NOTES
TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER
31, 2013
NOTE
1: ORGANIZATION, DESCRIPTION OF BUSINESS, GOING CONCERN AND BASIS OF PRESENTATION
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 net cash used in operating activities
of $90,200 during the six months ended December 31, 2013 and had a working capital deficit of approximately $4.68 million at December
31, 2013.
These matters 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.
Basis
of Presentation
The
unaudited interim financial information furnished herein reflects all adjustments, consisting only of normal recurring items,
which in the opinion of management are necessary to fairly state NuState Energy Holdings, Inc.’s (the “Company”
or “we”, “us” or “our”) financial position, results of operations and cash flows for the dates
and periods presented and to make such information not misleading. Certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America
have been omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”), nevertheless,
management of the Company believes that the disclosures herein are adequate to make the information presented not misleading.
These
unaudited financial statements should be read in conjunction with the Company’s audited financial statements for the year
ended June 30, 2013, contained in the Company’s Annual Report on Form 10-K filed with the SEC on September 1, 2013. The
results of operations for the six months ended December 31, 2013, are not necessarily indicative of results to be expected for
any other interim period or the fiscal year ending June 30, 2014.
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 about
recovery of assets from discontinued operations and assumptions used in Black-Scholes valuation methods, such as expected volatility,
risk-free interest rate, and expected dividend rate.
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 six months ended December 31, 2013 and 2012.
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 six months ended December 31, 2013 and 2012, 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 December 31, 2013 and 2012, 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.
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER
31, 2013
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
During
the six months ended December 31, 2013 and 2012, 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 at December 31, 2013 and 2012 is classified as Level 3 financial instrument.
Additional
Disclosures Regarding Fair Value Measurements
The
carrying value of cash and cash equivalents, other receivable, accounts payable and accrued expenses, accrued compensation, note
and convertible promissory notes payable, and liabilities from discontinued operations approximate their fair value due to the
short maturity of these items.
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 the fiscal year 2012 the Company 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.
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER
31, 2013
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 December 31, 2013, the Company had not
filed tax returns for the tax years ending June 30, 2008 through 2013 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, in any, would not be material in amount.
Share-Based
Payment
The
Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation, or ASC 718. 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 segment, which is to search for possible acquisition targets and merge with an operating company. The
Company’s chief operating decision-maker evaluates the performance of the Company based upon expenses by functional areas
as disclosed in the Company’s statements of operations.
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.
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER
31, 2013
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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 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). Potential
common shares includable in the computation of fully-diluted per-share results are not presented in the financial statements as
their affect would be anti-dilutive.
|
|
For
the Three Months ended December 31,
|
|
|
For
