NOTES
TO FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2012
Note
1-
Summary of Significant Accounting Policies
Basis
of Presentation and Organization
The Mobile Star Corp.
(“The Mobile Star” or the “Company”) is a Delaware corporation in the development stage and has not commenced
operations. The Company was incorporated under the laws of the State of Delaware on September 25, 2007 and began activity in January
2008. The business plan of the Company is to develop a commercial application of a self operated computerized karaoke recording
booth. The Company also intends to obtain approval of its patent application, and manufacture and market the product and/or seek
third party entities interested in licensing the rights to manufacture and market the device. The accompanying financial statements
of The Mobile Star were prepared by the accounts of the Company under the accrual basis of accounting.
Unaudited
Interim Financial Statements
The interim financial
statements of the Company as of September 30, 2012, and for the periods then ended, and cumulative from inception, are unaudited.
However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the Company’s financial position as of September 30, 2012, and the results of its
operations and its cash flows for the periods ended September 30, 2012, and cumulative from inception. These results are not necessarily
indicative of the results expected for the calendar year ending December 31, 2012,. The accompanying financial statements and
notes thereto do not reflect all disclosures required under accounting principles generally accepted in the United States. Refer
to the Company’s audited financial statements as of December 31, 2011, filed with the SEC, for additional information, including
significant accounting policies.
Cash
and Cash Equivalents
For purposes
of reporting within the statement of cash flows, the Company considers all cash on hand, cash accounts not subject to withdrawal
restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less to be cash
and cash equivalents.
Revenue
Recognition
The Company
is in the development stage. Once the Company has commenced operations, it will recognize revenues when delivery of goods or completion
of services has occurred provided there is persuasive evidence of an agreement, acceptance has been approved by its customers,
the fee is fixed or determinable based on the completion of stated terms and conditions, and collection of any related receivables
is probable.
Loss
per Common Share
Basic loss
per share is computed by dividing the net loss attributable to the common stockholders by the weighted average number of shares
of common stock outstanding during the period. Fully diluted loss per share is computed similar to basic loss per share except
that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive. Common stock equivalents were not included in
the computation of diluted earnings per share in the statement of operations due to the fact that the Company reported a net loss
and to do so would be anti-dilutive for the periods presented.
Income
Taxes
Deferred
tax assets and liabilities are determined based on temporary differences between the bases of certain assets and liabilities for
income tax and financial reporting purposes. The deferred tax assets and liabilities are classified according to the financial
statement classification of the assets and liabilities generating the differences.
The Company
maintains a valuation allowance with respect to deferred tax assets. The Company establishes a valuation allowance based upon
the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position
and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient
taxable income within the carry forward period under the federal tax laws.
Changes
in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the
related deferred tax asset. Any change in the valuation allowance will be included in income in the year of the change in estimate.
Fair
Value of Financial Instruments
The Company
estimates the fair value of financial instruments using the available market information and valuation methods. Considerable judgment
is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts the Company
could realize in a current market exchange. As of September 30, 2012, the carrying value of accounts payable, accrued liabilities,
and loans from directors and stockholders approximated fair value due to the short-term nature and maturity of these instruments.
Patent
and Intellectual Property
The Company
capitalizes the costs associated with obtaining a Patent or other intellectual property associated with its intended business
plan. Such costs are amortized over the estimated useful lives of the related assets.
Deferred
Offering Costs
The Company
defers the direct incremental costs of raising capital as other assets until such time as the offering is completed. At the time
of the completion of the offering, the costs are charged against the capital raised. Should the offering be terminated, deferred
offering costs are charged to operations during the period in which the offering is terminated.
Impairment
of Long-Lived Assets
The Company
evaluates the recoverability of long-lived assets and the related estimated remaining lives when events or circumstances lead
management to believe that the carrying value of an asset may not be recoverable. For the period ended September 30, 2012, no
events or circumstances occurred for which an evaluation of the recoverability of long-lived assets was required.
Common
Stock Registration Expenses
The Company
considers incremental costs and expenses related to the registration of equity securities with the SEC, whether by contractual
arrangement as of a certain date or by demand, to be unrelated to original issuance transactions. As such, subsequent registration
costs and expenses are expensed as incurred.
Estimates
The financial
statements are prepared on the basis of accounting principles generally accepted in the United States. The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and expenses. Actual results could differ from those estimates made by management.
