UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2012
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 000-53446
ABSOLUTE LIFE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 71-1013330 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
45 Broadway, 6th Floor New York, New York |
10006 | |
| (Address of principal executive offices) | (Zip Code) | |
| (212) 201-4070 | ||
| (Registrant's telephone number, including area code) | ||
__________________________________________
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.
Yesx 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 (Section 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).
Yesx 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," "non-accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | ¨ |
| Non-accelerated filer | ¨ . (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨ Nox .
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 92,229,599 shares of common stock as of January 14, 2013.
ABSOLUTE LIFE SOLUTIONS, INC.
Quarterly Report On Form 10-Q
For The Quarterly Period Ended
November 30, 2012
INDEX
| Page | |||
| PART I - FINANCIAL INFORMATION | |||
| Item 1. | Condensed Consolidated Financial Statements | 3 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 16 | |
| Item 4. | Controls and Procedures | 16 | |
| PART II - OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 16 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 16 | |
| Item 3. | Defaults Upon Senior Securities | 16 | |
| Item 4. | Mine Safety Disclosures | 16 | |
| Item 5. | Other Information | 16 | |
| Item 6. | Exhibits | 16 | |
| 2 |
Item 1. Financial Statements
The following unaudited interim financial statements of Absolute Life Solutions, Inc. and its Subsidiary (sometimes referred to as "we", "us" or "our Company") are included in this quarterly report on Form 10-Q:
| Page | |
| Condensed Consolidated Balance Sheets at November 30, 2012 (unaudited) and August 31, 2012 | 4 |
| Condensed Consolidated Statements of Operations for the three months ended November 30, 2012 and 2011 and the period from November 15, 2012 to November 30, 2012 (unaudited) | 5 |
| Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 2012 and 2011 and the period from November 15, 2012 to November 30, 2012 (unaudited) | 6 |
| Notes to Condensed Consolidated Financial Statements | 7 |
| 3 |
ABSOLUTE LIFE SOLUTIONS, INC.AND ITS SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
| November 30, 2012 (unaudited) | August 31, 2012 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 502,298 | $ | 4,885 | ||||
| Prepaid expenses | 19,533 | 15,192 | ||||||
| Current assets of discontinued operations | 9,647,608 | 4,562,177 | ||||||
| Total current assets | 10,169,439 | 4,582,254 | ||||||
| Equipment, net | 60,141 | 66,129 | ||||||
| Security deposit | 56,688 | 56,688 | ||||||
| Deferred income taxes | 27,783 | - | ||||||
| Noncurrent assets of discontinued operations | 145,781 | 64,667,124 | ||||||
| TOTAL ASSETS | $ | 10,459,832 | $ | 69,372,195 | ||||
| LIABILITIES | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 417,989 | $ | 441,297 | ||||
| Current liabilities of discontinued operations | 10,100,009 | 60,076,710 | ||||||
| Total current liabilities | 10,517,998 | 60,518,007 | ||||||
| Deferred rent | 66,498 | 49,335 | ||||||
| Long-term liabilities of discontinued operations | - | 4,243,044 | ||||||
| TOTAL LIABILITES | 10,584,496 | 64,810,386 | ||||||
| STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||
| Preferred stock ($0.00001 par value; 100,000,000 authorized; | ||||||||
| of which 60,000 are designated as Series A 12.5% convertible preferred stock; No Series A issued and outstanding ( August 31, 2012 – No Series A issued and outstanding) | - | - | ||||||
| of which 25,000 are designated as Series B 12.5% convertible preferred stock; No Series B issued and outstanding ( August 31, 2012 – No Series B issued and outstanding) | - | - | ||||||
| Common stock ($0.00001 par value; 500,000,000 authorized; 92,544,747 issued and 92,229,599 outstanding) (August 31, 2012 - 92,544,747 issued and 92,229,599 outstanding) | 925 | 925 | ||||||
| Additional paid in capital | 51,488,598 | 51,486,890 | ||||||
| Treasury stock, at cost (315,148 shares of common stock) (August 31, 2012- 315,148 shares of common stock) | (44,121 | ) | (44,121 | ) | ||||
