2.
GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
The
Company’s unaudited condensed consolidated financial statements are prepared using generally accepted accounting principles
applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course
of business. The Company has incurred significant recurring losses which have resulted in an accumulated deficit of $13,017,034
net loss of $295,156 and net cash used in operations of $72,685 for the six months ended March 31, 2017 which raises substantial
doubt about the Company’s ability to continue as a going concern.
During
the six months ended March 31, 2017, the Company raised $120,000, $26,400 and $1,000 in cash proceeds from the issuance of convertible
promissory notes, short term notes and sale of preferred stock, respectively. The Company believes that its current cash on hand
will not be sufficient to fund its projected operating requirements through June 2017.
EXOLIFESTYLE,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2017
The
Company’s primary source of operating funds since inception has been cash proceeds from the private placements of common
stock and proceeds from convertible and other debt. The Company intends to raise additional capital through private placements
of debt and equity securities, but there can be no assurance that these funds will be available on terms acceptable to the Company,
or will be sufficient to enable the Company to fully complete its development activities or sustain operations. If the Company
is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables, reduce
overhead, or scale back its current business plan until sufficient additional capital is raised to support further operations.
There can be no assurance that such a plan will be successful.
Accordingly,
the accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern
and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets
and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values.
The condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
3.
DEFERRED INCOME AND CUSTOMER DEPOSITS
The
Company has received advances from customers seeking to purchase a franchise. The deposits are classified as customer deposits
until a franchise agreement is signed. Once a franchise agreement is signed the advances are nonrefundable and reclassified to
deferred income. The franchisee has the responsibility to complete the build out of the restaurant within the time designated
in the franchise agreement (generally 5 years). Once the restaurant build out is complete and is operational the Company recognizes
the franchise fee as revenues. If the franchisee fails to complete the build out within the required period the franchise fee
is forfeited and the Company recognizes the fee as income.
4.
PROPERTY AND EQUIPMENT
Property
and equipment as of March 31, 2017 and September 30, 2016 is summarized as follows:
|
|
March 31, 2017
|
|
|
September 30, 2016
|
|
Construction in process
|
|
$
|
-
|
|
|
$
|
18,150
|
|
Equipment
|
|
|
70,627
|
|
|
|
67,997
|
|
Leasehold improvements
|
|
|
12,232
|
|
|
|
12,232
|
|
Furniture and fixtures
|
|
|
42,584
|
|
|
|
42,584
|
|
Subtotal
|
|
|
125,443
|
|
|
|
140,963
|
|
Less accumulated depreciation
|
|
|
(100,537
|
)
|
|
|
(92,299
|
)
|
Property and equipment, net
|
|
$
|
24,906
|
|
|
$
|
48,664
|
|
Depreciation
expense for the three and six months ended March 31, 2017 was $4,156 and $8,238, respectively; and $3,254 and $6,085 for the three
and six months ended March 31, 2016, respectively.
During
the six months ended March 31, 2017, the Company settled its outstanding proposed Shaker & Pie operating leases and construction.
As such, the Company realized a gain on settlement of $29,974.
EXOLIFESTYLE,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2017
5.
INTANGIBLE ASSETS
Intangible
assets as of March 31, 2017 and September 30, 2016 are summarized as follows:
|
|
March 31, 2017
|
|
|
September 30, 2016
|
|
Franchise and trademark rights
|
|
$
|
71,949
|
|
|
$
|
71,949
|
|
Trademark costs
|
|
|
45,429
|
|
|
|
45,429
|
|
Website
|
|
|
43,625
|
|
|
|
43,625
|
|
Subtotal
|
|
|
161,003
|
|
|
|
161,003
|
|
Less accumulated depreciation
|
|
|
(52,833
|
)
|
|
|
(49,893
|
)
|
Intangible assets, net
|
|
$
|
108,170
|
|
|
$
|
111,110
|
|
Amortization
expense for the three and six months ended March 31, 2017 was $1,470 and $2,940, respectively; and $1,470 and $2,940 for the three
and six months ended March 31, 2016, respectively.
6.
NOTES PAYABLE
On
July 10, 2014 the Company issued a note payable with face value $50,000, non-interest bearing, due on demand. The balance as of
March 31, 2017 and September 30, 2016 was $50,000.
On
June 9, 2016, the Company issued an unsecured promissory note with a face value of $7,600 with additional borrowing of 3,800 during
the six months ended March 31, 2017. The promissory note bears interest at 8% and is due six months from advances with monthly
payments of $1,347 per month. The balance as of March 31, 2017 and September 30, 2016 was $2,300 and $3,502, respectively.
