of year | $ | 1,806 | $ | 6,130 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | - | $ | - | ||||
| Income taxes | $ | - | $ | - | ||||
| Issuance of common stock for conversion of debt | $ | 21,569 | $ | - | ||||
| Issuance of common stock to settle liability to IBC Funds | $ | - | $ | 447,874 | ||||
| Issuance of common stock to satisfy accrued compensation | $ | 500,000 | $ | - | ||||
| Issuance of common stock to partially satisfy settlement payable to ASC Recap | $ | - | $ | 24,894 | ||||
See accompanying notes to financial statements.
| F-6 |
NUSTATE ENERGY HOLDINGS, INC.
JUNE 30, 2016 AND 2015
NOTE 1: ORGANIZATION, DESCRIPTION OF BUSINESS AND GOING CONCERN
NuState Energy Holdings, Inc., or the Company, currently is a Florida corporation that was incorporated in Nevada in October 1987. It was formerly known as Jaguar Investments, Inc. between October 1987 and May 2003, Power2Ship, Inc. between May 2003 and November 2006, and Fittipaldi Logistics, Inc. between November 2006 and December 2007.
The accompanying financial statements have been prepared on a going concern basis. The Company had a loss from operations of $720,000 and had net cash used in operating activities of approximately $424,000 during the year ended June 30, 2016 and had a working capital deficit of approximately $4,500,000 and an accumulated deficit of $41,540,000 at June 30, 2016. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, to fund possible future acquisitions, and to generate profitable operations in the future. Management plans to provide for the Company’s capital requirements by continuing to issue additional equity and debt securities. The outcome of these matters cannot be predicted at this time and there are no assurances that, if achieved, the Company will have sufficient funds to execute its business plan or generate positive operating results. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reported period. Actual results will differ from those estimates. Included in these estimates are assumptions used in Black-Scholes-Merton derivative liability valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate and in the valuation allowance of deferred tax assets.
Cash and Cash Equivalents
The Company considers all highly liquid, temporary, cash equivalents with an original maturity of three months or less when purchased, to be cash equivalents. The Company had no cash equivalents during the years ended June 30, 2016 and 2015.
Concentration of Credit Risks
The Company is subject to a concentration of credit risk from cash.
The Company’s cash account is held at a financial institution and is insured by the Federal Deposit Insurance Corporation, or FDIC, up to $250,000. During the years ended June 30, 2016 and 2015, the Company had not reached a bank balance exceeding the FDIC insurance limit.
Derivative Liabilities
The Company assessed the classification of its derivative financial instruments as of June 30, 2016 and 2015, which consist of convertible instruments and rights to shares of the Company’s common stock, and determined that such derivatives meet the criteria for liability classification under ASC 815.
ASC 815 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 subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.
| F-7 |
NUSTATE ENERGY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2016 AND 2015
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
During the year ended June 30, 2016 and 2015, the Company had notes payable outstanding in which the conversion rate was variable and undeterminable. Accordingly, the Company has recognized a derivative liability in connection with such instruments. The Company uses judgment in determining the fair value of derivative liabilities at the date of issuance and at every balance sheet thereafter and in determining which valuation method is most appropriate for the instrument (e.g., Black-Scholes-Merton), the expected volatility, the implied risk free interest rate, as well as the expected dividend rate, if any.
Fair Value of Financial Instruments
The Company accounts for assets and liabilities measured at fair value on a recurring basis, in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
| Level 1: | Observable inputs such as quoted market prices in active markets for identical assets or liabilities. | |
| Level 2: | Observable market-based inputs or unobservable inputs that are corroborated by market data. | |
| Level 3: | Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions. |
The Company’s derivative liability is classified as Level 3 financial instrument.
Additional Disclosures Regarding Fair Value Measurements
The carrying value of cash, accounts payable and accrued expenses, accrued compensation, notes payable and convertible promissory notes payable, approximate their fair value due to the short maturity of these items or the use of market interest rates.
Convertible Instruments
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 ASC 470-20, Debt with Conversion and Other Options. 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 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, Contracts in Entity’s own Equity, generally provides that, among other things, if an event is not within the entity’s control, such contract could require net cash settlement and shall be classified as an asset or a liability.