| Accumulated deficit | (51,570,066 | ) | (46,881,885 | ) | ||||
| Total Stockholders' (Deficit) Equity | (124,664 | ) | 4,561,809 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | $ | 10,459,832 | $ | 69,372,195 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
ABSOLUTE LIFE SOLUTIONS, INC. AND ITS SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
| Three months ended November 30, 2012 | Three months ended November 30, 2011 | From November 15, 2012 to November 30, 2012 | ||||||||||
| Sales, general and administrative expenses | $ | (260,670 | ) | $ | - | $ | (81,391 | ) | ||||
| Loss from continuing operations before income tax | (260,670 | ) | - | (81,391 | ) | |||||||
| Income tax provision | (162,869 | ) | - | (50,854 | ) | |||||||
| Loss from continuing operations | (423,539 | ) | - | (132,245 | ) | |||||||
| Loss from discontinued operations (including loss on disposal of life settlement contracts of $8,438,584 for the three months ended November 30, 2012), net of tax | (4,264,642 | ) | (4,388,393 | ) | - | |||||||
| Net loss | $ | (4,688,181 | ) | $ | (4,388,393 | ) | $ | (132,245 | ) | |||
| Basic and diluted loss per common share | ||||||||||||
| Continuing operations | $ | (0.01 | ) | $ | - | |||||||
| Discontinued operations | (0.04 | ) | (0.05 | ) | ||||||||
| Net loss per common share | $ | (0.05 | ) | $ | (0.05 | ) | ||||||
| Basic weighted average shares outstanding | 98,229,599 | 91,424,597 | ||||||||||
| Diluted weighted average shares outstanding | 98,229,599 | 91,424,597 | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
| ABSOLUTE LIFE SOLUTIONS, INC. AND ITS SUBSIDIARY |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| UNAUDITED |
| Three months ended November 30, 2012 | Three months ended November 30, 2011 | From November 15, 2012 to November 30, 2012 | ||||||||||
| OPERATING ACTIVITIES | ||||||||||||
| Net loss | $ | (4,688,181 | ) | $ | (4,388,393 | ) | $ | (132,245 | ) | |||
| Loss from discontinued operations | 4,264,642 | 4,388,393 | - | |||||||||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operations | ||||||||||||
| Stock-based compensation | 1,708 | - | 1,708 | |||||||||
| Depreciation | 5,988 | 5,988 | 998 | |||||||||
| Deferred rent | 17,163 | 1,927 | 2,860 | |||||||||
| Deferred income taxes | 162,869 | - | 50,854 | |||||||||
| Changes in operating assets and liabilities | ||||||||||||
| Prepaid expenses | (4,341 | ) | 15,569 | (991 | ) | |||||||
| Accounts payable and accrued expenses | (23,308 | ) | 54,856 | 66,120 | ||||||||
| Net cash (used in) provided by operating activities- continuing operations | (263,460 | ) | 78,340 | (10,696 | ) | |||||||
| Net cash (used in) provided by operating activities- discontinued operations | (3,360,799 | ) | (1,489,337 | ) | 9,153,085 | |||||||
| Net cash (used in) provided by operating activities | (3,624,259 | ) | (1,410,997 | ) | 9,142,389 | |||||||
| INVESTING ACTIVITIES | ||||||||||||
| Net cash provided by investing activities- continuing operations | - | - | - | |||||||||
| Net cash provided by investing activities- discontinued operations | 9,756,718 | 542,634 | - | |||||||||
| Net cash provided by investing activities | 9,756,718 | 542,634 | - | |||||||||
| FINANCING ACTIVITIES | ||||||||||||
| Net cash provided by financing activities- continuing operations | - | - | - | |||||||||
| Net cash provided by financing activities- discontinued operations | 3,671,000 | - | 836,000 | |||||||||
| Net cash provided by financing activities | 3,671,000 | - | 836,000 | |||||||||
| Change in cash and cash equivalents | 9,803,459 | (868,363 | ) | 9,978,389 | ||||||||
| Cash and cash equivalents, beginning | 233,050 | 1,917,896 | 58,120 | |||||||||
| Cash and cash equivalents, ending | 10,036,509 | 1,049,533 | 10,036,509 | |||||||||
| Less cash and cash equivalents of discontinued operations, ending | 9,534,211 | 1,049,533 | 9,534,211 | |||||||||
| Cash and cash equivalents of continuing operations, ending | $ | 502,298 | $ | - | $ | 502,298 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
ABSOLUTE LIFE SOLUTIONS INC. AND ITS SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
November 30, 2012
1. NATURE AND CONTINUANCE OF OPERATIONS
Absolute Life Solutions, Inc. (the “Company”) was originally incorporated as Shimmer Gold, Inc. in the State of Nevada on September 7, 2006 and was in the business of the acquisition and exploration of mineral resources.