On
September 8, 2016, the Company issued an unsecured factoring agreement with a face value of $8,750, bearing an estimated interest
rate of 13% whereby the Company will remit daily a portion of their collected receivables until repaid, including interest. The
balance as of March 31, 2017 and September 30, 2016 was $-0- and $6,660, respectively.
On
December 9, 2016, the Company issued an unsecured factoring agreement with a face value of $22,600, bearing an estimated interest
rate of 15% whereby the Company will remit daily a portion of their collected receivables until repaid, including interest. The
balance as of March 31, 2017 was $6,172.
7.
CONVERTIBLE NOTES PAYABLE
Convertible
notes payable as of March 31, 2017 and September 30, 2016 is summarized as follows:
|
|
March 31, 2017
|
|
|
September 30, 2016
|
|
Notes payable, acquired in recapitalization
|
|
$
|
7,581
|
|
|
$
|
37,991
|
|
Notes payable, due July 27, 2020, net of unamortized debt discounts
of $338,808 and $314,006, respectively
|
|
|
266,743
|
|
|
|
271,544
|
|
Note payable, due July 20, 2020, net of unamortized debt discounts
of $158,913 and $190,144, respectively
|
|
|
33,442
|
|
|
|
9,856
|
|
Note payable, due August 5, 2020, net of unamortized debt discount
of $46,505 and $53,426
|
|
|
9,050
|
|
|
|
2,129
|
|
Subtotal
|
|
|
316,816
|
|
|
|
321,520
|
|
Less current maturities
|
|
|
(7,581
|
)
|
|
|
(37,991
|
)
|
Long term portion
|
|
$
|
309,235
|
|
|
$
|
283,529
|
|
EXOLIFESTYLE,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2017
Under
the terms of the securities purchase agreement dated July 27, 2015, the Company issued and sold an aggregate of $1,333,334 principal
amount of convertible debentures due July 27, 2020 for a price of $1,200,000. Proceeds from this debenture will be paid to the
company as follows: $140,000 upon signing with the balance payable in five consecutive monthly installments of $212,000 commencing
on September 1, 2015. The company agreed to pay interest for the first 12 months at the rate of 10% per annum on the amounts advanced
payable in cash in six equal tranches, the first of which is due on date the company closed on the financing and remainder will
be due on each of the first five monthly anniversaries of such date.
As
of March 31, 2017, the Company has received net proceeds of $597,000 under the security purchase agreement and $250,000 not under
the security purchase agreement (same terms and conditions).
The
terms of the Securities Purchase Agreement contain certain negative covenants by the company, unless consent of purchasers holding
at least 75% of the aggregate principal amount of the outstanding debentures, including prohibitions on: incurrence of certain
indebtedness and liens, amendment to our articles of incorporation or bylaws, repayment or repurchase of the company’s common
stock or debts, sell substantially all of its assets or merger with another entity, pay cash dividends or enter into any related
party transactions. The Company granted investors certain pro-rata rights of first refusal on future offerings by the company
for as long as the investor(s) beneficially own any of the debentures.
The
debentures are convertible into shares of the company’s common stock at a conversion price initially equal to 65% of the
lowest traded price of its common stock for the twenty trading days prior to each conversion date subject to adjustment. In July
2016, the percentage was reduced (reset) from 65% to 50% of those notes under the Securities Purchase Agreement. The conversion
price of the debentures is subject to proportional adjustment in the event of stock splits, stock dividends and similar corporate
events. In addition, the conversion price is subject to adjustment if the company issues or sells shares of its common stock for
a consideration per share less than the conversion price then in effect, or issue options, warrants or other securities convertible
or exchange for shares of its common stock at a conversion or exercise price less than the conversion price of the debentures
then in effect. If either of these events should occur, the conversion price is reduced to the lowest price at which these securities
were issued or are exercisable.
At
the time of issuance and until December 31, 2015, the Company determined that the conversion provisions embedded in issued convertible
debentures did not meet the defined criteria of a derivative in such that the net settlement requirement of delivery of common
shares does not meet the “readily convertible to cash” as described in Accounting Standards Codification 815 and therefore
bifurcation was not required. There was no established market for the Company’s common stock. As of December 31, 2015, the
Company determined a market had been established for the Company’s common stock and accordingly, reclassified from equity
to liability treatment the initial previously recorded beneficial conversion feature of the conversion provision of $270,306.
