Attached files
| file | filename |
|---|---|
| EX-32.1 - CERTIFICATION - Hydrogen Future Corp | aflb_ex321.htm |
| EX-31.1 - CERTIFICATION - Hydrogen Future Corp | aflb_ex311.htm |
| EX-31.2 - CERTIFICATION - Hydrogen Future Corp | aflb_ex312.htm |
| EX-32.2 - CERTIFICATION - Hydrogen Future Corp | aflb_ex322.htm |
| EXCEL - IDEA: XBRL DOCUMENT - Hydrogen Future Corp | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2012
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-138927
A5 LABORATORIES INC.
(Exact Name of registrant as specified in its charter)
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Nevada
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20-5277531
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(State or other Jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification Number)
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2525 Robinhood Street, Suite 1100
Houston, TX 77005
(Address of principal executive offices)
(713) 465-1001
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:
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Large Accelerated Filer
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¨
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Accelerated Filer
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¨
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Non-Accelerated Filer
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¨
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Smaller Reporting Company
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þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of September 3, 2013, there were 100,000,000 shares outstanding of the registrant’s common stock.
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Page
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| PART I—FINANCIAL INFORMATION | |||||
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| Item 1. | 3 | ||||
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| Item 2. | 19 | ||||
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| Item 3. | 25 | ||||
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| Item 4. | 25 | ||||
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| PART II—OTHER INFORMATION | |||||
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| Item 1. | 26 | ||||
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| Item 1A. | 26 | ||||
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| Item 2. | 26 | ||||
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| Item 3. | 26 | ||||
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| Item 4. | 26 | ||||
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| Item 5. | 26 | ||||
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| Item 6. | 27 | ||||
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| 28 | |||||
2
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A5 Laboratories, Inc.
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(A Development Stage Company)
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Balance Sheets
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December 31,
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September 30,
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|||||||
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2012
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2012
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(Unaudited)
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Assets
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Current assets
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Cash
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$ | 788 | $ | 788 | ||||
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Other receivables
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1,079 | 1,079 | ||||||
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Total current assets
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1,867 | 1,867 | ||||||
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Property and equipment - net
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225,166 | 233,699 | ||||||
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Debt issue costs - net
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26,123 | 29,182 | ||||||
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Total assets
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$ | 253,156 | $ | 264,748 | ||||
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Liabilities and Stockholders' (Deficit)
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Current Liabilities
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Accounts payable and accrued liabilities
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$ | 122,610 | $ | 122,610 | ||||
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Accounts payable - related party
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415,719 | 415,719 | ||||||
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Accrued interest payable
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48,272 | 37,458 | ||||||
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Notes/Advances payable - related party
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27,173 | 27,173 | ||||||
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Advances payable
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- | - | ||||||
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Derivative liability
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49,159 | 134,678 | ||||||
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Convertible debt - net
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434,108 | 165,145 | ||||||
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Total current liabilities
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1,097,041 | 902,783 | ||||||
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Stockholders' (Deficit)
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Preferred stock, $0.001 par value, 100,000,000 shares authorized; none issued and outstanding
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- | - | ||||||
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Common stock, $0.001 par value, 100,000,000 shares authorized; 61,354,369 and 46,354,369 issued and outstanding
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61,438 | 46,438 | ||||||
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Additional paid-in capital
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2,097,516 | 2,054,016 | ||||||
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Deficit accumulated during the development stage
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(3,003,345 | ) | (2,738,994 | ) | ||||
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Accumulated other comprehensive income
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505 | 505 | ||||||
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Total stockholders' (deficit)
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(843,885 | ) | (638,035 | ) | ||||
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Total liabilities and stockholders' (deficit)
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$ | 253,156 | $ | 264,748 | ||||
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A5 Laboratories, Inc.
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(A Development Stage Company)
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Statements of Operations
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(Unaudited)
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Three Months Ended December 31,
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June 21, 2006
(Inception) to
June 30,
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2012
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2011
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2012
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Expenses
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General and Administrative Expenses
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$ | 235,092 | $ | 202,105 | $ | 2,077,982 | ||||||
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Impairment of software
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- | - | $ | 1,035,027 | ||||||||
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Total
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235,092 | 202,105 | 3,113,009 | |||||||||
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Other (Expense)
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Interest expense
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(114,777 | ) | (72,781 | ) | $ | (410,281 | ) | |||||
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Tax refunds
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- | $ | 36,071 | |||||||||
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Derivative expense
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(137,631 | ) | $ | (1,478,257 | ) | |||||||
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Change in fair value of derivative liability
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223,150 | (163,404 | ) | $ | 1,962,132 | |||||||
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Total Other (Expense) - net
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(29,258 | ) | (236,185 | ) | 109,665 | |||||||
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Net Income (Loss)
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$ | (264,350 | ) | $ | (438,290 | ) | $ | (3,003,345 | ) | |||
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Net loss per common share - basic and diluted
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$ | (0.004 | ) | $ | (0.009 | ) | ||||||
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Weighted average number of common shares outstanding
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during the period/year - basic and diluted
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60,779,150 | 47,905,617 | ||||||||||
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A5 LABORATORIES, INC.