Recent
Accounting Pronouncements
In May 2011,
the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRSs")." Under ASU 2011-04,
the guidance amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value
has the same meaning in U.S. GAAP and in IFRS and that their respective fair value measurement and disclosure requirements are
the same. ASU 2011-04 is effective for public entities during interim and annual periods beginning after December 15, 2011. Early
adoption is not permitted. The Company does not believe that the adoption of ASU 2011-04 will have a material impact on the Company's
results of operation and financial condition.
In June
2011, the FASB issued ASU No. 2011-05, "Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income,"
("ASU 2011-05") which amends current comprehensive income guidance. This accounting update eliminates the option to
present the components of other comprehensive income as part of the statement of shareholders' equity. Instead, comprehensive
income must be reported in either a single continuous statement of comprehensive income which contains two sections, net income
and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies
during the interim and annual periods beginning after Dec. 15, 2011 with early adoption permitted. The Company does not believe
that the adoption of ASU 2011-05 will have a material impact on the Company's results of operation and financial condition.
There were
various other updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries. None of the updates are expected to a have a material impact on the Company's financial position,
results of operations or cash flows.
Note
2-
Development Stage Activities and Going Concern
The Company
is currently in the development stage, and has limited operations. The business plan of the Company is to develop a commercial
application of a self-operated computerized karaoke recording booth. The Company also intends to obtain approval of its patent
application, and manufacture and market the product and/or seek third party entities interested in licensing the rights to manufacture
and market the device.
In January
2008, the Company entered into a Assignment Agreement whereby the Company acquired all of the rights, title and interest in the
invention known as the “Self operated computerized karaoke recording booth” for consideration of royalties ranging
from 1% to 5% based on the net income of the Company for 30 years from the date of the Company's incorporation. On February 20,
2008, the Company filed PCT and U.S. patent applications for the invention.
The Company commenced
a capital formation activity to submit a Registration Statement on Form S-1 to the Securities and Exchange Commission (“SEC”)
to register and sell in a self-directed offering 28,000 (post reverse stock split) shares of newly issued common stock for proceeds
of up to $200,000. The Registration Statement on Form S-1 was filed with the SEC on August 12, 2008 and declared effective on
September 8, 2008. The Company has issued 28,000 (post reverse stock split) shares of common stock pursuant to the Registration
Statement on Form S-1, and received proceeds of $200,000.
The accompanying
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. The Company has limited revenue to cover its operating costs,
and as such, has incurred an operating loss since inception. Further, as of September 30, 2012, the cash resources of the Company
were insufficient to meet its current business plan. These and other factors raise substantial doubt about the Company’s
ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result
from the possible inability of the Company to continue as a going concern.
Note
3-
Patent Pending
In January
2008, the Company entered into a Assignment Agreement whereby the Company acquired all of the rights, title and interest in the
invention known as the “Self operated computerized karaoke recording booth” for consideration of royalties ranging
from 1% to 5% based on the net income of the Company for 30 years from the date of the Company's incorporation. On February 20,
2008 the Company filed PCT and U.S. patent applications for the invention.
Note
4-
Loans from Related Parties - Directors and Stockholders
As
of September 30, 2012, loans from related parties amounted to $25,134, and represented working capital advances from officers
who are also stockholders of the Company. The loans are unsecured, non-interest bearing, and due on demand.
On
May 23, 2012, the Company signed a $200,000 convertible promissory note with a related party. The note bears interest at
8% per annum and is due on May 23, 2013. The note has conversion rights that allow the holder of the note to convert after
180 days all or any part of the remaining principal balance into the Company’s common stock at the current trading price.
Note
5-
Convertible Notes Payable
On January
6, 2011, the Company signed a $35,000 convertible promissory note with a third party. The note bears interest at 8% per
annum and was due on October 10, 2011. The note has conversion rights that allow the holder of the note to convert after
180 days all or any part of the remaining principal balance into the Company’s common stock at a price equal to 55% of the
average of the lowest three trading prices for the Common Stock during the most recent ten day period. As of September 30, 2012
this note was reduced by $24,300 upon conversion to shares.
