UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarter ended: November 30, 2013

 

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

Commission File Number: 001-32658

 

OSL HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

Nevada		98-0441032
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
60 Dutch Hill Road, Suite 13, Orangeburg, NY		10962
(Address of principal executive offices)		(Zip Code)

 

(845) 363-6776

(Registrant’s telephone number, including area code)

 

Not applicable.

(Former Name, former address and former fiscal year, if changed since last report)

 

Indicate by checkmark 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 filer. See definition 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]
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. As of January 21, 2014 there were 152,207,316 shares of common stock, $.001 par value, outstanding.

 

 

 

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TABLE OF CONTENTS

 

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			Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements		F-1
	Consolidated Balance Sheets November 30, 2013 (Unaudited) and August 31, 2013 (Audited)		F-1
	Consolidated Statements of Operations for the three months ended November 30, 2013 and 2012 (Unaudited) and from September 16, 2010 (inception) to November 30, 2013		F-2
	Consolidated Statements of Cash Flows for the three months ended November 30, 2013 and 2012 (Unaudited) and from September 16, 2010 (inception) to November 30, 2013		F-3
	Notes to Consolidated Financial Statements (Unaudited)		F-4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		4
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		6
Item 4.	Controls and Procedures		6
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings		7
Item 1A.	Risk Factors		7
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		7
Item 3.	Defaults Upon Senior Securities		7
Item 4.	Mine Safety Disclosures		7
Item 5	Other Information		7
Item 6.	Exhibits		8
	SIGNATURES		9

 

 

USE OF CERTAIN DEFINED TERMS

 

Except as otherwise indicated by the context, references in this report to “we,” “us,” “our,” “our Company,” or “the Company” are to the combined business of OSL Holdings Inc. and its consolidated subsidiaries.

 

In addition, unless the context otherwise requires and for the purposes of this report only:

 

	●	“Commission” refers to the Securities and Exchange Commission;
	●	“Crisnic” refers to Crisnic Fund, S.A., a Costa Rican corporation;
	●	“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
	●	“OSL” refers to Office Supply Line, Inc., a Nevada corporation and a wholly-owned subsidiary of the Company;
	●	“Red Rock” refers to the Company while named Red Rock Pictures Holdings, Inc.; and
	●	“Securities Act” refers to the Securities Act of 1933, as amended.

 

CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. A list of factors that could cause our actual results of operations and financial condition to differ materially is set forth below:

 

	●	Our ability to continue as a going concern.
	●	Our limited operating history, ability to achieve profitability and history of losses.
	●	Our need for significant additional capital to fund our business plan.
	●	Our ability to attract merchants and members to our loyalty program.
	●	Economic conditions that have an adverse effect on consumer spending.
	●	The market price for shares of our common stock has been and may continue to be highly volatile and subject to wide fluctuations and the impact of penny stock rules on the liquidity of our common stock.

 

We caution that the factors described herein and other factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

OSL HOLDINGS INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

 

		As of				As of
		November 30, 2013				August 31, 2013
		(Unaudited)
Assets
Current assets:
Cash		$	1,085			$	70,217
Prepaid and other assets			2,000				3,000
Total current assets			3,085				73,217
Total assets		$	3,085			$	73,217
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable and accrued liabilities		$	1,145,479			$	1,117,420
Accrued officers compensation			893,308				716,000
Advances from related parties			58,160				63,560
Senior secured convertible note			-				19,950
Secured promissory note – in default			170,000				170,000
Convertible notes, net of discount			238,482				317,232
Convertible notes with related parties, net of discount			47,590				39,153
Promissory notes, net of discount			74,390				300,000
Promissory notes with related parties, net of discount			94,286				91,428
Derivative liability			2,004,014				2,574,365
Total current liabilities			4,725,709				5,409,108
Commitment and contingencies			-				-
Stockholders’ deficit:
Common Stock, $.001 par value; 450,000,000 shares authorized; 152,207,316 and 136,936,316 shares issued and outstanding at November 30, 2013 and August 31, 2013, respectively			152,208				136,937
Additional paid-in capital			8,508,166				7,808,965
Deficit accumulated during the development stage			(13,382,998	)			(13,281,793	)
Total stockholders’ deficit			(4,722,624	)			(5,335,891	)
Total liabilities and stockholders’ deficit		$	3,085			$	73,217

 

See accompanying notes to the consolidated unaudited financial statements.

 

 

OSL HOLDINGS INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months				Three Months				September 16, 2010
		Ended				Ended				(Inception) to
		November 30, 2013				November 30, 2012				November 30, 2013
		(Unaudited)				(Unaudited)				(Unaudited)
Operating expenses:
General and administrative expenses			394,711				271,310				5,546,317
Impairment of website development costs			100				-				185,900
Operating loss			(394,811	)			(271,310	)			(5,732,217	)
Other:
Interest expense			(182,023	)			(129,119	)			(678,425	)
Loss on conversion of debt and settlement of accrued interest			-				(43,066	)			(755,978	)
Gain on settlement of debt			44,829				-				66,529
Debt issuance costs			-				(44,172	)			(145,510	)
Change in value of derivative liability			430,800				36,179				(5,462,220	)
Reverse merger costs			-				-				(647,880	)
Costs of rescinded acquisition			-				-				(27,297	)
Other income (expense), net			293,606				(180,178	)			(7,650,780	)
Net loss		$	(101,205	)		$	(451,488	)		$	(13,382,998	)
Net loss per common share
Net loss per common share – basic and diluted		$	(0.00	)		$	(4.32	)
Weighted average common shares outstanding – basic and diluted			146,555,195				104,536

 

See accompanying notes to the consolidated unaudited financial statements.

 

 