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(A Development Stage Company)
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Statements of Cash Flows
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(Unaudited)
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Three Months Ended December 31,
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June 21, 2006
(Inception) to
December 31,
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2012
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2011
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2012 | ||||||||||
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$ | (264,350 | ) | $ | (438,290 | ) | $ | (3,003,345 | ) | |||
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
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Share based payments
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58,500 | - | 239,500 | |||||||||
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Impairment of software
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- | 1,035,027 | ||||||||||
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Derivative expense
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137,631 | 1,478,257 | ||||||||||
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Depreciation
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8,533 | 8,854 | 409,483 | |||||||||
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Amortization of debt issue cost
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3,059 | 4,970 | 24,778 | |||||||||
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Amortization of debt discount
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103,963 | 64,336 | 340,289 | |||||||||
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Change in fair value of derivative liabilities
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(223,150 | ) | 163,404 | (1,962,132 | ) | |||||||
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Changes in operating assets and liabilities:
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(Increase) decrease in other receivables
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- | 77,321 | (1,079 | ) | ||||||||
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Increase (decrease) in accounts payable and accrued expense
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- | (12,965 | ) | 122,610 | ||||||||
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Increase in accounts payable - related party
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133,249 | 415,719 | ||||||||||
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Increase in accrued interest
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10,814 | 3,474 | 48,272 | |||||||||
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Net cash provided by (used in) operating activities
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(165,000 | ) | 4,353 | (852,620 | ) | |||||||
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchase of property and equipment
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- | (288,799 | ) | |||||||||
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Net cash used in investing activities
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- | - | (288,799 | ) | ||||||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from related party notes/advances
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- | 338 | 31,586 | |||||||||
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Proceeds from convertible notes payable
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340,303 | |||||||||||
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Notes Issued for Professional services
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165,000 | 1,802 | 218,727 | |||||||||
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Repayment of related party notes/advances
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- | (1,992 | ) | (968 | ) | |||||||
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Cash paid as debt offering costs
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- | (24,000 | ) | |||||||||
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Proceeds from issuance of common stock
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- | 579,500 | ||||||||||
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Net cash provided by financing activities
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165,000 | 148 | 1,145,148 | |||||||||
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Net (Decrease) in Cash
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- | 4,501 | 3,729 | |||||||||
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Effect of Exchange Rates on Cash
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(4,647 | ) | (2,941 | ) | ||||||||
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Cash - Beginning of Period/Year
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788 | 854 | ||||||||||
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Cash - End of Period/Year
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$ | 788 | $ | 708 | $ | 788 | ||||||
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SUPPLEMENTARY CASH FLOW INFORMATION:
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Cash paid during the period/year for:
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Interest
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$ | - | $ | - | $ | - | ||||||
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Income Taxes
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$ | - | $ | - | $ | - | ||||||
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SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
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Debt converted to common shares
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$ | - | $ | - | $ | 96,484 | ||||||
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Common stock issued to acquire software
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$ | - | $ | - | $ | 1,380,876 | ||||||
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Debt discount recorded on convertible debt accounted for as a derivative liability
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$ | - | $ | 300,000 | $ | 300,000 | ||||||
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Debt discount recorded on convertible debt accounted for as a derivative liability - original issue discount
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$ | - | $ | 27,122 | $ | 27,122 | ||||||
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Debt issue costs - warrants
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$ | - | $ | 26,901 | $ | 26,901 | ||||||
A5 Laboratories Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2012
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information.
The financial information as of September 30, 2012 is derived from the audited financial statements presented in the Company’s Annual Report on Form 10-K for the years ended September 30, 2012 and 2011. The unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, which contains the audited financial statements and notes thereto, together with the Management’s Discussion and Analysis, for the years ended September 30, 2012 and 2011.
Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The interim results for the three months ended December 31, 2012 are not necessarily indicative of results for the full fiscal year.
Note 2 Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
A5 Laboratories, Inc., (the “Company”) was incorporated in the State of Nevada on June 21, 2006. The Company was originally incorporated as El Palenque Nercery, Inc. and changed its name to El Palenque Vivero, Inc. on December 31, 2006. On March 23, 2010, it further changed its name to A5 Laboratories Inc., which is based in Quebec, Canada.
The Company intends to provide contract research and laboratory services to the pharmaceutical industry. To date, the activities of the Company have been limited to raising capital.
The Company’s fiscal year end is September 30.
Development Stage
The Company's financial statements are presented as those of a development stage enterprise. Activities during the development stage primarily include equity based financing and further implementation of the business plan.
Risks and Uncertainties
The Company intends to operate in an industry that is subject to rapid change. The Company’s operations will be subject to significant risk and uncertainties including financial, operational, technological, regulatory and other risks, including the potential risk of business failure.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 reported amounts of revenues and expenses during the reporting period.
A5 Laboratories Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2012
(Unaudited)
Such estimates for the periods ended December 31, 2012 and 2011, and assumptions affect, among others, the following:
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●
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estimated carrying value, useful lives and impairment of property and equipment;
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●
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estimated fair value of derivative liabilities;
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●
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estimated valuation allowance for deferred tax assets; and
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●
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estimated fair value of share based payments
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Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.
Cash and Cash Equivalents
The Company considers highly liquid financial instruments purchased with a maturity of three months or less to be cash equivalents. At December 31, 2012 and September 30, 2012, the Company had no cash equivalents.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. At December 31, 2012 and September 30, 2012, there were no balances that exceeded the federally insured limit.
Property and Equipment
Property and equipment (including related party purchases) is stated at cost, less accumulated depreciation computed on a straight-line basis over the estimated useful lives. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized when deemed material. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.
Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company recognized an impairment of $1,035,027 during the year ended September 30, 2011. See Note 6.
Beneficial Conversion Feature
For conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”) and related debt discount.
When the Company records a BCF, the relative fair value of the BCF would be recorded as a debt discount against the face amount of the respective debt instrument. The discount would be amortized to interest expense over the life of the debt.
Derivative Liabilities
Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.
