NOTE 1
－
ORGANIZATION AND BUSINESS BACKGROUND
Organic Plant Health, Inc. was incorporated in the State of Nevada on September 5, 2007 and subsequently changed its name to QX Bio-Tech Group, Inc., then to Accumedspa Holdings, Inc., and finally to Organic Plant Health, Inc. on December 15, 2010. Organic Plant Health, LLC, (referred to herein as “OPH”), a North Carolina Limited Liability Company, was originally founded in Charlotte, NC in 2007 by Billy Styles and Alan Talbert. The business produces and distributes organic based fertilizers and soil conditioners for use in the continual care of residential and commercial landscapes.
On December 10, 2010, OPH entered into a Plan of Exchange agreement (the “Plan of Exchange”) between and among the members of OPH (“OPH Members”) and Acumedspa Holdings, Inc., (herein referred to as the Company), a publically traded Nevada corporation, and its majority shareholder, Mr.
Brian Sperber
.
Pursuant to the terms of the Plan of Exchange, Acumedspa Holdings, Inc.
acquired 100% of the membership interests of OPH in exchange for a transfer of 3,985,000 shares of the Company’s Convertible Preferred Stock to
OPH Members
, which
gave
OPH
Members a controlling interest in Acumedspa Holdings, Inc., representing approximately 76.47% of the then issued and outstanding shares on a dilutive basis.
OPH and Acumedspa Holdings, Inc.
were hereby reorganized, such that the Company acquired 100% of the ownership of
OPH
, and
OPH
became a wholly-owned subsidiary of the Company.
The stock exchange transaction was accounted for as a reverse acquisition and recapitalization of the Company whereby OPH was deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquiree (legal acquirer). The accompanying consolidated financial statements are in substance those of OPH, with the assets and liabilities, and revenues and expenses, of the Company being included effective from the date of stock exchange transaction. The Company is deemed to be a continuation of the business of OPH. Accordingly, the accompanying consolidated financial statements include the following:
|
|
(1)
|
The balance sheet consists of the net assets of the accounting acquirer at historical cost and the net assets of the accounting acquiree at historical cost;
|
|
|
(2)
|
The financial position, results of operations, and cash flows of the accounting acquirer for all periods presented as if the recapitalization had occurred at the beginning of the earliest period presented and the operations of the accounting acquiree from the date of stock exchange transaction.
|
On December 11, 2010, the Company vended out the two subsidiaries, ACUMEDSPA LLC, a Tennessee
Limited Liability Company
, and CONSUMER CARE OF AMERICA LLC, a Florida
Limited Liability Company,
pursuant to an Agreement entered between and among OPH and Chinita LLC
,
a Nevada Limited Liability Company (“Buyer”). Accordingly, the Buyer acquired 100% interest in ACUMEDSPA LLC and 100% interest in CONSUMER CARE OF AMERICA LLC, as well as any and all assets and liabilities in both subsidiaries in exchange for the total payments of not less than Two Hundred dollars ($200). As a result of the transactions consummated at the closing, the purchase gave the Buyer a controlling interest in both subsidiaries; therefore, ACUMEDSPA LLC and CONSUMER CARE OF AMERICA LLC were no longer wholly-owned subsidiaries of the Company.
Organic Plant Health, Inc. and OPH are hereinafter referred to as the “Company”.
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) under the accrual basis of accounting.
NOTE 2
－
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of accounts receivables, inventories, income taxes and the estimation on useful lives of property, plant and equipment. Actual results could differ from these estimates.
Basis of Consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiary.
All significant inter-company balances and transactions within the Company and subsidiary have been eliminated upon consolidation.
Cash and Cash Equivalents
The Company considers all short-term investments with a maturity of three months or less when purchased to be cash and equivalents for purposes of the statement of cash flows.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’ assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness and the economic environment. As of December 31, 2012 and 2011, the Company had allowances for uncollectible accounts of $1,970 and $2,577, respectively.
Inventory
Inventory consisted of finished goods and raw materials, and is valued at lower of cost or market value, cost being determined on the first-in, first-out method. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of December 31, 2012 and 2011, the Company did not record an allowance for obsolete inventories. The Company has periodically written off obsolete inventory. Inventory write-offs totaled $0 and $2,557 during the years ended December 31, 2012 and 2011, respectively
Fixed Assets, Net
Fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:
|
|
Depreciable life
|
|
Residual
value
|
|
Machinery and Equipment
|
5 years
|
|
|
5%
|
|
Furniture and fixture
|
7 years
|
|
|
5%
|
|
Software
|
3 years
|
|
|
5%
|
Expenditure for maintenance and repairs is expensed as incurred.
Fair Value for Financial Assets and Financial Liabilities
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification (“ASC”) for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB ASC (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
|
Level 1 -
|
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
Level 2 -
|
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
Level 3 -
|
Pricing inputs that are generally observable inputs and not corroborated by market data.
|
The carrying amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their fair values because of the short maturity of these instruments.
Derivative Financial Instruments
FASB ASC subtopic 815-40, Derivatives and Hedging, Contracts in Entity’s own Equity (“ASC 815-40”) became effective for the Company on October 1, 2009. The Company’s convertible debt has conversion provisions based on a discount the market price of the Company’s common stock.