The Company determines whether the instruments issued in the transactions are considered indexed to the Company’s own stock. During fiscal years 2014 the Company’s issued convertible securities with variable conversion provisions that resulted in derivative liabilities.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of ASC 740-10, “Accounting for Income Taxes,” which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows the provisions of ASC 740-10, “Accounting for Uncertain Income Tax Positions”. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.
| F-8 |
NUSTATE ENERGY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2016 AND 2015
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Income Taxes, continued
The Company has adopted ASC 740-10-25, “Definition of Settlement”, which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. As of June 30, 2016, the Company had not filed tax returns for the tax years ending June 30, 2008 through 2015 and such returns, when filed, potentially will be subject to audit by the taxing authorities for a minimum of three years beyond the filing date under the three-year statute of limitations. The Company has not accrued any potential tax penalties associated with not filing these tax returns. Due to recurring losses, management believes such potential tax penalties, if any, would not be material in amount.
Share-Based Payments
The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation - Stock Compensation”. Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which is the vesting period.
The Company has elected to use the Black-Scholes-Merton, or BSM, option-pricing model to estimate the fair value of its options, which incorporates various subjective assumptions including volatility, risk-free interest rate, expected life, and dividend yield to calculate the fair value of stock option awards. Compensation expense recognized in the statements of operations is based on awards ultimately expected to vest and reflects estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Segment Reporting
The Company operates in one business segment which technologies are providing pertinent, real-time information to the worldwide transportation and security industries.
Recent Accounting Pronouncements
Recent accounting pronouncements have been issued but deemed by management to be outside the scope of relevance to the Company.
As an emerging growth company, we have elected to use the exemption provided for in the Jumpstart Our Business Startups Act or JOBS Act allowing us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies pursuant to Section 102(b)(1) of the Act.
Basic and Diluted Earnings Per Share
Basic earnings per share are calculated by dividing income available to stockholders by the weighted-average number of shares of Common Stock outstanding during each period. Diluted earnings per share are computed using the weighted average number of shares of Common Stock and the dilutive Common Stock share equivalents outstanding during the period. Dilutive Common Stock share equivalents consist of shares issuable upon the exercise of stock options and warrants (calculated using the modified-treasury stock method) and conversion of other securities such as convertible debt or convertible preferred stock. Potential common shares includable in the computation of fully-diluted per-share results are not presented in the financial statements for the year ended June 30, 2016, as their effect would be anti-dilutive. Share amounts reflect the 1500:1 reverse stock split which was effective as of June 16, 2016.
| F-9 |
NUSTATE ENERGY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2016 AND 2015
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Basic and Diluted Earnings Per Share, continued
| For the Years ended June 30, | ||||||||
| 2016 | 2015 | |||||||
| Numerator: | ||||||||
| Net loss from operations | $ | (719,868 | ) | $ | (358,656 | ) | ||
| Interest expense | (456,546 | ) | (310,864 | ) | ||||
| Loss on settlement of debt | (12,135 | ) | (339,421 | ) | ||||
| Gain (loss) on restructuring of debt | 1,897,927 | (11,928 | ) | |||||
| Gain (loss) on change in fair value of derivative liabilities | 189,712 | 60,481 | ||||||
| Numerator for basic earnings per share- net income (loss) | $ | 634,090 | $ | (960,388 | ) | |||
| Denominator: | ||||||||
| Denominator for basic earnings per share-weighted average shares | 4,087,739 | 1,052,898 | ||||||
Effect of dilutive securities-when applicable: | ||||||||
| Convertible promissory notes | 50,238,846 | 2,617,285 | ||||||
| Preferred Stock | 13,759 | 44,069 | ||||||
| Warrants | - | - | ||||||
| Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions | 54,340,344 | 3,714,252 | ||||||
| Earnings (loss) per share Basic: | $ | 0.15 | $ | (0.91 | ) | |||