A5 Laboratories Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2012
(Unaudited)
Debt Issue Costs and Debt Discount
The Company paid debt issue costs, and recorded debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized over the life of the debt to interest expense. When a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued, the Company provides the debt holder with an original issue discount. The original issue discount is recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.
Share-Based Payments
Generally, all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest. Share-based payment awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expense resulting from share-based payments are recorded as a component of general and administrative expense.
Earnings per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
Since the Company reflected a net loss in 2012 and 2011, respectively, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented.
The Company had the following potential common stock equivalents at December 31, 2012 and September 30, 2012:
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December 31,
2012
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September 30,
2012
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Warrants (1)
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7,894,737 | 7,894,737 | ||||||
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Convertible debt (1)
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442,326,525 | 91,061,086 | ||||||
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Total common stock equivalents (2)
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450,221,262 | 98,955,822 | ||||||
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(1)
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The potential shares for which these instruments can convert into common stock currently exceed the Company’s authorized shares for common stock. The Company has identified a debt and warrant holder who cannot exceed ownership in the Company by 9.99%. The investor is limited to 6,135,437 shares on a fully diluted basis, which is the Company’s maximum exposure at the balance sheet date.
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(2)
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There are other warrant holders included in total warrants besides those described in note (1) above.
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A5 Laboratories Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2012
(Unaudited)
Fair Value of Financial Instruments
The carrying amounts of the Company’s short-term financial instruments, other receivables, accounts payable and accrued liabilities, approximate fair value due to the relatively short period to maturity for these instruments.
Foreign Currency Transactions
The Company’s functional currency is the Canadian Dollar. The Company’s reporting currency is the U.S. Dollar. All transactions initiated in Canadian Dollars are translated to U.S. Dollars in accordance with ASC 830-10-20 “Foreign Currency Translation” as follows:
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(i)
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Monetary assets and liabilities at the rate of exchange in effect at the balance sheet date;
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(ii)
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Equity at historical rates; and
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(iii)
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Revenue and expense items at the average exchange rate prevailing during the period.
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Adjustments arising from such translations are deferred until realization and are included as a separate component of stockholders’ equity (deficit) as a component of comprehensive income (loss). Therefore, translation adjustments are not included in determining net income (loss) but reported as other comprehensive income (loss).
For foreign currency transactions, the Company translates these amounts to the Company’s functional currency at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made, a foreign exchange transaction gain or loss results which is included in determining net income for the period.
Comprehensive Income (Loss)
Comprehensive income or loss is comprised of net earnings or loss and other comprehensive income or loss, which includes certain changes in equity, excluded from net earnings, primarily foreign currency translation adjustments.
Foreign Country Risks
The Company may be exposed to certain risks as its operations are being conducted in Canada. The Company’s results may be adversely affected by change in the political and social conditions in Canada due to governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversions and remittances abroad, and rates and methods of taxation, among other things. The Company does not believe these risks to be significant, and no such losses have occurred in the current or prior periods because of these factors. However, there can be no assurance those changes in political and other conditions will not result in any adverse impact in future periods.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB's intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
A5 Laboratories Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2012
(Unaudited)
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The guidance in ASU 2011-05 applies to both annual and interim financial statements and eliminates the option for reporting entities to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. This ASU also requires consecutive presentation of the statement of net income and other comprehensive income. Finally, this ASU requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this ASU should be applied retrospectively and are effective for fiscal year, and interim periods within those years, beginning after December 15, 2011. The Company has adopted this guidance in these financial statements.
Note 3 Going Concern
As reflected in the accompanying financial statements, the Company had a net loss of $264,350 for the three months ended December 31, 2012. The Company also has a working capital deficit of $1,095,174 and a deficit accumulated during the development stage of $3,003,345 at December 31, 2012. In addition, the Company is in the development stage and has not yet generated any revenues. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue its operations is dependent on Management's plans, which include potential asset acquisitions, mergers or business combinations with other entities, further implementation of its business plan and continuing to raise funds through debt or equity raises. The Company will likely rely upon equity financing in order to ensure the continuing existence of the business.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 4 Fair Value of Financial Assets and Liabilities
The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels of inputs to measure fair value:
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●
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Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
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●
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Level 2: Inputs reflect: quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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●
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Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
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A5 Laboratories Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2012
(Unaudited)
At December 31, 2012, the fair value of financial instruments measured on a recurring basis includes derivative liabilities, determined based on level two inputs consisting of quoted prices in active markets for identical assets. The carrying amount reported for accounts payable, accrued liabilities, and notes payable approximates fair value because of the short-term maturity of these financial instruments.
The Company has a derivative liability measured at fair market value on a recurring basis. Consequently, the Company had changes in fair value reported in the statements of operations, which were attributable to the change in market value relating to the liability for the three months ended December 31, 2012.
The following is the Company’s derivative liability measured at fair value on a recurring basis at:
|
December 31,
2012
|
September 30,
2012
|
|||||||
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Level 1
|
$ | - | $ | - | ||||
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Level 2 – Derivative Liability
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49,159 | 134,678 | ||||||
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Level 3
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- | - | ||||||
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Total
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$ | 49,159 | $ | 134,678 | ||||
Note 5 Other Receivables
As of December 31, 2012 and September 30, 2012, the Company had receivables of $1,079 for each period for taxes paid on products and services. Under Canadian law, the Company is required to pay GST (Goods and Services Tax) and PST (Provincial Sales Tax) on goods and services that are consumed, used or supplied in the course of their business activities. The Company is eligible to receive credit for both taxes. The Company received substantial reimbursement during fiscal 2012.