The Company had derivative liabilities resulting from the issuance of convertible debt, which were measured at fair value on a recurring basis using an option pricing model, consistent with level 3 inputs. Consequently, the Company has adjusted the fair value of the derivative liabilities at December 31, 2012 and recorded a gain related to the change in the value of the derivative liability of $80,813 in the statement of operations that were attributable to the change in unrealized gains or losses relating to the derivative liabilities still held at the reporting date for the year ended December 31, 2012. There were no derivative liabilities at December 31, 2011 nor a gain or loss reported for the year ended December 31, 2011.
Revenue Recognition
In accordance with ASC 605-10-S99-1 for revenue recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured. The Company provides a warranty, but only in as much as the products conform to their descriptions and that they are reasonably fit for the purpose stated on the label, when used properly under normal conditions.
Sale of Products
The Company recognizes revenue from the sale of products upon delivery to the customers and the transfer of title and risk of loss. The Company did not record any product returns for the years ended December 31, 2012 and 2011, respectively.
License Income
License income is generated from the sale of license agreements, and optional license agreements, to approved distribution partners that desire to represent the Company in developing sales and marketing agreements with potential wholesale customers. The license fee paid by the approved distribution partners is a non-refundable, one-time charge and independent from the sale of products or services. The Company amortizes licensing revenue on a straight-line basis over the relative license periods.
Cost of Goods Sold
Cost of goods sold consists primarily of costs of raw materials, purchased goods, direct labor, and other costs directly attributable to the production of products. Write-down of inventories to lower of cost or market is also recorded in cost of goods sold.
Stock-Based Compensation
The Company accounts for stock-based compensation using the fair value method following the guidance set forth in ASC 718-10. This section requires a public entity to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which a consultant is required to provide service in exchange for the award within the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which consultants do not render the requisite service. During the years ended December 31, 2012 and 2011, the Company recorded $840,183 and $75,000, respectively, in compensation expense based on the fair value of services rendered in exchange for common shares issued to the consultants. These approximated the fair value of the shares at the dates of issuances.
Income Taxes
The Company follows ASC 740, “
Income Taxes
” regarding accounting for uncertainty in income taxes, which prescribes the recognition threshold, and measurement attributes for financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. In addition, the guidance requires the determination of whether the benefits of tax positions will be more likely than not sustained upon audit based upon the technical merits of the tax position. For tax positions that are determined to be more likely than not sustained upon audit, a company recognizes the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not determined to be more likely than not sustained upon audit, a company does not recognize any portion of the benefit in the financial statements. The guidance provides for de-recognition, classification, penalties and interest, accounting in interim periods and disclosure.
For the years ended December 31, 2012 and 2011, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2012 and 2011, the Company did not have any significant unrecognized uncertain tax positions.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
Loss per Share
The Company calculates net loss per share in accordance with FASB ASC 260,
“Earnings per Share”
. Basic loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding. No diluted loss per share is required to be represented.
Related Parties
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence. A material related party transaction has been identified in Note 7 and Note 8 in the financial statements.
Subsequent Events
The Company evaluated for subsequent events through the issuance date of the Company’s financial statements. See Note 15.
Recently Issued Accounting Standards
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the consolidated results of its operations.
In May 2011, FASB issued Accounting Standards Update No. 2011-04,
“Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”
(“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. The adoption of this standard did not materially expand its financial statement note disclosures.
In September 2011, the FASB issued ASU 2011-08, “
Testing Goodwill for Impairment
”, which allows, but does not require, an entity when performing its annual goodwill impairment test the option to first do an initial assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount for purposes of determining whether it is even necessary to perform the first step of the two-step goodwill impairment test. Accordingly, based on the option created in ASU 2011-08, the calculation of a reporting unit’s fair value is not required unless, as a result of the qualitative assessment, it is more likely than not that fair value of the reporting unit is less than its carrying amount. If it is less, the quantitative impairment test is then required. ASU 2011-08 also provides for new qualitative indicators to replace those currently used. Prior to ASU 2011-08, entities were required to test goodwill for impairment on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is performed to measure the amount of impairment loss, if any. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company adopted ASU 2011-08 during the first quarter of fiscal 2013. The adoption of ASU 2011-08 did not impact the Company’s results of operations or financial condition.
In December 2011, FASB issued Accounting Standards Update 2011-11, “
Balance Sheet - Disclosures about Offsetting Assets and Liabilities
” to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity's balance sheet. The update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. The new disclosure requirements relating to this update are retrospective and effective for annual and interim periods beginning on or after January 1, 2013. The update only requires additional disclosures, as such, the adoption of this standard had no a material impact on its results of operations, cash flows or financial condition.
In July 2012, the FASB issued ASU No. 2012-02, “
Testing Indefinite-Lived Intangible Assets for Impairment
”. The guidance allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test.
ASU 2012-02 allows companies the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired, before determining whether it is necessary to perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. Companies can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets or choose to only perform the quantitative impairment test for any indefinite-lived intangible in any period.
ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company is in the process of evaluating the guidance and the impact ASU 2012-02 will have on its consolidated financial statements.
NOTE 3
－
ACCOUNTS RECEIVABLE
Accounts receivable was comprised of the following amounts as of December 31, 2012 and 2011:
|
|
As of December 31,
|
|
|
|
2012
|
|
2011
|
|
|
Gross trade accounts receivable from customers
|
$
|
39,403
|
|
$
|
51,540
|
|
|
Allowance for doubtful customer accounts
|
|
(1,970
|
)
|
|
(2,577
|
)
|
|
Accounts receivable, net
|
$
|
37,433
|
|
$
|
48,963
|
|
The Company establishes an allowance for doubtful accounts based on managements’ assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness and the economic environment, which is approximately 5% of accounts receivable outstanding.