| Earnings (loss) per share Diluted: | $ | 0.01 | $ | (0.91 | ) | |||
The weighted-average potentially dilutive common share equivalents outstanding at June 30, 2016 and 2015 are as follows:
| 2016 | 2015 | |||||||
| Series A Preferred Stock | 9,329 | - | ||||||
| Series B Preferred Stock | 4,430 | 1,995 | ||||||
| Series C Preferred Stock | - | 22 | ||||||
| Series D Preferred Stock | - | 12,667 | ||||||
| Series F Preferred Stock | - | 17,130 | ||||||
| Series H Preferred Stock | - | 1,864 | ||||||
| Series I Preferred Stock | - | 10,000 | ||||||
| Series J Preferred Stock | - | 333 | ||||||
| Series Y Preferred Stock | - | 58 | ||||||
| Convertible notes payable | 50,238,846 | 2,617,285 | ||||||
| Warrants | - | - | ||||||
| Total | 50,252,605 | 2,661,354 | ||||||
NOTE 3: DERIVATIVE LIABILITY
The Company accounts for the embedded conversion features included in its convertible instruments as derivative liabilities. The aggregate fair value of derivative liabilities at June 30, 2016 and 2015 amounted to $636,096 and $295,808, respectively. For the year ended June 30, 2016, the Company recorded a gain on the change in fair value of derivative liabilities of $189,712. For the year ended June 30, 2015, the Company recorded a gain on the change in derivative liability of $60,481. At each measurement date, the fair value of the embedded conversion features was based on the Black-Scholes-Merton method using the following assumptions:
| Year Ended June 30, | ||||||||
| 2016 | 2015 | |||||||
| Effective Exercise price | 0.0035 – 0.00477 | 0.075 | ||||||
| Effective Market price | 0.0073 | 0.15 | ||||||
| Volatility | 497% - 703% | 465% | ||||||
| Risk-free interest | 0.13% | 0.1% | ||||||
| Terms | 14 - 365 days | 252 - 365 days | ||||||
| Expected dividend rate | 0% | 0% | ||||||
| F-10 |
NUSTATE ENERGY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2016 AND 2015
NOTE 3: DERIVATIVE LIABILITY, continued
Changes in the derivative liabilities during the years ended June 30, 2016 and 2015 are as follows:
| Derivative liabilities at June 30, 2014 | $ | 356,289 | ||
| Gain on change in fair value of derivative liability, recognized as other income | (60,481 | ) | ||
| Derivative liability at June 30, 2015 | 295,808 | |||
| Derivative liability expense | 265,000 | |||
| Original discount on convertible notes payable charged to derivative liability | 265,000 | |||
| Gain on change in fair value of derivative liability, recognized as other expense | (189,712 | ) | ||
| Derivative liabilities at June 30, 2016 | $ | 636,096 |
NOTE 4: CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE
Convertible Notes Payable
At June 30, 2016 and June 30, 2015 convertible debentures consisted of the following:
| June 30, | ||||||||
| 2016 | 2015 | |||||||
| Convertible notes payable | $ | 1,609,349 | $ | 1,421,730 | ||||
| Discount on convertible notes | (108,750 | ) | - | |||||
| Convertible notes payable to ASC Recap | 147,965 | 150,000 | ||||||
| Total | $ | 1,648,564 | $ | 1,571,730 | ||||
The Company had convertible promissory notes aggregating approximately $1.6 million and $1.6 million at June 30, 2016 and June 30, 2015, respectively. The related accrued interest amounted to approximately $1,037,000 and $754,000 million at June 30, 2016 and June 30, 2015, respectively. The convertible notes payable bear interest at rates ranging from 10% to 18% per annum. The convertible notes are generally convertible, at the holders’ option, at rates ranging from $0.00125 to $0.0267 per share. At June 30, 2016, approximately $1.6 million of convertible promissory notes had matured, are in default, and remain unpaid.
On July 22, 2013 and May 6, 2014, the Company issued to ASC Recap LLC (“ASC”), in connection with the Company’s settlement with ASC of up to approximately $2.5 million in liabilities of the Company, two convertible promissory notes with principal amounts of $25,000 and $125,000, respectively. The July 22, 2013 note matured on March 31, 2014 and remains unpaid and in default. The May 6, 2014 note matured on May 6, 2015, is in default, and remains unpaid. The notes are convertible into the common stock of the Company at any time at a conversion price equal to 50% of the lowest closing bid price of our common stock for the twenty days prior to conversion.
Notes Payable
The Company had promissory notes aggregating $240,241 and $90,241 at June 30, 2016 and June 30, 2015, respectively. The related accrued interest amounted to approximately $200,000 and $25,000 at June 30, 2016 and June 30, 2015, respectively. The notes payable bear interest at rates ranging from 0% to 16% per annum and are payable monthly. All promissory notes outstanding as of June 30, 2016 have matured, are in default, and remain unpaid.
