UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20132014
Commission file number: 000-54648
LAS VEGAS RAILWAY EXPRESS, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware | 56-646797 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
6650 Via Austi Parkway, Suite 140
Las Vegas, NV 89119
(Address of principal executive offices)
(702) 583-6715
(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 Securities Exchange Act of 1934 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 [X] 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 [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] |
| Non-accelerated filer | [ ] | Smaller reporting company | [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
Number of outstanding shares of common stock as of August 14, 20132014 was 166,066,106.26,702,072.
Explanatory Note![](https://capedge.com/proxy/10-Q/0001096906-14-001157/logo.jpg)
The purpose of this Amendment No. 1 to the Annual Report of LAS VEGAS RAILWAY EXPRESS, INC. (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2013, filed with the Securities and Exchange Commission on August 14, 2013 (the “Form 10-Q”), is to amend CERTIFICATION PURSUANT TO 18 U.S.C. SEC. 1350 filed as Exhibit 32.1 to correct the reference to the reporting period from “September 30, 2012” to “ June 20, 2013”. This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.
LAS VEGAS RAILWAY EXPRESS, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION | PAGE |
| | |
Item 1. | Financial Statements: | 3 |
| | |
| Condensed Balance Sheets – June 30, 20132014 (Unaudited) and March 31, 20132014 | 3 |
| | |
| Condensed Statements of Operations - for the Three Months Ended June 30, 20132014 and 20122013 (Unaudited) | 4 |
| | |
| Condensed Statements of Cash Flows - for the Three Months Ended June 30, 20132014 and 20122013 (Unaudited) | 5 |
| | |
| Notes to Condensed Financial Statements (Unaudited) | 6 |
| | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 1518 |
| | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 2025 |
| | |
Item 4. | Controls and Procedures | 2025 |
| | |
PART II OTHER INFORMATION | |
| | |
Item 1. | Legal Proceedings | 2126 |
| | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 2126 |
| | |
Item 3. | Defaults upon Senior Securities | 2126 |
| | |
Item 4. | Mine Safety Disclosures | 2127 |
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Item 5. | Other Information | 2127 |
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Item 6. | Exhibits | 2227 |
| | |
SIGNATURES | 2228 |
PART I FINANCIAL INFORMATION
LAS VEGAS RAILWAY EXPRESS, INC. CONDENSED BALANCE SHEETS
| | June 30, | | | March 31, | |
| | 2013 | | | 2013 | |
| | (Unaudited) | | | | |
Assets | | | | | | |
| | | | | | |
Current assets | | | | | | |
Cash | | $ | 970,303 | | | $ | 1,262,615 | |
Other current assets | | | 767,601 | | | | 471,772 | |
Total current assets | | | 1,737,904 | | | | 1,734,387 | |
| | | | | | | | |
Property and equipment, net of accumulated depreciation | | | 499,920 | | | | 393,789 | |
| | | | | | | | |
Other assets | | | | | | | | |
Deposit with Union Pacific | | | 600,000 | | | | 600,000 | |
Other assets | | | 29,307 | | | | 25,958 | |
Goodwill | | | 843,697 | | | | 843,697 | |
Total other assets | | | 1,473,004 | | | | 1,469,655 | |
Total assets | | $ | 3,710,828 | | | $ | 3,597,831 | |
| | | | | | | | |
Liabilities and Stockholders' Deficit | | | | | | | | |
| | | | | | | | |
Current liabilities | | | | | | | | |
Short term notes payable | | $ | 13,333 | | | $ | 13,333 | |
Accounts payable and accrued expenses | | | 478,687 | | | | 375,295 | |
Derivative liability | | | 5,801,826 | | | | 3,181,537 | |
Convertible notes payable, net of discount | | | 750,401 | | | | 116,042 | |
Liabilities of discontinued operations | | | 85,041 | | | | 194,041 | |
Total current liabilities | | | 7,129,288 | | | | 3,880,248 | |
Deferred tax liability | | | 60,405 | | | | 55,914 | |
Total liabilities | | | 7,189,693 | | | | 3,936,162 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
| | | | | | | | |
Stockholders' deficit | | | | | | | | |
Common stock, $0.0001 par value, 200,000,000 shares authorized, 162,316,106 and 154,111,882 shares issued and outstanding as of June 30, 2013 (unaudited) and March 31, 2013, respectively | | | 16,232 | | | | 15,411 | |
Additional paid-in capital | | | 18,297,073 | | | | 18,221,881 | |
Accumulated deficit | | | (21,792,170 | ) | | | (18,575,623 | ) |
Total stockholders' deficit | | | (3,478,865 | ) | | | (338,331 | ) |
Total liabilities and stockholders' deficit | | $ | 3,710,828 | | | $ | 3,597,831 | |
| | June 30, | | | March 31, | |
| | 2014 | | | 2014 | |
| | (Unaudited) | | | | |
Assets | | | | | | |
| | | | | | |
Current assets | | | | | | |
Cash | | $ | 43,413 | | | $ | 87,910 | |
Other current assets | | | 88,986 | | | | 101,250 | |
Total current assets | | | 132,399 | | | | 189,160 | |
| | | | | | | | |
Property and equipment, net of accumulated depreciation | | | 699,328 | | | | 684,407 | |
| | | | | | | | |
Other assets | | | | | | | | |
Other assets | | | 21,500 | | | | 22,385 | |
Total other assets | | | 21,500 | | | | 22,385 | |
Total assets | | $ | 853,227 | | | $ | 895,952 | |
| | | | | | | | |
Liabilities and Stockholders' Deficit | | | | | | | | |
| | | | | | | | |
Current liabilities | | | | | | | | |
Short term notes payable | | $ | - | | | $ | 13,333 | |
Accounts payable and accrued expenses | | | 480,231 | | | | 442,711 | |
Derivative liability | | | 1,519,753 | | | | 1,198,018 | |
Notes payable - related parties | | | 59,000 | | | | - | |
Current portion of convertible notes payable, net of discount | | | 1,942,060 | | | | 1,271,984 | |
Total current liabilities | | | 4,001,044 | | | | 2,926,046 | |
Long-term portion of convertible debt, net of current portion | | | 257,625 | | | | 150,000 | |
Total liabilities | | | 4,258,669 | | | | 3,076,046 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
| | | | | | | | |
Stockholders' deficit | | | | | | | | |
Common stock, $0.0001 par value, 200,000,000 shares authorized, 24,075,114 and 16,041,143 shares issued and outstanding as of June 30, 2014 (unaudited) and March 31, 2014, respectively | | | 2,408 | | | | 1,604 | |
Additional paid-in capital | | | 32,707,028 | | | | 29,445,945 | |
Common stock payable | | | 66,485 | | | | - | |
Accumulated deficit | | | (36,181,363 | ) | | | (31,627,643 | ) |
Total stockholders' deficit | | | (3,405,442 | ) | | | (2,180,094 | ) |
Total liabilities and stockholders' deficit | | $ | 853,227 | | | $ | 895,952 | |
See accompanying notes to condensed financial statements
-
LAS VEGAS RAILWAY EXPRESS, INC. CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| | Three Months Ended | | | Three Months Ended | |
| | June 30, | | | June 30, | | | June 30, | | | June 30, | |
| | 2013 | | | 2012 | | | 2014 | | | 2013 | |
| | | | | (Restated) | | | | | | | |
Operating Expenses: | | | | | | | | | | | | |
Compensation and payroll taxes | | $ | 849,329 | | | $ | 564,842 | | | $ | 2,866,004 | | | $ | 849,329 | |
Selling, general and administrative | | | 208,123 | | | | 89,738 | | | | 384,050 | | | | 208,123 | |
Professional fees | | | 581,788 | | | | 121,865 | | | | 769,388 | | | | 581,788 | |
Depreciation expense | | | 1,434 | | | | 160 | | | | 2,436 | | | | 1,434 | |
Total expenses | | | 1,640,674 | | | | 776,605 | | | | 4,021,878 | | | | 1,640,674 | |
| | | | | | | | | | | | | | | | |
Loss from operations | | | (1,640,674 | ) | | | (776,605 | ) | | | (4,021,878 | ) | | | (1,640,674 | ) |
| | | | | | | | | | | | | | | | |
Other (expense) income | | | | | | | | | |
Other income (expense) | | | | | | | | | |
Interest expense | | | (2,521,627 | ) | | | (13,770 | ) | | | (1,402,041 | ) | | | (2,521,627 | ) |
Change in derivative liability | | | 950,245 | | | | 22,440 | | | | 870,199 | | | | 950,245 | |
Total other (expense) income | | | (1,571,382 | ) | | | 8,670 | | |
Total other income (expense) | | | | (531,842 | ) | | | (1,571,382 | ) |
| | | | | | | | | | | | | | | | |
Net loss from continuing operations before provision for income taxes | | | (3,212,056 | ) | | | (767,935 | ) | |
Net loss from operations before provision for income taxes | | | | (4,553,720 | ) | | | (3,212,056 | ) |
Provision for income taxes | | | (4,491 | ) | | | (4,491 | ) | | | - | | | | (4,491 | ) |
Net loss from continuing operations | | | (3,216,547 | ) | | | (772,426 | ) | |
| | | | | | | | | |
Discontinued operations: | | | | | | | | | |
Income from discontinued operations, net of income taxes | | | - | | | | 484,420 | | |
| | | | | | | | | | | | | | | | |
Net loss | | $ | (3,216,547 | ) | | $ | (288,006 | ) | | $ | (4,553,720 | ) | | $ | (3,216,547 | ) |
| | | | | | | | | | | | | | | | |
Net loss per share, continuing operations, basic and diluted | | $ | (0.02 | ) | | $ | (0.01 | ) | |
Net income per share, discontinued operations, basic and diluted | | $ | - | | | $ | 0.01 | | |
Net loss per share, basic and diluted | | $ | (0.02 | ) | | $ | (0.00 | ) | | $ | (0.34 | ) | | $ | (0.40 | ) |
| | | | | | | | | |
Weighted average number of common shares outstanding, basic and diluted | | | 160,066,779 | | | | 61,535,442 | | | | 13,357,337 | | | | 8,003,339 | |
See accompanying notes to condensed financial statements
LAS VEGAS RAILWAY EXPRESS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Three Months Ended | |
| | June 30, | | | June 30, | |
| | 2014 | | | 2013 | |
| | | | | | |
Cash flows from operating activities | | | | | | |
Net loss | | $ | (4,553,720 | ) | | $ | (3,216,547 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 2,436 | | | | 1,434 | |
Amortization of discounts on note payable | | | 1,041,344 | | | | 2,305,550 | |
Amortization of debt offering costs | | | - | | �� | | 155,391 | |
Deferred tax provision | | | - | | | | 4,491 | |
Change in value of derivative liability | | | (870,199 | ) | | | (950,245 | ) |
Stock issued and subscribed for services | | | 511,869 | | | | 400,905 | |
Stock option compensation | | | 2,446,615 | | | | - | |
Stock issued in connection with exchange agreements | | | 103,388 | | | | - | |
Warrants issued for services | | | 82,354 | | | | 221,789 | |
| | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | |
Other current assets | | | 12,264 | | | | 20,531 | |
Other assets | | | 885 | | | | (3,349 | ) |
Liabilities of discontinued operations, net | | | - | | | | (109,000 | ) |
Accounts payable and accrued expenses | | | 129,443 | | | | 104,303 | |
| | | | | | | | |
Net cash used in operating activities | | | (1,093,321 | ) | | | (1,064,747 | ) |
| | | | | | | | |
Cash flows from investing activities | | | | | | | | |
Purchases of property and equipment | | | (17,357 | ) | | | (107,565 | ) |
Net cash used in investing activities | | | (17,357 | ) | | | (107,565 | ) |
| | | | | | | | |
Cash flows from financing activities | | | | | | | | |
Proceeds from exercise of stock options | | | 514 | | | | - | |
Proceeds from convertible notes payable | | | 1,006,667 | | | | 880,000 | |
Proceeds from notes payable - related parties | | | 59,000 | | | | - | |
| | | | | | | | |
Net cash provided by financing activities | | | 1,066,181 | | | | 880,000 | |
| | | | | | | | |
Net change in cash | | | (44,497 | ) | | | (292,312 | ) |
Cash, beginning of the period | | | 87,910 | | | | 1,262,615 | |
Cash, end of the period | | $ | 43,413 | | | $ | 970,303 | |
| | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | |
Interest paid | | $ | - | | | $ | - | |
Income taxes paid | | $ | - | | | $ | - | |
| | | | | | | | |
Supplemental disclosure of non-cash investing and financing transactions: | | | | | | | | |
Stock issued as payment of accounts payable | | $ | 38,771 | | | $ | - | |
Stock issued for debt and accrued interest | | $ | 84,929 | | | $ | 270,911 | |
See accompanying notes to condensed financial statements
LAS VEGAS RAILWAY EXPRESS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| | June 30, | | | June 30, | |
| | 2013 | | | 2012 | |
| | | | | (Restated) | |
Cash flows from operating activities | | | | | | |
Net loss | | $ | (3,216,547 | ) | | $ | (288,006 | ) |
Income from discontinued operations | | | | | | | (484,420 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 1,434 | | | | 160 | |
Amortization of discounts on note payable | | | 2,305,550 | | | | 3,628 | |
Amortization of debt offering costs | | | 155,391 | | | | - | |
Deferred tax provision | | | 4,491 | | | | 4,491 | |
Change in value of derivative liability | | | (950,245 | ) | | | (22,440 | ) |
Stock issued and subscribed for services | | | 400,905 | | | | 394,227 | |
Stock option compensation | | | - | | | | 20,131 | |
Warrants issued for services | | | 221,789 | | | | - | |
| | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | |
Other current assets | | | 20,531 | | | | 15,500 | |
Other assets | | | (3,349 | ) | | | - | |
Liabilities of discontinued operations, net | | | (109,000 | ) | | | (89,392 | ) |
Accounts payable and accrued expenses | | | 104,303 | | | | 3,021 | |
| | | | | | | | |
Net cash used in operating activities | | | (1,064,747 | ) | | | (443,100 | ) |
| | | | | | | | |
Cash flows from investing activities | | | | | | | | |
Purchases of property and equipment | | | (107,565 | ) | | | (14,596 | ) |
Net cash used in investing activities | | | (107,565 | ) | | | (14,596 | ) |
| | | | | | | | |
Cash flows from financing activities | | | | | | | | |
Proceeds from sale of stock | | | - | | | | 1,190,000 | |
Proceeds from convertible notes payable | | | 880,000 | | | | - | |
Payments on note payable | | | - | | | | (25,000 | ) |
| | | | | | | | |
Net cash provided by financing activities | | | 880,000 | | | | 1,165,000 | |
| | | | | | | | |
Net change in cash | | | (292,312 | ) | | | 707,304 | |
Cash, beginning of the period | | | 1,262,615 | | | | 53,632 | |
Cash, end of the period | | $ | 970,303 | | | $ | 760,936 | |
| | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | |
Interest paid | | $ | - | | | $ | 1,944 | |
Income taxes paid | | $ | - | | | $ | - | |
| | | | | | | | |
Supplemental disclosure of non-cash investing and financing transactions: | | | | | | | | |
Stock issued for debt | | $ | 270,911 | | | $ | 559,200 | |
Stock issued for reduction of liabilities from discontinued operations | | $ | - | | | $ | 156,239 | |
See accompanying notes to condensed financial statements
LAS VEGAS RAILWAY EXPRESS, INC. NOTES TO CONDENDED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization and basis of presentation
Basis of Financial Statement Presentation:
The accompanying unaudited interim financial statements of Las Vegas Railway Express, Inc. (the "Company") have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. However, the results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending March 31, 20142015 or any other future period. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2013.2014.