During the years ended December 31, 2012 and 2011, the Company had bad debt expenses of $(1,830) and $2,720, respectively, in the accompanying consolidated statements of operations.
Inventory was comprised of the following as of December 31, 2012 and 2011:
|
|
|
As of December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Raw materials
|
|
$
|
35,442
|
|
|
$
|
16,665
|
|
|
Work in process
|
|
|
-
|
|
|
|
-
|
|
|
Finished goods
|
|
|
24,121
|
|
|
|
22,147
|
|
|
Total inventory
|
|
|
59,563
|
|
|
|
38,812
|
|
|
Provision for obsolete inventories
|
|
|
-
|
|
|
|
-
|
|
|
Inventory, net
|
|
$
|
59,563
|
|
|
$
|
38,812
|
|
NOTE 5
－
PROPERTY AND EQUIPMENT
Property and equipment was comprised of the following as of December 31, 2012 and 2011:
|
|
|
As of December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Cost:
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
178,309
|
|
|
$
|
178,309
|
|
|
Furniture and fixtures
|
|
|
25,623
|
|
|
|
25,623
|
|
|
Software
|
|
|
13,252
|
|
|
|
13,252
|
|
|
Total cost
|
|
|
217,184
|
|
|
|
217,184
|
|
|
Less: Accumulated depreciation
|
|
|
(140,280
|
)
|
|
|
(110,410
|
)
|
|
Property and equipment, net
|
|
$
|
76,904
|
|
|
$
|
106,774
|
|
Depreciation expense was $29,870 and $30,109 for the years ended December 31, 2012, respectively.
The Company had outstanding balances on its notes payable of the following amounts as of December 31, 2012 and 2011:
|
|
|
As of December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Bank of Granite, 8.5% interest rate, due on March 26, 2012
(1)
|
|
$
|
-
|
|
|
$
|
2,377
|
|
|
Bank of NC, 6.5% interest rate, due on June 30, 2013
(2)
|
|
|
32,007
|
|
|
|
66,337
|
|
|
Greentree Financial Group, 6% interest rate, due on January 1, 2013, net of discount
(3)
|
|
|
100,000
|
|
|
|
50,000
|
|
|
NEKCO LLC, 20% interest rate, due on April 21, 2012. Default interest rate is 5% per month
(4)
|
|
|
40,000
|
|
|
|
40,000
|
|
|
Mark Blumberg, 5.75% interest rate, due on October 1, 2015
(5)
|
|
|
84,638
|
|
|
|
96,823
|
|
|
Asher Enterprises Inc., 8% interest rate, due on December 9, 2012, paid in full by 47,134 shares of common stock
(6)
|
|
|
-
|
|
|
|
-
|
|
|
Asher Enterprises Inc., 8% interest rate, due on February 4, 2013, net of discount $11,375
(7)
|
|
|
9,125
|
|
|
|
-
|
|
|
Asher Enterprises Inc., 8% interest rate, due on April 5, 2013, net of discount $32,500
(8)
|
|
|
-
|
|
|
|
-
|
|
|
G5 Capital Advisors, 8% interest rate, due on December 31, 2014, net of discount $94,981
(9)
|
|
|
10,019
|
|
|
|
-
|
|
|
Total notes payable
|
|
|
275,789
|
|
|
|
255,537
|
|
|
Less: Current portion of notes payable
|
|
|
(207,879
|
)
|
|
|
(103,310
|
)
|
|
Total long-term notes payable
|
|
$
|
67,910
|
|
|
$
|
152,227
|
|
|
(1)
|
The Company had a line of credit with Bank of Granite at an interest rate of prime plus 3 % per annum. The balance on this credit line was paid in full on February 21, 2012. The Company recorded interest expenses of $44 during the year ended December 31, 2012.
|
|
(2)
|
The Company has a loan payable to Bank of North Carolina at an interest rate of 6.5% per annum and due on June 30, 2013. The balance of this loan was $32,007 as of December 31, 2012, all of which was classified as short-term loan payable. The Company recorded interest expenses of $2,551during the year ended December 31, 2012.
|
|
(3)
|
On January 1, 2011, the Company entered into a convertible promissory note (GT Note) in a principal amount of $100,000 payable to Greentree Financial Group (“Greentree”), which bears an interest rate of 6% per annum and is due on January 1, 2013. Pursuant to GT Note, Greentree has an option to convert all or any portion of the accrued interest and unpaid principal balance of GT Note into the Common Stock of the Company or its successors, at Ten Cents ($.10) per share, no sooner than September 30, 2012. The conversion price associated with GT Note was determined based on the facts that the Company had nominal trading volume for its stock, and had negative shareholder equity at the time of issuance.
|
The GT Note was discounted in full due to the issuance of 20,000 shares of Common Stock as a sweetener to the GT Note, and the beneficial conversion feature. The fair value of the 20,000 shares was $68,245 determined by an arm’s length payable settlement with a non-affiliate since there was nominal trading volume of the Company’s common stock in the market. The amount was recorded as a discount to the note payable, which was amortized over 2 years beginning on January 1, 2011. The remaining discount of $31,755 represented the intrinsic value of the beneficial conversion option, which was also amortized over 2 years beginning on January 1, 2011. The Company recorded interest expense related to this note of $6,000 and amortization of the debt discount in the amount of $50,000 during the years ended December 31, 2012 and 2011, respectively. The carrying value of the GT Note was $100,000 as of December 31, 2012. The convertible promissory note in a principal amount of $100,000 payable to Greentree was due on January 1, 2013 and has not been paid. The Company is in negotiation process with Greentree to either refinance or pay it off.