The
Company determined the fair value of the embedded conversion provisions of the debentures of $2,085,898 at December 31, 2015 using
the Multinomial Lattice pricing model and the following assumptions: estimated contractual terms, a risk free interest rate of
1.76%, a dividend yield of 0%, and volatility of 56.38%. The fair value derivative liability of $2,085,898 was recorded as a liability
at December 31, 2015 and a charge to current period interest of $1,815,591 representing the excess in fair value of the liability
from the initially recorded beneficial conversion feature reclassified from equity.
During
the six months ended March 31, 2017, the Company issued an aggregate of $120,000 convertible debentures. The Company determined
the initial fair value of the embedded conversion provisions of the debentures of $327,078 at issuance date using the Multinomial
Lattice pricing model and the following assumptions: estimated contractual terms, a risk free interest rate of 0.98% to 1.54%,
a dividend yield of 0%, and volatility of 61.92% to 62.29%. The determined fair value of the derivative liability of $327,078
was charged as a debt discount up to the net proceeds of the notes with the remainder of $207,078 charged to current period operations
as non-cash interest expense.
EXOLIFESTYLE,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2017
At
March 31, 2017, the fair value of the embedded conversion provisions of the debentures of $992,636 was determined using the Binomial
Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 61.21%; risk free rate: 1.50%; and expected
life: 3.31 to 3.35 years. The Company recorded a gain on change in derivative liabilities of $2,898,130 and $284,655 during the
three and six months ended March 31, 2017, respectively.
During
the six months ended March 31, 2017, the Company issued an aggregate of 4,773,355 shares of its common stock in settlement of
$107,645 of the outstanding convertible notes.
For
the three and six months ended March 31, 2017, the Company amortized $47,176 and $133,350 of debt discount and original issuance
discounts to period operations as interest expense, respectively; and for the three and six months ended March 31, 2016, the Company
amortized $16,810 and $30,684 of debt discount and original issuance discounts to period operations as interest expense, respectively.
Under
the terms of a Registration Rights Agreement entered into as part of the offering, the company agreed to file a registration statement
with the Securities and Exchange Commission within 60 days of the closing date covering the public resale of the shares of common
stock underlying the debentures, and to use its best efforts to cause the registration statement to be declared effective within
180 days from the closing date. Should the number of shares of common stock the company is permitted to include in the initial
registration statement be limited pursuant to Rule 415 of the Securities Act of 1933, the company further agreed to file additional
registration statements with the SEC to register any remaining shares. The Company will pay all costs associated with the registration
statements, other than underwriting commissions and discounts. The parties to the Registration Rights Agreement have agreed to
defer the Company’s obligation to file a registration statement until further notice by the holders of the convertible debt.
From
March 19, 2013 through October 4, 2013, the Company entered into promissory notes for an aggregate of $65,600 in cash. The notes
are unsecured, interest bearing at 10% per annum (18% upon default), and matured from September 19, 2013 through April 4, 2014.
The notes were initially convertible at the option of the Company at a fixed price of $0.20 per share.
In
connection with the recapitalization, the holders of convertible debt in the original principal amount of $65,600 agreed as part
of the merger to limit the number of shares convertible pursuant to such debt and accrued interest into 40,000,000 shares of our
common stock.
During
the six months ended March 31, 2017, the Company has issued an aggregate of 21,184,042 shares of its common stock in settlement
of $30,410 of promissory notes.
8.
DERIVATIVE LIABILITIES
As
described in Note 7, the Company issued convertible notes that contain conversion features and reset provision. The accounting
treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception
date and to fair value as of each subsequent reporting date.
9.
STOCKHOLDERS’ DEFICIT
Preferred
stock
The
Company is authorized to issue 20,000,000 shares of $0.0001 par value preferred stock as of March 31, 2017 and September 30, 2016.
As of March 31, 2017, the Company has designated and sold 12,000,000 shares of Series A Preferred Stock.
Each
share of Series A Preferred Stock is entitled to 125 votes on all matters submitted to a vote to the stockholders of the Company,
does not have conversion, dividend or distribution upon liquidation rights.
EXOLIFESTYLE,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2017
Common
stock
The
Company is authorized to issue 500,000,000 shares of $0.0001 par value common stock as of March 31, 2017 and September 30, 2016.
As of March 31, 2017 and September 30, 2016, the Company had 108,259,852 and 82,302,455 common shares issued and outstanding.
During
the six months ended March 31, 2017, the Company issued an aggregate of 4,773,355 shares of its common stock in settlement of
$107,645 of the outstanding convertible notes.
During
the six months ended March 31, 2017, the Company has issued an aggregate of 21,184,042 shares of its common stock in settlement
of $30,410 of promissory notes.