On May 21, 2010, the Company changed its name from Shimmer Gold, Inc. to Absolute Life Solutions, Inc. During the fiscal year ended August 31, 2010, the Company commenced operations as a specialty financial services company engaged in the business of purchasing life settlement contracts for long-term investment purposes.
During the year ended August 31, 2012, the Company formed a wholly-owned subsidiary Infinity Augmented Reality, LLC (“IAR or “Infinity”) which is actively engaged in the development of software applications which will utilize Augmented Reality. Through IAR, the Company intends to develop a comprehensive augmented reality platform for consumers. IAR’s objective is to establish itself firmly as a preeminent source for state-of-the-art augmented reality experiences, forging a strong association, early on, between the Infinity brand and the burgeoning medium.
Effective November 15, 2012, the Company reached an agreement with the agent of the Lenders regarding the satisfaction of the outstanding balance of the Loans, under the terms of a Loan Satisfaction Agreement. Such agreement resulted in the disposition of all of the life settlement contracts that were held by the Company to the Lender or an affiliate of the Lender. As a result of the foregoing, the Company is no longer engaged in its prior primary activity as a specialty financial services company primarily engaged in the purchase of life settlement contracts. As a result of the foregoing, the Company is currently classified as a development stage company. As of November 30, 2012, all of the operations related to the Company’s life settlements business are reported as discontinued operations in the condensed consolidated financial statements. The prior period operations related to this business have also been reclassified as discontinued operations retrospectively for all periods presented.
The continued existence of the Company is dependent upon its ability to generate profit from its augmented reality business and to meet its obligations as they come due. If additional cash is needed, the Company intends to finance the future capital required for continued operations from a combination of debt and equity markets. However, there is no assurance that (a) traditional debt and equity markets may be accessible as required, or if so, on acceptable terms and, or (b) the demand for and selling prices of the Company’s augmented reality software applications, may not be sufficient to meet cash flow requirements. The outcome of these matters cannot be predicted with certainty and therefore the Company may not be able to continue or expand operations as planned. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These unaudited condensed consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of November 30, 2012 and 2011 and for the three months then ended have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the annual audited financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and our wholly-owned subsidiary. All significant intercompany accounts and transactions are eliminated in the consolidation process. The unaudited Balance Sheet as of November 30, 2012, Statements of Operations for the three months ended November 30, 2012 and 2011, and Statements of Cash Flows for the three months ended November 30, 2012 and 2011, are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the period presented. The results for the three months ended November 30, 2012 are not necessarily indicative of results to be expected for the year ending August 31, 2013 or for any future interim period. In addition, the balance sheet data at August 31, 2012 was derived from the audited financial statements but does not include all disclosures required by GAAP. The accompanying financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on January 3, 2013.
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 reporting period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The most significant estimates with regard to these financial statements relate to deferred income tax amounts and rates and timing of the reversal of income tax differences.
| 7 |
Development Stage Company
Effective November 15, 2012, the Company is considered a development stage company, having limited operating revenues during the period from November 15, 2012 (“Inception”) to November 30, 2012, as defined by ASC 915-205,Development-Stage Entities. ASC 915-205 requires companies to report their operations, shareholders equity and cash flows upon entering the development stage through the date that revenues are generated. The Company had operating expenses of $179,279 and $143,753 respectively for the period from September 1, 2012 to November 15, 2012 and the period from June 1, 2012 to August 31, 2012 respectively, relating to its augmented reality business.
Cash and Cash Equivalents
The Company considers all short term investments with an original maturity of three months or less to be cash equivalents. The Company maintains cash balances that may be uninsured or in deposit accounts that exceed Federal Deposit Insurance Corporation limits. The Company maintains its cash deposits with major financial institutions.
Reclassifications
During the three months ended November 30, 2012, the Company disposed of all its life settlement contracts. As of November 30, 2012, all of the operations related to the life settlements business, as well as any resulting gain or loss recognized from the disposal, have been reported as discontinued operations in the condensed consolidated financial statements. The Company has also reported the prior period operations related to this business as discontinued operations retrospectively for all periods presented. Additionally, the assets and liabilities related to the life settlements business have been classified as discontinued operations in the consolidated balance sheets for all periods presented. See Note 3 - Discontinued Operations for more information.