|
(4)
|
The Company has a loan payable to NEKCO, LLC in the amount of $40,000 (“Principal Amount”) that was due on April 21, 2012 (“Maturity Date”). Interest accrued on the unpaid balance of the Principal Amount from December 21, 2011 until the maturity date of April 21, 2012, at the fixed rate of 20.0% calculated on the basis of a flat interest payment if the loan is repaid on or before Maturity Date. The loan went into default on April 21, 2012 and the default interest will be accrued at a rate of 5% per month on the outstanding balance. Accordingly, the Company recorded interest expense of $24,000 related to this note during the year ended December 31, 2012.
|
|
(5)
|
The Company has a loan payable to Mark Blumberg (“Mr. Blumberg”), a former member of the Company, at an interest rate of 5.75% per annum and due on October 1, 2015. The loan was due to the redemption of Mr. Blumberg’s membership of the Company pursuant to a settlement agreement entered on January 1, 2011. The balance of this loan was $84,638 as of December 31, 2012, of which $26,747 was classified as a current liability. The Company recorded interest expenses of $11,154 during the year ended December 31, 2012.
|
|
(6)
|
On March 9, 2012, the Company entered into a convertible promissory note (Asher Note I) in a principal amount of $42,500 payable to Asher Enterprises Inc. (“Asher”), which bears an interest rate of 8% per annum and is due on December 9, 2012. Pursuant to Asher Note I, Asher has an option to convert all or any portion of the accrued interest and unpaid principal balance of Asher Note I into the Common Stock of the Company or its successors, at 58% of the market price, no sooner than September 5, 2012. The conversion price associated with Asher Note I was determined based on the facts that the Company had nominal trading volume for its stock, and had negative shareholder equity at the time of issuance.
|
The Company has determined that the conversion feature of Asher Note I represents an embedded derivative since Asher Note I is convertible into a variable number of shares upon conversion. Accordingly, Asher Note I is not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of this derivative instrument has been recorded as a liability on the balance sheet with the corresponding amount recorded as a discount to Asher Note I. Such discount will be accreted from the commencing date of conversion period to the maturity date of Asher Note I. The change in the fair value of the derivative liability will be recorded in other income or expenses in the statement of operations at the end of each period, with the offset to the derivative liability on the balance sheet. The beneficial conversion feature included in Asher Note I resulted in an initial debt discount of $42,500 and an initial loss on the valuation of derivative liabilities of $3,682 based on the initial fair value of the derivative liability of $46,182. The fair value of the embedded derivative liability was calculated at conversion commencing date utilizing the following assumptions:
|
Conversion Commencing Date
|
|
|
Fair Value
|
|
|
Term
(Years)
|
|
|
Assumed Conversion Price
|
|
|
Market Price on Commencing Date
|
|
|
Volatility Percentage
|
|
|
Risk-free
Rate
|
|
|
9/5/12
|
|
|
$
|
46,182
|
|
|
|
0.26
|
|
|
$
|
1.70
|
|
|
$
|
3.25
|
|
|
|
314
|
%
|
|
|
0.016
|
|
|
|
In October of 2012, the principal of $42,500 and accrued interest of $1,700 were converted into 47,134 and 2,378 shares of Common Stock of the Company, respectively, pursuant to the terms of Asher Note I. The Company recorded interest expense related to this note of $1,700 and amortization of the debt discount in the amount of $42,500 during the year ended December 31, 2012.
|
|
(7)
|
On April 30, 2012, the Company entered into a convertible promissory note (Asher Note II) in a principal amount of $32,500 payable to Asher Enterprises Inc. (“Asher”), which bears an interest rate of 8% per annum and is due on February 4, 2013. Pursuant to Asher Note II, Asher has an option to convert all or any portion of the accrued interest and unpaid principal balance of Asher Note II into the Common Stock of the Company or its successors, at 58% of the market price, no sooner than October 27, 2012. The conversion price associated with Asher Note II was determined based on the facts that the Company had nominal trading volume for its stock, and had negative shareholder equity at the time of issuance.
|
|
|
The Company has determined that the conversion feature of Asher Note II represents an embedded derivative since Asher Note II is convertible into a variable number of shares upon conversion. Accordingly, Asher Note II is not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of this derivative instrument has been recorded as a liability on the balance sheet with the corresponding amount recorded as a discount to Asher Note II. Such discount will be accreted from the commencing date of conversion period to the maturity date of Asher Note II. The change in the fair value of the derivative liability will be recorded in other income or expenses in the statement of operations at the end of each period, with the offset to the derivative liability on the balance sheet. The beneficial conversion feature included in Asher Note II resulted in an initial debt discount of $32,500 and an initial loss on the valuation of derivative liabilities of $1,271 based on the initial fair value of the derivative liability of $33,771. The fair value of the embedded derivative liability was calculated at conversion commencing date utilizing the following assumptions:
|
|
Conversion
Commencing Date
|
|
|
Fair Value
|
|
|
Term
(Years)
|
|
|
Assumed Conversion Price
|
|
|
Market Price on Commencing Date
|
|
|
Volatility Percentage
|
|
|
Risk-free
Rate
|
|
|
10/27/12
|
|
|
$
|
33,771
|
|
|
|
0.27
|
|
|
$
|
0.75
|
|
|
$
|
1.40
|
|
|
|
387
|
%
|
|
|
0.018
|
|
|
|
On November 30, 2012, principal of $12,000 was converted into 40,678 shares of Common Stock of the Company pursuant to the terms of Asher Note II. At December 31, 2012, the Company revalued the embedded derivative liability related to the remaining balance of $20,500. For the period from conversion commencing date to December 31, 2012, the Company decreased the derivative liability of $33,771 by $9,074 resulting in a derivative liability of $24,697 at December 31, 2012.