the Six Months ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common stockholders
|
|
$
|
(91,725
|
)
|
|
$
|
1,766,466
|
|
|
$
|
(216,647
|
)
|
|
$
|
1,653,444
|
|
Interest
expense
|
|
|
(59,020
|
)
|
|
|
(63,000
|
)
|
|
|
(104,379
|
)
|
|
|
(123,940
|
)
|
Gain
((loss) on change in fair value of derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5.556
|
|
Numerator
for basic earnings per share- net loss from continuing operations attributable to common stockholders-as adjusted
|
|
$
|
(150,745
|
)
|
|
$
|
1,703,466
|
|
|
$
|
(321,026
|
)
|
|
$
|
1,535,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share-weighted average shares
|
|
|
344,313,187
|
|
|
|
321,212,912
|
|
|
|
344,313,187
|
|
|
|
321,212,912
|
|
Effect
of dilutive securities-when applicable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
promissory notes
|
|
|
173,002,686
|
|
|
|
152,859,165
|
|
|
|
173,002,686
|
|
|
|
152,859,165
|
|
Preferred
Stock
|
|
|
66,103,200
|
|
|
|
66,103,200
|
|
|
|
66,103,200
|
|
|
|
66,103,200
|
|
Options
|
|
|
-
|
|
|
|
74,000,000
|
|
|
|
-
|
|
|
|
74,000,000
|
|
Warrants
|
|
|
45,047,293
|
|
|
|
57,047,293
|
|
|
|
45,047,293
|
|
|
|
57,047,293
|
|
Denominator
for diluted earnings per share—adjusted weighted-average shares and assumed conversions
|
|
|
628,466,366
|
|
|
|
671,222,570
|
|
|
|
628,466,366
|
|
|
|
671,222,570
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share-basic
|
|
$
|
-
|
|
|
$
|
0.01
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share-diluted
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER
31, 2013
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Basic
and Diluted Earnings Per Share
The
weighted-average potentially dilutive common share equivalents outstanding at December 31, 2013 and 2012 are as follows:
|
|
2013
|
|
|
2012
|
|
Series
B Preferred Stock
|
|
|
2,992,000
|
|
|
|
2,992,000
|
|
Series
C Preferred Stock
|
|
|
33,200
|
|
|
|
33,200
|
|
Series
D Preferred Stock
|
|
|
19,000,000
|
|
|
|
19,000,000
|
|
Series
F Preferred Stock
|
|
|
25,695,000
|
|
|
|
25,695,000
|
|
Series
H Preferred Stock
|
|
|
2,796,000
|
|
|
|
2,796,000
|
|
Series
I Preferred Stock
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
Series
J Preferred Stock
|
|
|
500,000
|
|
|
|
500,000
|
|
Series
Y Preferred Stock
|
|
|
87,000
|
|
|
|
87,000
|
|
Convertible
notes payable
|
|
|
173,002,686
|
|
|
|
152,859,165
|
|
Options
|
|
|
—
|
|
|
|
74,000,000
|
|
Warrants
|
|
|
45,047,293
|
|
|
|
57,047,293
|
|
Total
|
|
|
284,153,379
|
|
|
|
350,009,658
|
|
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 December 31, 2013 and June 30, 2013 amounted to $274,052 and $295,808, respectively. For
the six months ended December 31, 2013 and 2012, the Company recorded a gain related to the change in fair value of the derivative
liability amounting to $21,755 and a loss of $539,667, respectively. At each measurement date, the fair value of the embedded
conversion features was based on the Black-Scholes-Merton method using the following assumptions:
|
|
Six
Months Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Effective
Exercise price
|
|
$
|
-
|
|
|
$
|
0.0001
|
|
Effective
Market price
|
|
$
|
-
|
|
|
$
|
0.0006
|
|
Volatility
|
|
|
-
|
|
|
|
505
|
%
|
Risk-free
interest
|
|
|
-
|
|
|
|
0.1
|
%
|
Terms
|
|
|
-
|
|
|
|
365
days
|
|
Expected
dividend rate
|
|
|
-
|
|
|
|
0
|
%
|
Changes
in the derivative liabilities during the six months ended December 31, 2013 and 2012 are as follows:
Derivative
liability at June 30, 2013
|
|
$
|
-
|
|
Gain
on change in fair value of derivative liability, recognized as other income
|
|
|
-
|
|
Derivative
liability at December 31, 2013
|
|
$
|
-
|
|
Derivative
liability at June 30, 2012
|
|
$
|
5,556
|
|
Gain
on change in fair value of derivative liability, recognized as other expense
|
|
|
(5,556
|
)
|
Derivative
liability at December 31, 2012
|
|
$
|
-
|
|
NOTE
4: ACCRUED INTEREST PAYABLE
Changes
in accrued interest payable during the six months ended December 31, 2013 are as follows:
Accrued
interest payable at June 30, 2013
|
|
$
|
1,200,630
|
|
Interest
expense for the six months ended December 31, 2013
|
|
|
104,379
|
|
Accrued
interest payable at December 31, 2013
|
|
$
|
1,305,009
|
|
NUSTATE
ENERGY HOLDINGS, INC.