Going Concern:
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company had no revenue, ahas net losslosses of $3,216,547$4,553,720 for the three months ended June 30, 2013 and2014. The Company also has an accumulated deficit of $21,792,170 through$36,181,363 and a negative working capital of $3,868,645 as of June 30, 2013,2014, as well as outstanding convertible notes payable of $2,405,000 which are payable on February 1, 2014.$2,959,792. Management believes that it will need additional equity or debt financing to be able to implement the business plan. These matters raiseGiven the lack of revenue, capital deficiency and negative working capital, there is substantial doubt about the Company’s ability to continue as a going concern.
The Company estimates that it will need to obtain $10 million in additional capital to begin operations of its planned train service. The Company intendsManagement is attempting to raise these funds through the public or private saleadditional equity and debt to sustain operations until it can market its services and achieves profitability. The successful outcome of equity and/or debt securities. There isfuture activities cannot be determined at this time and there are no assurance such funding will be available on terms acceptable toassurances that, if achieved, the Company will have sufficient funds to execute its intended business plan or at all. If the Company succeeds in raising such funds, it intends to use them for railcar purchase, design, refurbishment and outfitting for the National Routes beginning October 2013. The North Las Vegas depot design and construction, lease payments on the North Las Vegas depot site, Union Pacific Railroad (“UP”)capital infrastructure improvements of approximately $56 million and the procurement of 24 railcars designed specifically for the Las Vegas route are planned to be paid for through a Railroad Rehabilitation & Improvement Financing (“RRIF”) loan from FRA. The Company estimates that thegenerate positive operating capital generated from the National Routes would fund the operating costs of the deployment of the Las Vegas route. The RRIF loan will pay for the infrastructure improvements required on that route.results.
The accompanying financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Restatements:
The accompanying condensed financial statements for the three months ended June 30, 2012 have been restated to reflect a correction relating to certain warrants and notes payable outstanding which contained elements that qualified them as derivative liabilities. Accordingly, the Company obtained a third party valuation of the warrants and embedded derivatives and reclassified them as derivative liabilities. As a result, the Company recorded the change in the fair value of the derivative liabilities as a component of the condensed statement of operations. The Company also made corrections to stock-based compensation, as well as its deferred income tax provision.
The impact of the restatements described above is as follows.
For the three months ended June 30, 2012: | | | | | | | | | |
| | As Previously | | | | | | | |
| | Reported | | | Adjustments | | | Restated | |
| | | | | | | | | |
Compensation and payroll taxes | | $ | 326,115 | | | $ | 238,727 | | | $ | 564,842 | |
Selling, general and administrative | | | 89,738 | | | | - | | | | 89,738 | |
Professional fees | | | 148,365 | | | | (26,500 | ) | | | 121,865 | |
Depreciation expense | | | 160 | | | | - | | | | 160 | |
Total expenses | | | 564,378 | | | | 212,227 | | | | 776,605 | |
| | | | | | | | | | | | |
Loss from operations | | | (564,378 | ) | | | (212,227 | ) | | | (776,605 | ) |
Interest expense | | | (10,553 | ) | | | (3,217 | ) | | | (13,770 | ) |
Change in derivative liability | | | - | | | | 22,440 | | | | 22,440 | |
Total other income (expense) | | | (10,553 | ) | | | 19,223 | | | | 8,670 | |
Net loss from continuing operations before tax provision | | | (574,931 | ) | | | (193,004 | ) | | | (767,935 | ) |
Provision for income taxes | | | - | | | | (4,491 | ) | | | (4,491 | ) |
Net loss from continuing operations | | | (574,931 | ) | | | (197,495 | ) | | | (772,426 | ) |
Discontinued operations: | | | | | | | | | | | | |
Income from discontinued operations, net of income tax | | | 484,420 | | | | - | | | | 484,420 | |
Net loss | | $ | (90,511 | ) | | $ | (197,495 | ) | | $ | (288,006 | ) |
(2) Summary of Significant Accounting Policies
Risks and Uncertainties:
The Company operates in an industry that is subject to intense competition and potential government regulations. Significant changes in regulations and the inability of the Company to establish contracts with rail services providers could have a materially adverse impact on the Company’s operations.
Use of Estimates:
The preparation of financial statements in conformity with GAAP 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 reported periods.
Property and Equipment:
Property and equipment are recorded at historical cost and depreciated on a straight-line basis over their estimated useful lives of approximately five years once the individual assets are placed in service. The Company expenses all purchases of equipment with individual costs of under $500.$500, and these amounts are not material to the financial statements.
IntangibleLong-Lived Assets:
Goodwill representsIn accordance with FASB ASC 360-10, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of purchase pricethe carrying amount over tangiblethe fair value, based on market value when available, or discounted expected cash flows, of those assets and intangibleis recorded in the period in which the determination is made. The Company’s management believes there has been no impairment of its long-lived assets acquired, less liabilities assumed arising from the acquisition of the train business on November 23, 2009. Goodwill is not amortized, but is reviewed for potential impairment on an annual basis at the reporting unit level. As required by the “Intangibles – Goodwill and Other” topic of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), the Company conducted an analysis of the goodwill on its single reporting unit using the Company’s market capitalization (based on Level 1 inputs). Forduring the three months ended June 30, 2013,2014 or 2013. There can be no assurance, however, that market conditions will not change or demand for the assessment for impairment found that there is noCompany’s business model will continue. Either of these could result in future impairment of goodwill. The Company has no accumulated impairment losses on goodwill.
Deposit with Union Pacific:
On November 8, 2012, the Company signed an agreement with Union Pacific Railroad Company whereby the Company was granted a nonexclusive operating right to use Union Pacific railroad track between Daggett, California and Las Vegas, Nevada. In connection with this agreement, the Company made an earnest money deposit of $600,000 and is required to meet certain financial conditions, including the provision of a letter of credit in favor of Union Pacific in the amount of $27,444,145 on or before October 31, 2013. Failure to meet the conditions specified in the agreement will result in the Company losing the $600,000 deposit.
Income Taxes:
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The deferred tax assets of the Company relate primarily to operating loss carryforwards for federal income tax purposes. A full valuation allowance for deferred tax assets has been provided because the Company believes it is not more likely than not that the deferred tax asset will be realized. Realization of deferred tax assets is dependent on the Company generating sufficient taxable income in future periods.
The Company’s goodwill is deductible for tax but not for book. This difference creates a deferred tax liability, which cannot be matched with the Company’s deferred tax asset. As a result, the Company cannot net it with its net operating loss carryforward and therefore records a deferred tax liability to reflect the future non-deductibility of its goodwill asset. The deferred tax liability at June 30, 2013 (unaudited) and March 31, 2013 was $60,405 and $55,914, respectively.
The Company periodically evaluates its tax positions to determine whether it is more likely than not that such positions would be sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their technical merits. As of June 30, 20132014 and March 31, 2013,2014, the Company has not established a liability for uncertain tax positions.
Basic and Diluted Loss Per Share:
In accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASCASC”) 260, “Earnings Per Share,” the basic loss per common share is computed by dividing the net loss available to common stockholders after preferred stock dividends, by the weighted average common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if diluted potential common stock had been converted to common stock. Common stock equivalents have not been included in the earnings per share computation for the three months ended June 30, 20132014 and 20122013 as the amounts are anti-dilutive. As of June 30, 2013,2014, the Company had 2,000,0001,770,969 outstanding options which were excluded from the computation of net income per share because they are anti-dilutive. As of June 30, 2013,2014, the Company also had convertible debt of $2,405,000 that is convertible into 48,100,000 shares of common stock$2,959,792 which was excluded from the computation. As of June 30, 2013,2014, the Company had 82,449,8422,315,649 outstanding warrants which were also excluded from the computation because they were anti-dilutive.
Share Based Payment:
The Company issues stock, options and warrants as share-based compensation to employees and non-employees.
The Company accounts for its share-based compensation to employees in accordance FASB ASC 718. Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period.
The Company accounts for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50 “Equity - Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance completion date. For interim periods, the fair value is estimated and the percentage of completion is applied to that estimate to determine the cumulative expense recorded.
The Company values stock compensation based on the market price on the measurement date. As described above, for employees this is the date of grant, and for non-employees, this is the date of performance completion.
The Company values stock options and warrants that do not qualify as derivative instruments using the Black-Scholes option pricing model. Assumptions used in the Black-Scholes model to value options and warrants issued during the three months ended June 30, 2014 are as follows. There were no options or warrants granted during the three months ended June 30, 2013 or 2012 that were valued used inusing the Black-Scholes model.
| | Three Months Ended | |
| | June 30, | |
| | 2014 | |
| | | |
Expected life in years | | | 2.5 | |
Stock price volatility | | | 170.94% - 178.31 | % |
Risk free interest rate | | | 0.76% - 0.95 | % |
Expected dividends | | NA | |
Forfeiture rate | | | 0 | % |
Certain warrants qualify as derivative instruments and are valued using the binomial lattice method. See discussion below regarding accounting for derivative liabilities.