OSL HOLDINGS INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

		Three Months				Three Months				September 16, 2010
		Ended				Ended				(Inception) to
		November 30, 2013				November 30, 2012				November 30, 2013
		(Unaudited)				(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net loss:		$	(101,205	)		$	(451,488	)		$	(13,382,998	)
Adjustments to reconcile net loss to cash used in operating activities:
Cost of reverse merger			-				-				647,880
Impairment of website development costs			-				-				185,800
Fair value of stock issued upon rescinded acquisition			-				-				20,000
Fair value of stock issued for services from outside parties			-				-				714,981
Stock issued to officers for compensation and services			2,890				1,250				1,618,023
Cost of offerings			-				44,172				145,510
Loss on conversion of debt and accrued interest			-				43,066				755,978
Gain (Loss) on settlement of debt			(44,829	)			-				(66,529	)
Change in fair value of derivative liability			(430,800	)			(36,179	)			5,462,220
Amortization of note discount			145,044				75,664				518,920
Non cash interest expense on note conversions			-				40,267				69,101
(Increase) decrease in:
Prepaid and other assets			1,000				-				10,500
Accounts payable and accrued liabilities			99,360				53,928				811,539
Accrued compensation			177,308				150,000				1,113,308
Net cash used in operating activities			(151,232	)			(79,320	)			(1,375,766	)
Cash flows from financing activities:
Advances from (to) related parties			(5,400	)			26,850				(5,515	)
Payment of senior secured convertible note			(25,000	)			-				(105,000	)
Payment of promissory notes			-				-				(3,000	)
Payment of convertible notes			(12,500	)			-				(37,500	)
Cash received on issuance of convertible promissory notes			100,000				-				753,000
Cash received on issuance of a promissory note			25,000				52,500				392,365
Cash received on issuance of a promissory note – related parties			-				-				76,000
Cash received on shares to be issued			-				-				100,000
Cash received on issuance of common stock			-				-				206,500
Net cash provided by financing activities			82,100				79,350				1,376,850
Change in cash:
Net increase (decrease)			(69,132	)			30				1,085
Balance at beginning of period			70,217				202				-
Balance at end of period		$	1,085			$	232			$	1,085
Supplemental disclosures of cash flow information:
Cash paid for:
Income taxes		$	-			$	-			$	-
Interest		$	-			$	-			$	-
Non cash financing activities
Fair value of common shares issued upon conversion of senior secured promissory note		$	-			$	34,177			$	16,000
Common shares issued upon conversion of convertible notes and accrued interest		$	14,421			$	-			$	254,119
Accounts payable assumed on reverse acquisition		$	-			$	-			$	265,380
Acquisition of website for accounts payable		$	-			$	-			$	185,800
Promissory notes assumed on reverse acquisition		$	-			$	-			$	142,500
Issuance of note payable on reverse merger		$	-			$	-			$	240,000
Fair value of common shares issued upon conversion of accrued compensation		$	-			$	-			$	220,000
Fair value of beneficial conversion feature of convertible notes		$	-			$	336,868			$	358,333
Reclassification of common shares issuable to additional paid in capital		$	-			$	-			$	102,083
Common shares issued to lender as consideration for  issuance of promissory note		$	610			$	-			$	9,181
Reclassification of derivative liability to  additional paid in capital		$	139,551			$	-			$	4,036,157
Discount on notes payable from derivative liability		$	-			$	-			$	319,441
Reclassification of accounts payable to notes payable – related parties		$	-			$	-			$	63,674
Reclassification of accrued interest from notes payable to accrued liabilities		$	-			$	-			$	67,965
Fair value of common shares issued upon conversion of collaboration agreement		$	557,000			$	-			$	557,000

 

See accompanying notes to the consolidated unaudited financial statements.

 

 

OSL HOLDINGS INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2013 AND 2012

 

Note 1- Organization, Nature of Business and Basis of Presentation

 

Organization and Nature of Business

 

OSL Holdings, Inc. (the “Company”) was incorporated under the name Red Rock Pictures, Inc. on August 18, 2006 under the laws of the State of Nevada and was engaged in the business of developing, financing, producing and licensing feature-length motion pictures and direct response infomercials. On June 6, 2008, the Company entered into a stock for stock exchange agreement with Studio Store Direct, Inc. (“SSD”). Pursuant to the stock for stock exchange agreement, the Company acquired 100% of the assets of SSD by issuing 11,000 restricted common shares in exchange for all the issued and outstanding shares of SSD. With the addition of SSD, the Company also operated as a traditional infomercial production and distribution company.

 

On October 10, 2011, the Company completed a share exchange (the “Share Exchange”) with Office Supply Line, Inc. (“OSL”), a company incorporated in the State of Nevada on September 16, 2010, whereby OSL exchanged all of the issued and outstanding shares of OSL in exchange for 50,000 shares of the Company’s common stock. As part of the Share Exchange, the Company entered into a Share Cancellation Agreement and Release (the “Share Cancellation Agreement”) with Crisnic Fund S.A., a Costa Rican corporation (“Crisnic”), and OSL, pursuant to which Crisnic cancelled 14,130 shares of the Company in exchange for $10,000 cash and a Secured Promissory Note of OSL in the principal amount of $240,000 (the “Crisnic Note”). See Note 6.

 

Immediately prior to the Share Exchange, the Company entered into an Asset Assignment Agreement (the “Asset Assignment Agreement”) by and among Reno Rolle (“Rolle”), Todd Wiseman (“Wiseman”), former principals of the Company, and Red Rock Direct (an entity managed by Rolle and Wiseman), pursuant to which the Company assigned certain of its assets to Red Rock Direct in consideration of the cancelation of shares of the Company of Rolle (144 shares that had not yet been issued) and Wiseman (5,000 shares due under an employment agreement), pursuant to Share Cancellation Agreements and Releases entered into among each of Rolle (and Lynn Rolle, the wife of Rolle) and Wiseman, the Company and OSL; and the assumption of certain indebtedness of the Company by Red Rock Direct.

 

For financial statement reporting purposes, the Share Exchange was treated as a reverse acquisition, with OSL deemed the accounting acquirer and the Company deemed the legal acquirer. These financial statements reflect the historical activity of OSL, and the historical stockholders’ equity of OSL has been retroactively restated for the equivalent number of shares received in the Share Exchange after giving effect to the differences in par value offset to additional paid-in capital. In connection with the Share Exchange, OSL is deemed to have issued an additional 1,068 shares of common stock to its stockholders existing prior to the Share Exchange. Reverse merger costs of approximately $649,000 include net liabilities of $408,000 assumed upon the reverse merger and the $250,000 cost of the Share Cancellation Agreement.

 

On October 17, 2011, the Company changed its name to OSL Holdings Inc. and became a holding company for its operating subsidiaries.

 

On December 4, 2012, the Company amended its Articles of Incorporation to increase the number of authorized shares of Common Stock available for issuance from 120,000,000 to 450,000,000.

 

Effective January 9, 2013, the Company completed a reverse split of its outstanding shares of Common Stock, par value $0.001 (the “Common Stock”) and outstanding shares and per share data have been retroactively adjusted to effect the reverse split as if it occurred at the beginning of the earliest period presented.

 

Basis of Presentation

 

The unaudited interim financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the August 31, 2013 audited financial statements and the accompanying notes thereto included in our Form 10-K. While management believes the procedures followed in preparing these condensed financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.

 

These consolidated unaudited financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.

 

 

OSL HOLDINGS INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 2 – Going Concern

 

The Company’s consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced losses from operations since inception, does not have significant sources of revenue, has working capital and stockholders’ deficiencies and has been notified that it is in default on the Crisnic Note and these circumstances raise substantial doubt as to its ability to continue as a going concern. The Company has less than $2,000 cash on hand which is not sufficient to fund ongoing operations. The Company expects a burn rate of at least $50,000 per month and will need to raise at least $600,000 to continue its operations, and we can give no assurance of success. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s August 31, 2013 consolidated financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The Company’s existence is dependent upon management’s ability to develop profitable operations and resolve its liquidity problems. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

The Company will require additional capital, either through debt or private placements, in order to execute its business plan. Such additional financing may not become available on acceptable terms and there can be no assurance that any additional financing that the Company does obtain will be sufficient to meet its needs in the long term. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.

