Notes to Financial Statements
As of November 30, 2012 and for the
Three and Nine Months Ended November 30, 2012 and 2011
1. Background Information
Amwest Imaging Inc. (“AMWI”, or the “Company”) is a technology company whose primary business is providing relationship-building tools and processes that help any business cultivate profitable relationships with customers, all through web based solutions. Our Company is always working on new internet based technology. Our current portfolio consists of My Restaurant Web, (www.myrestaurantweb.com), Lok Drop (www.LokDrop.com), Zip Clik (www.ZipClik.com).
The Company derives its revenue by charging basic monthly fees for the use of these website tools and services, which all three of these technologies are currently creating revenue for the Company. The Company's goal is to provide high end turnkey solutions to both businesses and private users of the internet.
My Restaurant Web
This web-based solution specifically addresses the needs of restaurants that desire a website with a strong emphasis on marketing and attracting new customers. The primary component of this web-based solution, is an on-demand, fold out, turn-key website that is ready for immediate use. The websites designed are highly advanced, niche creations that exceed the needs of small businesses in the target markets. Following the website creation, design, and listing online, the client can utilize additional online tools to develop a marketing plan for its customer base implementing SMS technology (“texting”) and email marketing which is a must–have in today’s social networking environment.
We expect to expand the technology in the coming months to service several other industries.
Lok Drop
Lok Drop Online Storage provides a secure digital safe deposit box enabling entities to access, store, share and backup digital information in a secure, private and encrypted location. It can be used to access and share critical data from anywhere in the world.
Zip Clik
Zip Clik provides Encryption Software for Skype & Other Voice over Internet Protocol (VOIP) Software. Zip Clik software works by providing our own encryption at the time you start your VOIP conversation on any service. The encrypted version is then sent to the individual you are talking to, and then our software decrypts it back into voice as they receive it. This entire process is done instantly. It is important to note that Skype works with the legal system to decrypt conversations. The encryption does not protect your privacy nor conversations.
Formation History
Amwest Imaging Incorporated (the "Company"), was incorporated in the State of Nevada on April 7, 2010.
The Company's original principal business objective was to provide document digitization services to businesses. On September 6, 2011, the Company completed the transactions of the Share Exchange Agreement of September 6, 2011, between Amwest Imaging Incorporated, a Nevada corporation, and the shareholders of Instant Website Technology Inc. ("IWTI"). Accordingly, registrant acquired all of the issued and outstanding shares of Instant Website Technology Inc., in exchange for the issuance in the aggregate of 157,560,000 shares of common stock
of the registrant. As a result of the Share Exchange Agreement, Instant Website Technology Inc., Inc. became a wholly-owned subsidiary of registrant.
Amwest acquired from Instant Website Technology Inc. the rights to all technology related to
www.myrestaurantweb.com
including but not limited to, the Uniform Resource Locator (“URL”) and the website development tools; however, there were several modifications to the software that were required to facilitate revenue generation. This is why there was no immediate revenue after the purchase. The entire interface to allow turnkey websites had to be developed, as well as a new control panel and marketing capabilities for the site itself. Additionally, no employees were retained post merger, the accounting system was not transitioned, there were no bank accounts provided, and there were minimal recurring customers as the majority of the historical revenue came from a one-time sale of the technology and custom software development. It was determined that the assets acquired from Instant Website Technology Inc. did not constitute a business as there were several significant missing elements in the transferred assets that would be necessary to operate a business, including the simple ability to collect payments from the internet site.
2. Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the nine months ended November 30, 2012, the Company incurred a net loss of approximately $477,965 and approximately $306,047 for the year ended February 29, 2012. As of November 30, 2012, the Company has an accumulated deficit of $813,242 and positive working capital of $11,031; however, there are limited assets and minimal revenues to fund short term operating cash flow or service debt obligations. The Company used $82,228 and $105,339 of cash from operations during the nine months ended November 30, 2012 and the year ended February 29, 2012, respectively, which was funded by proceeds from the sale of stock and proceeds from the issuance of convertible derivative notes. There is no assurance that such financing will be available in the future. In view of these matters, there is substantial doubt that the Company will continue as a going concern. The Company is currently pursuing sources of short and long-term working capital.