Transactions
The Company generated proceeds of $315,000 from the issuance of convertible promissory notes with interest rates of 18% during fiscal 2016, and $25,000 from the issuance of a short term note payable, with an interest rate of 0% during fiscal 2016.
The Company generated proceeds of $185,000 from the issuance of convertible promissory notes with interest rates of 18% during fiscal 2015.
The Company recognized interest expense of approximately $292,000 and $311,000 during fiscal 2016 and 2015, respectively.
| F-11 |
NUSTATE ENERGY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2016 AND 2015
NOTE 5: OBLIGATIONS TO ASC RECAP, LLC
In July, 2013, certain of the Company’s creditors showed interest in selling their claims against the Company to ASC Recap, LLC (“ASC”); this group also included both current and past management of the Company. This led to the Company signing a Liability Purchase Agreement with ASC on July 23, 2013. This Agreement required the Company to issue common shares within five business days of each purchase at a 25% discount from the market price to ASC in amounts equal to the claims purchased from the Company’s creditors. In addition, under the terms of the Agreement, the Company issued a $25,000 non-interest bearing convertible promissory note to ASC, as described in Note 4.
ASC signed a series of Claim Purchase Agreements with certain creditors of the Company to purchase their claims against the Company totaling $2,531,565. These claims consisted of notes payable, convertible notes payable, vendor payables and accrued compensation to the Company’s CEO and to a related party. The Claim Purchase Agreements required ASC to settle the creditors’ claims against the Company for a total of $1,305,996. Each Claim Purchase Agreement stipulated that ASC would pay each creditor the agreed-upon amount in up to twelve (12) monthly installments.
In
January, 2014, the Company had not issued any shares to ASC as required by the agreement. As a result, ASC filed a complaint in
Leon County, Florida demanding the prescribed issuance of shares from the Company for the purchased claims. A settlement agreement
was reached on February 6, 2014, and on March 12, 2014 ASC Recap filed a motion in Leon County, Florida which forced the Company
to comply. ASC Recap was awarded a $2,531,565 judgement which was to be paid by issuing free trading common stock at a 25% discount
from the market price. In addition, on May 6, 2014, the Company issued a $125,000 non-interest bearing convertible
promissory note to ASC, as described in Note 4. Between April and June of 2014, the Company issued to ASC 322,220,000 shares of
common stock with an aggregate market value of $365,308, which reduced the recorded liability by $273,981; in July of 2014, the
Company issued 82,980,000 shares of common stock with an aggregate market value of $24,894 (see Note 6).
An analysis of the settlement liability due to ASC is as follows:
| Total creditor claims purchased by ASC - as ratified by the settlement agreement dated February 6, 2014 | $ | 2,531,565 | ||||||
| Reduction of liability by shares issued between April and June 2014: | ||||||||
| Market value of 322,220,000 common shares issued | $ | 365,308 | ||||||
| Less 25% discount as per settlement agreement | (91,327 | ) | (273,981 | ) | ||||
| Cash Payments and adjustments | (50,599 | ) | ||||||
| Liability after issuances of shares, cash payments, and adjustments | 2,206,985 | |||||||
| Add back the previous reduction of liability by shares issued in consideration of ASC waiving its right to additional shares under the settlement agreement | 273,981 | |||||||
| Liability as of June 30, 2014 agreed to by the Company and ASC | 2,480,966 | |||||||
| Increase in recorded liability by the market value of 82,980,000 common shares issued during July 2014 | 24,894 | |||||||
| Carrying value of settlement liability due to ASC at June 30, 2014 | 2,505,860 | |||||||
| Reduction of liability by shares issued in September 2014: | ||||||||
| Cash payments and adjustments | (133,347 | ) | ||||||
| Carrying value of settlement liability due to ASC at June 30, 2015 | $ | 2,372,513 | ||||||
| Transfer of liability due to ASC to Original debt-holders | (2,372,513 | ) | ||||||
| Carrying value of settlement liability due to ASC at June 30, 2016 | $ | - |
The transfer of liability due to ASC Recap consisted of the following:
| Notes payable | $ | 907,500 | ||
| Accounts payable and accrued liabilities | 85,006 | |||
| Accrued salaries | 702,895 | |||
| Loss on settlement of ASC liability | (12,135 | ) | ||
| Accrued interest payable | 689,247 | |||
| $ | 2,372,513 |
| F-12 |
NUSTATE ENERGY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2016 AND 2015
NOTE 5: OBLIGATIONS TO ASC RECAP, LLC, continued
The Company ceased issuing shares upon discovering that ASC had failed to make its first payment to the creditors on time, did not give verifiable reports to the creditors, or make regular monthly payments as specified in the Claim Purchase Agreement. A provision in each Claim Purchase Agreement stipulated that the “Purchaser (ASC) shall not be obligated to pay any portion of the purchase price in the event of a Default by the Company.” On August 13, 2015 ASC served the Company with a Notice of Default, which per the Agreement, returns the unpaid balance owed to the creditors of the Company.