Note 6 Property and Equipment
Property and equipment consists of the following:
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December 31,
2012
|
September 30,
2012
|
Estimated
Useful Lives
|
||||||||||
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Software
|
$ | - | $ | 1,380,876 | 3 | |||||||
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Leasehold improvements (1)
|
144,802 | 144,802 | 10 | |||||||||
|
Lab equipment (2)
|
106,062 | 106,705 | 10 | |||||||||
|
Office equipment
|
37,336 | 37,336 | 5 | |||||||||
| 288,843 | 1,669,719 | |||||||||||
|
Less: Accumulated depreciation
|
(63,677 | ) | (400,933 | ) | ||||||||
|
Less: Impairment
|
- | (1,035,027 | ) | |||||||||
|
Property and equipment – net
|
$ | 225,166 | $ | 233,699 | ||||||||
(1) See Note 8(B) – related party
(2) See below related to related party purchases
A5 Laboratories Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2012
(Unaudited)
During the year ended September 30, 2011, management evaluated the recoverability of long lived assets by determining whether the carrying value can be recovered through future cash flows. Management determined that it is more likely than not that no future cash flows are to be expected from the use of its software. Due to these circumstances, the remaining book value of the asset in the amount of $1,035,027 was fully impaired and is included in the statements of operations for the year ended September 30, 2011.
The leasehold improvements were completed and placed into service in July 2011.
The Company purchased $104,122 of lab equipment from an entity controlled by the Company’s former Chief Executive Officer during fiscal years ended 2010 and 2011 as follows:
|
2010
|
$ | 79,765 | ||
|
2011
|
24,357 | |||
| $ | 104,122 |
See Note 8 for software acquired from a related party.
Note 7 Notes Payable
(A) Related Party
The following is a summary of the Company’s related party liabilities:
|
December 31,
2012
|
September 30,
2012
|
|||||||
|
Notes payable (1)
|
$ | 30,956 | $ | 30,956 | ||||
|
Advances (2)
|
415,719 | 415,719 | ||||||
|
Less: payments
|
(3,783 | ) | (3,783 | ) | ||||
|
Total related party liabilities
|
$ | 442,892 | $ | 442,892 | ||||
(1) The note is non-interest bearing, unsecured, and due on demand.
(2) The advances are non-interest bearing, unsecured, and due on demand.
(B) Convertible Debt – Secured – Derivative Liabilities
During 2011, the Company issued convertible notes, totaling $300,000, with the following provisions:
|
●
|
Interest rate 6%;
|
|
●
|
Default interest rate of 12%;
|
|
●
|
Notes are due 48 months from the issuance date of February 23, 2011;
|
|
●
|
Conversion rates equal to 70% or 80% of the market price on date of conversion by applying a specified formula that utilizes the average of the 3 lowest quoted closing prices 20 days immediately preceding the conversion date, and then takes the higher of the average 3 lowest closing prices or $0.12 floor price; and
|
|
●
|
Secured by the Chief Executive Officer’s 15,000,000 shares of the Company common stock.
|
A5 Laboratories Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2012
(Unaudited)
The investor is entitled at its option to convert all or part of the principal and accrued interest into shares of the Company’s common stock at a conversion price as discussed above. The Company classified the embedded conversion feature as a derivative liability due to management’s assessment that the Company may not have sufficient authorized number of shares of common stock required to net-share settle.
On February 23, 2011, the Company entered into a secured convertible promissory note with a third party (the “Lender”). The note balance totaled $300,000. The Lender expects to contribute funds in tranches, the first tranche being equal to $300,000, and an additional ten tranches equal to $200,000 each commencing on October 23, 2011, and continuing each subsequent month for ten months. No additional draw downs occurred as of the period ended December 31, 2012. In January 2012, the Company received an additional $22,000 from this lender, under the same terms above, which is convertible to shares under the terms described below.
The number of shares of common stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the higher of (i) the Market Price or (ii) the Floor Price. Where “Market Price” is defined as 80% of the average of the closing bid price for the three (3) days with the lowest closing bids during the twenty trading days immediately preceding the conversion date, provided, however, that if the market prices fall below $0.05 per share of common stock the conversion factor shall be reduced by 10 percentage points. The “Floor Price” is defined as $0.012. The trading data used to compute the closing bid shall be as reported by Bloomberg, LP or if such information is not then being reported by Bloomberg, then as reported by such other data information sources as may be selected by the Lender.
The note also contains language that removes the $0.12 floor if certain “triggering events” occur during the life of the note. Since the floor price can be removed upon any one of these events occurring, the conversion feature of this note has two elements: normal conversion and conversion upon a triggering event.
Upon each occurrence of any of the following triggering events , (a) the Conversion Factor Shall be reduced by 10 percent points (i.e., if the Conversion Factor were 80% immediately prior to the occurrence of the triggering event, it shall be reduced to 70% upon the occurrence of a triggering event), (b) the Conversion Price shall be computed without regard to the Floor Price, and (c) this Note Shall accrue interest at the rate of 1% per month, whether before or after judgment; provided, however, that (1) in no event shall the triggering effects be applied more than two times, and (2) notwithstanding any provisions to the contrary herein, in no event shall the applicable interest rate at any time exceed the maximum interest rate allowed under applicable law:
The following reflects possible triggering events:
(a) Collateral Shares. If the value of the Collateral Shares (15,000,000 shares discussed above) falls below $1,800,000 (valued at the Market Price of a share of Common Stock) at any time.
(b) SEC Filings. The Company’s failure to timely file required filings with the SEC.
(c) Events of Default. The occurrence of any Event of Default.
As of December 31, 2011, as a result of the triggering events (a) and (b) listed above, the Company computed the exercise price related to convertible debt, without regard to the floor price.