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER
31, 2013
NOTE
5: CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE
Convertible
Notes Payable
At
December 31, 2013 and June 30, 2013 convertible debentures consisted of the following:
|
|
December
31, 2013
|
|
|
June
30, 2013
|
|
Convertible
notes payable
|
|
$
|
1,809,311
|
|
|
$
|
1,719,311
|
|
The
Company had convertible promissory notes aggregating approximately $1.8 million and $1.7 million at December 31, 2013 and June
30, 2013, respectively. The Convertible Notes Payable bear interest at rates ranging between 10% and 18% per annum. The Convertible
Notes Payable bear interest at rates ranging between 8% and 18% per annum. Interest is generally payable monthly. The Convertible
Notes Payable are generally convertible at rates ranging from $0.00064 and 0.0267 per share, at the holders’ option. At
December 31, 2013, approximately $0.8 million of convertible promissory notes had matured, are in default, and remain unpaid.
Notes
Payable
The
Company had promissory notes aggregating $265,000 at December 31, 2013 and June 30, 2013, respectively. The notes payable bear
interest at rates ranging from 8.0% to 16% per annum which is payable monthly. All promissory notes outstanding as of December
31, 2013 have matured, are in default, and remain unpaid.
NOTE
6: STOCKHOLDERS’ DEFICIT
Common
Stock
The
Company’s certificate of incorporation was amended on July 23, 2012 to increase the number of authorized shares of common
stock by one billion common shares bringing total authorized common shares to one billion seven hundred fifty million common shares.
On October 5, 2013 the Company increased its authorized common shares to 10,000,000,000 and on April 21, 2016 the Company increased
its authorized common shares to 20,000,000,000 at $0.0001 par value per share.
Transactions
During
the six months ended December 31, 2013, the Company issued 600,000,000 shares of common stock to its CEO as compensation, valued
at $60,000, or $0.0001 per share, based on the quoted market price.
Preferred
Stock
All
issued and outstanding shares of the Company’s preferred stock has a par value of $0.01 per share and rank 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, except for Series Y Preferred Stock. All preferred stock shall have no voting
rights except if such amendment would reduce the amount payable to the holders of preferred stock upon liquidation or dissolution
of the Company and cancel or modify the conversion rights of the holders of preferred stock as defined in the certificate of designations
of the respective series of preferred stock.
Series
B Preferred Stock
The
Series B Preferred Stock has a stated value of $5.00 per share. Each share of Series B preferred Stock is convertible in 20 shares
of the Company’s common stock. In addition, the holders of the preferred stock are entitled to receive annual dividends
of 10% payable in cash or shares of the Company’s common stock, at the Company’s option.
At
December 31, 2013, the Company’s undeclared cumulative dividends aggregated approximately $480,200.
Series
C Preferred Stock
The
Series C Preferred Stock has a stated value of $30.00 per share. Each share of Series C Preferred Stock is convertible in 100
shares of the Company’s common stock.
Series
D Preferred Stock
The
Series D Preferred Stock has a stated value of $25,000 per share. Each share of the Series D preferred Stock is convertible in
1,000,000 shares of the Company’s common stock. In addition, the holders of the Series D Preferred Stock are 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
The
Series F Preferred Stock has a stated value of $5,000 per share. Each share of Series F Preferred Stock is convertible in 200,000
shares of the Company’s common stock.
Series
H Preferred Stock
The
Series H Preferred Stock has a stated value of $1,000 per share. Each share of Series H Preferred Stock is convertible into the
greater of a) $0.025 per share or b) 100% of the average three lowest closing bid prices for the ten trading days immediately
preceding the notice of conversion.
Series
I Preferred Stock
The
Series I Preferred Stock has a stated value of $10.00 per share. Each share of Series I Preferred Stock is convertible into 500
shares of the Company’s common stock.
Series
J Preferred Stock
The
Series J Preferred Stock has a stated value of $2,500 per share. Each share of the Series J Preferred Stock is 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
The
Series Y Preferred Stock has a stated value and par value of $0.01 and has no liquidity preference. Each share of Series Y Preferred
Stock has 203 votes per share and has the right to vote with the common shareholders in all matters. The shares are 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 splits. The shares are held by one of the Company’s
former Chairman of the Board.
NOTE
8: RELATED PARTY TRANSACTIONS
The
Company has entered into a consulting agreement with 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. During the six months ended December 31, 2013 and 2012
the Company had incurred consulting fees and related expense reimbursements of $82,400 and $3,350, respectively.
NOTE
9: SUBSEQUENT EVENTS