NOTE 6: SETTLEMENT WITH IBC FUNDS, LLC
On October 9, 2014, we entered into a Settlement Agreement with IBC Funds, LLC (“IBC’). This agreement was approved by the Manatee County, Florida Court on October 10, 2014. Pursuant to the Settlement Agreement, the Company agreed to settle approximately $259,000 of outstanding accounts payable and accrued expenses (the “IBC Claim Amount”) by issuing IBC 858,814 shares of its common stock at a price per share equal to fifty percent of the lowest sales price of the common stock during the fifteen-day trading period preceding the request of payment. In the event the Company was delinquent on issuance of the Company’s shares upon request by IBC, the discount would be increased by five percent and by an additional five percent for each additional delinquency until all settlement shares had been received. At no time could IBC and its affiliates collectively own more than 4.99% of the outstanding shares of common stock. During October 2014, IBC paid an aggregate of $66,000 to various Company creditors. On February 12, 2015 IBC issued a letter of default to the Company.
NOTE 7: STOCKHOLDERS’ DEFICIT
Common Stock
At June 30, 2016 the Company had 13,333,000 authorized common shares. On July 20, 2016 the Company increased its authorized common shares to 250,000,000.
A summary of the issuance of shares of Common Stock, related consideration and fair value of transaction, for the year ended June 30, 2015 was as follows:
Number of shares of common stock |
Fair Value at Issuance |
Fair Value at Issuance (per share) |
|||||||||
| Issuance of common shares to IBC (see Note 6) | 572,667 | $ | 331,000 | $ | 0.578 | ||||||
| Issuance of common shares to IBC (see Note 6) | 286,247 | $ | 116,874 | $ | 0.408 | ||||||
| Issuances in to partially satisfy settlement payable to ASC Recap, LLC | 55,320 | $ | 24,894 | $ | 4.50 | ||||||
Issuances of Common Stock During 2016
During fiscal 2016 we issued shares of our common stock as follows:
| ● | On October 14, 2015, Ms. Roberton was issued 332,667 shares of common stock valued at $49,900, or $0.15 per share as a performance bonus pursuant to her employment agreement. | |
| ● | On October 9, 2015, we issued 3,333,333 shares of our common stock, twenty-six shares of Series F preferred stock, with a stated value of $5,000 and a par value of $0.001 per share, and three shares of Series H Preferred Stock, with a stated value of $1,000 and a par value of $0.001 per share, to the Company’s current Chairman of the Board in consideration for his forgiveness of $633,000 in accrued compensation. Subsequently, in October 2015, these Series F and Series H preferred shares were exchanged for 532,000 shares of Series A preferred stock. Holders of Series A preferred shares are restricted from converting their shares to common stock for two years (the “Lock-Up Period”). After the Lock-Up Period, they may convert up to one percent of their Series A preferred shares into common shares on a one for one basis each month for four years (the “Leak-Out Period”). However, the conversion price automatically reduces by 86% to $0.035 per share if our common stock is below $0.10 per share. At the end of the Leak-Out Period, up to all of the remaining Series A preferred shares may be converted to common stock at the shareholders’ discretion. |
Preferred Stock
Series A and B issued and outstanding shares of the Company’s preferred stock have a par value of $0.001. The Companies preferred shares Series C, D, F, H. I. J. and Y were exchanged for shares of Series A preferred stock in November, 2015. These classes of shares were subsequently cancelled. Issued and outstanding shares of Series C, D, F, H. I. J. and Y of the Company’s preferred stock had a par value of $0.01 per share. All classes rank(ed) prior to any class or series of the Company’s common stock as to the distribution of assets upon liquidation, dissolution or winding up of the Company or as to the payment of dividends. All preferred stock shall have no voting rights except if the subject of such vote would reduce the amount payable to the holders of preferred stock upon liquidation or dissolution of the company and cancel and modify the conversion rights of the holders of preferred stock as defined in the certificate of designations of the respective series of preferred stock.