 

Note 3 – Summary of Significant Accounting Policies

 

Fair Value of Financial Instruments

 

The Company measures its financial assets and liabilities in accordance with the requirements of ASC 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying value of the Company’s cash, accounts payable and accrued liabilities, advances from stockholder, senior secured convertible debt, secured note payable and advances from related parties approximates fair value because of the short-term maturity of these instruments.

 

The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s balance sheets on a recurring basis and their level within the fair value hierarchy as of November 30, 2013 and August 31, 2013, respectively.

 

		Level 1				Level 2				Level 3				Total
Fair value of Derivative Liability – November 30, 2013		$	–			$	–			$	2,004,014			$	2,004,014
			Level 1				Level 2				Level 3				Total
Fair value of Derivative Liability – August 31, 2013		$	–			$	–			$	2,574,365			$	2,574,365

 

 

OSL HOLDINGS INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 4 – Advances from Related Parties

 

The Company has received funding from certain related parties to help fund the cash operating needs of the Company. The balance outstanding as of November 30, 2013 and August 31, 2013 was $58,160 and $63,560, respectively. The loans are non-interest bearing, unsecured and due on demand. $53,160 of the advances from related parties are convertible at a 70% discount of the average trading price 5 days prior to conversion. Under ASC 815-15 “Derivative and Hedging”, it should be reclassified from equity to liability and the liabilities were subsequently measured at fair value at the end of each reporting period with the change in fair value recorded to earnings. See more information at footnote 10.

 

Note 5 – Senior Secured Convertible Note

 

The Company assumed a $100,000 senior secured convertible note due (the “Senior Note”) to The Exchange LLC (the “Exchange LLC”), an unrelated company, upon the consummation of the reverse merger recapitalization with OSL. On October 12, 2011, the Company and Exchange LLC entered into Amendment No. 1 (the “Amendment”) to the Senior Note. Pursuant to the Amendment, the maturity date of the Senior Note was extended to October 5, 2012 and the conversion price of the Senior Note was set at $0.001. Any conversion of debt owed to Exchange LLC under the Senior Note must be approved by the Board of Directors of the Company and in the event that the Board of Directors does not approve such conversion request, the corresponding principal amount shall be due. The Company entered into Amendment No. 2 (“Amendment 2”) to the Senior Note on December 12, 2012, pursuant to which the maturity date of the Senior Note was extended to October 5, 2013 and that the parties agreed that the conversion of the Senior Note shall not be affected by any reverse split of the Company’s Common Stock. The Company entered into Amendment No. 3 (“Amendment 3”) to the Senior Note on August 31, 2013 and that the parties agreed to reduce the balance owed of $101,000 to $35,000 so long as Exchange LLC is paid $10,000 on August 30, 2013, $10,000 on September 10, 2013, $10,000 on September 23, 2013, and $5,000 on September 30, 2013. As of August 31, 2013, the total remaining balance outstanding due to Exchange LLC under the Senior Note was $19,950.

 

On October 3, 2013, The Exchange LLC entered into an Assignment Agreement (the “Assignment Agreement”) by and among the Exchange LLC and an assignee for the remaining balance owed $14,421 in exchange for $5,000. During the three months ended November 30, 2013, the assignee elected to receive a total of 14,421,000 shares of Common Stock at an average conversion price of $0.01 or $14,421 as final repayment of the outstanding balance owed. In relation to Amendment 3 and in conjunction with the final repayment, the Company recorded a proportional reduction in balance of $44,829 which was recorded as a gain on extinguishment of debt during the three months ended November 30, 2013. As of November 30, 2013, the balance of the Senior Note has been paid in full.

 

On April 4, 2012, as a result of the issuance of convertible debt to Panache Capital, LLC, the convertible option of the senior secured convertible note became tainted. Under ASC 815-15 “Derivative and Hedging”, it should be reclassified from equity to liability and the liabilities were subsequently measured at fair value at the end of each reporting period with the change in fair value recorded to earnings.

 

As a result of note conversion, under ASC 815-15 “Derivative and Hedging”, the instruments are measured at fair value at the date of conversion with the change in fair value recorded to earning. See footnote 10 for impact of this derivative.

 

Note 6 – Secured Promissory Note, In Default

 

As part of the Share Exchange discussed in Note 1, the Company entered into the Share Cancellation Agreement with Crisnic and OSL. Pursuant to the Share Cancellation Agreement, Crisnic agreed to cancel 14,130 shares in exchange for $10,000 and the Crisnic Note in the principal amount of $240,000. Under the terms of the Crisnic Note, OSL was required to pay Crisnic $50,000 on November 8, 2011, then $25,000 every subsequent week until December 27, 2011, and one final payment of $15,000 on January 3, 2012. The Crisnic Note is non-interest bearing. Due to delays in raising financing, the Company was unable to meet the original repayment terms of the Crisnic Note. The Company has made intermittent payments and the balance due as of November 30, 2013 and August 31, 2013 was $170,000 which is currently due and payable.

 

 

OSL HOLDINGS INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

As security for the Crisnic Note, the Company contracted to issue into escrow 650,001 shares of Series A Preferred Stock (the “Preferred Shares”, to be released either to the Company upon full satisfaction of the Crisnic Note or to Crisnic on the escrow and default terms of the Crisnic Note. The Company discovered that the Preferred Shares were never authorized in the Company’s Articles of Incorporation (the “Articles”) and were never issued. The Company had been informed by Crisnic and by the Company’s previous counsel that the Preferred Shares had been authorized, issued and held in escrow. The Company received a written notice of default in accordance with the terms of the Crisnic Note on October 28, 2012. Since the Articles did not authorize any of the Preferred Shares, the Company does not believe that it is legally able to issue the Preferred Shares required by the Share Cancellation Agreement and the Crisnic Note at this time. The Company also takes the position that it is not obligated to issue the Preferred Shares as the intended recipient is the entity that misrepresented the Company’s ability to issue such shares, among other things. On May 31, 2013 Crisnic informed the Company it had assigned the Crisnic Note in to a person who had a claim against Crisnic as partial satisfaction of that person’s claim against Crisnic. The Company is seeking to negotiate a resolution of the Company’s dispute regarding the Crisnic Note with the current holder of the note.