Financial Instruments
The fair value of certain of the Company's financial instruments, consisting of cash, accounts payable and accrued expenses are estimated to be equal to their carrying value due to the short-term nature of these instruments. It is management's opinion that the Company is not exposed to significant interest, currency and credit risks arising from these financial instruments.
Deferred Rent Liability
The Company’s operating lease provides for minimum annual payments that adjust over the life of the lease. The aggregate minimum annual payments are expensed on the straight-line basis over the minimum lease term. The Company recognizes a deferred rent liability for rent escalations when the amount of straight-line rent exceeds the lease payments, and reduces the deferred rent liability when the lease payments exceed the straight-line rent expense.
Software Development Costs
The Company applies the principles of ASC 985-20,Software- Costs of Software to Be Sold, Leased, or Marketed, which requires that software development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product. The Company has adopted the "tested working model" approach to establishing technological feasibility for its products. Under this approach, a product in development is not considered to have passed the technological feasibility milestone until the Company has produced a model of the product that contains essentially all the functionality and features of the final product and have tested the model to ensure that it works as expected.The Company has expensed all software development costs when incurred since they have not reached technological feasibility.
Income Taxes
Deferred income taxes are provided for tax effects of temporary differences between the tax basis of asset and liabilities and their reported amounts in the financial statements. The Company uses the liability method to account for income taxes, which requires deferred taxes to be recorded at the statutory rate expected to be in effect when the taxes are paid. Valuation allowances are provided for a deferred tax asset when it is more likely than not that such asset will not be realized.
Management evaluates tax positions taken or expected to be taken in a tax return. The evaluation of a tax position includes a determination of whether a tax position should be recognized in the financial statements, and such a position should only be recognized if the Company determines that it is more likely than not that the tax position will be sustained upon examination by the tax authorities, based upon the technical merits of the position. For those tax positions that should be recognized, the measurement of a tax position is determined as being the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.
| 8 |
The Company’s policy for recording interest and penalties associated with audits is to record such expense as a component of income tax expense.
Earnings (Loss) per Share
Basic earnings (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the period. Included in basic loss per share calculations are the effects of 6,000,000 warrants exercisable at $.01. Diluted earnings per share reflect the potential dilution that could occur if potentially dilutive securities were exercised or converted to common stock. The dilutive effect of options and warrants and their equivalent is computed by application of the treasury stock method and the effect of convertible securities by the “if converted” method. There are no other potential common shares at November 30, 2012. As of November 30, 2011, there were25,400,000 and 25,842,500 warrants with an exercise price of $2.00 and $4.00 respectively, and 50,800,000 Series A and Series B preferred shares, convertible into 50,800,000 common shares that were not included in diluted earnings per share since their effect would have been anti-dilutive.
Stock-Based Compensation
The Company records stock-based compensation expense in accordance with ASC 718,Compensation - Stock Compensation. The Company accounts for stock based compensation arrangements using a fair value method and records such expense on a straight-line basis over the estimated life of the instrument.
Recent Accounting Pronouncements
Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the condensed consolidated financial statements of the Company.
3. DISCONTINUED OPERATIONS
Effective November 15, 2012, the Company reached an agreement with the agent of the Lenders regarding the satisfaction of the outstanding balance of the Loans, under the terms of a Loan Satisfaction Agreement. Such agreement resulted in the disposition of all of the life settlement contracts that were held by the Company to the Lender or an affiliate of the Lender. As of November 30, 2012, all of the operations related to the Company’s life settlements business are reported as discontinued operations in the condensed consolidated financial statements. The prior period operations related to this business have also been reported as discontinued operations retrospectively for all periods presented. The assets and liabilities related to the Company’s life settlements business are reported as assets and liabilities of discontinued operations in the condensed consolidated balance sheets as of November 30, 2012. We have presented the prior year assets and liabilities related to the Company’s life settlements business as discontinued operations to provide comparability between the periods presented.