On October 14, 2015 a former Chairman of the Board of the Company was issued 80 shares of Series F preferred stock with a stated value of $5,000 and a par value $0.001 per share, and 12 shares of Series H preferred stock, with a stated value of $1,000 and a par value $0.001 per share in consideration for his forgiveness of $412,000 in accrued compensation. Subsequently, in October 2015, these Series F and Series H shares were exchanged for 1,648,000 shares of Series A preferred stock.
On October 28, 2015, preferred shareholders representing a majority of each series of our outstanding preferred stock, voted to cancel all their shares of preferred stock in exchange for 11,181,340 shares of newly designated Series A preferred stock. The number of shares of newly issued Series A preferred stock issued to each preferred shareholder was calculated by dividing the total stated value of their preferred shares by $0.25. The holders of the Series A preferred shares are restricted from converting their shares to common stock for two years (the “Lock-Up Period”). After the Lock-Up Period, they may convert up to one percent of their Series A preferred shares into common shares on a one for one basis each month for four years (the “Leak-Out Period”). However, the conversion price automatically reduces by 86% to $0.035 per share if our common stock is below $0.10 per share. At the end of the Leak-Out Period, up to all of the remaining Series A preferred shares may be converted to common stock at the shareholders’ discretion.
| Class | Shares Cancelled | Shares of Series A Issued | ||||||
| Series B | (149,600 | ) | 2,992,000 | |||||
| Series C | (332 | ) | 39,840 | |||||
| Series D | (19 | ) | 1,900,000 | |||||
| Series F | (234 | ) | 4,689,500 | |||||
| Series H | (85 | ) | 340,000 | |||||
| Series I | (30,000 | ) | 1,200,000 | |||||
| Series J | (2 | ) | 20,000 | |||||
| Total | 11,181,340 | |||||||
On October 28, 2015 the 87,000 shares of Series Y preferred stock, owned by the Company’s former Chairman of the Board, were exchanged for 87,000 shares of Series A preferred stock. These shares of Series A preferred stock were valued at their fair market value of $8.70.
In November, 2015, we sold 40,000 shares of Series A preferred stock to one investor for $10,000 and sold 100,000 shares of Series B preferred stock to another investor for $25,000.
See Note 5 for Series B preferred stock issued in exchange for convertible notes payable and accrued interest.
Series A Preferred Stock
The Series A Preferred Stock has a stated value of $0.25 per share. Each one share of Series A Preferred Stock is convertible into one (1) share of Common Stock. In the event the Common Stock price per share is lower than $0.10 (ten cents) per share then the Conversion shall be set at $0.035 per share. The Common Stock shares are governed by Lock-Up/Leak-Out Agreements.
Series B Preferred Stock
Prior to cancellation, the Series B Preferred Stock had a stated value of $5.00 per share. Each share of Series B Preferred Stock was convertible into 20 shares of the Company’s common stock. In addition, the holders of the preferred stock were entitled to receive annual cumulative dividends of 10% payable in cash or shares of the Company’s common stock, at the Company’s option. At June 30, 2016, the Company had not declared the payment of cumulative dividends aggregating approximately $673,200.
Series C Preferred Stock
Prior to cancellation, the Series C Preferred Stock had a stated value of $30.00 per share. Each share of Series C Preferred Stock was convertible into 100 shares of the Company’s common stock.
| F-13 |
NUSTATE ENERGY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2016 AND 2015
NOTE 7: STOCKHOLDERS’ DEFICIT, continued
Preferred Stock, continued
Series D Preferred Stock
Prior to cancellation, the Series D Preferred Stock had a stated value of $25,000 per share. Each share of the Series D Preferred Stock was convertible into 1,000,000 shares of the Company’s common stock. In addition, the holders of the Series D Preferred Stock were entitled to receive a participation interest in the annual net profits generated from any future business activities undertaken by the Company in Brazil.