The Company’s ability to continue as a going concern is highly dependent on our ability to obtain additional sources of cash flow sufficient to fund our working capital requirements. However, there can be no assurance that the Company will be successful in its efforts to secure such cash flow. Any failure by us to timely procure additional financing or investment adequate to fund our ongoing operations, including planned product development initiatives and commercialization efforts, will have material adverse consequences on our financial condition, results of operations and cash flows.
The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
3. Significant Accounting Policies
The significant accounting policies followed are:
Use of estimates
-
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
-
The Company follows FASB Accounting Standards Codification (ASC) 305, “
Cash and Cash Equivalents”,
and considers currency on hand and demand deposits to be cash and considers short-term, highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents at November 30, 2012 and February 29, 2012 were $0 and $34,728, respectively.
Financial Instruments
- The Company's balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.
The Company follows Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820 "Fair Value Measurements and Disclosures" (ASC 820) which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
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·
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Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
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|
·
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Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; inputs other than quoted prices that are
observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
·
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Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
|
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of November 30, 2012 and February 29, 2012. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these
instruments. These financial instruments include accounts receivable, other current assets, accounts payable, accrued compensation and accrued expenses. Fair value of notes payable would be estimated based on current rates that would be available for debt of similar terms which is not significantly different from its stated value
.
Accounts receivable
-
The Company currently supplies their web solutions on a monthly basis, billing on the month of services and collection on customer accounts through credit cards or direct payments. The Company does not issue credit on services provided, therefore has minimal accounts receivable. No allowance for doubtful accounts is considered necessary to be established for amounts that may not be recoverable, since there have been limited credit sales.
Long-lived assets
-
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company periodically evaluates whether events and circumstances have occurred that indicate possible impairment. When impairment indicators exist, the Company uses market quotes, if available or an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether or not the asset values are recoverable. There have been no significant impairments of long-lived assets during the three months ended November 30, 2012.
Software development costs and capitalization
-
The Company accounts for software development costs in accordance with several accounting pronouncements, including FASB ASC 730, Research and Development, FASB ASC 350-40, Internal-Use Software, FASB 985-20, Costs of Computer Software to be Sold, Leased, or Marketed and FASB ASC 350-50, Website Development Costs. The Company has capitalized the cost of the technology license purchased from an unrelated third party. At the time of purchase the technology was available to be marketed. As such additional costs to customize, modify and betterment to the existing product was charged to expense as it was incurred Capitalized software costs are stated at cost. The estimated useful life of costs capitalized is evaluated for each specific project and is currently being amortized over five years. Amortization is computed on a straight line basis. The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the amortization period or the unamortized balance is warranted. Based upon its most recent analysis, the Company believes that no impairment of the proprietary software existed at November 30, 2012.
There were no Expenditures for software development costs incurred and expensed for the three months ended November 30, 2012 and 2011.
Expenditures for software development costs incurred and expensed for the nine months ended November 30, 2012 and November 30, 2011 was approximately $10,300 and none respectively.
Once technological feasibility of new products or features and functions of current products, which extend its useful life is established, the cost incurred until release to production are capitalized and amortized over a five year useful life. There were no amounts capitalized during the three or nine months ended November 30, 2012 or the three or nine months ended November 30, 2011. Amortization expenses related to capitalized software and charged to operations for the three months ended November 30, 2012 and three months ended November 30, 2011 were approximately $37,500 and none respectively. Amortization expenses related to capitalized software and charged to operations for the nine months ended November 30, 2012 and nine months ended November 30, 2011 were approximately $112,500 and $29,375, respectively.
Share-based Payments
- Share-based payments to employees, including grants of employee stock or stock options are recognized as compensation expense in the financial statements based on their fair values, in accordance with FASB ASC Topic 718, Share-based Payments. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The Company had no common stock options or common stock equivalents granted or outstanding for all periods presented. The company may issue shares as compensation in the future periods for employee services.
The Company may issue restricted stock to consultants for various services. Cost for these transactions will be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is to be measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty's performance is complete. The company has issue shares as compensation in the future period for services associated with the registration of the common shares.
Revenue recognition
-
The Company recognizes revenue on arrangements in accordance with FASB ASC No. 605, Revenue Recognition. In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability is reasonably assured.