Discontinued operations on the condensed consolidated statement of operations for the three months ended November 30, 2012 and 2011 are as follows:
| Three months ended November 30, 2012 | Three months ended November 30, 2011 | |||||||
| Sales, general and administrative expenses | $ | (129,200 | ) | $ | (375,143 | ) | ||
| Other income (expense) | ||||||||
| Realized gain on life settlement contracts held under investment method | - | 319,843 | ||||||
| Realized loss on extinguishment of debt | (8,438,584 | ) | - | |||||
| Change in fair value of life settlement contracts net of premiums paid | 2,055,438 | (7,879,926 | ) | |||||
| Interest expense | (1,610,571 | ) | - | |||||
| Loss from discontinued operations before income tax | (8,122,917 | ) | (7,935,226 | ) | ||||
| Income tax benefit | 3,858,275 | 3,546,833 | ||||||
| Net loss from discontinued operations | $ | (4,264,642 | ) | $ | (4,388,393 | ) | ||
| 9 |
Assets and liabilitiesof discontinued operations for theCompany’s life settlements business on the condensed consolidated balance sheets consist of the following:
| November 30, 2012 (unaudited) | August 31, 2012 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 9,534,211 | $ | 228,165 | ||||
| Accounts receivable | 113,397 | - | ||||||
| Investment in life settlement contracts at investment method | - | 4,334,012 | ||||||
| Total current assets of discontinued operations | 9,647,608 | 4,562,177 | ||||||
| Investment in life settlement contracts at fair value | - | 64,667,124 | ||||||
| Deferred income taxes | 145,781 | - | ||||||
| Total noncurrent assets of discontinued operations | $ | 145,781 | $ | 64,667,124 | ||||
| LIABILITIES | ||||||||
| Current Liabilities | ||||||||
| Interest payable | $ | 2,237,281 | $ | 626,710 | ||||
| Loans payable | 5,971,000 | 59,450,000 | ||||||
| Other payables | 1,170,526 | - | ||||||
| Income and other taxes payable | 721,202 | - | ||||||
| Total current liabilities of discontinued operations | 10,100,109 | 60,076,710 | ||||||
| Deferred income taxes | - | 4,243,044 | ||||||
| Total long-term liabilities of discontinued operations | $ | - | $ | 4,243,044 | ||||
As of November 30, 2012, the Company had aggregate outstanding obligations of $9,378,807 in discontinued operations, including (i) interest on Term Loan of $2,123,281 (the “Term Interest”), (ii) $5,971,000 outstanding under the Revolving Loan, plus $114,000 in interest under the Revolving Loan, or a total of $6,085,000 (the “Revolving Total”) due under the Revolving Loan and (iii) $1,170,526 premiums payable on behalf of ALS Capital Ventures LLC (the “Premiums Payable”).During the three months ended November 30, 2012,a life settlement contract matured resulting in cash proceeds of $10,000,000, a portion of which are included in cash and cash equivalents at November 30, 2012. Subsequent to November 30, 2012, these proceeds were used to satisfy the Term Interest of $2,123,281, the Revolving Total of $6,085,000 and the Premiums Payable of $1,170,526.
As of November 30, 2012, income tax payable of $721,202 is a result of $650,000 of taxes on realized gain from maturity of a life settlement contract which could not be offset by the capital loss generated by the disposition of life settlement contracts and other miscellaneous taxes of $71,202.
4. PREFERRED STOCK
As of November 30, 2012, there are no outstanding Series A Preferred Stock or Series B Preferred Stock.
5. COMMON STOCK, WARRANTS AND OPTIONS
Common Stock
The Company did not issue additional common stock during the quarter ended November 30, 2012.
| 10 |
Warrants
Warrant transactions are summarized as follows:
| Number of warrants | Weighted average exercise price | Weighted average life remaining (in years) | ||||||||||
| Balance as at August 31, 2012 | ||||||||||||
| Issued | 6,000,000 | 0.01 | 2.75 years | |||||||||
| Additions as of November 30, 2012 | ||||||||||||
| Issued | - | - | ||||||||||
| Balance as at November 30, 2012 | 6,000,000 | 0.01 | 2.50 years | |||||||||
As of November 30, 2012, there were 6,000,000warrants outstanding and exercisable with expiration dates commencing June 2015.
Except as set forth under limited circumstances, the warrants do not permit net cash settlement.
Stock Options
During the three months ended November 30, 2012, the Company granted 100,000 Non Qualified Stock Options at an exercise price of $0.31 vesting on October 24, 2013 and expiring on October 23, 2017 to a director. For the three months ended November 30, 2012, the compensation expense of these options was $1,708 and is included in the Condensed Consolidated Statement of Operations.