Options
On
January 10, 2017, the Company issued an option to a key employee to acquire 5,000,000 shares of the Company’s common stock
at $0.02 per share. The option vests as to 50% (2,500,000 shares) on July 10, 2017, and as to the remaining 50% (2,500,000 shares)
on January 10, 2018. The option period expires on January 10, 2027.
The
following assumptions were used in determining the fair value of employee option issued January 10, 2017:
Risk-free
interest rate
|
|
|
2.53
|
%
|
Dividend
yield
|
|
|
0
|
%
|
Stock
price volatility
|
|
|
62.62
|
%
|
Expected
life
|
|
|
10
years
|
|
Weighted
average grant date fair value
|
|
$
|
00.76
|
|
The
following table presents information related to stock options at March 31, 2017:
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
Exercisable
|
|
Exercise
|
|
|
Number
of
|
|
|
Remaining
Life
|
|
Number
of
|
|
Price
|
|
|
Options
|
|
|
In
Years
|
|
Options
|
|
$
|
0.2
|
|
|
|
5,000,000
|
|
|
9.79
|
|
|
-
|
|
A
summary of the stock option activity for the six months ended March 31, 2017 is as follows:
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Contractual
Term
|
|
|
Intrinsic
Value
|
|
Outstanding
at September 30, 2016
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
5,000,000
|
|
|
$
|
0.02
|
|
|
|
10.0
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2017
|
|
|
5,000,000
|
|
|
$
|
0.02
|
|
|
|
9.79
|
|
|
$
|
-
|
|
Exercisable
at March 31, 2017
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXOLIFESTYLE,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2017
The
aggregate intrinsic value in the preceding tables represents the total pretax intrinsic value, based on options with an exercise
price less than the Company’s stock price of $0.0052 as of March 31, 2017, which would have been received by the option
holders had those option holders exercised their options as of that date.
Option
valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated
using the Black-Scholes option model with a volatility figure derived from an index of historical stock prices of comparable entities
until sufficient data exists to estimate the volatility using the Company’s own historical stock prices. Management determined
this assumption to be a more accurate indicator of value. The Company accounts for the expected life of options based on the contractual
life of options for non-employees.
For
employees, the Company accounts for the expected life of options in accordance with the contract terms. The risk-free interest
rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected
term of the options. The fair value of stock-based payment awards during the three months ended March 31, 2017 and 2016 was estimated
using the Black-Scholes pricing model.
The
fair value of all options vesting during the three and six months ended March 31, 2017 of $11,212 and $11,212, respectively, was
charged to current period operations. Unrecognized compensation expense of $26,890 at March 31, 2017 will be expensed in future
periods.
Warrants
The
following table summarizes information with respect to outstanding warrants to purchase common stock of the Company, all of which
were exercisable, at March 31, 2017:
Exercise
|
|
|
Number
|
|
|
Expiration
|
|
Price
|
|
|
Outstanding
|
|
|
Date
|
|
$
|
0.25
|
|
|
|
13,797,242
|
|
|
|
July
2018
|
|
In
Connection with the merger agreement, the Company issued an aggregate of 13,797,242 warrants to acquire the Company’s common
stock at $0.25 per share for a period of three years. 11,411,512 warrants were issued as part of the exchange consideration to
acquire 100% of the common stock of Pizza Fusion and 2,385,730 shares were issued in exchange for previously issued and outstanding
warrants of Pizza Fusion Holdings, Inc.
A
summary of the warrant activity for the six months ended March 31, 2017:
|
|
|
|
|
Weighted-
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Contractual
Term
|
|
|
Intrinsic
Value
|
|
Outstanding
at September 30, 2016
|
|
|
13,797,242
|
|
|
$
|
0.25
|
|
|
|
1.75
|
|
|
$
|
-
|
|
Grants
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31,2017
|
|
|
13,797,242
|
|
|
$
|
0.25
|
|
|
|
1.25
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest at March 31, 2017
|
|
|
13,797,242
|
|
|
$
|
0.25
|
|
|
|
1.25
|
|
|
$
|
-
|
|
Exercisable
at March 31, 2017
|
|
|
13,797,242
|
|
|
$
|
0.25
|
|
|
|
1.25
|
|
|
$
|
-
|
|
EXOLIFESTYLE,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2017
The
aggregate intrinsic value in the preceding tables represents the total pretax intrinsic value, based on warrants with an exercise
price less than the Company’s management estimated market stock price as of March 31, 2017, which would have been received
by the warrant holders had those warrant holders exercised their warrants as of that date.
10.