|
The fair value of the embedded derivative liability was calculated at December 31, 2012 utilizing the following assumptions:
|
Fair Value
|
|
|
Term
(Years)
|
|
|
Assumed Conversion
Price
|
|
|
Volatility Percentage
|
|
|
Risk-free
Rate
|
|
|
$
|
24,697
|
|
|
|
0.096
|
|
|
$
|
0.15
|
|
|
|
528
|
%
|
|
|
0.018
|
|
The carrying value of Asher Note II was $9,125, net of the remaining debt discount, as of December 31, 2012. The Company recorded interest expense related to this note of $1,664 and amortization of the debt discount in the amount of $21,125 during the year ended December 31, 2012.
|
(8)
|
On July 2, 2012, the Company entered into a convertible promissory note (Asher Note III) in a principal amount of $32,500 payable to Asher Enterprises Inc. (“Asher”), which bears an interest rate of 8% per annum and is due on April 5, 2013. Pursuant to Asher Note III, Asher has an option to convert all or any portion of the accrued interest and unpaid principal balance of Asher Note II into the Common Stock of the Company or its successors, at 58% of the market price, no sooner than December 29, 2012. The conversion price associated with Asher Note III was determined based on the facts that the Company had nominal trading volume for its stock, and had negative shareholder equity at the time of issuance.
|
The Company has determined that the conversion feature of Asher Note III represents an embedded derivative since Asher Note III is convertible into a variable number of shares upon conversion. Accordingly, Asher Note III is not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of this derivative instrument has been recorded as a liability on the balance sheet with the corresponding amount recorded as a discount to Asher Note III. Such discount will be accreted from the commencing date of conversion period to the maturity date of Asher Note III. The change in the fair value of the derivative liability will be recorded in other income or expenses in the statement of operations at the end of each period, with the offset to the derivative liability on the balance sheet. The beneficial conversion feature included in Asher Note III resulted in an initial debt discount of $32,500 and an initial loss on the valuation of derivative liabilities of $12,230 based on the initial fair value of the derivative liability of $44,730. The fair value of the embedded derivative liability was calculated at conversion commencing date utilizing the following assumptions:
|
Conversion
Commencing Date
|
|
|
Fair Value
|
|
|
Term
(Years)
|
|
|
Assumed Conversion Price
|
|
|
Market Price on Commencing Date
|
|
|
Volatility Percentage
|
|
|
Risk-free
Rate
|
|
|
12/29/12
|
|
|
$
|
44,730
|
|
|
|
0.26
|
|
|
$
|
0.15
|
|
|
$
|
0.35
|
|
|
|
528
|
%
|
|
|
0.018
|
|
|
|
There was no revaluation for Asher Note III at December 31, 2012 due to immateriality. The carrying value of Asher Note III was $0 as of December 31, 2012 since the amortization of the debt discount did not start until January 1, 2013. The Company recorded interest expense related to this note of $1,296 during the year ended December 31, 2012.
|
|
(9)
|
On October 15, 2012, the Company entered into a convertible promissory note (G5 Note) in a principal amount of $105,000 payable to G5 Capital Advisors (“G5”) for services through January 31, 2013, which bears an interest rate of 8% per annum and is due on December 31, 2014. Pursuant to the Note, G5 has an option to convert all or any portion of the accrued interest and unpaid principal balance of the Note into the Common Stock of the Company or its successors, at 80% of the market price, at any time after the grant date. The conversion price associated with the G5 Note was determined based on the facts that the Company had nominal trading volume for its stock, and had negative shareholder equity at the time of issuance.
|
The Company has determined that the conversion feature of G5 Note represents an embedded derivative since G5 Note is convertible into a variable number of shares upon conversion. Accordingly, G5 Note is not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of this derivative instrument has been recorded as a liability on the balance sheet with the corresponding amount recorded as a discount to G5 Note. Such discount will be accreted from the grant date to the maturity date of G5 Note. The change in the fair value of the derivative liability will be recorded in other income or expenses in the statement of operations at the end of each period, with the offset to the derivative liability on the balance sheet. The beneficial conversion feature included in G5 Note resulted in an initial debt discount of $105,000 and an initial loss on the valuation of derivative liabilities of $91,747 based on the initial fair value of the derivative liability of $196,747. The fair value of the embedded derivative liability was calculated at grant date utilizing the following assumptions:
|
Grant Date
|
|
|
Fair Value
|
|
|
Term
(Years)
|
|
|
Assumed Conversion Price
|
|
|
Market Price on Grant Date
|
|
|
Volatility Percentage
|
|
|
Risk-free
Rate
|
|
|
10/15/12
|
|
|
$
|
196,747
|
|
|
|
2.21
|
|
|
$
|
1.05
|
|
|
$
|
2.15
|
|
|
|
399
|
%
|
|
|
0.0027
|
|
|
|
At December 31, 2012, the Company revalued the embedded derivative liability. For the period from the grant date to December 31, 2012, the Company decreased the derivative liability of $196,747 by $25,557 resulting in a derivative liability of $171,190 at December 31, 2012.