Valuation Assumptions
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option awards or related modifications. The Black-Scholes model requires the use of subjective and complex assumptions including the option's expected life and the underlying stock price volatility. The Company expects future volatility to approximate historical volatility. The following weighted average assumptions were used for estimating the fair value of options granted during the three months ended November 30, 2012 :
2012 |
2011 | |
iRisk-free interest rate |
0.85% |
- |
| Expected life | 5 years | - |
| Volatility | 85% | - |
| Dividend yield | 0% | - |
6. INCOME TAXES
Income tax expense consists of the following components at November 30, 2012 and 2011:
| 2012 | 2011 | |||||||
| Current tax expense | $ | - | $ | - | ||||
| Deferred tax expense | 162,869 | - | ||||||
| Total income tax expense | $ | 162,869 | $ | - | ||||
The Company calculates its interim tax provision in accordance with the provisions of ASC 740-270,Income Taxes; Interim Reporting. For interim periods, the Company estimates its annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes. The Company also computes the tax provision or benefit related to items reported separately and recognizes the items net of their related tax effect in the interim periods in which they occur. The Company also recognizes the effect of changes in enacted tax laws or rates in the interim periods in which the changes occur.
In computing the annual estimated effective tax rate the Company makes certain estimates and judgments, such as estimated annual taxable income or loss, the nature and timing of permanent and temporary differences between taxable income for financial reporting and tax reporting, and the recoverability of deferred tax assets. These estimates and assumptions may change as new events occur, additional information is obtained, or as the tax environment changes. The difference between the statutory rate of 35% and the effective rate of 62% is primarily attributable to the affect of state and local taxes and an increase in the valuation allowance pursuant to the Company currently in the development stage.
| 11 |
As of November 30, 2012, the Company has filed income tax returns through the fiscal 2011 tax year. The Company is required to file income tax returns in the United States (federal) and in New York State and City. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The evaluation was performed for the August 31, 2008 – August 31, 2012 tax years, which remain subject to examination. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in material changes to its financial position.
The Company’s policy for recording interest and penalties associated with audits is to record such expense as a component of income tax expense. There are no significant amounts accrued for penalties or interest as of or during the three months ended November 30, 2012 and 2011. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
7. SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date through the date the financial statements were publicly available. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Special Note: Certain statements in this quarterly report on Form 10-Q concerning our business prospects or future financial performance, anticipated revenues, expenses, profitability or other financial items, estimates as to size, growth in or projected revenues from the life settlement market, developments in industry regulations and the application of such regulations, expected outcomes of pending or potential litigation and regulatory actions, and our strategies, plans and objectives, together with other statements that are not historical facts, are “forward-looking statements” as that term is defined under the federal securities laws. All of these forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission, (“ SEC ”), including our Annual Report on Form 10-K for the year ended August 31, 2012 (“ Fiscal 2012 ”), particularly in the sections entitled “Item 1A – Risk Factors” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Unless required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Report or to reflect the occurrence of unanticipated events. Shareholders and potential shareholders should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Report. Management cautions that these statements are qualified by their terms and/or important factors, many of which are outside of our control, and involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made, including, but not limited to, the following:
| · | actual or anticipated fluctuations in our quarterly and annual operating results; |
| · | actual or anticipated product constraints; |
| · | decreased demand resulting from changes in laws; |
| · | product and services announcements by us or our competitors; |
| · | loss of any of our key executives; |
| · | regulatory announcements, proceedings or changes; |
| · | competitive product developments and legal developments; |
| · | any business combination we may propose or complete; |
| · | any financing transactions we may propose or complete; or |
| · | broader industry and market trends unrelated to its performance. |
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements.
Overview
During the year ended August 31, 2012, we formed a wholly-owned subsidiary Infinity Augmented Reality, LLC (“IAR or “Infinity”) which is actively engaged in the development of software applications which will utilize Augmented Reality. Through IAR, we intend to develop a comprehensive augmented reality platform for consumers. IAR’s objective is to establish itself firmly as a preeminent source for state-of-the-art augmented reality experiences, forging a strong association, early on, between the Infinity brand and the burgeoning medium.
Augmented reality is a medium in which real sensory inputs are enhanced, or augmented, with relevant digital information from the Internet. Using specially equipped eyewear, virtual images, video, and sound are superimposed for the user over what is actually seen and heard, heightening the real-life experience with additional information that is pertinent, informative, practical, and/or entertaining. The individual user may also be fully immersed in a virtual world, temporarily blocking out real surroundings. With augmented reality, sensory inputs are no longer limited to what is within eyeshot or earshot, but may incorporate, in real-time, all that the network has to offer.