COMMITMENTS AND CONTINGENCIES
Debt
assumption/indemnification
In
connection with the merger on July 1, 2015, previous officers of PF Hospitality Group, Inc. assumed and indemnified the Company
for an aggregate of $590,990 outstanding debt, all of which was considered old, unidentified and considered due by the previous
management.
Litigation
The
Company is subject at times to legal proceedings and claims, which arise in the ordinary course of its business. Although occasional
adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a
material adverse effect on its financial position, results of operations or liquidity. There was no outstanding litigation as
of March 31, 2017.
11.
RELATED PARTY TRANSACTIONS
The
Company’s current and former officers and stockholders advance funds to the Company for travel related and working capital
purposes. As of March 31, 2017 and September 30, 2016, there were no related party advances outstanding.
As
of March 31, 2017 and September 30, 2016, accrued compensation due officers and executives included in accounts payable was $852,219
and $796,496, respectively.
12.
FAIR VALUE MEASUREMENTS
ASC
825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities
required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it
would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent
risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes
three levels of inputs that may be used to measure fair value:
●
|
Level
1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities;
|
|
|
●
|
Level
2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially
the full term of the asset or liability; or
|
|
|
●
|
Level
3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and are unobservable.
|
EXOLIFESTYLE,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2017
Items
recorded or measured at fair value on a recurring basis in the accompanying unaudited condensed consolidated financial statements
consisted of the following items as of March 31, 2017:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Long-term
investments
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Total
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Derivative
liabilities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
992,636
|
|
|
$
|
992,636
|
|
Total
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
992,636
|
|
|
$
|
992,636
|
|
The
table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (derivative
liability) for the six months ended March 31, 2017.
Six
months ended March 31, 2017:
|
|
Derivative
Liabilities
|
|
Balance,
October 1, 2016
|
|
$
|
1,043,479
|
|
|
|
|
|
|
Transfers
in: from equity the initial beneficial conversion feature From initial fair value of derivative liability upon debenture issuance
|
|
|
120,000
|
|
|
|
|
|
|
Transfers
out: upon payoff or conversion of debentures
|
|
|
(93,266
|
)
|
|
|
|
|
|
Adjustment
to interest expense the excess of fair value of fair value of derivative liabilities
|
|
|
207,078
|
|
|
|
|
|
|
Mark-to-market
at March 31, 2017:
|
|
|
(284,655
|
)
|
|
|
|
|
|
Balance,
March 31, 2017
|
|
$
|
992,636
|
|
|
|
|
|
|
Net
income for the period included in earnings relating to the liabilities held at March 31, 2017
|
|
$
|
284,655
|
|
Level
3 Liabilities were comprised of our bifurcated convertible debt features on our convertible notes (see Note 7).
13.
SUBSEQUENT EVENTS
Common
stock
In
April 2017, the Company issued an aggregate of 4,247,381 shares of its common stock in settlement of $7,645 of convertible debentures.
In
May 2017, the Company issued an aggregate of 9,400,000 shares of its common stock in settlement of $19,760 of convertible debentures.
ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
We
are a management firm which creates and cultivates innovative lifestyle brands within the retail industry featuring functional
sports apparel brands under our EXO:EXO line of branded products. In addition, we founded the all-natural and organic pizza franchise,
Pizza Fusion with locations in selected markets in the United States, Saudi Arabia, and the United Arab Emirates.
EXO:EXO
Through
our wholly owned subsidiary EXO:EXO, Inc., (EXO) which we acquired on December 16, 2015, we design and produce compression knee
sleeves and other functional sports gear products utilized in weightlifting, CrossFit, powerlifting, Olympic weightlifting, endurance
training, boot camps, circuit training programs, and strength training protocols. The brand is currently offered in national fitness
retailers and sold through major online stores globally.
As
part of our plans to expand the core EXO product lines, on April 5, 2016 we announced the relaunch of EXO’s consumer facing
website,
www.exosleeve.com
, featuring a full portfolio of athletic sleeves, knee and wrist wraps, workout apparel and product
information that offers consumers a more user-engaging manner. In an effort to rapidly expand the brand, EXO has also established
several wholesale relationships with on-line retailers such as Rogue Fitness and WOD Superstore.
While
building EXO’s retail and business-to-business business to grow our wholesale sales channel, EXO has also been developing
a new active wear line to include workout shorts, tops, tanks, leggings and sports bras, which are all now available on our updated,
consumer-friendly website.