|
The fair value of the embedded derivative liability was calculated at December 31, 2012 utilizing the following assumptions:
|
Fair Value
|
|
|
Term
(Years)
|
|
|
Assumed Conversion
Price
|
|
|
Volatility Percentage
|
|
|
Risk-free
Rate
|
|
|
$
|
171,190
|
|
|
|
2
|
|
|
$
|
0.20
|
|
|
|
569
|
%
|
|
|
0.0025
|
|
The carrying value of the G5 Note was $10,019 as of December 31, 2012. The Company recorded interest expense related to this note of $1,772 and amortization of the debt discount in the amount of $10,019 during the year ended December 31, 2012.
NOTE 7
－
NOTES PAYABLE – RELATED PARTIES
The Company had outstanding balances on its notes payable – related parties of the following amounts as of December 31, 2012 and 2011:
|
|
|
As of December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Shareholder loans, Prime plus 2.5% interest rate, due July 2012, under negotiation process
|
|
$
|
55,800
|
|
|
$
|
55,800
|
|
|
Loans from officer, 5.5% interest rate, due on demand
|
|
|
15,884
|
|
|
|
60,884
|
|
|
Loan from officer, 13.17% interest rate, due on demand
|
|
|
35,000
|
|
|
|
-
|
|
|
Loans from company owned by shareholders, 5.5% interest rate, due May 2016
|
|
|
42,500
|
|
|
|
42,500
|
|
|
Total notes payable
|
|
|
149,184
|
|
|
|
159,184
|
|
|
Less: Current portion of notes payable
|
|
|
(106,684
|
)
|
|
|
(116,684
|
)
|
|
Total long-term notes payable
|
|
$
|
42,500
|
|
|
$
|
42,500
|
|
In July 2009, the Company’s shareholders made several loans in totaling $275,000 to the Company to fund its operations. The shareholder loans were evidenced by promissory notes due in July 2012, with interest at the floating interest rate of Prime plus 2.5%. The interest rate will be adjusted each calendar quarter of January 1, April 1, July 1 and October 1. The loans expired in July 2012 and are currently in default. The Company recorded interest expenses of $3,209 during the year ended December 31, 2012.
In addition, the Company had outstanding balances of $50,884 due to the Company’s President as of December 31, 2012. The funds borrowed from the Company’s President were to fund the Company’s operations. There are no formal promissory notes. Rather verbal agreements between the President and the Company dictate the terms. The notes unsecured and due on demand. Accordingly, the Company recorded interest expenses of $5,815 during the year ended December 31, 2012.
The Company has a loan payable to US Green Pros, LLC, a related party to the Company, at an interest rate of 5.5% per annum and which is due in full on May 17, 2016. The balance of this loan was $42,500 as of December 31, 2012. Accordingly, the Company recorded interest expenses of $2,338 during the year ended December 31, 2012.
NOTE 8
－
RELATED PARTIES TRANSACTION
In addition to the notes payable to related parties set forth in Note 7, the Company had the following related party transactions during the year ended December 31, 2012.
During the first quarter of 2012, one of the current shareholders submitted a subscription agreement to the Company regarding the purchase of 16,000 shares of the Company’s Common Stock at a price of $2.50 per share for cash proceeds of $40,000. The transaction was independently negotiated between the Company and the related party.
On October 8, 2012, the Board of Directors of the Company approved the issuance of 21,667 restricted shares of the Company’s Common Stock to settle stock payable to related party in amount of $32,500, which was in connection with subscription agreements entered into in August of 2011. The fair value of the stock issuance was determined by 75% of weighted average price of the Company’s Common Stock on the grant dates, at a price of approximately $1.50 per share.
NOTE 9
－
CAPITAL TRANSACTIONS
On December 19, 2012, the Board of Directors and Majority Shareholders of the Company authorized the effectuation of a 1-for-50 reverse split of the Company’s Common Stock. Accordingly, the Reverse Split combined the Company’s outstanding Common Stock on the basis of 50 outstanding shares being changed to 1 outstanding share. The Reverse Split became effective upon filing a Certificate of Change with the Secretary of State of the State of Nevada and receiving approval from FINRA on January 23, 2013. All share and per share data in the consolidated financial statements and notes to the consolidated financial statements has been restated per FASB 128 paragraph 134, as if the Reverse Split took effect at the beginning of the periods presented.
Common Stock Issued for Cash
During the first quarter of 2012, one investor submitted a subscription agreement to the Company regarding the purchase of 2,500 shares of the Company’s Common Stock at a price of $10 per share for cash proceeds of $25,000. The transaction was independently negotiated between the Company and the investor.
During the first quarter of 2012, one of the current shareholders submitted a subscription agreement to the Company regarding the purchase of 16,000 shares of the Company’s Common Stock at a price of $2.50 per share for cash proceeds of $40,000. The transaction was independently negotiated between the Company and the related party.
During the second quarter of 2012, five investors submitted subscription agreements to the Company regarding the purchase of 11,600 shares of the Company’s Common Stock at a price of $2.50 per share for cash proceeds of $29,000. The transaction was independently negotiated between the Company and the investors.