Consideration for future services are made by customers in advance of those services being provided. All accounts are currently on a month to month service; therefore revenue is recognized ratably over the period that the services are subscribed, the current month. The Company does not offer annual or other term agreements; therefore there is no unearned portion or deferral of revenue. Services are billed in advance of the period those services are provided.
The Company has not issued guarantees or other warrantees on the advertising subscription success or results. The Company has not experienced any refund requests or committed to any adjustments for terminated subscriptions. The Company does not believe that there is any required liability.
Advertising
- T
he costs of advertising are expensed as incurred. There was no Advertising expense incurred during the three months ended November 30, 2012 and $6,700 incurred for the three months ended November 30, 2011. The costs of advertising are expensed as incurred. Advertising expense was approximately $8,200 and $6,700 for the nine months ended November 30, 2012 and 2011, respectively. Advertising expenses, when incurred are to be included in the Company's operating expenses.
Commitment and contingencies –
The Company follows FASB ASC 450-20,
Loss Contingencies”
to report accounting for contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Related parties -
The Company follows FASB ASC 850,
Related Party Disclosures
for the identification of related parties and disclosure of related party transactions.
Income taxes
-
The Company follows FASB ASC 740,
Income Taxes,
which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of Operations in the period that includes the enactment date.
As of November 30, 2012, the Company had no unrecognized tax benefits or related interest and penalties. We will include future interest and penalties associated with any unrecognized benefits within provision for income taxes on the Statements of Operations, if applicable. We do not anticipate any unrecognized benefits in the next 12 months that would result in a material change to our financial position.
Loss per share
-
Basic and diluted loss per share are computed based on the weighted-average common shares and common share equivalents outstanding during the period. Common share equivalents consist of stock options, warrants and convertible notes payable. There were no common share equivalents excluded from the computation of diluted earnings per share for the three and nine months ended November 30, 2012 and 2011, because their effect is anti-dilutive.
Recent Accounting Pronouncements
Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification(TM) ("ASC") is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. Management has reviewed the aforementioned rules and releases and believes any effect will not have a material impact on the Company's present or future consolidated financial statements.
4. Software development costs and capitalization
The Company has capitalized the cost of acquiring their technology for internal and external use. The purchase price was valued at the agreed upon price with the unrelated party. Newly developed software was also capitalized based on our accounting policy. Acquired and Developed software costs consist of the following, as of November 30, 2012:
|
|
|
November 30, 2012
|
|
|
February 29, 2012
|
|
|
Acquired Software
|
|
$
|
587,500
|
|
|
$
|
587,500
|
|
|
Less accumulated amortization
|
|
|
187,500
|
|
|
|
75,000
|
|
|
|
|
$
|
400,000
|
|
|
$
|
512,500
|
|
|
2013
|
|
$
|
37,500
|
|
|
2014
|
|
|
150,000
|
|
|
2015
|
|
|
150,000
|
|
|
2016
|
|
|
62,500
|
|
|
2017
|
|
|
-
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
-
|
|
|
|
|
$
|
400,000
|
|
5. Notes payable
|
|
|
November 30, 2012
|
|
|
February 29, 2012
|
|
|
Asher note payable
|
|
$
|
-
|
|
|
$
|
42,500
|
|
|
Asher note payable (2)
|
|
|
22,000
|
|
|
|
|
|
|
Advanced Capital Management note payable
|
|
|
45,000
|
|
|
|
45,000
|
|
|
Shareholder note payable
|
|
|
25,000
|
|
|
|
25,000
|
|
|
Shareholder advance
|
|
|
17,500
|
|
|
|
10,000
|
|
|
Total debt
|
|
|
109,500
|
|
|
|
112,500
|
|
|
Debt discount
|
|
|
3,047
|
|
|
|
36,033
|
|
|
|
|
|
|
|
|
|
|
|
|
Total note payable
|
|
$
|
106,453
|
|
|
$
|
86,467
|
|
The Asher note payable was issued in January of 2012 and is a convertible promissory note for $42,500. The note pays interest at 8% per annum, and principal and accrued interest is due on the maturity date of October 19, 2012. The conversion option price associated with the note has a 45 percent discount to the market price of the stock. The market price is based on the average of the two lowest trading prices during a fifteen day period prior to conversion. The note is convertible at any time after 180 days. During the nine months ended November 30, 2012, Asher elected to convert $42,500 of the note together with accrued interest of $1,700 into 18,539,683 shares of common stock.