On April
11, 2011, the Company signed a $32,500 convertible promissory note with a third party. The note bears interest at 8% per
annum and was due on January 18, 2012. The note has conversion rights that allow the holder of the note to convert after
180 days all or any part of the remaining principal balance into the Company’s common stock at a price equal to 55% of the
average of the lowest three trading prices for the Common Stock during the most recent ten day period.
On May 23,
2012, the Company signed a $50,000 convertible promissory note with a third party. The note bears interest at 8% per annum
and was due on May 23, 2013. The note has conversion rights that allow the holder of the note to convert after 180 days
all or any part of the remaining principal balance into the Company’s common stock at the current trading price.
On May 23,
2012, the Company signed a $200,000 convertible promissory note with a related party. The note bears interest at 8% per
annum and was due on May 23, 2013. The note has conversion rights that allow the holder of the note to convert after 180
days all or any part of the remaining principal balance into the Company’s common stock at the current trading price.
In accordance
with ASC 470, the Company has analyzed the beneficial nature of the conversion terms and determined that a beneficial conversion
feature (BCF) exists. The Company calculated the value of the BCF using the intrinsic method as stipulated in ASC 470. The
BCF has been recorded as a discount to the notes payable and to Additional Paid-in Capital.
As of September
30, 2012, the balance of convertible notes payable is $293,200.
For the
nine months ended September 30, 2012, the Company recognized $10,152 in interest expense related to the notes and has amortized
$1,738 of the beneficial conversion features which has been recorded as interest expense.
Note
6-
Preferred and
Common Stock
On February 4, 2008, the Company
issued 112,000 (post reverse stock split) shares of its common stock to founders of the Company, some of whom were directors and
officers, for proceeds of $800.
The Company has commenced a
capital formation activity to submit a Registration Statement on Form S-1 to the SEC to register and sell in a self-directed offering
28,000 (post reverse stock split) shares of newly issued common stock for proceeds of up to $200,000. The Registration Statement
on Form S-1 was filed with the SEC on August 12, 2008 and declared effective on September 8, 2008. The Company has issued 28,000
(post reverse stock split) shares of common stock pursuant to the Registration Statement on Form S-1, and received proceeds of
$200,000. The Company incurred $40,000 of deferred offering costs related to this capital formation activity.
On June 26, 2009, the Company
implemented a 7 for 1 forward stock split on its issued and outstanding shares of common stock to the holders of record as
of June 24, 2009. As a result of the split, each holder of record on the record date automatically received six additional shares
of the Company’s common stock. After the split, the number of shares of common stock issued and outstanding were 70,000,000
shares. The accompanying financial statements and related notes thereto have been adjusted accordingly to reflect this forward
stock split.
On May 26, 2010, the Company
issued 20,000 (post reverse stock split) shares of its common stock to a Director for services valued at $25,000 based on the
current market price of the stock minus a discount for the restricted trading.
On February 25, 2011, the Company
issued 24,000 (post reverse stock split) shares of its common stock to Directors for repayment of loans of $49,000 based on the
current market price of the stock minus a discount for the restricted trading.
On August 26, 2011, the Company
issued 360,000 (post reverse stock split) shares of its common stock to Directors for services valued at $108,000 based on the
current market price of the stock minus a discount for the restricted trading.
On September 8, 2011, the Company
issued 60,000 (post reverse stock split) shares of its common stock for services valued at $25,500 based on the current market
price of the stock minus a discount for the restricted trading.
From January 1, 2011 to December
31, 2011, the Company issued 148,320 (post reverse stock split) shares of its common stock valued at $77,237 to retire convertible
debt and accrued interest of $5,437.
On October 7, 2011, the Company
filed a certificate of amendment of certificate of incorporation with the state of Delaware to increase the amount of authorized
common stock to 1,000,000,000 shares.
On January 4, 2012, the Company
issued 100,000 (post reverse stock split) shares of its common stock to a consultant for services valued at $35,500.
On February 2, 2012, the Company
issued 400,000 (post reverse stock split) shares of its common stock to two directors for services valued at $142,000.
On March 2, 2012, the Company
implemented a 1 for 500 reverse stock split on its issued and outstanding shares of common stock to the holders of record.
After the reverse split, the number of shares of common stock issued and outstanding were 1,318,868 shares. The accompanying financial
statements and related notes thereto have been adjusted accordingly to reflect this reverse stock split.
On June
5, 2012, the Company issued 1,875,000 shares of its common stock to a consultant for services valued at $28,125.