Common Stock Issued for Settlement
On October 3, 2012, the Board of Directors of the Company approved the issuance of 2,500 shares of the Company’s Common Stock to settle accounts payable of $6,750 to the corporate counsel. The fair value of the stock issuance was determined by the market price of the Company’s Common Stock on the grant dates, at a price of approximately $2.50 per share. The transaction was independently negotiated between the Company and the creditor.
On October 8, 2012, the Board of Directors of the Company approved the issuance of 21,667 restricted shares of the Company’s Common Stock to settle a stock payable to a related party in the amount of $32,500, which was in connection with subscription agreements entered into in August of 2011. The fair value of the stock issuance was determined by 75% of the weighted average price of the Company’s Common Stock on the grant dates, at a price of approximately $1.50 per share.
On December 3, 2012, the Board of Directors of the Company approved the issuance of 21,751 shares of the Company’s Common Stock to settle accounts payable of $11,202 to a non-related party. The fair value of the stock issuance was determined by the market price of the Company’s Common Stock on the grant dates, at a price of approximately $0.50 per share. The transaction was independently negotiated between the Company and the creditor.
Common Stock Issued for Note Conversion
In October 2012, principal of $42,500 and accrued interest of $1,700 of Asher Note I were converted into 47,134 and 2,378 shares of Common Stock of the Company, respectively, at a price of approximately $0.89 per share, representing 58% of the market price on the conversion dates.
On December 3, 2012, principal of $12,000 of Asher Note II was converted into 40,678 shares of Common Stock of the Company, at a price of approximately $0.29 per share, representing 58% of the market price on the conversion dates.
NOTE 10
－
STOCK BASED COMPENSATION
On April 1, 2012, the Company entered into a consulting agreement with a Consultant for business advisory services during the period from April 1, 2012 through September 30, 2012, in exchange for the issuance of 50,000 restricted shares of Common Stock of the Company. The fair value of the stock issuance was determined by 70% of the market value of the Company’s Common Stock on the grant date, at a price of approximately $6.30 per share. Accordingly, the Company calculated the stock based compensation of $315,000 at its fair value, which was recognized in full to the accompanying consolidated statements of operations since this agreement was deemed fully executed by December 31, 2012.
On April 1, 2012, the Company entered into another consulting agreement with the same Consultant for business advisory services during the period from April 1, 2012 through March 31, 2013, in exchange for the issuance of 64,000 restricted shares of Common Stock of the Company. The agreement was amended on October 1, 2012, pursuant to which additional 16,000 shares were issued for compensation. The fair value of the stock issuance was determined by 70% of the weighted average price of the Company’s Common Stock on the grant dates, at a price of approximately $5.40 per share. Accordingly, the Company calculated the stock based compensation of $431,200 at its fair value and booked pro rata within the relative service periods. For the year ended December 31, 2012, the Company recognized stock based compensation of $331,781 to the accompanying consolidated statements of operations and recorded deferred compensation in amount of $99,419 as of December 31, 2012.
On June 4, 2012, the Company entered into an agreement with a Consultant for marketing services during the period from June 4, 2012 through December 3, 2012 in exchange for the total issuance of 15,000 restricted shares of Common Stock. The fair value of the stock issuance was determined by 70% of the market value of the Company’s Common Stock on the grant date, at a price of approximately $2.80 per share. Accordingly, the Company calculated the stock based compensation of $42,000 at its fair value, which was recognized in full to the accompanying consolidated statements of operations since this agreement was deemed fully executed by December 31, 2012.
On August 6, 2012, the Company entered into an agreement with a Consultant for financial strategies services during the period from August 6, 2012 through February 5, 2013, in exchange for the issuance of 30,000 restricted shares of Common Stock of the Company. The fair value of the stock issuance was determined by 70% of the weighted average price of the Company’s Common Stock on the grant dates, at a price of approximately $3.15 per share. Accordingly, the Company calculated the stock based compensation of $94,500 at its fair value and booked pro rata within the relative service periods. For the year ended December 31, 2012, the Company recognized stock based compensation of $76,464 to the accompanying consolidated statements of operations and recorded deferred compensation in amount of $18,036 as of December 31, 2012.
On October 12, 2012, the Company entered into an agreement with a Consultant for marketing services during the period from October 12, 2012 through January 31, 2013, in exchange for the issuance of 65,500 restricted shares of Common Stock of the Company. The fair value of the stock issuance was determined by 70% of weighted average price of the Company’s Common Stock on the grant dates, at a price of approximately $1.50 per share. Accordingly, the Company calculated the stock based compensation of $105,000 at its fair value and booked pro rata within the relative service periods. For the year ended December 31, 2012, the Company recognized stock based compensation of $75,138 to the accompanying consolidated statements of operations and recorded deferred compensation in amount of $29,862 as of December 31, 2012.
NOTE 11
－
COMMITMENT AND CONTINGENCIES
The Company leases its retail stores and manufacturing facilities under non-cancelable operating lease agreements. The Company has no long-term lease agreements as the current expansion plans call for the Company to move to larger manufacturing and warehousing facilities in 2013. The Company is currently working on a new lease agreement.
For the years ended December 31, 2012 and 2011, the Company had rental expenses of $123,379 and $122,694, respectively.
Basic net loss per share is computed using the weighted average number of common shares outstanding during the years ended December 31, 2012 and 2011, respectively. There was no dilutive earning per share due to net losses during the periods.