EXO
has a strong foothold as the brand of choice for numerous elite functional fitness athletes including Christmas Abbott CrossFit
Games Competitor, Olympic Weightlifter, and first female NASCAR Pit Crew member, Noah Ohlsen, and Brooke Ence elite CrossFit Games
athletes. Expanding upon its popularity among elite athletes, on April 7, 2016 we announced that 2016 NFL Atlanta Falcon first
round draft pick Keanu Neal signed a non-binding memorandum of understanding to become a brand ambassador for EXO’s Athletic
Brand division.
Looking
towards the future, we are evaluating options for in-house fulfillment and logistics processes and fully expect that EXO will
drive solid opportunities for expansion. Our management believes that leveraging the infrastructure and operations teams will
lead to further acquisitions of undervalued brands in need of our managerial talent and cost control procedures.
Pizza
Fusion Operations
Pizza
Fusion was incorporated under the laws of the State of Florida on November 6, 2006. This company franchises restaurants emphasizing
the preparation of food with high quality organic and fresh ingredients for pizza and other menu items. Management has made the
determination that its Pizza Fusion hospitality operations are not aligned with the company’s fitness apparel operations.
As of March 31, 2017, we franchised a total
of 8 Pizza Fusion locations (six in the U.S. and three in Saudi Arabia). We have seen a reduction of four of the seven
locations in Saudi Arabia as a result of weakening demand stemming from reductions in discretionary spending due to continued
world-wide reductions in the price of and demand for crude oil. On April 15, 2017 the Ridgewood, New Jersey location closed.
In July 2017, we anticipate an additional U.S. location opening on the campus of Old Dominion University
in Virginia under our licensing agreement with Aramark Foods. On February 20, 2017, the Company entered into a master development
agreement whereby the Company granted exclusive rights to develop the Pizza Fusion brand in certain middle eastern countries (as
defined) . In connection with the agreement, the Company received $125,000 as initial fee and is scheduled to receive royalties
as restaurants are developed. As a result of the above, royalty income was $158,298 for the six months ended March 31, 2017, an
increase of $84,852 from the same period in 2016.
Results
of Operations
Three
months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
Total
Revenue
. For three months ended March 31 2017, total revenue increased by $185,133 to $322,612 compared to $137,479 in
the same period in fiscal 2016. The increase in revenue for the three months ended March 31, 2017 was related to both a $87,366
increase in sales from EXO which we acquired in December 2015 and an increase in royalty income of 97,767. The increase in royalty
income is the result of us signing a master development agreement for certain Middle Eastern countries during the three months
ended March 31, 2017, offset by a reduction of approximately $27,233 in royalty income due to the closure of five Pizza Fusion
locations in Saudi Arabia.
Cost
of sales.
Cost of sales was $87,666 or 48% of related sales for the three months ended March 31, 2017 giving us a gross
profit from sales of $93,810 or 52% as compared to a cost of sales of $39,790 (42%) and a gross profit of $54,320 (58%) for the
same period last year. In 2017, we are focusing more towards wholesale with higher volumes, but lower margins.
Total
Operating Expenses
. For three months ended March 31, 2017, total operating expenses decreased 62.0% to $249,544 compared
to $664,133 for same period in fiscal 2016. The decrease is primarily to a decrease from $396,000 to $11,212 in stock based compensation
from fiscal 2016 to 2017. Our payroll, selling, general and administrative expenses and depreciation increased by $51,219 due
to our acquisition of EXO subsidiary in fiscal 2017 as compared to 2016.
Gain
on change in fair value of derivative liabilities.
Beginning in fiscal 2015, we have issued convertible notes with an
embedded derivative, all requiring us to fair value the derivatives each reporting period and mark to market as a non-cash adjustment
to our current period operations. This resulted in a gain of $2,898,130 and $1,458,511 on change in fair value of derivative liabilities
for the three months ended March 31, 2017 and 2016, respectively.
Interest
expense
. Interest expense for the three months ended March 31, 2017 and 2016 was $63,149 and $16,809, respectively. Included
in the interest was non-cash amortization of debt discounts and non-cash related to our issued convertible notes of $47,176 for
the three months ended March 31, 2017 as compared to $16,810 for the same period last year.
Net
Income
. As a result of the above, the net income for three months ended March 31, 2017 increased $1,945,125, or 222.2%,
to $2,820,383 compared to $875,258 in the same period, last year.