Derivative Liabilities:
In connection with the private placement of Convertible Notesconvertible notes beginning in February 2013, the Company became contingently obligated to issue shares of common stock in excess of the 200 million authorized under the Company’s certificate of incorporation. Consequently, the ability to settle these obligations with shares would be unavailable causing these obligations to potentially be settled in cash. This condition creates a derivative liability.
The Company has a sequencing policy regarding share settlement wherein instruments with the earliest issuance date would be settled first. The sequencing policy also considers contingently issuable additional shares, such as those issuable upon a stock split, to have an issuance date to coincide with the event giving rise to the additional shares.
Using this sequencing policy, all instruments convertible intoOn December 2, 2013, the Company effected a one-for-twenty reverse stock split of the Company’s issued and outstanding common stock including warrantsshares. As a result, the Company’s outstanding shares of common stock and common stock equivalents no longer exceeded the conversion featurenumber of notes payable, issued on and subsequent to February 13,authorized shares. As a result, as of December 2, 2013, arethese instruments that were accounted for as derivative liabilities.liabilities were reclassified as equity.
The Company also has certain warrants and embedded conversion options in notes payable with elements that qualify as derivatives. The warrants have anti-dilution clauses that prevent calculation of the ultimate number of shares that may be issued upon exercise, and two of thefour outstanding notes payable that had a variable conversion feature that similarly prevented the calculation of the number of shares into which they were convertible.
The Company values these warrants and embedded conversion options in notes payable using the binomial lattice method. The resulting liability is valued at each reporting date and the change in the liability is reflected as change in derivative liability in the condensed statement of operations.operations (see Note 6).
Fair Value of Financial Instruments:
The Company's financial instruments as defined by FASB ASC 825-10-50 include cash, notes payable and derivative liabilities. Derivative liabilities are recorded at fair value. The principal balance of notes payable approximates fair value because current interest rates and terms offered to the Company for similar debt are substantially the same.
FASB ASC 820 defines fair value, establishes a framework for measuring fair value, in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. FASB ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions.
In determining the absenceappropriate fair value of such information or ifthe goodwill and derivative liabilities, the Company is not able to corroborate these prices by other available relevant market information,used the fair values are estimated using internal calculations or discounted cash flow techniques that incorporate prepayment rates, discount rates and delinquency and default and cumulative loss expectations, that are implied by market pricesfollowing input levels for similar securities and collateral structure types. Because thisits valuation technique relies on significant unobservable inputs, the fair value estimation is classified as Level 3. The process for determining fair value using unobservable inputs is generally more subjective and involves a high degree of management judgment and assumptions. These assumptions may have a significant effect on the estimates of fair value, and the use of different assumptions as well as changes in market conditions could have a material effect on the results of operations or financial condition.methodology.
| | | | Fair Value | | | | Fair Value Measurements at June 30, 2014 | |
| | | | as of | | | | Using Fair Value Heirarchy | |
| | | | June 30, 2014 | | | | Level 1 | | | | Level 2 | | | | Level 3 | |
| | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | |
Derivative liability | | | $ | 1,519,753 | | | $ | - | | | $ | 1,519,753 | | | $ | - | |
New Accounting Pronouncements:
There are no recent accounting pronouncements that management believes will have a material impact on the Company's present or future consolidated financial statements
(3) Property and Equipment
Property and equipment consisted of the following.
| | June 30, | | | March 31, | | | June 30, | | | March 31, | |
| | 2013 | | | 2013 | | | 2014 | | | 2014 | |
| | (Unaudited) | | | | | | (Unaudited) | | | | |
| | | | | | | | | | | | |
Office equipment | | $ | 51,458 | | | $ | 40,921 | | | $ | 65,084 | | | $ | 61,611 | |
Software | | | 30,167 | | | | 14,192 | | |
Computer software | | | | 24,167 | | | | 24,167 | |
Transportation equipment under construction | | | 435,610 | | | | 354,557 | | | | 635,686 | | | | 621,802 | |
| | | | | | | | | | | | | | | | |
| | | 517,235 | | | | 409,670 | | | | 724,937 | | | | 707,580 | |
| | | | | | | | | | | | | | | | |
Less: accumulated depreciation | | | (17,315 | ) | | | (15,881 | ) | | | (25,609 | ) | | | (23,173 | ) |
| | | | | | | | | | | | | | | | |
| | $ | 499,920 | | | $ | 393,789 | | | $ | 699,328 | | | $ | 684,407 | |
(4) Notes payable
A summary of outstanding notes payable is as follows:
| | June 30, | | | March 31, | | | June 30, | | | March 31, | |
| | 2013 | | | 2013 | | | 2014 | | | 2014 | |
| | (Unaudited) | | | | | | (Unaudited) | | | | |
| | | | | | | | | | | | |
Secured promissory notes, dated May 17, 2011 through May 17, 2012 to an investor bearing interest at 8% per annum, payable on May 17, 2012. The Company is in default on this note. | | | 13,333 | | | | 13,333 | | |
Secured promissory notes, dated May 17, 2011 through May 17, 2012 to an investor bearing interest at 8% per annum, payable on May 17, 2012. | | | $ | - | | | $ | 13,333 | |
| | | | | | | | | | | | | | | | |
Total outstanding notes payable | | $ | 13,333 | | | $ | 13,333 | | | $ | - | | | $ | 13,333 | |
The above note payable was repaid in full during the three months ended June 30, 2014. Debt Securities Assignment and Purchase agreement (see Note 7).
(5) Convertible Notes Payable
On October 1, 2013, the Company entered into a promissory note with JMJ Financial which provides for the Company to borrow up to $350,000 in principal (the “JMJ Note”). As of March 31, 2014, the Company had borrowed $150,000 under this Promissory Note. Outstanding borrowings mature two years from the effective date of each payment. If the outstanding balance of the note is repaid by the Company on or before 90 days from the effective date of the borrowing, the interest charged is 0%. However, if the Company does not repay the note within 90 days, a one-time interest charge of 12% shall be applied to the outstanding principal sum. The outstanding balance of the note may be converted into common stock at the option of the debt holder at a rate equal to $0.90 per share, or 60% of the lowest trading price in the 25 days trading days previous to the conversion date, subject to other adjustments in the agreement. During the three months ended June 30, 2014, the Company borrowed an additional $40,000 under the JMJ Note. During the three months ended June 30, 2014, JMJ Financial converted $69,785 of outstanding principal into 785,000 shares of common stock under the terms of the agreement. As of June 30, 2014, the outstanding balance of the JMJ Note amounted to $120,125.
On November 22, 2013, the Company, isentered into and closed a purchase agreement (the “Purchase Agreement”) with an institutional investor, pursuant to which the Company sold to the investor a senior secured convertible promissory note in defaultthe principal amount of $1,750,000 (the “Note”), and warrants to purchase 300,000 shares of common stock (the “Warrants”), for an aggregate purchase price of $1,750,000. The Note was scheduled to mature on the above note payable for $13,333. As of June 30, 2013, there has been no demand made for repayment2014, bears interest at the rate of 10% per year payable on maturity in cash or shares of common stock at the Company’s option (subject to certain conditions), and is convertible into shares of the notesCompany’s common stock at a conversion price equal to $0.70, subject to adjustment in the event of future stock splits, stock dividends, and similar transactions, or accrued interest.in the event of subsequent equity sales by the Company at a price lower than the conversion price then in effect. The Company’s obligations under the Note are secured by substantially all of the Company’s assets. The Warrants have a five year term, are exercisable on a cash or cashless basis, and have an exercise price equal to $1.00, subject to adjustment in the event of future stock splits, stock dividends, and similar transactions, or in the event of subsequent equity sales by the Company at a price lower than the exercise price then in effect.
(5) Convertible Notes Payable
During February and March 2013,On April 11, 2014, the Company entered into a Note Exchange Agreement with the debt holder holding the $1,750,000 Note originally issued on November 22, 2013 under the Purchase Agreement. Under the terms of the Note Exchange Agreement, the original senior secured convertible promissory note and accrued interest is cancelled and replaced with a seriesnew note for $2,000,000. The new note matures on November 30, 2014, bears interest at the rate of convertible notes10% per year payable (the “Convertible Notes”)on maturity in cash or shares of common stock at the Company’s option (subject to investors for total proceeds of $1,900,000. The Convertible Notes arecertain conditions), and is convertible into shares of the Company’s common stock at $0.05a conversion price equal to $0.45, subject to adjustments in the event of future stock splits, stock dividends, and similar transactions, or in the event of subsequent equity sales by the Company at a price lower than the conversion price then in effect. Under the new note, the Company’s obligations are secured by substantially all of the Company’s assets, excluding any railcar assets. The difference between the book value of the principal and accrued interest of the old note of $1,818,055 and the value of the new note of $2,000,000 of $181,944 was recorded as interest expense during the three months ended June 30, 2014.
On March 24, 2014, the Company entered into a Convertible Promissory Note with Iconic Holdings, LLC (the “Iconic Note”) in which the Company has access to borrow a total principal amount of $165,000. All borrowings incur interest at a rate of 8% per share atannum, which is payable as of the maturity date of March 24, 2015. The initial borrowing made by the Company amounted to $55,000, which represented the amount outstanding on the Iconic Note as of March 31, 2014. At the option of the debt holder.holder, the outstanding balance may be converted at any time into shares of the Company’s common stock at a conversion rate equal to the lower of $0.50 or 60% of the lowest trading price of the Company’s common stock during the 25 consecutive trading days prior to conversion election date. During the three months ended June 30, 2014, the Company borrowed an additional $100,000 under the Iconic Note. The Convertible Notesoutstanding principal balance as of June 30, 2014 amounted to $155,000.
On March 25, 2014, the Company entered into a convertible note agreement with KBM Worldwide, Inc. (the “KBM Note”) for total principal borrowings of $68,000, which represented the amount outstanding as of June 30, 2014 and March 31, 2014. The amounts are due nine months after the issuance of the note on December 25, 2014, and bear interest at a rate of 8% per annum, and haveannum. At the option of the debt holder, beginning 180 days after the issuance of the note, the debt holder may convert the outstanding balance of the KBM Note into shares of the Company’s common stock at a conversion rate equal to 61% of the average of the lowest three closing trading prices during the 10 trading day period prior to the conversion election date.
On April 2, 2014, the Company entered into a convertible promissory note for $100,000 with Beaufort Capital Partners LLC with a maturity date of February 1,October 2, 2014. Prior to March 31, 2013,The note is convertible into shares of the Company’s common stock at a discount of 42% of the lowest traded price during the 5 trading days preceding the conversion date.
On April 11, 2014, the Company entered into a Note Exchange Agreement with the debt holders converted $105,000holder holding the $1,750,000 senior secured convertible promissory note originally issued on November 22, 2013 under the Purchase Agreement. Under the terms of outstanding principal into 2,100,000 sharesthe Note Exchange Agreement, the original senior secured convertible promissory note is cancelled and replaced with a new note for $2,000,000. The new note matures on November 30, 2014, bears interest at the rate of common stock. As a result, as of March 31, 2013, the remaining gross principal balance of convertible notes10% per year payable outstanding amounted to $1,795,000.
During the three months ended June 30, 2013, the Company issued additional Convertible Notes to investors for additional proceeds of $880,000, with the same terms as described above. During the three months ended June 30, 2013, the debt holders converted $270,000 of outstanding principal and $911 of accrued interest into 5,417,756on maturity in cash or shares of common stock pursuantat the Company’s option (subject to certain conditions), and is convertible into shares of the Company’s common stock at a conversion price equal to $0.45, subject to adjustments in the event of future stock splits, stock dividends, and similar transactions, or in the event of subsequent equity sales by the Company at a price lower than the conversion price then in effect. Under the new note, the Company’s obligations are secured by substantially all of the Company’s assets, excluding any railcar assets.