Augmented reality requires an interface, such as digitally-enhanced eyewear, that can instantaneously overlay virtual images and video on top of what is actually experienced. Companies like Google, Vuforia and Lumus are in the process of developing augmented reality glasses that will change the way users see and interact with the world. IAR will utilize their augmented reality applications through these glasses and/or through other mobile devices such as smart phones. As the individual turns his or her head in various directions and looks at different people or objects through the eyewear, the sights that are overlaid change accordingly. The eyewear incorporates speakers that add virtual sounds to the overall experience, as well as microphones that capture and interpret the user’s spoken commands through speech recognition technology in order to summon desired information and actions.
Results of Operations
Our results of operations for the three months ended November 30, 2012, consisted of consisted of operating and administrative expenses for personnel, leased office space and professional fees, income tax expense and loss from discontinued operations.
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Three months ended November 30, 2012 compared to three months ended November 30, 2011
ABSOLUTE LIFE SOLUTIONS, INC.
| Three months ended November 30, 2012 | Three months ended November 30, 2011 | |||||||
| Sales, general and administrative expenses | $ | (260,670 | ) | $ | - | |||
| Loss from continuing operations before income tax | (260,670 | ) | - | |||||
| Income tax provision | (162,869 | ) | - | |||||
| Income from continuing operations | (423,539 | ) | - | |||||
| Loss from discontinued operations (including loss on disposal of life settlement contracts of $8,438,584 for the three months ended November 30, 2012), net of tax | (4,264,642 | ) | (4,388,393 | ) | ||||
| Net loss | $ | (4,688,181 | ) | $ | (4,388,393 | ) | ||
Expenses: Operating and administrative expenses increased from $0 for the three months ended November 30, 2011 to $260,670 for the three months ended November 30, 2012. Operating expenses were primarily related to consulting fees incurred for development of augmented reality applications. All of the operating and administrative expenses from the prior period related to our life settlements business and were reclassified to discontinued operations. See Note 3 - Discontinued Operations to the Condensed Consolidated Financial Statements contained elsewhere in this Form 10-Q for more information.
Other Income (Loss): We are currently a development stage company and have generated no income in the current period. All of the income (loss) from the prior period related to our life settlements business and was reclassified to discontinued operations. See Note 3 - Discontinued Operations to the Condensed Consolidated Financial Statements contained elsewhere in this Form 10-Q for more information.
Income Tax: Income tax expense increased from $0 for the three months ended November 30, 2011 to $162,869 for the three months ended November 30, 2012. The increase is primarily attributable to an increase in the valuation allowance pursuant to the Company currently in the development stage. Income tax benefit from the prior period related to our life settlements business and was reclassified to discontinued operations. See Note 3 - Discontinued Operations to the Condensed Consolidated Financial Statements contained elsewhere in this Form 10-Q for more information.
Net Income (Loss): We reported a net loss of $4,688,181 for the three months ended November 30, 2012 compared to a net loss of $4,388,393 for the three months ended November 30, 2011. The increase of approximately $300,000 from the prior period is primarily attributable to an increase of approximately $260,000 in general and administrative expenses and an increase of approximately $163,000 in income tax expense offset by a decrease of approximately $123,000 loss from discontinued operations. Refer to preceding discussions for explanation of variances.
Liquidity and Capital Resources
Net cash used in operating activities for the three months ended November 30, 2012 was $3,624,259. Net cash provided by investing activities was $9,756,718 arising from proceeds received from discontinued operations. Net cash provided by financing activities was $3,671,000 arising from proceeds received from discontinued operations. This resulted in an increase in cash of $9,803,459. Approximately $9,300,000 of that increase relates to cash and cash equivalents from discontinued operations, the remaining increase of $502,298 relates to cash and cash equivalents of continuing operations.
Working Capital and Capital Availability: As of November 30, 2012, we had negative working capital of $348,559 consisting of working capital of $103,842 from continuing operations and negative working capital of $452,401 from discontinued operations.We currently have approximately $400,000 cash on hand which will sustain our operations for approximately five months. We expect to raise additional funds to continue our augmented reality operations through debt or subsequent equity offerings. Such issuance may dilute the interest of our existing shareholders. During the next twelve months we anticipate that we will not generate significant cash from operations. We are unable to estimate our working capital requirements and capital availability for Infinity for the next twelve months.