The following table sets forth the computation of basic net loss per share for the periods indicated:
|
|
For the Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
Numerator: Net loss
|
$
|
(1,401,300
|
)
|
$
|
(469,990
|
)
|
|
Denominator: Weighted average common shares outstanding
|
|
1,392,824
|
|
|
1,021,179
|
|
|
Basic net loss per share
|
$
|
(1.01
|
)
|
$
|
(0.46
|
)
|
NOTE 13
－
CONCENTRATION AND RISK
Major Customers
Major customers with their revenues are presented as follows for the year ended December 31, 2012:
|
Customer
|
|
Revenues
|
|
Percent
|
|
Accounts
Receivable
|
|
|
Customer A
|
|
$
|
75,652
|
|
9%
|
|
$
|
-
|
|
|
Customer B
|
|
|
44,072
|
|
5%
|
|
|
6
|
|
|
Customer C
|
|
|
42,208
|
|
5%
|
|
|
2,781
|
|
|
Customer D
|
|
|
38,089
|
|
5%
|
|
|
1,239
|
|
|
|
|
$
|
173,358
|
|
24%
|
|
$
|
4,020
|
|
The Company had no customers whose purchases represented 10% or more of the Company’s total revenues during the year ended December 31, 2011.
Major Vendors
During the year ended December 31, 2012, major vendors were as follows:
|
Vendor
|
|
Purchases
|
|
Percent
|
|
Accounts
Payable
|
|
|
Vendor A
|
|
$
|
242,068
|
|
61%
|
|
$
|
91,154
|
|
|
Vendor B
|
|
|
39,790
|
|
10%
|
|
|
-
|
|
|
Vendor C
|
|
|
35,453
|
|
9%
|
|
|
37,542
|
|
|
Vendor D
|
|
|
22,744
|
|
6%
|
|
|
11,332
|
|
|
|
|
$
|
340,055
|
|
86%
|
|
$
|
140,028
|
|
During the year ended December 31, 2011, major vendors were as follows:
|
Vendor
|
|
Purchases
|
|
Percent
|
|
Accounts
Payable
|
|
|
Vendor A
|
|
$
|
90,006
|
|
24%
|
|
$
|
-
|
|
|
Vendor B
|
|
|
56,405
|
|
15%
|
|
|
-
|
|
|
Vendor C
|
|
|
40,212
|
|
11%
|
|
|
28,851
|
|
|
Vendor D
|
|
|
35,520
|
|
9%
|
|
|
-
|
|
|
|
|
$
|
222,143
|
|
59%
|
|
$
|
28,851
|
|
Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.
NOTE 14
－
GOING CONCERN
These consolidated financial statements have been prepared assuming that Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
As of December 31, 2012, the Company had an accumulated deficit of $2,652,736. Management has taken certain action and continues to implement changes designed to improve the Company’s financial results and operating cash flows. The actions involve certain cost-saving initiatives and growing strategies, including (a) reductions in raw materials costs, as well as packaging costs; and (b) expansion of the business model into new markets. Management believes that these actions will enable the Company to improve future profitability and cash flow in its continuing operations through December 31, 2013. As a result, the 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 outcome of the Company’s ability to continue as a going concern.
Management is confident that it will secure adequate funding to propel its operations and expansion into new markets. Management is in the process of reviewing several potential funding agreements, which, if one is selected, will provide the necessary resources to meet expansion goals set by the Company for the foreseeable future. These funds, if secured, will be used to fund key initiatives related to the expansion into other markets and product categories, and to fund its ongoing operations. Although management is confident that it will be able to secure such funding, there is no guarantee that such a funding agreement will be secured, nor is there any assurance that if a funding agreement is secured, that the Company will be able to expand its operations into new markets and product categories.
NOTE 15
－
SUBSEQUENT EVENTS
In accordance with ASC Topic 855-10, the Company has analyzed its operations subsequent to December 31, 2012 to the date these consolidated financial statements were issued. Besides the transactions disclosed below, the Company does not have other material subsequent events to disclose in these consolidated financial statements.
On December 19, 2012, the Board of Directors and Majority Shareholders of the Company authorized the effectuation of a 1-for-50 reverse split of the Company’s Common Stock (the “Reverse Split”). Accordingly, the Reverse Split combined the Company’s outstanding Common Stock on the basis of 50 outstanding shares being changed to 1 outstanding share. The Reverse Split became effective upon filing a Certificate of Change with the Secretary of State of the State of Nevada and receiving approval from FINRA on January 23, 2013. The consolidated statement of stockholders’ equity has been restated per FASB 128 paragraph 134, as if the Reverse Split took effect at the beginning of the periods presented.
On January 2, 2013, the Company issued 68,572 shares to Asher to partially settle the principal of Asher Note II, in amount of $12,000. The remaining balance of $8,500 in Asher Note II and the principal of $32,500 in Asher Note III were bought out by cash payment of $40,000 on January 25, 2013.
On January 24, 2013, the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Kenactiv Innovations Inc., a Delaware corporation (“Kenactiv”), pursuant to which (a) the Company has issued to Kenactiv fifty-four million sixty-two thousand eight hundred and eighty-five (54,062,885) shares of the Company’s common stock, par value $.001 (the “OPHI Shares”), and (b) Kenactiv has (i) issued fifty million (50,000,000) shares of Kenactiv’s common stock, par value, $.001 (the “Kenactiv Shares”) to the Company; and (ii) committed up to Three Hundred and Fifty Thousand U.S. Dollars ($350,000) to the Company (the “Kenactiv Investment”). In connection with the execution of the Share Exchange Agreement, the Company experienced a change in control.