On October 4, 2012, Mr. Fife invoked triggering event (a) described above and was issued 15,000,000 shares. Based upon the price of the common stock at that time of $.0039, the company recorded an expense of $58,500 in general and administrative expenses. The Note remains outstanding at the Balance Sheet date.
A5 Laboratories Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2012
(Unaudited)
(C) Debt Issue Costs
In connection with the issuance of the $300,000 note discussed above, the Company incurred debt issue costs as follows:
|
●
|
8% cash – which is equivalent to $24,000, and
|
|
●
|
8% warrants – having a fair value of $26,901, which was computed as follows;
|
|
Commitment
Date
|
||||
|
Expected dividends
|
0%
|
|||
|
Expected volatility
|
180%
|
|||
|
Expected term: conversion feature
|
2 years
|
|||
|
Risk free interest rate
|
1.73%
|
|||
In January 2012, we raised an additional $22,000 as discussed above, and the Company incurred debt issue costs as follows:
|
●
|
8% cash – which is equivalent to $1,760, and
|
|
●
|
8% warrants – having a fair value of $154, which was computed as follows;
|
|
Commitment
Date
|
||||
|
Expected dividends
|
0%
|
|||
|
Expected volatility
|
364%
|
|||
|
Expected term: conversion feature
|
2 years
|
|||
|
Risk free interest rate
|
0.65%
|
|||
The debt issue costs have been capitalized and are being amortized over the life of the note.
|
Debt issue costs paid, September 30, 2011
|
$ | 50,901 | ||
|
Amortization of debt issue costs, September 30, 2011
|
(11,833 | ) | ||
|
Amortization of debt issue costs, September 30, 2011
|
(9,833 | ) | ||
|
Amortization of debt issue costs, December 31, 2012
|
(3,504 | ) | ||
|
Debt issue costs - net
|
$ | 26,123 |
(D) Debt Discount
During the three months ended December 31, 2012 and December 31, 2011, Company recorded debt discounts totaling $165,000 and $0, respectively.
The debt discount recorded in the current quarter pertains to convertible debt containing embedded conversion options that are required to bifurcated and reported at fair value.
During the three months ended December 31, 2012, the Company amortized $103,963 in debt discount.
A5 Laboratories Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2012
(Unaudited)
Note 8 Stockholders’ Equity (Deficit)
(A) Common Stock
Stock Issued in 2013
On October 4, 2012, the Company issued 15,000,000 shares to John Fife as part of default provisions on a convertible note. See Note 7A above.
Stock issued in 2012
On October 2, 2011, a lender converted $50,000 pertaining to a note it held with an original principal of $300,000, for 3,000,000 shares of common stock ($0.0166667/share). The quantity of shares issued is based upon the formula described above pertaining to the effect of the triggering event (see Note 7(B)).
On January 3, 2012, the Company issued 2,307,692 shares of common stock for $30,000 ($0.013/share) for services rendered.
On March 4, 2012, a lender converted $21,494 pertaining to a note it held with an original principal of $300,000, for 3,800,000 shares of common stock ($0.00566/share). The quantity of shares issued is based upon the formula described above pertaining to the effect of the triggering event (see Note 7(B)).
Stock issued 2011
During November and December 2010, the Company issued 312,500 shares of common stock for $100,000 ($0.32/share).
On June 14, 2011, the Company issued 75,000 shares of common stock for $15,000 ($0.20/share).
On September 2, 2011, a lender converted $24,990 pertaining to a note it held with an original principal of $300,000, for 1,120,000 shares of common stock ($0.022313/share). The quantity of shares issued is based upon the formula described above pertaining to the effect of the triggering event (see Note 7(B)).
Stock issued in 2010
On March 9, 2010, the Company’s board of directors authorized a 10-for-1 forward split of its common stock effective April 8, 2010. Each stockholder of record on April 7, 2010 received ten new shares of the Company’s $0.001 par value common stock for every one old share outstanding. The effects of the split have been retroactively applied to all periods presented in the accompanying financial statements.
On June 3, 2010, the Company issued 250,000 shares of common stock for $162,500 ($0.65/share).
On July 20, 2010, the Company issued 1,569,177 shares of common stock, having a fair value of $1,380,876 ($0.88/share), based upon the closing trading price, to acquire software from an affiliate of the Company’s Chief Executive Officer.
A5 Laboratories Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2012
(Unaudited)
On July 30, 2010, the Company issued 125,000 shares of common stock for $100,000 ($0.80/share). In addition, the stockholder received a 2-year warrant for 125,000 shares with an exercise price of $1.20.
On August 18, 2010, the Company issued 125,000 shares of common stock for $100,000 ($0.80/share). In addition, the stockholder received a 2-year warrant for 125,000 shares with an exercise price of $1.20.
On August 23, 2010, the Company issued 20,000 shares of common stock to a consultant, having a fair value of $16,000 ($0.80/share), based upon the closing trading price. At September 30, 2010, the Company expensed this stock issuance as a component of general and administrative expense.
On September 17, 2010, the Company issued 150,000 shares of common stock to a consultant, having a fair value of $135,000 ($0.90/share), based upon the closing trading price. At September 30, 2010, the Company expensed this stock issuance as a component of general and administrative expense.
Stock issued in 2007
During 2007, the Company issued 20,500,000 shares of common stock for $82,000 ($0.004/share).
Stock Issued in 2006
On June 21, 2006 (Inception), the Company issued 10,000,000 shares of common stock for $5,000 ($0.0005/share) to directors and officers of the Company.