On April 17, 2014, the Company entered into a convertible note payable with Vista Capital Investments, LLC providing for borrowings up to $250,000 with a maturity date of April 17, 2016. The note has a one-time interest charge of 12% and is due on the maturity date. The outstanding balance of the note along with accrued interest is convertible into shares of the Company’s common stock at a rate equal to the original termslesser of $0.25 or 60% of the lowest trade occurring during the 25 trading days preceding the conversion date. The Company received borrowings under this convertible note payable of $50,000 in April 2014, which represented the agreements. Asoutstanding balance as of June 30, 2013,2014.
On April 30, 2014, the remainingCompany entered into a convertible note payable with Redwood Management, LLC providing for total borrowings of $250,000, which is payable in 3 installments of $83,333, one upon execution of the note, one due one month after execution, and one due two months after execution. Interest on the note equals 10% of the total principal balance, regardless of how long the note is outstanding for. The Company received payments of $83,333 on May 5, 2014 and on May 30, 2014. The convertible notes payablenote matures 6 months after the issuance, at which point the outstanding principal and interest is due. The outstanding balance related to this note amounted to $2,405,000, including $50,000$166,667 as of June 30, 2014.
On May 6, 2014, the Company entered into a convertible note payable with KBM Worldwide, Inc. providing for total borrowings of $32,500 which accrue interest at a rate of 8% per annum. The convertible note matures and is due in full on February 12, 2015 along with any unpaid accrued interest. The outstanding to a Directorprincipal and accrued interest is convertible into shares of common stock at the option of the Company.holder at a conversion rate equal to 61% of the average of the lowest 3 trading prices during the 10 trading days prior to the conversion.
On May 12, 2014, the Company entered into a secured convertible promissory note with Typenex Co-Investment, LLC (the “Typenex Note”) providing for total borrowings up to $335,000 which accrue interest at a rate of 10% per annum. All outstanding borrowings mature and are due in 20 months from the issuance date. The Company does not have sufficient authorizedreceived an initial payment of $87,500 on the note issuance date. The outstanding principal and interest is convertible into shares of common stock at the option of the holder at a conversion rate equal to coverthe lesser of $0.35 per share or 60% of the average of the 3 lowest closing bid prices in the 20 trading days preceding the conversion featuredate. If the average of the convertible notes.3 lowest closing bid prices is less than $0.10, then the conversion factor is reduced from 60% to 55%. The conversion featuredebt holder was also issued warrants on May 12, 2014 in connection with this note payable granting the right to purchase a number of common stock shares equal to $167,500 divided by the market price (defined as the higher of the Convertible Notes issuedclosing price on and after February 13, 2013 created a derivative liabilitythe issuance date or the volume weighted average price of the stock for the Company. See Note 6, Derivative Instruments.trading day that is 2 days prior to the exercise date) at an exercise price of $0.35 per share. The beneficial conversion featureoutstanding balance related to this note amounted to $87,500 as of June 30, 2014.
On May 28, 2014, the Company issued into a convertible promissory note with Beaufort Capital Partners LLC providing for borrowings of $125,000. The convertible promissory note matures on August 28, 2014, at which point the Company owes $187,500 which includes a total of $62,500 in interest expense. The outstanding amounts are convertible into shares of common stock at the option of the notes issuedholder at a conversion rate equal to 60% of the lowest traded price during the prior 20 trading days from the date of the conversion.
On June 13, 2014, the Company entered a convertible debenture agreement with Group 10 Holdings, LLC providing for total borrowing of $55,000 which accrue interest at the rate of 12% per annum. All borrowings mature and are due in one year from the issuance date. The debenture is convertible into shares of common stock at the option of the holder at the conversion rate lesser of 55% discount of the lowest closing bid price during the 25 trading days prior to February 13, 2013 wasthe date of notice conversion or $0.25 per share. In connection with the agreement, the Company issued 50,000 shares of common stock as a commitment fee. The fair value of the common stock issued amounted to $8,500 and has been recorded as a discount to the notes based on its intrinsic value.note payable. The amount is being amortized into interest expense through the maturity date of June 13, 2015.
In connectionThe above warrants issued with the Convertible Notes, the Company granted an aggregate of 53,600,000 (including 17,600,000 during the three months ended June 30, 2013) warrants to purchase additional shares of common stock at anPurchase Agreement and Typenex Note have anti-dilution clauses and variable exercise price of $0.10 per share and a contractual life of 3 years. Of the 17,600,000 warrants granted during the three months ended June 30, 2013, 1,000,000 were granted to a Directorrates that prevent calculation of the Company. The Company does notultimate number of shares that may be issued upon exercise, and all of the outstanding convertible note balances described above have sufficient authorizedvariable conversion features that similarly prevented the calculation of the number of shares to cover the warrants.into which they were convertible. As a result, the Company accounts for both the conversion feature associated with these notes and the warrants issued duringas derivatives. The Company values these warrants and conversion features using the three months ended June 30, 2013 were determined to bebinomial lattice method. The resulting liability is valued at each reporting date and the change in the liability is reflected as change in derivative liabilities which resultedliability in additional derivative liabilitiesthe statement of $1,372,237. See Note 8, Derivative Instruments.operations.
The value of the derivative liabilities and discounts created through the issuance of the Convertible Notes and warrants during the three months ended June 30, 2013 as described above exceeded the proceeds of the Convertible Notes by $1,401,191. This excess was recorded as interest expense on the issuance dates of each note and warrant during the three months ended June 30, 2013.12
The following summarizes the book value of the convertible notes payable outstanding as of June 30, 20132014 and March 31, 2013.2014.
| | June 30, | | | March 31, | |
| | 2013 | | | 2013 | |
| | (Unaudited) | | | | |
| | | | | | |
Principal balance of convertible notes payable outstanding | | $ | 2,405,000 | | | $ | 1,795,000 | |
| | | | | | | | |
Less: discount on convertible notes payable | | | (1,654,599 | ) | | | (1,678,958 | ) |
| | | | | | | | |
Convertible notes payable, net | | $ | 750,401 | | | $ | 116,042 | |
.
| | June 30, | | | March 31, | |
| | 2014 | | | 2014 | |
| | (Unaudited) | | | | |
| | | | | | |
Principal balance of convertible notes payable outstanding | | $ | 2,959,792 | | | $ | 2,023,000 | |
| | | | | | | | |
Less: discount on convertible notes payable | | | (760,107 | ) | | | (601,016 | ) |
| | | | | | | | |
Convertible notes payable, net | | $ | 2,199,685 | | | $ | 1,421,984 | |
Future scheduled maturities of these notes payable are as follows:
| | Year Ended | | | Year Ended | |
| | March 31, | | | June 30, | |
| | | | | | |
2014 | | $ | 2,405,000 | | |
2015 | | | $ | 2,702,167 | |
2016 | | | | 257,625 | |
Total | | $ | 2,405,000 | | | $ | 2,959,792 | |
In connection with the Convertible Notes, the Company incurred debt issuance costs, which primarily represented commissions paid to acquire the debt. These costs have been capitalized and are being amortized through the maturity date of the notes. During the three months ended June 30, 2013, the Company capitalized an additional $521,351 of debt issuance costs, including the fair value of 4,760,000 warrants issued on April 29, 2013 as commission. Amortization of these capitalized debt issuance costs amounted to $155,391 for the three months ended June 30, 2013, which is reflected as interest expense on the accompanying statement of operations. As of June 30, 2013 and March 31, 2013, the remaining amount of capitalized debt issuance costs amounted to $497,760 and $116,329, respectively, which are included as a component of other current assets on the accompanying consolidated balance sheets.
(6) Derivative Instruments
Excess Shares
In connection with the private placement of Convertible Notesconvertible notes beginning in February 2013, (see Note 5), the Company became contingently obligated to issue shares of common stock in excess of the 200 million shares authorized under the Company’s certificate of incorporation. Consequently, the ability to settle these obligations with shares would be unavailable causing these obligations to potentially be settled in cash. This condition creates a derivative liability.
The Company hashad a sequencing policy regarding share settlement wherein instruments with the earliest issuance date would be settled first. The sequencing policy also considers contingently issuable additional shares, such as those issuable upon a stock split or anti-dilution, to have an issuance date to coincide with the event giving rise to the additional shares.
Using this sequencing policy, all instruments convertible into common stock, including warrants and the conversion feature of notes payable, issued on and subsequent to February 13, 2013 areNovember 30, 2012 were classified as derivative liabilities. On December 2, 2013, the Company effected a one-for-twenty reverse stock split of the Company’s issued and outstanding common stock shares. As a result, the Company’s outstanding shares of common stock and common stock equivalents no longer exceeded the number of authorized shares. As a result, as of December 2, 2013, these instruments that were accounted for as derivative liabilities were reclassified as equity.
Other Derivatives
The Company has certain warrants and notes payable with elements that qualify as derivatives. The warrants have anti-dilution clauses that prevent calculation of the ultimate number of shares that may be issued upon exercise, and two of the notes payable had apayables have variable conversion featurefeatures that similarly prevented the calculation of the number of shares into which they were convertible.
The derivative liability, as it relates to the different instruments, is shown in the following table.
| | Three Months Ended June 30, 2013 | | | Three Months Ended June 30, 2012 | | | Three Months Ended June 30, 2014 | | | Three Months Ended June 30, 2013 | |
| | | | | Conversion Feature | | | | | | | | | Conversion Feature | | | | | | | | | Conversion Feature | | | | | | | | | Conversion Feature | | | | |
| | | | | of | | | | | | | | | of | | | | | | | | | of | | | | | | | | | of | | | | |
| | Warrants | | | Notes Payable | | | Total | | | Warrants | | | Notes Payable | | | Total | | | Warrants | | | Notes Payable | | | Total | | | Warrants | | | Notes Payable | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance, April 1 | | $ | 1,663,394 | | | $ | 1,518,143 | | | $ | 3,181,537 | | | $ | 134,791 | | | $ | 35,708 | | | $ | 170,499 | | | $ | 205,248 | | | $ | 992,770 | | | $ | 1,198,018 | | | $ | 1,663,394 | | | $ | 1,518,143 | | | $ | 3,181,537 | |
Additional issuances | | | 2,472,282 | | | | 1,364,711 | | | | 3,836,993 | | | | - | | | | - | | | | - | | | | 148,903 | | | | 1,043,031 | | | | 1,191,934 | | | | 2,472,282 | | | | 1,364,711 | | | | 3,836,993 | |
Exercised/converted | | | - | | | | (266,459 | ) | | | (266,459 | ) | | | - | | | | (29,439 | ) | | | (29,439 | ) | | | - | | | | - | | | | - | | | | - | | | | (266,459 | ) | | | (266,459 | ) |
Change in derivative liability | | | 22,441 | | | | (972,686 | ) | | | (950,245 | ) | | | (22,440 | ) | | | - | | | | (22,440 | ) | | | (247,591 | ) | | | (622,608 | ) | | | (870,199 | ) | | | 22,441 | | | | (972,686 | ) | | | (950,245 | ) |
Ending balance, June 30 | | $ | 4,158,117 | | | $ | 1,643,709 | | | $ | 5,801,826 | | | $ | 112,351 | | | $ | 6,269 | | | $ | 118,620 | | | $ | 106,560 | | | $ | 1,413,193 | | | $ | 1,519,753 | | | $ | 4,158,117 | | | $ | 1,643,709 | | | $ | 5,801,826 | |
The derivative liability was valued using the binomial lattice method with the following inputs.
| | Three | | | Three | | |
| | Months Ended | | | Months Ended | | | Three Months Ended | | Three Months Ended |
| | June 30, 2013 | | | June 30, 2012 | | | June 30, 2014 | | June 30, 2013 |
| | | | | | | | | | |
Expected life in years | | 0.59 - 4.43 years | | | 0.17 - 4.28 years | | | 0.25 - 5 years | | 0.59 - 4.43 years |
Stock price volatility | | | 112.3% - 270.1 | % | | | 48.5% - 191.6 | % | | 160.4% - 256.7% | | 112.3% - 270.1% |
Discount rate | | | 0.09% - 1.20 | % | | | 0.07% - 0.61 | % | | 0.04% - 1.68% | | 0.09% - 1.20% |
Expected dividends | | None | | | None | | | None | | None |
Forfeiture rate | | | 0 | % | | | 0 | % | | 0% | | 0% |
(7) Equity
Common Stock
The Company is authorized to issue 200,000,000 shares of common stock and no other class of stock at this time. The holders of common stock are entitled to one vote per share on all matters submitted to a vote of stockholders and are not entitled to cumulate their votes in the election of directors. The holders of common stock are entitled to any dividends that may be declared by the Board of Directors out of funds legally available therefore subject to the prior rights of holders of any outstanding shares of preferred stock and any contractual restrictions we have against the payment of dividends on common stock. In the event of our liquidation or dissolution, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive or other subscription rights and no right to convert their common stock into any other securities.