 

Note 7 – Convertible Notes

 

Convertible notes payable consist of the following as of November 30, 2013 and August 31, 2012:

 

		November 30, 2013				August 31, 2013
Convertible notes payable, interest at 8% per annum (A) – related parties		$	47,590			$	47,590
Convertible notes payable, interest at 10% per annum (B)			238,482				450,982
Convertible notes payable			286,072				498,572
Less: note discount			-				(142,187	)
Convertible notes payable, net of discount		$	286,072			$	356,385

 

(A) Asher Enterprises, Inc. (Assigned on March 21, 2013)

 

During the period November 15, 2011 to August 31, 2013, the Company issued four unsecured convertible notes (the “Asher Notes”) to Asher Enterprises, Inc. (“Asher”) in the aggregate amount of $135,500. The Asher Notes are due after one year and bear interest at 8% per annum where interest accrues and is payable in cash upon maturity provided that the elected conversion to common shares does not occur. Any amount of principal or interest on these Asher Notes which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date until the past due amount is paid. At any time or times after 180 days from the date of the Asher Notes and until the maturity dates, Asher is entitled to convert any portion of the outstanding and unpaid amount into fully paid and non-assessable shares of Common Stock. The conversion price will be based on a 49-59% discount to the average of the three lowest closing bid prices for the Company’s Common Stock during the ten trading days immediately preceding a conversion date.

 

Each of the Asher Notes includes an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of common stock instruments at or below the current exercise price. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion price of the Asher Notes is not a fixed amount because they are subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features are not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities upon issuance and at the end of each reporting period or termination of the instrument with the change in fair value recorded to earnings.

 

During the year ending August 31, 2012, $113,000 of the Asher Notes were issued. The Company determined the initial fair value of the embedded conversion feature of the Asher Notes issued during the year ended August 31, 2012 to be $258,510. This amount was determined by management using a weighted-average Black-Scholes Merton option pricing model. In accordance with current accounting guidelines, the excess of $145,510 of derivative liability created over the face amount of the Asher Notes was considered to be a debt issuance cost during the year ended August 31, 2012. As such the Company recorded an $113,000 valuation discount upon issuance. During the year ended August 31, 2012, the Company amortized $34,338 of the discount and as of August 31, 2012, the remaining discount of $78,662 is offset against the balance of the notes for financial statement presentation. During the year ended August 31, 2013, the $22,500 of the Asher Notes was issued. The Company determined the initial fair value of the embedded conversion feature of the Asher Notes issued during the year ended August 31, 2013 to be $39,846. The excess of $17,346 of derivative liability over the face amount was considered to be a loss on derivative liability and recorded a $22,500 debt discount. During the year ended August 31, 2013 the Company further amortized $92,275 of the discount and as of August 31, 2013, the remaining discount of $89,911 is offset against the balance of the notes for financial statement presentation.

 

 

OSL HOLDINGS INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

On March 21, 2013, the Company entered into that certain Assignment, Termination and Release Agreement (the “Assignment Agreement”) by and among the Company; Asher; Samuel Kotch (“S. Kotch”) and Benjamin Kotch (“B. Kotch”) (S. Kotch and B. Kotch each an “Assignee” and collectively the “Assignees”), each the son of Eric Kotch, the Chief Financial Officer, Secretary, Treasurer and a director of the Company, pursuant to which i) Asher assigned its rights to the Asher Notes, issued pursuant to those certain corresponding securities purchase agreements (the “SPAs”); ii) the Company and Asher agreed to terminate their obligations to one another under the Asher Notes and the SPAs; and iii) the Company and Asher provided one another with complete releases of all claims, in consideration of a payment by the Assignees of $125,500 to Asher. The Company and the Assignees also entered into that certain Consent to Assignment dated March 21, 2103, whereby the Company consented to the waiver of the requirement under the SPAs that any assignee of the Asher Notes be an accredited investor.

 

During the year ended August 31, 2013, the Company issued a total of 8,070,793 shares of Common Stock at an average conversion price of $0.01 or $87,910 and $7,769 as partial repayment of the Convertible Notes and accrued interest. As a result of the conversion, $886,875 of loss on conversion of debt and accrued interest was recognized during the year ended August 31, 2013. As of August 31, 2013, the total remaining balance was $39,153, net of discount of $8,437.

 

During the three months ended November 30, 2013 the Company further amortized $8,437 leaving no remaining discount to offset against the balance of the notes for financial statement presentation. As of August November 30, 2013, the total remaining balance was $47,590.

 

The Company determined the fair value of the embedded conversion feature of all the Asher Notes as of November 30, 2013 to be $57,430. For the three months ended November 30, 2013, $32,481 was recorded as a gain on derivative from these notes resulted from the change in fair value of the conversion features. This amount was determined by management using a weighted-average Black-Scholes Merton option pricing model.

 

(B) Panache Capital, LLC

 

During the period March 5, 2012 to April 26, 2012, the Company issued four convertible promissory notes (the “March Panache Notes”) to Panache Capital, LLC (the “Panache”) for an aggregate amount of $250,000, with 10% annum interest. The Panache Notes are each due after the one year anniversary thereof. All past-due principal of the March Panache Notes bears interest at 15%. There is a 25% prepayment fee. Panache has the right to convert the March Panache Notes, in their entirety or in part, into Common Stock of the Company. The conversion price is based on a 25% discount to the average of the three lowest closing bid prices for the Company’s Common Stock during the ten trading days immediately preceding a conversion date. The Company determined the initial fair value of the beneficial conversion feature was $83,333 and was recorded by the Company as a loan discount, which is being amortized as interest expense over the life of the notes. As of August 31, 2013 and 2012, the unamortized balance of the March Panache Notes discount was $417 and $47,861, respectively. The Company recorded an additional $30,000 of debt discount, and amortized a total of $77,444 of debt discount into interest expense during the year ended August 31, 2013.

 

On September 21, 2012, the Company entered into an amendment agreement (the “Panache Amendment”) with Panache which amends the March Panache Notes. Pursuant to the Panache Amendment, the Company had the option, for 90 days after September 21, 2012 (the “Outside Date”), to redeem the March Panache Notes for 100% of their outstanding principal and interest, which it opted not to do. Additionally, Panache was not able, until the Outside Date and absent an event of default, to convert any of the March Panache Notes into Company Common Stock. Each of the March Panache Notes were further amended to permit Panache to convert the March Panache Notes at a price not to fall below a 49% discount to the average of the three lowest closing bid prices for the Company Common Stock during the ten trading days immediately preceding a conversion date.

 

The Company analyzed the modification of the term under ASC 470-60 “Trouble Debt Restructurings” and ASC 470-50 “Extinguishment of Debt”. The Company determined the creditor has not granted a concession and the modification of the embedded conversion options does not fall in the scope of ASC 470-50.