On August 1, 2006, the Company issued 15,000,000 shares of common stock for $15,000 ($0.0001/share) to directors and officers of the Company.
(B) Stock Warrants
The following is a summary of the Company’s warrants that are outstanding and exercisable at December 31, 2012 and 2011:
|
Warrants
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Life in Years
|
Intrinsic
Value
|
|||||||||||||
|
Balance – September 30, 2011
|
1,074,000 | $ | 0.30 | 1.27 | $ | 8,560 | ||||||||||
|
Granted
|
- | - | - | - | ||||||||||||
|
Forfeited/Cancelled
|
- | - | - | - | ||||||||||||
|
Exercised
|
- | - | ||||||||||||||
|
Balance – December 31, 2012 - outstanding
|
1,074,000 | $ | 0.30 | 0.52 | $ | - | ||||||||||
|
Balance – December 31, 2012 - exercisable
|
1,074,000 | $ | 0.30 | 0.52 | $ | - | ||||||||||
A5 Laboratories Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2012
(Unaudited)
Note 9 Commitments and Contingencies
(A) Contingencies
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. The Company is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.
(B) Facility Lease – Related Party
The Company had subleased office space from a company controlled by the Company’s former Chief Executive. This lease has expired and the company no longer leases this space.
Rent expense for the three months ended December 31, 2012 and 2011 was $-0- and 44,249, respectively.
(C) Equipment Lease
The Company had agreed to rent equipment from its former Chief Executive.
Rental equipment expense for the six months ended December 31, 2012 and 2011 was $-0- and $24,566, respectively.
Note 10 Derivative Liabilities
The Company identified conversion features embedded within convertible debt ($300,000) issued in 2011 (see 7(B)). The Company has determined that the features associated with the embedded conversion option should be accounted for at fair value as a derivative liability.
As a result of the application of ASC No. 815, the fair value of the conversion feature is summarized as follows:
|
Derivative liability balance at September 30, 2012
|
$ | 134,678 | ||
|
Derivative liabilityFair value at the commitment date for convertible notes issued
|
||||
|
Fair value mark to market adjustment – December 31, 2012
|
(223,150 | ) | ||
|
Derivative liability associated with new issuances through December 31, 2012
|
137,631 | |||
|
Derivative liability balance at December 31, 2012
|
$ | 49,159 |
The Company recorded the derivative liability to debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining value of the derivative as it exceeded the gross proceeds of the note. The Company recorded a derivative expense of $0 for the three months ended December 31, 2011.
The fair value at the commitment and remeasurement dates were based upon the following management assumptions:
|
February 23,
2011
|
December 31,
2012
|
|||||||
|
Commitment Date
|
Remeasurement Date
|
|||||||
|
Expected dividends
|
0 | % | 0 | % | ||||
|
Expected volatility
|
180 | % | 298 | % | ||||
|
Expected term: conversion feature
|
4 years
|
2.65 years
|
||||||
|
Risk free interest rate
|
1.73 | % | 0.25 | % | ||||
A5 Laboratories Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2012
(Unaudited)
Note 11 Other Related Party Transactions
The Company accrues consulting and rental fees to its former Chief Executive Officer as follows:
|
Balance at September 30, 2012 and December 31, 2012
|
$ | 415,719 | ||
The consulting and rental fees are components of general and administrative expenses.
Note 12 Subsequent Events
The Company has evaluated events subsequent to the balance sheet date through the issuance date of these financial statements in accordance with FASB ASC 855 and has determined there are no such events that would require adjustment to, or disclosure in, the financial statements.
Forward Looking Statements
This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the U.S. Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking statements (collectively the “Filings”) and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011, filed with the SEC, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Plan of Operation
A5 Laboratories Inc. is a development stage company specializing in production of natural interferons using a unique technology that allows the Company to produce interferons for the human and animal health market. In order to execute our business plan, we need to raise additional capital to avoid the interruption of our current Custom Research Organization (CRO) and CRO related software sales operations.
On August 2, 2010, the Company filed a provisory patent with the U.S. Patent office in order to preserve our technology for the production of natural gamma interferons. Over the next 12 months, the Company plans to produce interferon in different research centers worldwide. The Company currently has two research labs engaged to produce interferons using our own technology. The first lab in Europe has finished their work and the results will be published in the next fiscal quarter. The second lab in North America will being testing immediately after the publication of the first set of results. Although this technology has previously been tested, the Company is currently focused on producing interferons in different independent laboratories.
After completion of lab scale production of interferons using our technology in North America and with the assurance of repeatability of our technology in various centers, we will begin producing interferons for in vitro testing at our own facility in Montreal. Simultaneously, we plan to proceed with the necessary regulatory efforts needed in Europe to register our product for veterinary use. If successful, we plan on introducing the interferon for one species (bovine or porcine). The Company also hopes to begin clinical trials in United States, including satisfying various FDA requirements, by the end of 2012.
Results of Operations
Our results of operations are summarized below:
|
|
Quarter Ended
December 31,
2012 ($)
|
Quarter Ended
December 31,
2011 ($)
|
|
|||||
|
Revenue
|
|
|
0.00
|
|
|
|
0.00
|
|
|
Expenses
|
|
|
(235,092)
|
|
|
|
(202,105)
|
|
|
Other Income (Expenses)
|
( 29,258)
|
(236,185)
|
||||||
|
Net Income (Loss)
|
|
|
(264,350)
|
|
|
|
(438,290)
|
|
|
Income (Loss) Per Share
|
|
|
(.004)
|
|
|
|
(0.009)
|
|
Three Months Ended December 31, 2012 Compared to the Three Months Ended December 31, 2011
During the three months ended December 31, 2012, we did not earn any revenues. We have not earned any revenues since our inception and there is no assurance that we will be able to earn any revenues in the future.