On June
5, 2012, the Company issued 1,875,000 shares of its common stock to a consultant for services valued at $28,125.
On June 5, 2012, the Company
issued 16,531,175 to an investor for $250,000.
On June 21, 2012, the Company
issued 500,000 shares of its common stock to a consultant for services valued at $7,500.
From January
1, 2012 to June 30, 2012, the Company issued 127,783 shares of its common stock valued at $9,500 to retire convertible debt and
accrued interest.
During the three months ended
September 30, 2012, the Company issued 145 shares of its Series B preferred convertible stock for proceeds of $8,700 and received
paid subscriptions of $76,410 for additional preferred shares.
Note
7-
Income Taxes
The provision
(benefit) for income taxes for the period ended September 30, 2012 and 2011 was as follows (assuming a 23% effective tax rate):
|
|
2012
|
|
2011
|
|
|
|
|
|
Current Tax Provision:
|
|
|
|
|
Federal-
|
|
|
|
|
Taxable
income
|
|
$-
|
|
$-
|
|
|
|
|
|
Total
current tax provision
|
|
$-
|
|
$-
|
|
|
|
|
|
|
|
|
|
Deferred Tax Provision:
|
|
|
|
|
|
|
|
|
Federal-
|
|
|
|
|
|
|
|
|
Loss carryforwards
|
|
$
|
171,362
|
|
|
$
|
38,187
|
|
Nondeductible interest expense
|
|
|
(400
|
)
|
|
|
(15,233
|
)
|
Change in valuation
allowance
|
|
|
(170,962
|
)
|
|
|
(22,954
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax
provision
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company
had deferred income tax assets as of September 30, 2012 and December 31, 2011 as follows:
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
|
Loss carryforwards
|
|
$
|
292,574
|
|
|
$
|
121,611
|
|
Less - Valuation allowance
|
|
|
(292,574
|
)
|
|
|
(121,611
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred
tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
The Company
provided a valuation allowance equal to the deferred income tax assets for the periods ended September 30, 2012 and December 31,
2011, because it is not presently known whether future taxable income will be sufficient to utilize the loss carry-forwards.
As of September
30, 2012, the Company had approximately $1,272,000 in tax loss carryforwards that can be utilized in future periods to reduce
taxable income, and expire in the year 2032.
The Company
did not identify any material uncertain tax positions. The Company did not recognize any interest or penalties for unrecognized
tax benefits.
The Company
has filed income tax returns in the United States. All tax years are closed by expiration of the statute of limitations.
Note
8-
Related Party Transactions
On February 4, 2008, the Company
issued 38,080 (post reverse stock split) shares of common stock to directors of the Company, for $272.
As described in Note 6, on
May 26, 2010, the Company issued 20,000 (post reverse stock split) shares of its common stock to a Director for services valued
at $25,000.
On February 25, 2011, the Company
issued 24,000 (post reverse stock split) shares of its common stock to Directors for repayment of loans of $49,000 based on the
current market price of the stock minus a discount for the restricted trading.
On August 26, 2011, the Company
issued 360,000 (post reverse stock split) shares of its common stock to Directors for services valued at $108,000 based on the
current market price of the stock minus a discount for the restricted trading.
On February 2, 2012, the Company
issued 400,000 (post reverse stock split) shares of its common stock to two directors for services valued at $142,000.
During the nine months ended
September 30, 2012 the Company paid fees to related parties amounting to $647,804.
Note
9- Commitments
On June
15, 2008, the Company entered into a Transfer Agent and Registrar Agreement with Nevada Agency and Trust Company ("NATCO").
Under the Agreement, the Company agreed to pay to NATCO an annual fee of $1,500 for the first year and $1,800 for every year thereafter.
NATCO will act as the Company’s transfer agent and registrar.
As described
in Note 2, in January 2008, the Company entered into a Assignment Agreement whereby the Company acquired all of the rights, title
and interest in the invention known as the “Self operated computerized karaoke recording booth” for consideration
of royalties ranging from 1% to 5% based on the net income of the Company for 30 years from the date of the Company's incorporation.
Note
10-
Concentration of Credit Risk
The Company’s
cash and cash equivalents are invested in a major bank in Israel and are not insured. Management believes
that the financial institution that holds the Company’s investments is financially sound and accordingly, minimal credit
risk exists with respect to these investments.