 

On September 21, 2012, the Company issued a convertible promissory note (the “September Panache Note” and together with the March Panache Notes, the “Panache Notes”) to Panache in the principal amount of $30,000, with 10% annum interest. The September Panache Note is due after the one year anniversary thereof. All past-due principal of the September Panache Note bears interest at 15%. There is a 25% prepayment fee. Panache has the right to convert the September Panache Note, in its entirety or in part, into Common Stock of the Company. The original conversion price was based on a 49% discount to the average of the three lowest closing bid prices for the Company’s common stock during the ten trading days immediately preceding a conversion date.

 

 

OSL HOLDINGS INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The March and September Panache Note includes an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of Common Stock instruments at or below the current exercise price. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion price of the September Panache Note is not a fixed amount because it is subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features are not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities upon issuance and at the end of each reporting period or termination of the instrument with the change in fair value recorded to earnings.

 

During the year ended August 31, 2013, the Company paid $25,000 and issued a total of 4,018 shares of Common Stock at an average conversion price of $1.00 or $4,018 in partial repayment of the Panache Notes. As of August 31, 2013 and 2012, the total remaining balance outstanding to Panache under the Panache Notes was $250,565 and $212,739, net of discount of $417 and $47,861, respectively.

 

During the three months ended November 30, 2013, the Company paid $12,500 in partial repayment of the Panache Notes. As of November 30, 2013, the total remaining balance outstanding to Panache under the Panache Notes was $238,482.

 

The Company determined the fair value of the embedded conversion feature for the March and September Panache Notes as of November 30, 2013 to be $247,345 and $5,297, respectively. For the three months ended November 30, 2013, $246,921 and ($3,434) was recorded as gain (loss) on derivative for the March and September Panache Notes, respectively resulted from the change in fair value of the conversion features. This amount was determined by management using a weighted-average Black-Scholes Merton option pricing model.

 

Kevin Mulhearn

 

On June 21, 2013, the Company issued an unsecured convertible promissory note to Kevin Mulhearn (“Mulhearn”) in the principal amount of $200,000, with 10% annum interest. The note is due on December 21, 2013. The note is convertible, in its entirety or in part, into Common Stock of the Company. The conversion price is the average of the three trading days prior to conversion, and the principal that will be converted is $400,000.

 

Under ASC 815-15 “Derivative and Hedging”, the Company determined that the convertible feature of the note should be classified as a derivative liability. See footnote 10 for further information on the impact. The derivative resulted in a debt discount of $200,000, of which $66,667 has been amortized into interest expense. As of August 31, 2013, the total remaining balance outstanding to Kevin Mulhearn was $66,667, net of discount of $133,333.

 

On October 2, 2013 the Company entered into a Project Collaboration and Profit Sharing Agreement (“Collaboration Agreement”) with Mulhearn (See Note 11), at which time the Company reclassified the balance owed on the $200,000 unsecured convertible note to additional paid in capital. In addition, the Company expensed the remaining debt discount balance of $133,333 to interest expense during the three months ended November 30, 2013.

 

Note 8 – Promissory Notes

 

In May 2013, the Company issued unsecured promissory notes (the “May Notes”) in an aggregate principal amount equal to $40,000 (the “Principal Amount”) to two (2) accredited investors. The May Notes accrue simple interest at a rate of 12% per annum and are due and payable six (6) months from the date of their respective issuances. All past-due principal of the May Notes shall bear interest until paid at the maximum nonusurious interest rate that at any time may be contracted for, taken, reserved, charged, or received on the indebtedness evidenced by the May Notes (the “Maximum Rate”) or, if no Maximum Rate is established by applicable law, at the rate of 15% per annum. The occurrence of any one of the following events will be deemed an event of default: (a) the Company shall fail to pay when due any principal of the May Notes; or (b) the Company shall: (i) apply for or consent to the appointment of a receiver, trustee, or intervenor, custodian or liquidator of all or a substantial part of its assets, (ii) be adjudicated as bankrupt or insolvent or file a voluntary petition for bankruptcy or admit in writing that it is unable to pay its debts as they become due, (iii) make a general assignment for the benefit of creditors, (iv) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (v) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against it in any bankruptcy, reorganization, or insolvency proceeding, or any action for the purpose of effecting any of the foregoing; or (vi) an order, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition appointing a receiver, trustee, intervenor or liquidator of all of its assets, and such order, judgment or decree shall continue unstayed and in effect for a period of sixty (60) days. As of November 30, 2013 and August 31, 2013, the total remaining balance outstanding under the May Notes is $40,000, respectively.

 

 

OSL HOLDINGS INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

On May 1, 2013, the Company issued an unsecured promissory note (the “May Investor Note”) in the principal amount of $10,000 to a private investor. The May Investor Note is due on demand, bears interest at 12% per annum where interest accrues and is payable in cash upon demand. As of November 30, 2013 and August 31, 2013, the total remaining balance outstanding under the May Investor Note is $10,000, respectively.

 

On May 31, 2013, the Company issued a unsecured promissory note (the “Subsequent May Note” and together with the May Notes and the Demand Note, the “Notes”) in an aggregate principal amount equal to $100,000 (the “Subsequent May Note Principal Amount”) to an accredited investor, substantially in the form of the May Notes. The Subsequent May Note accrues simple interest at a rate of 10% per annum and is due and payable six (6) months from the date of its issuances, with the Company able to pay the Subsequent May Note Principal Amount in common stock of the Company discounted by 20%. As of August 31, 2013, the total remaining balance outstanding under the Subsequent May Note is $100,000. On October 2, 2013 the Company entered into a Project Collaboration and Profit Sharing Agreement (“Collaboration Agreement”) with Mulhearn (See Note 12), at which time the Company reclassified the balance owed on the $100,000 unsecured promissory note to additional paid in capital.

 

During August, 2013, the Company issued an additional unsecured promissory note substantially in the form of the May Note in an aggregate principal amount equal to $150,000 (the “August, 2013 Note”) to an accredited investor. The August, 2013 Note is due on demand and bears an interest rate of 0%. As of August 31, 2013, the total remaining balance outstanding under the August 20, 2013 Note is $150,000. On October 2, 2013 the Company entered into a Project Collaboration and Profit Sharing Agreement (“Collaboration Agreement”) with Mulhearn (See Note 11), at which time the Company reclassified the balance owed on the $150,000 unsecured promissory note to additional paid in capital.

 

On November 14, 2013, the Company issued an unsecured promissory note in the principal amount of $25,000 to a private investor. The principal of this Note is due and payable on February 15, 2014. All past-due principal of this Note shall bear interest until paid at the rate of 12% per annum. In addition to the principal amount of $25,000 the Company agreed to deliver to the private investor shares of the Company’s common stock in an amount valued at $25,000 based on the five day average prices preceding the payment date. In addition, as additional consideration, the Company has agreed to issue the private investor an additional 50,000 shares at a price of $0.01 per share and allocate $500 of the principal amount of the promissory note towards payment of the purchase price. The Company determined the relative fair value of the 50,000 common stock to be $610. As of November 30, 2013, the total remaining balance outstanding under the promissory note is $25,000 net of discount of $610.