During the three months ended June 30, 2013, the Company issued an aggregate of 5,417,756270,911 shares of common stock for the conversion of $270,911 in convertible notes payable and accrued interest. This included 4,000,000200,000 shares of common stock for the conversion of a $200,000 convertible note payable held by a related party entity owned by a Director of the Company. During the three months ended June 30, 20122014 the Company issued an aggregate of 9,808,773785,000 of common stock as paymentfor the conversion of $715,439$69,875 of outstanding notes payable and accrued interest.payable.
During the three months ended June 30, 2013, the Company issued an aggregate of 2,590,000129,500 shares of common stock as payment for services, directors’ and employee compensation resulting in total expense of $318,550. During the three months ended June 30, 2012,2014, the Company issued an aggregate of 2,500,0001,390,000 shares of common stock as payment for services, directors’ and employee compensation resulting in an expense of $182,000.$511,870. The fair value of the directors’ and employees’ service was determined by the closing price of the stock on date of grant and board of director minutes authorizing the shares.
During the three months ended June 30, 2013, the Company issued 196,4689,823 shares of common stock for the exercise of warrants. There were no warrants exercised during the three months ended June 30, 2012.2014.
During the three months ended June 30, 2012,2014, the Company issued 23,600,0005,144,054 shares of common stock as partfor the exercise of a private placement for total proceeds of $1,190,000.stock options. There were no shares soldstock options exercised during the three months ended June 30, 2013.
On May 30, 2014, the Company entered into a Debt Securities Assignment and Purchase agreement, along with a Securities Exchange and Settlement Agreement with Beaufort Capital Partners LLC (“Beaufort”). Per the terms of the agreements, the Company assigned $38,771 of outstanding accounts payable to Beaufort, in exchange for allowing Beaufort to convert the amounts into common stock, at a date of their choosing, at a rate equal to 40% of the lowest traded price over the 20 days previous to the conversion date. During the three months ended June 30, 2014, Beaufort elected to convert the amount into 646,176 shares of common stock per the terms of the agreement. The difference between the conversion amount of $38,771 and the fair value of the shares issued amounted to $103,388, and was recorded as interest expense during the three months ended June 30, 2014.
On May 30, 2014, the Company entered into additional Debt Securities Assignment and Purchase and Securities Exchange and Settlement Agreements with Beaufort which provide for the assignment of $66,485 of liabilities from the Company to Beaufort, including $51,432 of outstanding account payables, outstanding note payable balance of $13,333 (see Note 4) and $1,720 of accrued interest. In connection with the agreements, the amounts are payable to Beaufort in common stock at a date of Beaufort’s choosing, at a rate equal to 40% of the lowest traded price over the 20 days previous to the conversion date. As of June 30, 2014, the amount of $66,485 is still outstanding as Beaufort has not elected to convert the amounts yet. As the amounts are required to be paid in common stock, the Company has classified these amounts as a component of stockholders equity on the accompanying condensed balance sheet as of June 30, 2014.
Warrants
During the three months ended June 30, 2013, the Company issued an aggregate of 17,600,000880,000 warrants in connection with the Convertible Notes issued during the period, as well as 4,760,000238,000 warrants for the payment of commissions associated with acquiring the Convertible Notes. These warrants have been accounted for as derivative liabilities (see Note 6).
During the three months ended June 30, 2013, the Company issued an additional 2,000,000100,000 warrants as payment of directors’ services. The warrants have been accounted for as derivative liabilities (see Note 6).
There were no warrants issued duringDuring the three months ended June 30, 2012.2014, the Company issued warrants in connection with the Typenex Note (see Note 5) granting the debt holder the right to purchase a number of common stock shares equal to $167,500 divided by the market price (defined as the higher of the closing price on the issuance date or the volume weighted average price of the stock for the trading day that is 2 days prior to the exercise date) at an exercise price of $0.35 per share. The warrants have been accounted for as derivative liabilities (see Note 6).
(8) Stock Option Plan:
The Company’s 2011 Stock Option Plan provides for the grant of 20,000,0001,000,000 incentive or non-statutory stock options to purchase common stock. Employees, who share the responsibility for the management growth or protection of the business of the Company and certain Non-Employee (“Selected Persons”),non-employees, are eligible to receive options which are approved by a committee of the Board of Directors. These options vest over five years and are exercisable for a ten-year period from the date of the grant. As of June 30, 2014 and March 31, 2014, the Company had 100,000 fully vested options outstanding under the 2011 Stock Option Plan at an exercise price of $10.00 per share. The options expire in November 2018.
On April 1, 2014, the Company adopted the 2014 Stock Option Plan which provides for the grant of options to certain members of management totaling an aggregate of 20% of the total issued and outstanding shares of common stock. The options are considered granted on each day that the Company issues shares, at which point the Company values the options using the Black-Scholes method and records the applicable share-based compensation expense. On April 1, 2014, the Company also issued stock options to directors as compensation which provides for the purchase of an aggregate total of 2,000,000 shares of common stock. All options granted have an exercise price of $0.0001 per share. The stock options are fully vested on the date of issuance and have a contractual life of 5 years.
The following is a summary of the Company’s stock option activity.
| | | | | Weighted- | | | Average | | | | |
| | | | | Average | | | Remaining | | | Aggregate | |
| | | | | Exercise | | | Contractual | | | Intrinsic | |
| | Options | | | Price | | | Life (Years) | | | Value | |
| | | | | | | | | | | | |
Outstanding at March 31, 2014 | | | 100,000 | | | $ | 10.00 | | | | 4.59 | | | $ | - | |
Granted | | | 6,815,023 | | | | 0.0001 | | | | | | | | 2,446,581 | |
Exercised | | | (5,144,054 | ) | | | 0.0001 | | | | | | | | 1,268,912 | |
Outstanding at June 30, 2014 (unaudited) | | | 1,770,969 | | | $ | 0.56 | | | | 4.73 | | | $ | 166,930 | |
| | | | | | | | | | | | | | | | |
Vested and expected to vest at June 30, 2014 | | | 1,770,969 | | | $ | 0.56 | | | | 4.73 | | | $ | 166,930 | |
| | | | | | | | | | | | | | | | |
Exercisable at June 30, 2014 | | | 1,770,969 | | | $ | 0.56 | | | | 4.73 | | | $ | 166,930 | |
As of June 30, 2013,2014, the Company had 2,000,000no unvested stock options outstanding at an exercise priceor unrecognized stock option expense. The weighted average grant date fair value of $0.50$0.36 per share. These options were fully vested as of March 31, 2013, and therefore there no further compensation cost was recorded during the three months ended June 30, 2013. Stock option compensation cost recorded during the three months ended June 30, 2012 amounted to $20,131. No options were granted or exercised during the quarters ended June 30, 2013 and 2012. The outstanding options will expire in November 2018.
(9)Discontinued Operations:
Prior to January 21, 2010, the Company had been actively engaged in acquiring underperforming mortgage loan portfolios and generating revenues from re-performing, sale of loans and fee revenue. As of January 21, 2010, the Company changed its primary business and abandoned the prior business. Accordingly, the assets and liabilities and results of operation related to this business have been classified as discontinued operations in the financial statements for all periods presented. During the three months ended June 30, 2013 and 2012, the Company had net income from discontinued operations of $0 and $484,420, respectively, which resulted from the write down of payables.option.
The following table summarizes the liabilities classified as discontinued operations in the accompanying balance sheets:information about stock options outstanding and exercisable at June 30, 2014.
| | June 30, | | | March 31, | |
| | 2013 | | | 2013 | |
| | (Unaudited) | | | | |
| | | | | | |
Notes payable, related party | | $ | 85,041 | | | $ | 194,041 | |
| | $ | 85,041 | | | $ | 194,041 | |
The Company entered into forbearance agreements with investors holding the notes that are included in liabilities to be disposed of. The new notes call for monthly payments and to be repaid in full by December 31, 2013. | | | Options Outstanding | | | Options Exercisable | |
| | | | | | Weighted | | | Weighted | | | | | | Weighted | |
| | | | | | Average | | | Average | | | | | | Average | |
Exercise | | | Number | | | Remaining | | | Exercise | | | Number | | | Exercise | |
Price | | | of Shares | | | Life (Years) | | | Price | | | of Shares | | | Price | |
| | | | | | | | | | | | | | | | |
$ | 10.00 | | | | 100,000 | | | | 4.34 | | | $ | 10.00 | | | | 100,000 | | | $ | 10.00 | |
| 0.0001 | | | | 1,670,969 | | | | 4.76 | | | | 0.0001 | | | | 1,670,969 | | | | 0.0001 | |
| | | | | 1,770,969 | | | | | | | | | | | | 1,770,969 | | | | | |
(10) Subsequent Events
On July 1, 2013 and July 22, 2013 the Company issued 750,000 shares of common stock for consulting services.
On July 16, 2013 the Company was granted an extension with respect to meeting certain conditions under its operating agreement with the Union Pacific Railroad to October 31, 2013. All other conditions remain in place.
On July 17, 2013 the Company issued 2,000,000 restricted shares of common stock to employees per employment agreements.
On August 2, 2013 the Company issued 1,000,000 restricted shares of common stock for consulting services.
(9) Related Party Transactions
During the three months ended June 30, 2014, the Company entered into short-term borrowings with the Chief Financial Officer and Chief Executive Officer amounting to a total of $59,000. The outstanding amounts accrue interest at a rate of 10% per month and are payable on demand.
(10) Subsequent Events
On July 1, 2014, the Company entered into a convertible promissory note with KBM Worldwide, Inc. for borrowings of $32,500 which bear interest at a rate of 8% per annum. The outstanding borrowings and accrued interest are payable on March 19, 2015. The outstanding amounts are convertible into shares of common stock at the debt holder’s option at a conversion rate equal to 61% of the average of the lowest three trading prices during the 10 trading days prior to the conversion.
On July 18, 2014, the Company entered into a convertible note payable with LG Capital Funding, LLC providing for total borrowings of $90,000, which is payable in 2 installments of $45,000, one upon execution of the note and one is the back end. Interest on the note equals 8% of the total principal balance. The Company received payment of $45,000 on July 22, 2014. The convertible note matures 12 months after the issuance, at which point the outstanding principal and interest is due. The outstanding amounts are convertible into shares of common stock at a conversion rate equal to 57% of the lowest trading price during the fifteen trading days prior to the conversion.
On July 24, 2014, the Company entered into a security purchase agreement with ADAR BAYS, LLC providing for total borrowings of $71,000, with the first note being of $36,000 and the second note being in the amount of $35,000. Interest on the note equals 8% of the total principal balance. The Company received payment of $36,000 on July 28, 2014. The convertible note matures 12 months after the issuance, at which point the outstanding principal and interest is due. The outstanding amounts are convertible into shares of common stock at a conversion rate equal to 57% of the lowest trading price during the fifteen trading days prior to the conversion.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements about the Company's business, financial condition and prospects that reflect management's assumptions and beliefs based on information currently available. There can be no assurance that the expectations indicated by such forward-looking statements will be realized. If any of management's assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, Las Vegas Railway Express, Inc., actual results may differ materially from those indicated by the forward- looking statements.
The key factors that are not within the Company's control and that may have a direct bearing on operating results include, but are not limited to, managements' ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry, as well as the risk factors identified in the Company’s Annual Report on Form 10-K for the year ended March 31, 2013,2014, filed with the SEC on July 1, 2013.June 30, 2014.
When used in this Report, words such as, "believes," "expects," "intends," "plans," "anticipates," "estimates" and similar expressions are intended to identify and qualify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions. However, the forward-looking statements contained herein are not covered by the safe harbors created by Section 21E of the Securities Exchange Act of 1934.
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere herein.