Six
months Ended March 31, 2017 Compared to Six Months Ended March 31, 2016
Total
Revenue
. For six months ended March 31 2017, total revenue increased by $349,282 to $519,005 compared to $169,723 in the
same period in fiscal 2016. The increase in revenue for the six months ended March 31, 2017 was related to both a $264,430 increase
in sales from EXO which we acquired in December 2015 and an increase in royalty income of 84,852. The increase in royalty income
is the result of us signing a master development agreement for certain Middle Eastern countries during the six months ended March
31, 2017, offset by a reduction of approximately $40,148 in royalty income due to the closure of five Pizza Fusion locations in
Saudi Arabia.
Cost
of sales.
Cost of sales was $193,470 or 54% of related sales for the six months ended March 31, 2017 giving us a gross
profit from sales of $167,237 or 46% as compared to a cost of sales of $40,288 (42%) and a gross profit of $55,989 (58%) for the
same period last year. In 2017, we are focusing more towards wholesale with higher volumes, but lower margins.
Total
Operating Expenses
. For six months ended March 31, 2017, total operating expenses decreased 35.1% to $544,762 compared
to $839,547 for same period in fiscal 2016. The decrease is primarily to a decrease from $396,000 to $11,212 in stock based compensation
from fiscal 2016 to 2017. Our payroll, selling, general and administrative expenses and depreciation increased by $140,831 due
to our acquisition of EXO subsidiary in fiscal 2017 as compared to 2016.
Gain
on change in fair value of derivative liabilities.
Beginning in fiscal 2015, we have issued convertible notes with an
embedded derivative, all requiring us to fair value the derivatives each reporting period and mark to market as a non-cash adjustment
to our current period operations. This resulted in a gain of $284,655 and $1,458,511 on change in fair value of derivative liabilities
for the six months ended March 31, 2017 and 2016, respectively.
Interest
expense
. Interest expense for the six months ended March 31, 2017 and 2016 was $390,558 and $1,851,011, respectively.
Included in the interest was non-cash amortization of debt discounts and non-cash related to our issued convertible notes of $340,428
for the six months ended March 31, 2017 as compared to $1,846,377 for the same period last year.
Net
Loss
. As a result of the above, the net loss for six months ended March 31, 2017 decreased $807,456, or 73.2, to $295,156
compared to $1,102,612 in the same period, last year.
Liquidity
and Capital Resources
Liquidity
is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements.
Six
Months Ended March 31, 2017 Compared to Six Months Ended March 31, 2016
As
of March 31, 2017, our working capital deficit (current liabilities in excess of current assets) amounted to $1,157,244, an increase
of $40,188 as compared to working capital deficit of $1,117,056 as of September 30, 2016. This increase is primarily a result
of a $42,938 increase in current liabilities, offset by a $2,750 increase in current assets. Working capital at March 31, 2017
included primarily cash of $91,219, accounts and royalty receivables of $11,765, inventory of $114,907, vendor deposits of $36,467
and prepaid and other current assets of $12,479, offset by accounts payable and accrued liabilities of $1,121,167, advances of
$205,861, customer deposits of $31,000, convertible notes payable of $7,581 and $58,472 of notes payable.
Cash
used in operating activities of $72,685 during six months ended March 31,2017 was primarily attributable to a net loss of $295,156,
partially offset by non-cash interest of $207,078, depreciation and amortization of $144,528, and stock based compensation of
$11,212, offset by gain on change in derivative liability of $284,655, gain on settlement of lease of $29,974 and changes in operating
assets and liabilities of $174,282.
Cash
used in investing activities was $2,630 during six months ended March 31, 2017 comprised purchases of property and equipment.
Cash
provided by financing activities of $119,310 during six months ended March 31, 2017 was attributable to proceeds from issuance
of convertible notes of $120,000, $26,400 from issuance of notes payable and $1,000 sale of preferred stock, net with repayments
of $28,090. Cash provided by financing activities of $162,500 during six months ended March 31, 2016 was attributable to proceeds
from convertible notes and advances of $150,000 and $12,500, respectively.
Capital
Resources
We
expect to incur a minimum of $500,000 in expenses during the next twelve months of operations as we expand our EXO operations.
We estimate that this will be comprised of approximately $300,000 towards inventory and marketing costs and approximately $200,000
will be needed for general overhead expenses such as for corporate legal and accounting fees, office overhead and general working
capital.
We
have not determined the amount of funds needed to finance our growth plans. In the event we run into cost overruns or lower than
anticipated revenues, we will have to raise the funds to pay for these expenses. We potentially will have to issue debt or equity,
or enter into a strategic arrangement with other third parties.
We
currently have no agreements, arrangements or understandings with any person to obtain funds through bank loans, lines of credit
or any other sources. There can be no assurance that additional capital will be available to us. Since we have no other such arrangements
or plans currently in effect, our inability to raise funds for the above purposes that exceed our current working capital will
have a severe negative impact on our ability to remain a viable company.