 

Note 9 – Promissory Notes with Related Parties

 

On August 8, 2011, the Company issued an unsecured promissory note in the principal amount of $24,000 to a related party. The promissory note is due on demand, bears interest at 8% per annum where interest accrues and is payable in cash upon demand. As of November 30, 2013 and August 31, 2013, the total remaining balance outstanding is $24,000.

 

On April 15, 2013, the Company issued an unsecured promissory note in the principal amount of $6,000 to a related party. The promissory note is due on demand, bears interest at 12% per annum where interest accrues and is payable in cash upon demand. As of November 30, 2013 and August 31, 2013, the total remaining balance outstanding is $6,000.

 

 

OSL HOLDINGS INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

On May 13, 2013, the Company issued a promissory note in an aggregate principal amount equal to $20,000 to a related party. The promissory note accrues simple interest at a rate of 12% per annum and is due on demand. All past-due principal shall bear interest until paid at the maximum nonusurious interest rate that at any time may be contracted for, taken, reserved, charged, or received on the indebtedness evidenced by the promissory note (the “Maximum Rate”) or, if no Maximum Rate is established by applicable law, at the rate of 15% per annum. The occurrence of any one of the following events will be deemed an event of default: (a) the Company shall fail to pay when due any principal of the promissory note; or (b) the Company shall: (i) apply for or consent to the appointment of a receiver, trustee, or intervenor, custodian or liquidator of all or a substantial part of its assets, (ii) be adjudicated as bankrupt or insolvent or file a voluntary petition for bankruptcy or admit in writing that it is unable to pay its debts as they become due, (iii) make a general assignment for the benefit of creditors, (iv) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (v) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against it in any bankruptcy, reorganization, or insolvency proceeding, or any action for the purpose of effecting any of the foregoing; or (vi) an order, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition appointing a receiver, trustee, intervenor or liquidator of all of its assets, and such order, judgment or decree shall continue unstayed and in effect for a period of sixty (60) days. The Company also issued 200,000 shares of its common stock to the related party as consideration for issuance of the promissory note. The Company determined the relative fair value of the common stock to be $8,571. As of August 31, 2013, the total remaining balance outstanding under the promissory note is $11,429 net of discount of $8,571. As of November 30, 2013, the total remaining balance outstanding under the promissory note is $14,286 net of discount of $5,714.

 

On May 28, 2013, the Company issued a demand promissory note (the “Demand Note”) in an aggregate principal amount equal to $50,000 (the “Demand Note Principal Amount”) to an accredited investor and related party, which is secured by all intellectual and personal property of the Company. The Demand Note accrues simple interest at a rate of 12% per annum, is due and payable on any future date on which the holder of the Demand Note (the “Demand Noteholder”) demands repayment (the “Due Date”). Unpaid principal after the Due Date shall accrue interest at a rate of 16% annually until paid. The occurrence of any one of the following events will be deemed an event of default: (a) the failure of the Company to pay the Demand Note Principal Amount and any accrued interest in full on or before the Due Date; (b) the death of the Demand Noteholder; (c) the filing of bankruptcy proceedings involving the Company as a debtor; (d) the application for the appointment of a receiver for the Company; (e) the making of a general assignment for the benefit of the Company’s creditors; (f) the insolvency of the Company; or (g) a misrepresentation by the Company to the Demand Noteholder for the purpose of obtaining or extending credit. As of November 30, 2013 and August 31, 2013, the total remaining balance outstanding under the Demand Note is $50,000.

 

Note 10 – Derivative Liability

 

In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion feature of certain of the Company’s Asher Notes and September Panache Note (described in Note 8), does not have a fixed settlement provision because conversion of the Asher Notes and the September Panache Notes will be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the holders of the Asher Notes and the September Panache Note from the potential dilution associated with future financings. In accordance with the FASB authoritative guidance, the conversion feature of the Asher Notes and the March and September Panache Note was separated from the host contract and recognized as a derivative instrument. The conversion feature of the Asher Notes and the Panache Notes have been characterized as a derivative liability to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 

At the date of issuance and as of November 30, 2013 August 31, 2013, the derivative liabilities were valued using a probability weighted average Black-Scholes pricing model with the following assumptions:

 

At the date of issuance and as of November 30, 2013 and August 31, 2013, the derivative liabilities were valued using a probability weighted average Black-Scholes pricing model with the following assumptions:

 

		At				At Date of				At
		November 30, 2013				Issuance				August 31, 2013
Conversion feature :
Risk-free interest rate			0.01 – 0.11	%			0.25	%			0.02 - 0.09	%
Expected volatility			31 - 334	%			215	%			45 – 661	%
Expected life (in years)			0.01 - 0.5				1				0.01 – 0.48
Expected dividend yield			0	%			0	%			0	%
Fair Value :
Conversion feature		$	2,004,014			$	96,672			$	2,574,365

 

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected volatility was based on the Company’s historical volatility for its common stock. The expected life of the conversion feature of the Asher Notes and the September Panache Note was based on the terms thereof. The expected dividend yield was based on the fact that the Company has not paid dividends to its stockholders in the past and does not expect to pay dividends to its stockholders in the future.

 

 

OSL HOLDINGS INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company determined the fair value of the derivative liabilities to be $2,004,014 as of November 30, 2013, and the Company recorded a gain for the change in fair value of derivative liabilities of $430,800 for the three months ended November 30, 2013.

 

The following table summarizes the derivative liabilities included in the consolidated balance sheet:

 

Derivative liability
Derivative liabilities as of August 30, 2013		$	2,574,365
Change in fair value of derivative liability			(430,800	)
Settlement of derivative liability due to conversion of related notes			(139,551	)
Derivative liabilities as of November 30, 2013		$	2,004,014

 

Note 11 – Capital Stock

 

Preferred Stock

 

As security for the Crisnic Note (see Note 6) due to an uncured event of default, the Company contracted to issue 650,001 Preferred Shares. Each Preferred Share would, among other things as provided in the Certificate of Designations relating to the Series A Preferred Stock: (i) carry voting rights 100 times of the Company’s common stock, (ii) carry no dividends, (iii) carry liquidation preference two times the sum available for distribution to common stock holders, (iv) automatically convert after at such time as the Company has filed a certificate of amendment with the State of Nevada to increase the authorized shares of common stock of the Company to a minimum of 500,000,000 into 100 shares of common stock, and (v) not be subject to reverse stock splits and other changes to the common stock capital of the Company. As discussed in Note 6, the Company has not issued the Preferred Shares.

 

Common Stock

 

Common Stock Issued for Employee Compensation and Services

 

During the three months ended November 30, 2013, the Company issued a total of 300,000 shares of Common Stock to its officers as stipulated in the executive employment agreements with certain executive officers of the Company and was valued at the market price on the respective dates of issuance for $2,890.