Business Overview
Our company, Las Vegas Railway Express, Inc. (the “Company”, was funded on“we”, “us”, or “our”), formerly known as Liberty Capital Asset Management, Inc., acquired 100% of the visionissued and outstanding stock of establishing a new and innovative passenger train service between Las Vegas Railway Express, a Nevada corporation on January 21, 2010. In connection with the acquisition, the Company changed its name to Las Vegas Railway Express, Inc. and changed its business plan to one of developing passenger rail transportation and ancillary ticketing and reservation services between the Los Angeles metropolitan area using existing railroad tracks and specialized rail cars that have been refurbished to resemble a casino style motif. This has been the center point of our business plan using existing freight railroad lines. The development concept is to provide a Las Vegas, style experience onNevada. In November 2012, the trains. We have acquired a series of 16 passenger railcars underCompany executed an agreement with Transportation Management Services,Union Pacific Railroad which has providedallowed the Company with 16 bi-levelto operate its passenger service on their property from Daggett, California to Las Vegas, a distance of 175.8 miles. In May 2013, the Company and Amtrak, which was planning to haul the Company’s rail cars from Los Angeles to Las Vegas in regular service, was informed by BNSF Railway (“BNSF”) that it would not approve Amtrak’s request to operate on the BNSF system. Although the Company tried several alternative approaches to satisfy BNSF’s denial, none were accepted and both Amtrak and the Company were forced to suspend their efforts to establish the planned service over the Cajon Pass route.
Our assessment is that when we started, BNSF had 3,000 locomotives in mothballs and 2,000 crews furloughed. Traffic through Cajon Pass was at 86 trains per day with a total capacity of 756 passengers. Passengers will board our160 trains per day. In short, they had capacity. Today, all locomotives are back in Los Angelesservice and make stop in Fullerton, approximately30 miles away, before continuing non-stop to Las Vegas. We are constructingBNSF is leasing 1,000 more. Oil is being hauled over this corridor and capacity is at a new depot station in North Las Vegas, 3 miles from downtown. Passengers will be able to book their ticketspremium with 120+ trains per day over the pass. With pending capacity issues, BNSF is reserving its rail franchise for freight and has closed off any access via Amtrak’s national ticketing network as well as through our website. We will also book rooms, outings, shows and the like for our passengers.Cajon pass.
The Company has also identified eight routes similar toDuring the LAdevelopment period for the Los Angeles to Las Vegas route, currently served by Amtrak trains, which originate from a metropolitan areathe company became visible in the press and have a segmentseveral independently owned passenger rail companies discussed how the Club X style could be deployed on existing excursion lines. The Company began to focus its infrastructure towards acquiring independently owned passenger rail operations throughout the United States and providing upscale commuter Club X railcars for various state Department of Transportation municipal transportation agencies.
On April 23, 2014, the route, which passes through a casino/resort destination orCompany entered into an agreement with the Santa Fe Southern Railway, located in Santa Fe New Mexico, to another metropolitan area.manage the passenger services on the railroad. The Company will constructbe adding its Vegas ClassClub X cars for each route, which it will couple up to the Amtrak trains andtrain consists. Operations on the route are planned to commence in August 2014. Subsequent routes will serve asfollow with a First Class option for current Amtrak travelers. The Company will pay a fee to Amtrak to haul the cars and to couple and uncouple them at the destinations. This is a common practice with Amtrak through its Charter Group and requires no master agreement or agreements with railroad companies. The origination and destination stations along the various routes already exist, so the Company will not need to construct any station facilities in order to operate these routes. The Company has executed a Memorandum of Understanding, or MOU, with AMTRAK for haulage of the cars outlining duties and responsibilities of each party, subject to execution of a definitive agreement.similar deployment format.
Our core business plan emanates fromThe Company owns outright a regional transportation feasibility study publishedseries of 16 bi-level passenger railcars as well as two leased cars acquired through an agreement with Mid America Leasing Company. These cars are planned for use in 2007, which suggested that a well-run rail service between Los Angelesthe deployment of cars on our future affiliated routes and Las Vegas could garner up to 30% of the approximately 12 million passengers who regularly drive between theseacquired companies. The first two metropolitan areas. See: www.rtcsouthernnevada.com. We believe that with our current business plan, we would be able to break-even, on an operating basis, with approximately 1.5% of that overall market. In addition, a market study done by RL Banks outlines eight other routes with similar demographics to the X Train LA/Las Vegas route. We believe the operating model we will use on the LA/Las Vegas route is replicable on the other eight routes with similar potential financial results.
Over the last 18 months, wecars have been engaged in activities designedcompleted and are scheduled to secure the necessary rights, equipment and facilities required to commence commercialgo into service on the LASanta Fe Southern Railway in August of 2014. The remaining cars are scheduled to Las Vegas route inbe refurbished during the remainder of 2014. These include: securing operating rights to run our trains over tracks owned by private railroads; obtaining the capability to operate train equipment safely and in conformity with applicable government regulations; purchasing or leasing appropriate locomotive and passenger cars designed to move passengers over the route in comfort; and securing leases on terminal facilities and passenger depots in Los Angeles and in Las Vegas. In addition, we have had discussions with Amtrak regarding coupling our casino style consists up to their existing passenger trains on the routes we have identified. Based on these discussions, we believe this arrangement, under which we would pay the going rate fee for such accommodation, will be acceptable to Amtrak
We have entered into an MOU with Amtrak for managing the operation of the train.
We have executed a Memorandum of Understanding with the City of Fullerton for use of their station for a Southern California station of the LA/Las Vegas service. The Company’s common stock is currently quoted on the OTCQB under the symbol “XTRN”. The company website is www.vegasxtrain.com. The contents of this website are not incorporated into this Report.
The Company maintains offices at 6650 Via Austi Parkway, Suite 140, Las Vegas, Nevada 89119.
Critical Accounting Policies
The preparation of our consolidatedcondensed financial statements and notes thereto requires management to make estimates and assumptions that affect the amounts and disclosures reported within those financial statements. On an ongoing basis, management evaluates its estimates, including those related to impairment of goodwill,long-lived assets, contingencies, litigation and income taxes. Management bases its estimates and judgments on historical experiences and on various other factors believed to be reasonable under the circumstances. Actual results under circumstances and conditions different than those assumed could result in differences from the estimated amounts in the financial statements. There have been no material changes to these policies during the fiscal year.
Intangible and Long-Lived Assets:
We followIn accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“FASB ASC”) Topic 360, “Property Plant and Equipment”, which establishes a “primary asset” approach to determine360-10, the cash flow estimation period for a group ofCompany evaluates long-lived assets and liabilities that represents the unit of accounting for a long lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an assettheir net book value may not be recoverable. TheWhen such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of a long-lived assetthose assets and is not recoverable if it exceedsrecorded in the sumperiod in which the determination is made.
Share Based Payment:
The Company issues stock, options and warrants as share-based compensation to employees and non-employees.
The Company accounts for its share-based compensation to employees in accordance FASB ASC 718. Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the undiscounted cash flows expected to result fromaward, and is recognized as expense over the use and eventual disposition of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.requisite service period.
Goodwill is accountedThe Company accounts for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC Topic 350, “Intangibles – Goodwill and Other”. We assess the impairment505-50 “Equity - Based Payments to Non-Employees.” Measurement of long-lived assets, including goodwill and intangibles on an annual basis or whenever events or changes in circumstances indicate that the fair valueshare-based payment transactions with non-employees is less than its carrying value. Factors that we consider important which could trigger an impairment review include poor economic performance relative to historical or projected future operating results, significant negative industry, economic or company specific trends, changes in the manner of our use of the assets or the plans for our business, market price of our common stock, and loss of key personnel. We have determined that there was no impairment of goodwill.
Stock-Based Compensation:
Transactions in which the Company exchanges its equity instruments for goods or services is accounted for using authoritative guidance for stock based compensation. This guidance also addresses transactions in which the Company incurs liabilities in exchange for goods or services that are based on the fair value of whichever is more reliably measurable: (a) the Company’sgoods or services received; or (b) the equity instruments orissued. The final fair value of the share-based payment transaction is determined at the performance completion date. For interim periods, the fair value is estimated and the percentage of completion is applied to that may be settled byestimate to determine the issuance of those equity instruments.cumulative expense recorded.
If the Company issues stock for services which are performed over a period of time, the Company records the value paid in the equity section of the Company’s financial statements as it is a non-cash equity transaction. The Company accretesvalues stock compensation based on the expense to stock based compensation expensemarket price on a monthly basisthe measurement date. As described above, for services rendered withinemployees this is the period.date of grant, and for non-employees, this is the date of performance completion.
We useThe Company values stock options and warrants that do not qualify as derivative instruments using the fair value method for equity instruments granted to non-employees and will useBlack-Scholes option pricing model. Assumptions used in the Black-Scholes model to value options and warrants issued during the three months ended June 30, 2014 are as follows. There were no options or warrants granted during the three months ended June 30, 2013 that were valued using the Black-Scholes model.
| | | | Three Months Ended |
| | | | June 30, |
| | | | 2014 |
| | | | |
Expected life in years | | | 2.5 |
Stock price volatility | | | 170.94% - 178.31% |
Risk free interest rate | | | 0.76% - 0.95% |
Expected dividends | | | NA |
Forfeiture rate | | | 0% |
Certain warrants qualify as derivative instruments and are valued using the binomial lattice method. See discussion below regarding accounting for measuring the fair value of options, if issued. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.derivative liabilities.
Derivative Liabilities:
In connection with the private placement of Convertible Notesconvertible notes beginning in February 2013, the Company became contingently obligated to issue shares of common stock in excess of the 200 million authorized under the Company’s certificate of incorporation. Consequently, the ability to settle these obligations with shares would be unavailable causing these obligations to potentially be settled in cash. This condition creates a derivative liabilities in relation to dilutive securities.liability.
The Company has a sequencing policy regarding share settlement wherein instruments with the earliest issuance date would be settled first. The sequencing policy also considers contingently issuable additional shares, such as those issuable upon a stock split, to have an issuance date to coincide with the event giving rise to the additional shares.
Using this sequencing policy, all instruments convertible intoOn December 2, 2013, the Company effected a one-for-twenty reverse stock split of the Company’s issued and outstanding common stock including warrantsshares. As a result, the Company’s outstanding shares of common stock and common stock equivalents no longer exceeded the conversion featurenumber of notes payable, issued subsequent to February 19,authorized shares. As a result, as of December 2, 2013, arethese instruments that were accounted for as derivative liabilities.liabilities were reclassified as equity.
The Company also has certain warrants and embedded conversion options in notes payable with elements that qualify as derivatives. The warrants have anti-dilution clauses that prevent calculation of the ultimate number of shares that may be issued upon exercise, and two of thefour outstanding notes payable that had a variable conversion feature that similarly prevented the calculation of the number of shares into which they were convertible.
The Company values these warrants and embedded conversion options in notes payable using the binomial lattice method. The resulting liability is valued at each reporting date and the change in the liability is reflected as change in derivative liability in the condensed statement of operations.
New Accounting Pronouncements:Fair Value of Financial Instruments:
ThereThe Company's financial instruments as defined by FASB ASC 825-10-50 include cash, notes payable and derivative liabilities. Derivative liabilities are no recent accounting pronouncements that management believes will have a material impact onrecorded at fair value. The principal balance of notes payable approximates fair value because current interest rates and terms offered to the Company's present or future consolidated financial statements.
Company for similar debt are substantially the same.
FASB ASC 820 defines fair value, establishes a framework for measuring fair value, in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. FASB ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions.