Our General and Administrative expenses for the three months ended December 31, 2012 and 2011 can be summarized as follows:
|
|
For the Three Months
Ended December 31,
|
|||||||||||
|
|
2012 ($)
|
2011 ($)
|
Difference ($)
|
|||||||||
|
Management fees to related party – Note 7
|
-0-
|
119,316
|
(119,316)
|
|||||||||
|
Professional fees
|
165,000
|
18,743
|
146,257
|
|||||||||
|
Rent paid to Related party
|
-0-
|
43,970
|
(43,970)
|
|||||||||
|
Other General and administrative expenses
|
70,092
|
20,075
|
50,017
|
|||||||||
Our net loss for the three month period ended December 31, 2012 was $264,350, compared to a net loss of $438,290 for the three month period ended December 31, 2011, an improvement of $173,940.
During the three month period ended December 31, 2012, we incurred operating expenses (and respective net operating losses) of $235,092, compared to operating expenses of $202,105 incurred during the three month period ended December 31, 2011,an increase of $32,987. The operating expenses incurred during the three month period ended December 31, 2012 and 2011 consisted of (i) $0 and $119,316 of management fees to a related party; (ii) $165,000 and $18,743 in fees paid to professionals; (iii) $0 and $43,970 of rent to a related party; and (iv) $70,092 and $20,075 in other general and administrative expenses, respectively. Our expenses increased during the three month period ended December 31, 2012 by $32,987 primarily due to increased professional and other general and administrative expenses of $275,121. These expenses increased due to consulting agreements and an expense of $58,500 payment associated with a default on our $300,000 note to John Fife. See Convertible Debt below for more detail.
Other income incurred during the three month period ended December 31, 2012 was comprised of derivative expense from the issuance of the consulting note of $137,631 and interest expense of $114,777. It was partially offset by a positive change in the fair value of the derivative liability of $223,150. This was a decrease of $206,927 from the three months ended December 31, 2011 and was primarily from the change in the fair value of the derivative liability.
Therefore, our net loss and net loss per share during the three month period ended December 31, 2012, was $264,350 or $0.004 per share, compared to a net loss and loss of $438,290 or $0.009 per share during the three month period ended December 31, 2011. The weighted average number of shares outstanding was 60,779,150 for the three month period ended December 31, 2012, compared to 47,905,617 for the three month period ended December 31, 2011.
Liquidity and Capital Resources
As of December 31, 2012, our current assets were $1,867 and our current liabilities were $1,097,041, which resulted in a working capital deficiency of $1,095,174. As of December 31, 2012, current assets were comprised of: (i) $789 in cash; and (ii) $1,079 in Canadian General Service Taxes refundable. As of December 31, 2012, current liabilities were comprised of: (i) $122,610 in accounts payable and accrued liabilities; (ii) $415,719 in accounts payable due to a related party; (iii) $48,272 in accrued interest payable; (iv) $27,173 in notes payable due to a related party; (v) $434,108 in convertible debt (net of $127,851 of discount); (vi) a derivative liability of $49,159 resulting from convertible notes payable and warrants.
As of December 31, 2012, our total assets of $253,156 were comprised of: (i) $1,868 in current assets; (ii) $26,123 in debt issue costs (net of $19,862 of amortization); and (iii) $225,166 in property and equipment (net of $63,633 of depreciation). As of December 31, 2012, our total liabilities of $1,097,041 were comprised of current liabilities of the same amount.
Stockholders’ equity (deficit) decreased $205,850 from ($638,035) as of September 30, 2012 to ($843,885) as of December 31, 2012. The change in Stockholder’s deficit was comprised of (i) net loss of ($264,350, partially offset by (ii) share-based payments of $58,500;
Cash Flows from Operating Activities
We did not generate positive cash flows from operating activities. For the nine months ended December 31, 2012, net cash flows provided by operations was $(165,000). Net cash flows used in operating activities for the three months ended December 31, 2012, consisted of a net loss of ($264,350) and the change in the fair value of the derivative liability of ($223,150) adjusted by: (i) share based payments of $58,500; (ii) derivative expense of $137,631; (iii) $8,533 in depreciation expense; (iv) $3,059 in amortization of debt issue cost; and (v) $103,963 in amortization of debt discount. Net cash flows used by operating activities was further changed by an increase in accrued interest of $10,814.
Cash Flows from Investing Activities
For the three months ended December 31, 2012, net cash flows provided by investing activities was $0.
Cash Flows from Financing Activities
We have financed our operations primarily from debt or the issuance of equity instruments. For the three months ended December 31, 2012, net cash flows provided from financing activities was $165,000. This was from the issuance of the consulting note.
We anticipate that we will meet our ongoing cash requirements by selling our equity securities or through shareholder loans. Our management has changed our business focus to the acquisition of operating assets and we estimate that our expenses over the next 12 months will be approximately $350,000, as described in the table below. These estimates may change significantly depending on the nature of our future business activities and our ability to raise capital from shareholders or other sources.
|
Estimated
|
Estimated Expenses
|
||||
|
Description
|
Completion Date
|
($)
|
|||
|
Legal and accounting fees
|
12 months
|
90,000
|
|||
|
Due diligence expenses
|
12 months
|
60,000
|
|||
|
General and administrative expenses
|
12 months
|
200,000
|
|||
|
Total
|
350,000
|
||||
Material Commitments
As of the date of this Quarterly Report, we do not have any material commitments other than as described below.