 

Common Stock Issued for Partial Repayment of Senior Secured Convertible Notes

 

During the three months ended November 30, 2013, the Company issued a total of 14,421,000 shares of Common Stock at an average conversion price of $0.01 or $14,421 in the aggregate, as partial repayment of outstanding indebtedness, as discussed in Note 5 above.

 

Project Collaboration and Profit Sharing Agreement

 

On October 2, 2013 the Company entered into a Project Collaboration and Profit Sharing Agreement (“Collaboration Agreement”) with Kevin Mulhearn (“Mulhearn”). The purpose of the Collaboration Agreement was to provide the Company with finance, development and marketing services for the launch of its Shop4Equality marketing program. The Investor contributed $550,000, of which $450,000 was received during the year ended August 31, 2013 (See Notes 7 and 8) and $100,000 was received during the three months ended November 30, 2013. The Investor agreed to cancel $557,000 of the promissory notes with accrued interest owed by the Company. Additionally, the Company issued 500,000 shares of its common stock, at par value, as partial consideration for the Investor to enter into the Agreement. The Investor also acquired 5,100,000 shares of the Company’s common stock from a third party in a separate transaction as of the date of the agreement.

 

The profit sharing arrangement related to the Shop4Equality project is as follows:

 

1.		The Investor will receive 100% of the first $550,000 in losses, 45% of the first $500,000 in gains, 10% thereafter unless reduced pro-rata by the other Investor’s interests until November 15, 2013;
2.		The Company will receive 0% of the first $550,000 in losses, 45% of the first $500,000 in gains, and 80% thereafter until November 15, 2013.
3.		After November 15, 2013, 100% of the Shop4Equality gains or losses shall be the Company’s.
4.		On January 30, 2014, the Company shall issue to the Investor shares valued as of January 15, 2014, at an amount equal to $1,000,000 less gains distributed to Investor.

 

 

OSL HOLDINGS INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The obligations of the Company are guaranteed and secured by the assets of the Company including the name Shop4Equality and the related URL, all URLs owned by the Company, all software owned by the Company, all contracts between the Company and partner organizations, and all cash and receivables of the Company.

 

During the three months ended November 30, 2013, the Company reclassified the $450,000 received as of August 31, 2013 from convertible and promissory notes to additional paid in capital (See Note 7 and Note 8).

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We have been developing websites and other applications that are expected to collect and transmit real-time consumer and business sales data that facilitates the ability to sell data, manage electronic marketplaces, operate real-time loyalty rewards and transact with buyers in multiple channels.

 

As part of our development efforts we launched our Equality Rewards loyalty rewards program to empower shoppers to support diversity and equal rights every day by simply using a loyalty rewards card and app when they shop. Our Equality Rewards loyalty program is a transactional network that brings together brands, distributors, wholesalers, retailers (both online commerce and brick and mortar stores) and consumer’s audiences to accelerate commerce and value. The goal is to take advantage of these cross platform (the ability to purchase products online, through mobile device, or at retail stores), cross channel (the different channels that purchases occur in such as business to business (“B2B”), business to consumer(“B2C”), and public sector such as govt.) and cross vertical (the motivation behind the purchase such as a diversity purchase, purchase to benefit a non-profit, or sustainability purchase of green products)commerce companies to enhance the overall offering of each.

 

We built the www.equalityrewards.com website, mobile rendering site and Apple application which we launched for limited use in June 2013 to target the lesbian, gay, bisexual, and transgender, or LGBT vertical market. We believe further development of Equality Rewards will enable shoppers to not only save money on the go, but also to be active supporters of equal rights. We believe the Equality Rewards program will encourage shoppers to feel good about shopping at local retailers, saving money, and supporting their causes. We further believe that retailers will gain traffic and loyalty among active and savvy consumers. We seek to elevate the visibility of the rights we believe in by donating a percentage of the rewards redeemed.

 

As we continue to grow, we plan to operate additional real-time loyalty rewards platform that can facilitate the earning and redemption of our currency at the point of the transaction (online, mobile, at retail) as well as on future transactions. The Company plans on leveraging these business units to connect buyers, sellers as well as channels that will clearly differentiate itself from the competitive landscape so that each venture can scale revenues and their respective offerings to their specific market(s) or across markets. When the Company has sufficient financial resources, it plans on bringing onboard additional management talent with broad experience in technology, distribution, interactive and affinity marketing as well as the diversity markets to further our corporate strategy of entering our other lines of business.

 

Recent Developments

 

The website launch provided valuable feedback on market acceptance and functionality. The Company did not raise sufficient capital to execute a comprehensive marketing campaign to consumers and retailers. The success of the Company is dependent on its ability to obtain sufficient funds to market its offerings to consumers and merchants.

 

Results of Operations

 

Comparison of the Three Months Ended November 30, 2013 and November 30, 2012

 

Revenue

 

The Company had no revenues for the three months ended November 30, 2013 and November 30, 2012, respectively.

 

General and Administrative

 

General and administrative expenses were $394,711 and $271,310 for the three months ended November 30, 2013 and November 30, 2012, respectively. The increase in expenses was related primarily to increased executive compensation, including stock based compensation and an increase in professional service expenses.

 

Other Income (Expense), Net

 

Other income (expense), net was $293,606 and ($180,178) for the three months ended November 30, 2013 and November 30, 2012, respectively. The change in balance of $473,784 was a result of primarily a $44,829 gain on settlement of debt (see Note 5 to the Consolidated Financial Statements), and a $430,800 change in value of derivative liability (see Note 10 to the Consolidated Financial Statements).

 

 

Net Loss

 

Our net loss for the three months ended November 30, 2013 was $101,205. By comparison, we had net loss of $451,488 for the three months ended November 30, 2012. Our net loss was attributable to our lack of revenue together with increased general and administrative expenses, increased interest expense, loss on conversion of debt and settlement of accrued interest, gain on settlement of debt and the change in value of our derivative liability, as discussed above. We expect to continue to incur net losses until such time as we can begin generating regular revenue from operations.

 

Liquidity and Capital Resources

 

Liquidity is a measure of a company’s ability to meet potential cash requirements. The Company is in the development stage and has not generated revenues since inception. It has experienced recurring operating losses and negative cash flows from operations from September 16, 2010 (inception) to November 30, 2013. It also has a working capital deficit and stockholders’ deficit of $4,728,794 and $13,382,998, respectively at November 30, 2013. We have less than $2,000 cash on hand which will not be sufficient to meet our need for cash. Consequently, a substantial amount of cash will be required in order to continue operations over the next twelve months.