Off-Balance
Sheet Arrangements
As
of March 31, 2017, EXOlifestyles, Inc. did not have any off-balance sheet arrangements that have or are reasonably likely to have
a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement”
generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party,
under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained
or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market
risk support for such assets.
Auditor’s
Opinion Expresses Doubt About the Company’s Ability to Continue as a “Going Concern”
The
independent auditor’s report on our September 30, 2016 consolidated financial statements states that the Company’s
historical losses and accumulated deficiency raise substantial doubts about the Company’s ability to continue as a going
concern, due to the losses incurred and deficiency. If we are unable to develop our business, we will have to reduce, discontinue
operations or cease to exist, which would be detrimental to the value of the Company’s common stock. We can make no assurances
that our business operations will develop and provide us with significant cash to continue operations.
In
order to continue as a going concern, we will need, among other things, additional capital resources. Management’s plan
is to obtain such resources for our capital needs by obtaining capital from management and significant shareholders sufficient
to meet its operating expenses and planned expansion and seeking equity and/or debt financing. However, management cannot provide
any assurances that we will be successful in accomplishing any of our plans.
Our
ability to continue as a going concern is dependent upon our ability to successfully accomplish the plans described in the preceding
paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements
do not include any adjustments that might be necessary if we were unable to continue as a going concern.
Critical
Accounting Policies
We
have identified the following policies below as critical to its business and results of operations. Our reported results are impacted
by the application of the following accounting policies, certain of which require management to make subjective or complex judgments.
These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact
quarterly or annual results of operations. For all of these policies, management cautions that future events rarely develop exactly
as expected, and the best estimates routinely require adjustment. Specific risks associated with these critical accounting policies
are described in the following paragraphs.
Estimates.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets 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. Actual results could differ from those estimates.
Impairment
of Long-Lived Assets.
The Company continually monitors events and changes in circumstances that could indicate carrying amounts
of long-lived assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the
recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted
expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company
recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or the fair value less costs to sell.
Fair
value of Financial Instruments.
The fair value of cash and cash equivalents, royalties receivable, prepaid expenses and other
assets, accounts payable and accrued liabilities, deferred income, approximates the carrying amount of these financial instruments
due to their short-term nature. The fair value of long-term debt, which approximates its carrying value, is based on current rates
at which we could borrow funds with similar remaining maturities.
Derivative
Liability.
The Company accounts for derivatives in accordance with ASC 815, which establishes accounting and reporting standards
for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments
or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship
designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as
hedge relationships and the types of relationships designated are based on the exposures hedged. At March 31, 2017 and September
30, 2016, the Company did not have any derivative instruments that were designated as hedges.
Stock-based
Compensation.
The Company follows the provisions of ASC 718 which requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the statement of operations based on their fair values. The Company uses
the Black-Scholes pricing model for determining the fair value of stock-based compensation.
Revenue
Recognition.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product or service has
occurred, all obligations have been performed pursuant to the terms of the agreement, the sales price is fixed or determinable,
and collectability is reasonably assured.
Royalty
and franchise income
In
connection with its franchising operations, the Company receives initial franchise fees, area development fees, franchise deposits
and royalties which are based on sales at franchised restaurants.
Franchise
fees, which are typically received prior to completion of the revenue of the revenue recognition process, are deferred when received.
Such fees are recognized as income when substantially all services to be performed by the Company and conditions related to the
sale of the franchise have been performed or satisfied, which generally occurs when the franchised restaurant commences operations.
Development
agreements require the developer to open a specified number of restaurants in the development area within a specified time period
or the agreements may be cancelled by the Company. Fees from development agreements are deferred when received and recognized
as income as restaurants in the development area commence operations on a pro rata basis to the minimum number of restaurants
required to be open.
Deferred
franchise fees and development fees are classified as current or long term in the financial statements based on the projected
opening date of the restaurants. Royalty fees, which are based upon a percentage of franchise sales, are made by the franchisee.
Sales
Sales
are generated from an online process either through a web site or through third party providers such as Amazon. Collections are
received at the point of sales.
During
the six months ended March 31, 2017, sales were comprised of sports products from the Company’s wholly owned subsidiary,
EXO.
Recent
Accounting Pronouncements
We
implemented all new accounting standards that are in effect and that may impact its consolidated financial statements. We do not
believe that there are any other new accounting pronouncements that have been issued that might have a material impact on the
consolidated financial position or results of operations.