Series F Preferred Stock
Prior to cancellation, the Series F Preferred Stock had a stated value of $5,000 per share. Each share of Series F Preferred Stock was convertible into 200,000 shares of the Company’s common stock.
Series H Preferred Stock
Prior to cancellation, the Series H Preferred Stock had a stated value of $1,000 per share. Each share of Series H Preferred Stock was convertible into the greater of a) $0.025 per share or b) 100% of the average of the three lowest closing bid prices for the ten trading days immediately preceding the Company’s receipt of a notice of conversion.
Series I Preferred Stock
Prior to cancellation, the Series I Preferred Stock had a stated value of $10.00 per share. Each share of Series I Preferred Stock was convertible into 500 shares of the Company’s common stock.
Series J Preferred Stock
Prior to cancellation, the Series J Preferred Stock had a stated value of $2,500 per share. Each share of the Series J Preferred Stock was convertible into the Company’s common shares using a conversion price equal to 50% of the average closing price of the Company’s common stock for the ten trading days immediately preceding the conversion date, although in no instance less than $0.01 per share or greater than $0.03 per share.
Series Y Preferred Stock
Prior to cancellation, the Series Y Preferred Stock had a stated value and par value of $0.01 and had no liquidity preference. Each share of Series Y Preferred Stock had 203 votes per share and had the right to vote with the common shareholders in all matters. The shares were convertible into one share of the Company’s common stock at the holder’s option subject to an adjustment upon issuing dividends or distributions payable in common stock and reverse or forward stock split. The shares were held by a former Chairman of the Board of the Company.
Warrants
| Weighted Average | ||||||||||||
| Weighted Average | Remaining | |||||||||||
| Warrants | Price per Share | Contractual Term | ||||||||||
| Outstanding at June 30, 2014 | 45,047,293 | $ | 0.025 | 1.48 | ||||||||
| Granted | - | - | ||||||||||
| Exercised | - | - | ||||||||||
| Forfeitures | (45,047,293 | ) | 0.025 | |||||||||
| Outstanding at June 30, 2015 | - | $ | - | - | ||||||||
| Granted | - | - | ||||||||||
| Exercised | - | - | ||||||||||
| Forfeitures | ||||||||||||
| Outstanding at June 30, 2016 | - | $ | - | - | ||||||||
| F-14 |
NUSTATE ENERGY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2016 AND 2015
NOTE 7: STOCKHOLDERS’ DEFICIT, continued
Options
In January 2001, The Company adopted the 2001 Employee Compensation Plan, or the Plan. The Plan provided for stock compensation through awards of shares of the Company’s common stock.
The Company’s board of directors may appoint a Compensation Committee to administer the Plan. In the absence of such appointment, the board of directors is responsible for the administration of the Plan. The Company did not appoint a Compensation Committee to administer the Plan. The board of directors has the sole power to award shares of common stock under the Plan, as well as determine those individuals eligible to receive an award of Plan shares. Awards of shares under the Plan may be made as compensation for services rendered, directly or in lieu of other compensation payable, as a bonus in recognition of past services or performance or may be sold to an employee.
The maximum number of shares which may be awarded under the plan is 5,000,000. Awards were generally granted to:
| ● | executive officers, officers and directors (including advisory and other special directors) of the Company; |
| ● | full-time and part-time employees of the Company; |
| ● | natural persons engaged by the Company as consultants, advisors or agents; and |
| ● | a lawyer, law firm, accountant or accounting firm, or other professional or professional firm engaged by the Company. |
Grants to employees may be made for cash, property, services rendered or other forms of payment constituting lawful consideration under applicable law. Shares awarded, other than for services rendered, may not be sold at less than the fair value of our common stock on the date of grant.
The plan terminated in January 2011. The board of directors has absolute discretion to amend the plan with the exception that the board had no authority to extend the term of the plan, to increase the number of shares subject to award under the plan or to amend the definition of “Employee” under the plan.
The Company generally recognizes its share-based payments over the vesting period for which such payments are made.