Results of Operations
The following is a comparison of the consolidated results of operations for the three months ended June 30, 20132014 and 2012.2013.
| | Three Months Ended | | | | | | | |
| | June 30, | | | June 30, | | | | | | | |
| | 2014 | | | 2013 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | |
Compensation and payroll taxes | | $ | 2,866,004 | | | $ | 849,329 | | | $ | 2,016,675 | | | | 237.4 | % |
Selling, general and administrative | | | 384,050 | | | | 208,123 | | | | 175,927 | | | | 84.5 | % |
Professional fees | | | 769,388 | | | | 581,788 | | | | 187,600 | | | | 32.2 | % |
Depreciation expense | | | 2,436 | | | | 1,434 | | | | 1,002 | | | | 69.9 | % |
Total expenses | | | 4,021,878 | | | | 1,640,674 | | | | 2,381,204 | | | | 145.1 | % |
| | | | | | | | | | | | | | | | |
Loss from continuing operations | | | (4,021,878 | ) | | | (1,640,674 | ) | | | (2,381,204 | ) | | | 145.1 | % |
| | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | |
Interest expense | | | (1,402,041 | ) | | | (2,521,627 | ) | | | 1,119,586 | | | | -44.4 | % |
Change in derivative liability | | | 870,199 | | | | 950,245 | | | | (80,046 | ) | | | -8.4 | % |
Total other income (expense) | | | (531,842 | ) | | | (1,571,382 | ) | | | 1,039,540 | | | | -66.2 | % |
| | | | | | | | | | | | | | | | |
Net loss from operations before provision for income taxes | | | (4,553,720 | ) | | | (3,212,056 | ) | | | (1,341,664 | ) | | | 41.8 | % |
Provision for income taxes | | | - | | | | (4,491 | ) | | | 4,491 | | | | -100.0 | % |
Net loss | | $ | (4,553,720 | ) | | $ | (3,216,547 | ) | | $ | (1,337,173 | ) | | | 41.6 | % |
| | Three Months Ended | | | | | | | |
| | June 30, | | | June 30, | | | | | | | |
| | 2013 | | | 2012 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | |
Compensation and payroll taxes | | $ | 849,329 | | | $ | 564,842 | | | $ | 284,487 | | | | 50.4 | % |
Selling, general and administrative | | | 208,123 | | | | 89,738 | | | | 118,385 | | | | 131.9 | % |
Professional fees | | | 581,788 | | | | 121,865 | | | | 459,923 | | | | 377.4 | % |
Depreciation expense | | | 1,434 | | | | 160 | | | | 1,274 | | | | 796.3 | % |
Total expenses | | | 1,640,674 | | | | 776,605 | | | | 864,069 | | | | 111.3 | % |
| | | | | | | | | | | | | | | | |
Loss from continuing operations | | | (1,640,674 | ) | | | (776,605 | ) | | | (864,069 | ) | | | 111.3 | % |
| | | | | | | | | | | | | | | | |
Other (expense) income | | | | | | | | | | | | | | | | |
Interest expense | | | (2,521,627 | ) | | | (13,770 | ) | | | (2,507,857 | ) | | | 18212.5 | % |
Change in derivative liability | | | 950,245 | | | | 22,440 | | | | 927,805 | | | | 4134.6 | % |
Total other (expense) income | | | (1,571,382 | ) | | | 8,670 | | | | (1,580,052 | ) | | | -18224.4 | % |
| | | | | | | | | | | | | | | | |
Net loss from continuing operations before provision for income taxes | | | (3,212,056 | ) | | | (767,935 | ) | | | (2,444,121 | ) | | | 318.3 | % |
Provision for income taxes | | | (4,491 | ) | | | (4,491 | ) | | | - | | | | 0.0 | % |
Net loss from continuing operations | | | (3,216,547 | ) | | | (772,426 | ) | | | (2,444,121 | ) | | | 316.4 | % |
| | | | | | | | | | | | | | | | |
Discontinued operations: | | | | | | | | | | | | | | | | |
Income from discontinued operations, net of income taxes | | | - | | | | 484,420 | | | | (484,420 | ) | | | -100.0 | % |
| | | | | | | | | | | | | | | | |
Net loss | | $ | (3,216,547 | ) | | $ | (288,006 | ) | | $ | (2,928,541 | ) | | | 1016.8 | % |
Operating Expenses
Compensation expense increased by $284,487,$2,016,675, or 50.4%237.4%, during the quarter ended June 30, 20132014 as compared to the quarter ended June 30, 2012.2013. The increase in compensation expense during the quarter ended June 30, 20132014 is relatedprimarily due to the hiringissuance of additional full-timestock options to employees and Board members resulting in additional expenses of $2,446,615. The increase in expenses in 2014 was offset by additional expenses during the additional board membersquarter ended June 30, 2013 of $221,789 for the issuance of warrants as compensation to Board members. Selling, general and administrative expenses increased by $175,927, or 84.5%, during the quarter ended June 30, 2014 as compared to the same period in 2012. In addition, we issued warrants as compensation to Board members during the three months June 30, 2013 resulting in additional expenses of $221,789. Selling, general and administrative expenses increased by $118,385, or 131.9%, during the quarter ended June 30, 2013 as compared to the same period in 2012 primarily due to increases in directorrental expense for two railcars that we began leasing in August 2013, as well as increased expenses associated with our Assignment and officers’ insurance and travel expenses relatedUse Agreement with Santa Fe Railroad which we expect to raising capital.start operating in August 2014. Professional fees increased by $459,923,$187,600, or 377.4%32.2%, during 20132014 as compared to 20122013 due primarily to increases in legal fees, consulting services, accounting and financial advisory related to the implementation of the business plan and raising funds.
Other (Expense) Income
Interest expense increaseddecreased by $2,507,857$1,119,586, or 44.4%, during the quarter ended June 30, 20132014 as compared to the same period in 2012.2013. The increasedecrease is due primarily to the increase in debt outstanding during the quarter ended June 30, 2013 due to the issuance of convertible notes payable from February 2013 through June 2013. The conversion feature associated with the convertible notes and the value of warrants issued in connection with the convertible notes have been accounted for as discounts to the convertible notes payable. The discount is being amortized into interest expense over the maturity date of the convertible notes. This resulted in additional interest expense during the three months ended June 30, 2013 of $2,305,550. In addition, we had capitalized debt issuance costs related to these convertible notes payable, which are being amortized over the maturity date of the notes of February 1, 2014, which resulted in additional interest expense in 2013 of $155,391. These amounts did not exist duringWe had no additional interest expense from the same periodamortization of capitalized debt issuance costs in 2012.2014. During the three months ended June 30, 2014, we had no remaining capitalized debt issuance costs and amortization of debt discounts amounted to $1,041,344.
The change in the value of the derivative liabilities for the three months ended June 30, 2014 amounted to $950,245$870,199, which represents the change in the fair value of the derivative liabilities since the year ended March 31, 2014. The change in value of the derivative liabilities for the three months ended June 30, 2013 as comparedamounted to $22,440 for$950,245, which represents the same periodchange in the fair value of 2012.the derivative liabilities since the year ended March 31, 2013. The increasedecrease in the value of the derivative liabilities during these periods was primarily due to the increase in derivative liabilities outstanding resulting from the issuancedecline of convertible notes and warrants from February 2013 through June 2013. The amounts are being treated as derivative liabilities as we became contingently obligated to issue shares of commonour stock in excess of the 200 million shares authorized under the Company’s certificate of incorporation. This condition did not existprice during the three months ended June 30, 2012.period, which has driven the reduction in value.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support asset growth, satisfy disbursement needs, maintain reserve requirements and otherwise operate on an ongoing basis. The Company has no operating revenues and is currently dependent on debt financing and sale of stockequity to fund operations.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company had ahas net losslosses of $3,216,547$4,553,720 for the three months ended June 30, 2013 and2014. The Company also has an accumulated deficit of $21,792,170 through$36,181,363 and a negative working capital of $3,868,645 as of June 30, 2013,2014, as well as outstanding convertible notes payable of $2,405,000 which are payable on February 1, 2014.$2,959,792. Management believes that it will need additional equity or debt financing to be able to implement the business plan. These matters raiseGiven the lack of revenue, capital deficiency and negative working capital, there is substantial doubt about the Company’s ability to continue as a going concern.
The Company estimates that it will need to obtain a minimum of $10 million in additional capital to begin operations of its planned train service. The Company intends to raise these funds through the public or private sale of equity and/or debt securities. There is no assurance such funding will be available on terms acceptable to the Company, or at all. If the Company succeeds in raising such funds, it intends to use them for railcar purchase, design, refurbishment and outfitting, Las Vegas depot design and construction, lease payments, Union Pacific Railroad (“UP”) and BNSF Railway Company (“BNSF”) mileage fees, salaries and other professional fees and also information technology and corporate infrastructure development. In addition, we will need to pay approximately $56 million to UP to procure operating rights for the Company on the UP route between Daggett, CA and Las Vegas, NV. The Company plans to apply for a Railroad Rehabilitation & Improvement (“RRIF”) loan to secure the capital for the improvements on the Union Pacific Railroad. RRIF funding may be used to acquire, improve or rehabilitate rail equipment or facilities, including track, components of track, bridges, yards, buildings and shops.
We continue to actively pursue various funding options, including equity offerings and debt financings, to obtain additional funds to continue the development of our products and bring them to commercial markets. There can be no assurance that we will be able to consummate any fund raising transactions on terms acceptable to us or at all.
We believe that the successful growth and operation of our business is dependent upon our ability to do the following:
| -· | obtain adequate sources of debt or equity financing to pay unfunded operating expenses and fund long-term business operations; and |
| - |
· | manage or control working capital requirements by controlling operating expenses. |
ThereManagement is attempting to raise additional equity and debt to sustain operations until it can market its services and achieves profitability. The successful outcome of future activities cannot be determined at this time and there are no assuranceassurances that, weif achieved, the Company will be successful in achieving our long-term plans as set forth above,have sufficient funds to execute its intended business plan or that such plans, if consummated, will enable us to obtain profitable operations or continue in the long-term.generate positive operating results.
Description of Outstanding Debt
We have outstanding convertible notes payable of $2,405,000, which earn interest of 8% per annum and mature on February 1, 2014. The outstanding principal and accrued interest are convertible into shares of common stock at a rate of $0.05 per share at the option of the debt holder.
We have an outstanding note payable of $13,333 which was due on May 17, 2012 and earns interest at 8% per annum. The Company is in default on this note payable. As of June 30, 2013, there has been no demand made for repayment of the notes or accrued interest.
Cash Flows
Net cash used in operating activities for the three months ended June 30, 2014 and 2013 waswere $1,093,321 and $1,064,747, as compared to net cashrespectively. Cash used in operating activities for the three months ended June 30, 20122014 and 2013 were primarily due to net losses of $443,100. The primary reasons for$4,553,720 and $3,216,547, respectively. During the differences between ourthree months ended June 30, 2014, the net loss included significant non-cash expenses of $3,216,547$511,869 in stock issued for services, $1,041,344 in amortization of discounts on notes payable, and net cash used$2,446,615 in operating activities forstock option compensation. During the three months ended June 30, 2013, werethe net loss included significant non-cash expenses of $400,905 for stock issued for services, $221,789 in warrants issued for services, and $2,305,550 in amortization of discounts on convertible notes payable of $2,305,550,payable.
Net cash used in investing activities during the non-cash stock issued for compensationthree months ended June 30, 2014 amounted to $17,357, which represented property and services of $440,905, and the non-cash issuance of warrants for services of $221,789, offset by a decrease in our derivative liabilities of $950,245. The changes in assets and liabilities compared to 2012equipment acquisitions primarily related to the timingacquisition of payments for operating items, primarily payroll, as well as the payment of $109,000 of liabilities from discontinued operations.
Cashrail cars and related costs. Net cash used in investing activities during the three months ended June 30, 2013 were expenditureswas $107,565 primarily due to the acquisition of $107,565 forrail cars and other capitalized costs towards the purchase of property and equipment. During the three months ended June 30, 2012, we had purchases of property and equipment of $14,569.railroad project.
Net cash provided by financing activities was $880,000for the three months ended June 30, 2014 amounted to $1,066,181 which consisted of $1,006,667 in proceeds from the issuance of convertible notes payable, $59,000 in proceeds from related party notes payable, and $514 from the exercise of stock options. Net cash provided by financing activities for the three months ended June 30, 2013 consistingwas $880,000 which consisted of proceeds from the issuance of convertible notes payable.
Description of Indebtedness
For a complete description of our outstanding debt as of June 30, 2014 and March 31, 2014, see Notes 4 and 5 to the condensed financial statements.