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Going Concern Qualification
The Company will require additional funds to finance its new augmented reality operations. Effective November 15, 2012, we are a development stage company dependent upon the expected demand for our software applications and our ability to generate sufficient cash from our augmented reality business to meet our obligations as they come due. We may not be able to obtain additional financing on reasonable terms or at all. These conditions raise substantial doubt about our ability to continue as a going concern. However, there can be no assurance that the Company can successfully implement its business plan, and it is uncertain that the Company will achieve a profitable level of operations and be able to obtain additional financing. There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all.
Application of Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based on our condensed financial statements that were prepared in accordance with accounting principles generally accepted in the United States of America. To guide our preparation, we follow accounting policies, some of which represent critical accounting policies as defined by the SEC. The SEC defines critical accounting policies as those that are both most important to the portrayal of a company’s financial condition and results and require management’s most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates involve significant judgments, assumptions and estimates by management that may have a material impact on the carrying value of certain assets and liabilities, disclosures of contingent liabilities, and the reported amounts of income and expenses during the reporting period that management considers critical accounting estimates. The judgments, assumptions and estimates used by management are based on historical experience, management’s experience, knowledge of the accounts and other factors that are believed to be reasonable. Because of the nature of the judgments and assumptions made by management, actual results may differ materially from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of our operations. Areas affected by our estimates and assumptions are identified below.
We apply the principles of ASC 985-20,Software- Costs of Software to Be Sold, Leased, or Marketed, which requires that software development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product. We have adopted the "tested working model" approach to establishing technological feasibility for its products. Under this approach, a product in development is not considered to have passed the technological feasibility milestone until we have produced a model of the product that contains essentially all the functionality and features of the final product and have tested the model to ensure that it works as expected. We have expensed all software development costs when incurred since they have not reached technological feasibility.
We review the carrying value of the property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment includes current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, there was no impairment during the three months ended November 30, 2012.
We evaluate the useful lives of our property and equipment to assure that an adequate amount of depreciation is being charged to operations. Useful lives are based generally on specific knowledge of an asset’s life in combination with the Internal Revenue Service rules and guidelines for depreciable lives for specific types of assets.
We are required to estimate our income taxes. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include a tax provision or reduce our tax benefit in the statements of operations. We use our judgment to determine our provision or benefit for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.
We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.
We have not made any material changes to our critical accounting estimates or assumptions or the judgments affecting the application of those estimates or assumptions.
Off-Balance Sheet Arrangements
We did not engage in any off-balance sheet arrangements or transactions.
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Outlook
Our wholly-owned subsidiary Infinity Augmented Reality, LLC (“IAR or “Infinity”) is actively enagaged in the development of software applications which will utilize Augmented Reality.IAR is finalizing specifications for Infinity’s applications and engaged a third party to prepare the necessary programs and related intellectual property. We believe our Company and our industry are fundamentally sound and well positioned to deal with the current uncertainty in the financial and capital markets. We carry no operational debt and do not rely on leverage in our capital structure. We do rely, however, upon the availability of investment capital. While it is conceivable that a financial crisis could diminish the supply of investment capital throughout the economy, we believe that greater investment capital will be placed in the augmented reality sector. We believe this is due to the fact that augmented reality is one of the technologies of the future.
Our operating strategy is to increase cash flows generated from operations by increasing revenues while controlling operating and administrative expenses. We believe that domestic and international demand for augmented reality products will continue to grow as the industry continues to mature.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Management does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures. With the participation of our Chief Executive Officer and Chief Accounting Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)), as of the end of the period covered by this report. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such periods, our disclosure controls and procedures were not effective due to the material weaknesses noted below, in ensuring that (i) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
| · | Due to the small size of its staff, the Company did not have sufficient segregation of duties to support its internal control over financial reporting. |
There were no changes in our internal controls over financial reporting during the quarter ended November 30, 2012, that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of our business, we may periodically become subject to various lawsuits. However, to our knowledge, we are not a party to any pending or threatened material legal proceedings. To our knowledge, no governmental authority is contemplating commencing a legal proceeding in which we would be named as a party.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
The Company currently does not have senior securities.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit Number | Description |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act . |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act . |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
| ABSOLUTE LIFE SOLUTIONS, INC. | |
| January 21, 2013 | /s/ Joshua Yifat |
Joshua Yifat Treasurer and Chief Financial Officer (Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Capacity in which signed | Date | ||
| /s/ Avrohom Oratz | ||||
| Avrohom Oratz | President and Chief Executive Officer (Principal Executive Officer ) | January 21, 2013 |
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