The Company had no outstanding options or option activity between July 1, 2013 and June 30, 2016
The total compensation cost related to non-vested awards not yet recognized amounted to $0 at June 30, 2016 and 2015. There was no intrinsic value as of June 30, 2016. The Company’s policy is to issue shares pursuant to the exercise of stock options from its available authorized but unissued shares of common stock. It does not issue shares pursuant to the exercise of stock options from its treasury shares.
| F-15 |
NUSTATE ENERGY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2016 AND 2015
NOTE 8: INCOME TAXES
The Company has not filed its corporate tax returns since fiscal 2007.
Due to recurring losses, the Company’s tax provision for the years ended June 30, 2016 and 2015 was $0.
A summary of our deferred tax is as follows:
| June 30, 2016 | June 30, 2015 | |||||||
| Tax benefit of net operating loss carry forward | $ | 10,364,000 | $ | 10,698,000 | ||||
| Less: valuation allowance | (10,364,000 | ) | (10,698,000 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
As of June 30, 2016, the Company had unused net operating loss carry forwards of approximately $26.9 million available to reduce future federal taxable income. Net operating loss carryforwards expire through fiscal years ending 2036. During the year ended June 30, 2016 the Company utilized net operating loss carryforwards of approximately $866,000 to reduce current taxable income. Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally a greater than 50% change in ownership).
The Company’s ability to offset future taxable income, if any, with tax net operating loss carryforwards may be limited due to the non-filing of tax returns and the impact of the statute of limitations on the Company’s ability to claim such benefits. Furthermore, changes in ownership may result in limitations under Internal Revenue Code Section 382. Due to these limitations, and other considerations, management has established full valuation allowances on deferred tax assets relating to net operating loss carryforward, as the realization of any future benefits from these assets is uncertain.
The valuation allowance at June 30, 2016 and 2015 was $10,364,300 and $10,698,000, respectively. The change in the valuation allowance during the year ended June 30, 2016 was a decrease of approximately $334,000. The change in the valuation allowance during the year ended June 30, 2015 was an increase of $222,000.
The table below summarizes the differences between our effective tax rate and the statutory federal rate as follows for fiscal 2016 and 2015. The effective tax rate is 35% Federal and 3.6% for State after Federal income tax (benefit):
| 2016 | 2015 | |||||||
| Computed “expected” income tax (benefit) | 35.0 | % | (35.0 | )% | ||||
| State income taxes, net of federal income tax (benefit) | 3.6 | % | (3.6 | )% | ||||
| Permanent differences | 14.1 | % | 23.0 | % | ||||
| Subtotal | 52.7 | % | (15.6 | )% | ||||
| Change in valuation allowance | (52.7 | )% | 15.6 | % | ||||
| Provision for income taxes | — | % | — | % | ||||
NOTE 9: RELATED PARTY TRANSACTIONS
During fiscal 2016 and 2015, the Company incurred expenses of $97,841 and $110,400, respectively, to a related party by means of common ownership and management with the Company as compensation to our Chairman of the Board and Chief Financial Officer.
| F-16 |
NUSTATE ENERGY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2016 AND 2015
NOTE 10: SUBSEQUENT EVENTS
On July 8, 2016 Kathleen Roberton resigned her position as Chief Executive Officer and member of the Board of Directors of NuState Energy Holdings, Inc.
On July 8, 2016 Mr. Kevin Yates, the current Chairman of the Board, was named as Chief Executive Officer.
On July 20, 2016, the Company adopted Articles of Amendment to its Articles of Incorporation to increase the number of authorized shares of Common Stock from 13,333,333 shares to 250,000,000 shares.
On August 15, 2016 the Company’s Board of Directors appointed Mark B. Lucky as the Company’s interim Chief Financial Officer.
On August 15, 2016 the Company issued 20,000,000 shares of its common stock to its CEO, Kevin Yates, as compensation. The shares were valued at $0.03 per share, the market price of the common stock on the date of issuance. The recipient were accredited investors and the issuances were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that act.
On August 15, 2016 the Company issued 5,000,000 shares of its common stock to its newly appointed CFO, Mark Lucky, as compensation. The shares were valued at $0.03 per share, the market price of the common stock on the date of issuance. The recipient were accredited investors and the issuances were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that act.
On August 15, 2016 the Company issued 2,000,000 shares of its common stock to its former CEO, Kathleen Roberton, pursuant to a settlement agreement, for unpaid wages. Per agreement, the shares were valued at $0.04 per share. The recipient were accredited investors and the issuances were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that act.
| F-17 |