On October 1, 2013, the Company entered into a promissory note with JMJ Financial which provides for the Company to borrow up to $350,000 in principal (the “JMJ Note”). As of March 31, 2014, the Company had borrowed $150,000 under this Promissory Note. Outstanding borrowings mature two years from the effective date of each payment. If the outstanding balance of the note is repaid by the Company on or before 90 days from the effective date of the borrowing, the interest charged is 0%. However, if the Company does not repay the note within 90 days, a one-time interest charge of 12% shall be applied to the outstanding principal sum. The outstanding balance of the note may be converted into common stock at the option of the debt holder at a rate equal to $0.90 per share, or 60% of the lowest trading price in the 25 days trading days previous to the conversion date, subject to other adjustments in the agreement. During the three months ended June 30, 2012, we had net cash provided by financing activities2014, the Company borrowed an additional $40,000 under the JMJ Note. During the three months ended June 30, 2014, JMJ Financial converted $69,785 of $1,165,000, which represented $1,190,000 from the proceeds from the saleoutstanding principal into 785,000 shares of common stock offsetunder the terms of the agreement. As of June 30, 2014, the outstanding balance of the JMJ Note amounted to $120,125.
On November 22, 2013, the Company, entered into and closed a purchase agreement (the “Purchase Agreement”) with an institutional investor, pursuant to which the Company sold to the investor a senior secured convertible promissory note in the principal amount of $1,750,000 (the “Note”), and warrants to purchase 300,000 shares of common stock (the “Warrants”), for an aggregate purchase price of $1,750,000. The Note was scheduled to mature on June 30, 2014, bears interest at the rate of 10% per year payable on maturity in cash or shares of common stock at the Company’s option (subject to certain conditions), and is convertible into shares of the Company’s common stock at a conversion price equal to $0.70, subject to adjustment in the event of future stock splits, stock dividends, and similar transactions, or in the event of subsequent equity sales by repaymentsthe Company at a price lower than the conversion price then in effect. The Company’s obligations under the Note are secured by substantially all of $25,000the Company’s assets. The Warrants have a five year term, are exercisable on a cash or cashless basis, and have an exercise price equal to $1.00, subject to adjustment in the event of future stock splits, stock dividends, and similar transactions, or in the event of subsequent equity sales by the Company at a price lower than the exercise price then in effect.
On April 11, 2014, the Company entered into a Note Exchange Agreement with the debt holder holding the $1,750,000 Note originally issued on November 22, 2013 under the Purchase Agreement. Under the terms of the Note Exchange Agreement, the original senior secured convertible promissory note and accrued interest is cancelled and replaced with a new note for $2,000,000. The new note matures on November 30, 2014, bears interest at the rate of 10% per year payable on maturity in cash or shares of common stock at the Company’s option (subject to certain conditions), and is convertible into shares of the Company’s common stock at a conversion price equal to $0.45, subject to adjustments in the event of future stock splits, stock dividends, and similar transactions, or in the event of subsequent equity sales by the Company at a price lower than the conversion price then in effect. Under the new note, the Company’s obligations are secured by substantially all of the Company’s assets, excluding any railcar assets. The difference between the book value of the principal and accrued interest of the old note of $1,818,055 and the value of the new note of $2,000,000 of $181,944 was recorded as interest expense during the three months ended June 30, 2014.
On March 24, 2014, the Company entered into a Convertible Promissory Note with Iconic Holdings, LLC (the “Iconic Note”) in which the Company has access to borrow a total principal amount of $165,000. All borrowings incur interest at a rate of 8% per annum, which is payable as of the maturity date of March 24, 2015. The initial borrowing made by the Company amounted to $55,000, which represented the amount outstanding on the Iconic Note as of March 31, 2014. At the option of the debt holder, the outstanding balance may be converted at any time into shares of the Company’s common stock at a conversion rate equal to the lower of $0.50 or 60% of the lowest trading price of the Company’s common stock during the 25 consecutive trading days prior to conversion election date. During the three months ended June 30, 2014, the Company borrowed an additional $100,000 under the Iconic Note. The outstanding principal balance as of June 30, 2014 amounted to $155,000.
On March 25, 2014, the Company entered into a convertible note agreement with KBM Worldwide, Inc. (the “KBM Note”) for total principal borrowings of $68,000, which represented the amount outstanding as of June 30, 2014 and March 31, 2014. The amounts are due nine months after the issuance of the note on December 25, 2014, and bear interest at a rate of 8% per annum. At the option of the debt holder, beginning 180 days after the issuance of the note, the debt holder may convert the outstanding balance of the KBM Note into shares of the Company’s common stock at a conversion rate equal to 61% of the average of the lowest three closing trading prices during the 10 trading day period prior to the conversion election date.
On April 2, 2014, the Company entered into a convertible promissory note for $100,000 with Beaufort Capital Partners LLC with a maturity date of October 2, 2014. The note is convertible into shares of the Company’s common stock at a discount of 42% of the lowest traded price during the 5 trading days preceding the conversion date.
On April 11, 2014, the Company entered into a Note Exchange Agreement with the debt holder holding the $1,750,000 senior secured convertible promissory note originally issued on November 22, 2013 under the Purchase Agreement. Under the terms of the Note Exchange Agreement, the original senior secured convertible promissory note is cancelled and replaced with a new note for $2,000,000. The new note matures on November 30, 2014, bears interest at the rate of 10% per year payable on maturity in cash or shares of common stock at the Company’s option (subject to certain conditions), and is convertible into shares of the Company’s common stock at a conversion price equal to $0.45, subject to adjustments in the event of future stock splits, stock dividends, and similar transactions, or in the event of subsequent equity sales by the Company at a price lower than the conversion price then in effect. Under the new note, the Company’s obligations are secured by substantially all of the Company’s assets, excluding any railcar assets.
On April 17, 2014, the Company entered into a convertible note payable with Vista Capital Investments, LLC providing for borrowings up to $250,000 with a maturity date of April 17, 2016. The note has a one-time interest charge of 12% and is due on the maturity date. The outstanding balance of the note along with accrued interest is convertible into shares of the Company’s common stock at a rate equal to the lesser of $0.25 or 60% of the lowest trade occurring during the 25 trading days preceding the conversion date. The Company received borrowings under this convertible note payable of $50,000 in April 2014, which represented the outstanding balance as of June 30, 2014.
On April 30, 2014, the Company entered into a convertible note payable with Redwood Management, LLC providing for total borrowings of $250,000, which is payable in 3 installments of $83,333, one upon execution of the note, one due one month after execution, and one due two months after execution. Interest on the note equals 10% of the total principal balance, regardless of how long the note is outstanding for. The Company received payments of $83,333 on May 5, 2014 and on May 30, 2014. The convertible note matures 6 months after the issuance, at which point the outstanding principal and interest is due. The outstanding balance related to this note amounted to $166,667 as of June 30, 2014.
On May 6, 2014, the Company entered into a convertible note payable with KBM Worldwide, Inc. providing for total borrowings of $32,500 which accrue interest at a rate of 8% per annum. The convertible note matures and is due in full on February 12, 2015 along with any unpaid accrued interest. The outstanding principal and accrued interest is convertible into shares of common stock at the option of the holder at a conversion rate equal to 61% of the average of the lowest 3 trading prices during the 10 trading days prior to the conversion.
On May 12, 2014, the Company entered into a secured convertible promissory note with Typenex Co-Investment, LLC (the “Typenex Note”) providing for total borrowings up to $335,000 which accrue interest at a rate of 10% per annum. All outstanding borrowings mature and are due in 20 months from the issuance date. The Company received an initial payment of $87,500 on the note issuance date. The outstanding principal and interest is convertible into shares of common stock at the option of the holder at a conversion rate equal to the lesser of $0.35 per share or 60% of the average of the 3 lowest closing bid prices in the 20 trading days preceding the conversion date. If the average of the 3 lowest closing bid prices is less than $0.10, then the conversion factor is reduced from 60% to 55%. The debt holder was also issued warrants on May 12, 2014 in connection with this note payable granting the right to purchase a number of common stock shares equal to $167,500 divided by the market price (defined as the higher of the closing price on the issuance date or the volume weighted average price of the stock for the trading day that is 2 days prior to the exercise date) at an exercise price of $0.35 per share. The outstanding balance related to this note amounted to $87,500 as of June 30, 2014.
On May 28, 2014, the Company issued into a convertible promissory note with Beaufort Capital Partners LLC providing for borrowings of $125,000. The convertible promissory note matures on August 28, 2014, at which point the Company owes $187,500 which includes a total of $62,500 in interest expense. The outstanding amounts are convertible into shares of common stock at the option of the holder at a conversion rate equal to 60% of the lowest traded price during the prior 20 trading days from the date of the conversion.
On June 13, 2014, the Company entered a convertible debenture agreement with Group 10 Holdings, LLC providing for total borrowing of $55,000 which accrue interest at the rate of 12% per annum. All borrowings mature and are due in one year from the issuance date. The debenture is convertible into shares of common stock at the option of the holder at the conversion rate lesser of 55% discount of the lowest closing bid price during the 25 trading days prior to the date of notice conversion or $0.25 per share. In connection with the agreement, the Company issued 50,000 shares of common stock as a commitment fee. The fair value of the common stock issued amounted to $8,500 and has been recorded as a discount to the note payable. The amount is being amortized into interest expense through the maturity date of June 13, 2015.
Management currently believes that cash flowsThe Company also has outstanding short-term borrowings from currentits Chief Financial Officer and future equity investments will be sufficientChief Executive Officer amounting to meet the Company’s liquidityan aggregate of $59,000. The amounts are payable on demand and capital needsbear interest at least through fiscal 2014.a rate of 10% per month.
On July 1, 2014, the Company entered into a convertible promissory note with KBM Worldwide, Inc. for borrowings of $32,500 which bear interest at a rate of 8% per annum. The outstanding borrowings and accrued interest are payable on March 19, 2015. The outstanding amounts are convertible into shares of common stock at the debt holder’s option at a conversion rate equal to 61% of the average of the lowest three trading prices during the 10 trading days prior to the conversion.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures and Changes in Internal Control over Financial Reporting
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of June 30, 2013.2014. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2013,2014, our disclosure controls and procedures were effective.
Management’s Responsibility for Financial Statements
Our management is responsible for the integrity and objectivity of all information presented in this Quarterly Report on Form 10-Q. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s financial position and results of operations.
Changes in Internal Control Over Financial Reporting
There were no changes during the three months ended June 30, 20132014 in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION Item 1. Legal Proceedings
In the ordinary course of business, the Company may be or has been involved in legal proceedings from time to time. As of the date of this quarterly report on Form 10-Q, there have been no material changes to any legal proceedings relating to the Company which previously were not reported.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the 3 months ended June 30, 2013,2014, the Company issued shares of its common stock as follows:
· | ● | 5,417,756785,000 shares issued to convertible promissory notes holders for conversion of $69,875 of outstanding notes and accrued interest for a total value of $270,911.payable. |
| | |
· | ● | 1,590,0001,390,000 shares issued for services of $103,550.$511,870. |
| |
· | 5,144,054 shares issued to employees and Board of Director members for the exercise of stock options. |
| ● |
· | 1,000,000664,917 shares issued to Boardas payment of Director member per agreements.outstanding accounts payable of $38,771 |
The above referenced issuances were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering.
Item 3. Default Upon Senior Securities
The Company has an outstanding note payable of $13,333 which was due on May 17, 2012 and earns interest at 8% per annum. The Company is in default on this note payable. As of June 30, 2013, there has been no demand made for repayment of the notes or accrued interest.None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
None
Item 6. Exhibits.
Exhibit No. | | Description |
| | |
31.1 | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002. |
| | |
31.2 | | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002. |
| | |
32. | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002 |
EX-101.INS | XBRL INSTANCE DOCUMENT |
| |
EX-101.SCH | XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT |
| |
EX-101.CAL | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE |
| |
EX-101.DEF | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
| |
EX-101.LAB | XBRL TAXONOMY EXTENSION LABELS LINKBASE |
| |
EX-101.PRE | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
SIGNATURES
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 hereunto duly authorized.
Date: February 12,August 14, 2014 | Las Vegas Railway Express, Inc. |
| |
| By: /s//s/ Michael A. Barron |
| Chief Executive Officer (principal executive officer) |
| |
| |
Date: February 12,August 14, 2014 | |
| By: /s//s/ Wanda Witoslawski |
| Chief Financial Officer (principal financial officer) |
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