 

Due to delays in raising financing, among other factors, the Company was unable to meet the original repayment terms of a $240,000 promissory note (the “Crisnic Note”) it issued to Crisnic Fund S.A. (“Crisnic”) in connection with the October 10, 2011 Share Exchange entered into by the Company the acquire Office Supply Line, Inc. (“OSL”). The current principal balance of the Crisnic Note is $170,000 as of November 30, 2013 and is currently due and payable and in default. In addition, the Company is in default under the Share Exchange as a result of its failure to issue 650,001 shares of its Preferred Stock to Crisnic. The Company is contesting its obligation to issue the Preferred Stock to Crisnic or the assignee of the Crisnic Note. In addition to the Crisnic Note, the Company has $461,000 of indebtedness with various terms of repayment through November 30, 2013. We can give no assurance that we will generate revenues, if at all, in order to satisfy our or our subsidiaries’ repayment obligations under any of our or their indebtedness.

 

Net cash used in operating activities was $151,232 and $79,320 for the three months ended November 30, 2013 and 2012, respectively. Cash was primarily used to fund our net losses from operations.

 

Net cash provided by financing activities was $82,100 and $79,350 for the three months ended November 30, 2013 and 2012, respectively. During the three months ended November 30, 2013, we received cash of $100,000 relating to a collaboration and profit sharing agreement and $25,000 from the issuance of a promissory note and we received. These receipts were offset by $35,500 in payments of promissory notes and convertible notes. The Company also made net payments of $5,400 on operating loans from related parties.

 

We believe our current working capital position together with our expected future cash flows from operations will be insufficient to fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations for at least the next twelve months.

 

In addition to the anticipated $125,000 per month necessary to cover our operating expenses, we anticipate additional annual website and technology development costs of between $300,000 and $500,000. We have been and expect to continue to fund these activities with debt and equity financing.

 

The Company will require additional capital, either through debt or private placements, in order to meet its substantial debt obligations and execute its business plan. Such additional financing may not become available on acceptable terms and there can be no assurance that any additional financing that the Company does obtain will be sufficient to meet its needs in the long term. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.

 

Off Balance Sheet Arrangements

 

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Going Concern

 

The Company’s independent certified public accountants have stated in their audit report for the year ended August 31, 2013, that the Company has no current source of revenue and, without realization of additional capital, it would be unlikely for the Company to continue as a going concern. If the Company is not successful in raising the necessary capital, then the Company believes that its independent certified public accountants would issue an opinion with a similar going concern modification regarding the Company’s financial condition.

 

  

Critical Accounting Policies

 

The Company’s consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use if estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our consolidated financial statements.

 

Our significant accounting policies are summarized in Note 3 of our annual consolidated financial statements filed on Form 10-K for the fiscal year ended August 31, 2013 and filed with the SEC on December 16, 2013. While all these significant accounting policies impact our financial condition and results of operations, the Company views certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on the Company’s consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

We are a Smaller Reporting Company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 4.  Controls and Procedures

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, (as defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the period ended November 30, 2013. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are ineffective to ensure that information required to be disclosed by us in the reports 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 that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

We are in the continuous process of improving our internal control over financial reporting in an effort to eliminate these material weaknesses through improved supervision and training of our staff, but additional effort is needed to fully remedy these deficiencies. Management has engaged a Certified Public Accountant as a consultant to assist with the financial reporting process in an effort to mitigate some of the identified weaknesses. The Company intends on hiring the necessary staff to address the weaknesses once additional capital is obtained which will allow full operations to commence.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

We have taken numerous steps to address the underlying causes of the internal control deficiencies, primarily through the development and implementation of policies, improved processes and documented procedures, the retention of third-party experts and contractors, and the hiring of additional accounting personnel with technical accounting and inventory accounting experience.

 

 

Changes in internal control over financial reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

We are not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A.  Risk Factors

 

We are a Smaller Reporting Company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended November 30, 2013 we issued a total of 14,421,000 shares of our Common Stock at an average conversion price of $0.01 or $14,421 in the aggregate, upon conversion of outstanding indebtedness owed by the Company. These shares were issued in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended (the “Securities Act”).

 

We issued 500,000 shares of our common stock in exchange for the cancellation of $450,000 of promissory notes and accrued interest owed by the Company in connection with the October 2, 2013 Project Collaboration and Profit Sharing Agreement for an aggregate consideration of $557,000. These shares were issued in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act.

 

During the three months ended November 30, 2013, the Company issued a total of 300,000 shares of its common stock to its officers as stipulated in the executive employment agreements with certain executive officers of the Company and was valued at the market price on the respective dates of issuance, which averaged less than $0.01 per share. These shares were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

 

On November 14, 2013, the Company agreed to issue shares of its common stock in an amount valued at $25,000 based on the five day average prices preceding the payment date. In addition, the Company has agreed to issue an additional 50,000 shares at a price of $0.01 per share and allocate $500 of the principal amount of a November 14, 2013 promissory note it issued to an investor towards payment of the purchase price. The Company agreed to issue these shares as additional consideration to investor in connection with the November 2013 promissory note. These shares will be issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

 

Item 3.  Defaults Upon Senior Securities

 

Due to delays in raising financing, among other factors, the Company was unable to meet the original repayment terms of a $240,000 promissory note (the “Crisnic Note”) it issued to Crisnic Fund S.A. (“Crisnic”) in connection with the October 10, 2011 Share Exchange entered into by the Company the acquire Office Supply Line, Inc. (“OSL”). The current principal balance of the Crisnic Note is $170,000 as of November 30, 2013 and is currently due and payable and in default. In addition, the Company is in default under the Share Exchange as a result of its failure to issue 650,001 shares of its Preferred Stock to Crisnic. The Company is contesting its obligation to issue the Preferred Stock to Crisnic or the assignee of the Crisnic Note.

 

Item 4.  Mine Safety Disclosures

 

None

 

Item 5.  Other Information

 

None

 

  

Item 6. Exhibits

 

Exhibit Number		Exhibit Title
10.32		Project Collaboration and Profit Sharing Agreement dated October 2, 2013 among OSL Holdings, Inc. and Kevin Mulhearn.
31.1		Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (included in Exhibit 32.1).
101.INS +		XBRL Instance Document
101.SCH +		XBRL Taxonomy Schema
101.CAL +		XBRL Taxonomy Calculation Linkbase
101.DEF +		XBRL Taxonomy Definition Linkbase
101.LAB +		XBRL Taxonomy Label Linkbase
101.PRE +		XBRL Taxonomy Presentation Linkbase

 

In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

 

+ Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

  

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 thereunto duly authorized.

 

	OSL Holdings, Inc.
Date: January 21, 2014	By:	/s/ Robert H. Rothenberg
		Robert H. Rothenberg, Chief Executive Officer
		(Principal Executive Officer)
Date: January 21, 2014	By:	/s/ Eric Kotch
		Eric Kotch, Chief Financial Officer
		(Principal Financial and Accounting Officer)