Convertible Debt
Fife Note
Effective on February 23, 2011, the company entered into a secured convertible promissory note between the Company and John M. Fife (“Lender”). The note balance totaled $300,000 USD. In accordance with the terms and provision of the convertible feature, the lender will contribute funds convertible in tranche’s. The first tranche being equal to $300,000 USD and an additional ten (10) tranches equal to $200,000 USD each commencing on October 23, 2011, and continuing each subsequent month for ten months. The number of shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the higher of (i) the market price or (ii) the floor price. Where “Market Price” is defined as 80% of the average of the closing bid price for the three (3) days with the lowest closing bids during the twenty trading days immediately preceding the conversion date. Providing however that if the market prices falls below $0.05 per share of common stock the conversion factor shall be reduced by 10 percentage points.
For purposes hereof the “Floor Price” is defined as $0.012. The trading data used to compute the closing bid shall be as reported by Bloomberg, LP or if such information is not then being reported by Bloomberg, then as reported by such other data information sources as may be selected by the lender.
In accordance with the terms of this note, a debt discount has been calculated using the “floor price” of $0.12 per share under the intrinsic value method of valuation. This calculation resulted in a total debt discount of $300,000, of which $64,336 was amortized and expensed during the quarter ended December 31, 2012.
On October 4, 2012, Mr. Fife foreclosed on his note to us because we were in default. According to the terms of the indenture, Mr. Fife was issued 15 million shares to forestall on his claim against the firm. At the time, the common stock of the Company was trading at $.0039. Therefore, a corresponding expense of $58,500 was recorded at that time and included in General and Administrative Expense.
Lucosky Brookman LLP Note
Effective on January 10, 2012, the Company issued to Lucosky Brookman LLP (“Lucosky”) a convertible promissory note ( the “Lucosky Note”) for legal services provided since February 1, 2011 of $53,727. The Lucosky Note bears interest at twelve percent (12%) per annum and has a term of six months. Should the Lucosky Note not be paid by the Maturity Date, an event of Default occurs and the interest rate becomes eighteen percent (18%) per annum. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The “Market Price” is defined as 50% of the average of the closing price for the five (5) days immediately preceding the conversion date.
Southridge Partners II LP Notes
Effective on February 6, 2012, the Company issued to Southridge Partners II LP (“SRP II”) a convertible promissory note ( the “SRP II Note”) for funds provided of $15,000. The SRP II Note bears interest at five percent (5%) per annum and matures on August 31, 2012. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The “Market Price” is defined as 50% of the average of the low two (2) closing bid prices for the five (5) days immediately preceding the conversion date.
On October 1, 2012, the Company issued to SRPII, a note for $165,000 for past consulting services not previously accrued. The note is due on July 31, 2013 and carries no interest. Shares of common stock to be issued shall be determined by dividing (a) the conversion amount by (b) the market price. The market price is defined as 50% of the low closing bid price for the five days previous.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Inflation
The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 reported amounts of revenues and expenses during the reporting period.
Such estimates for the quarter ended December 31, 2012 and 2011, and assumptions affect, among others, the following:
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estimated carrying value, useful lives and related impairment of property and equipment;
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estimated fair value of derivative liabilities;
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estimated valuation allowance for deferred tax assets, due to continuing losses; and
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estimated fair value of share based payments.
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Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.
Derivative Liabilities
Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.
Debt Issue Costs and Debt Discount
The Company may pay debt issue costs, and record debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized over the life of the debt to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued, the Company provides the debt holder with an original issue discount. The original issue discount is recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.
Share-based Payments
Generally, all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.
Earnings per Share
In accordance with accounting guidance now codified as FASB ASC Topic 260, “Earnings per Share,” basic earnings (loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
Since the Company reflected a net loss in 2011 and 2010, respectively, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented.
Fair Value of Financial Instruments
ASC 820 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:
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Level 1 inputs: Quoted prices for identical instruments in active markets.
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Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
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Level 3 inputs: Instruments with primarily unobservable value drivers.
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Foreign Currency Transactions
The Company’s functional currency is the Canadian Dollar. The Company’s reporting currency is the U.S. Dollar. All transactions initiated in Canadian Dollars are translated to U.S. Dollars in accordance with ASC 830-10-20 “Foreign Currency Translation” as follows:
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(i)
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Monetary assets and liabilities at the rate of exchange in effect at the balance sheet date;
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(ii)
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Equity at historical rates; and
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(iii)
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Revenue and expense items at the average exchange rate prevailing during the period.
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Adjustments arising from such translations are deferred until realization and are included as a separate component of stockholders’ equity (deficit) as a component of comprehensive income (loss). Therefore, translation adjustments are not included in determining net income (loss) but reported as other comprehensive income (loss).
For foreign currency transactions, the Company translates these amounts to the Company’s functional currency at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made, a foreign exchange transaction gain or loss results which is included in determining net income for the period.
We do not hold any derivative instruments and do not engage in any hedging activities.
(a) Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s principal executive officer (“PEO”) and principal financial officer (“PFO”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the PEO and PFO concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective to ensure that information that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the PEO and PFO, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012, as filed with the SEC on August 15, 2013.
Not applicable.
There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default not cured within 30 days, with respect to any indebtedness of the Company.
Not applicable.
None.
(d) Exhibits.
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Exhibit No.
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Description
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Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a))*
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Certification by the Principal Accounting Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a))*
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Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
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Certification by the Principal Accounting Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
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* filed herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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A5 LABORATORIES, INC.
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Dated: September 3, 2013
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By:
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/s/ Frank Neukomm
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Name: Frank Neukomm
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Title: Chief Executive Officer
(Principal Executive Officer)
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