The Asher note payable (2) was issued in March of 2012 and is a convertible promissory note for $42,500. The note pays interest at 8% per annum, and principal and accrued interest is due on the maturity date of December 20, 2012. The conversion option price associated with the note has a 45 percent discount to the market price of the stock. The market price is based on the average of the two lowest trading prices during a fifteen day period prior to conversion. The note is convertible at any time after 180 days. During the nine months ended November 30, 2012, Asher elected to convert $20,500 of the note into 38,257,756 shares of common stock.
The Advanced Capital Management note payable was issued in December of 2011 for $45,000. The note pays no interest unless in default, and principal is due on the maturity date of December 6, 2012.
The Shareholder note payable was issued in December of 2012 for $25,000. The note pays interest at 1% per annum, and principal and accrued interest is due on the maturity date of December 15, 2012.
Shareholder advances are considered payable on demand and are non-interest bearing. The Company owed $17,500 to a shareholder as of November 30, 2012. No interest has been accrued or imputed on these debts, as management believes that interest expense would be immaterial in the interim periods.
6. Derivative liability
In January and March of 2012 the Company issued convertible promissory notes for $42,500 and $42,500, respectively. The notes pay interest at 8% per annum, and principal and accrued interest is due on the maturity dates of October 19, 2012 and December 20, 2012, respectively. The conversion option price associated with the notes has a 45 percent discount to the market price of the stock. The market price is based on the average of the two lowest trading prices during a fifteen day period prior to conversion. The notes are convertible at any time after 180 days. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the Black Scholes model to determine the fair value of the conversion option. At the issuance date, the Company recorded a debt discount and derivative liability of approximately $42,500 and $108,979, respectively for the note issued in January. At the issuance date, the Company recorded a debt discount and derivative liability of $42,500 and $67,972 for the notes issued in January and March, respectively. The debt discount will be amortized over the life of the notes.
The Company recognized approximately $36,100 and $39,500 of interest expense related to amortization of the debt discount during the three and nine months ended, November 30, 2012, respectively. As of November 30, 2012 the unamortized discount related to the notes was $3,047. The derivative liability will be adjusted to fair value each reporting period with unrealized gain (loss) reflected in other income and expense. The unrealized gain associated with the derivative liability was approximately $34,611 and $101,376 for the three months and nine months ended November 30, 2012, respectively.
Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of November 30, 2012 and February 29, 2012 related to the above derivative liability are as follows:
|
|
|
Fair Value Measurements at
November 30, 2012
(1)
|
|
|
Fair Value Measurements
at February 29, 2012
(1)
|
|
|
|
|
Using Level 2
|
|
|
Total
|
|
|
Using Level 2
|
|
|
Total
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
(28,146
|
)
|
|
$
|
(28,146
|
)
|
|
$
|
(61,034
|
)
|
|
$
|
(61,034
|
)
|
|
Total liabilities
|
|
$
|
(28,146
|
)
|
|
$
|
(28,146
|
)
|
|
$
|
(61,034
|
)
|
|
$
|
(61,034
|
)
|
|
|
(1)
|
The Company did not have any assets or liabilities measured at fair value using Level 1 or Level 3 of the fair value hierarchy as of November 30, 2012 or February 29, 2012.
|
The Company’s derivative liabilities are classified within Level 2 of the fair value hierarchy. The Company utilizes the Black-Scholes Option Pricing Model to value the derivative liabilities utilizing observable inputs such as the Company’s common stock price, the exercise price of the warrants, and expected volatility, which is based on historical volatility. The Black-Scholes model employs the market approach in determining fair value.
7. Income Taxes
There is no current or deferred income tax expense or benefit for the periods ended November 30, 2012 and 2011.
As of November 30, 2012 and February 29, 2012, the Company had federal and state net operating loss carry-forwards totaling approximately $289,201 and $92,539, respectively, which begin expiring in 2032. The Company has established a valuation allowance to fully reserve all deferred tax assets at November 30, 2012 and February 29, 2012 because it is more likely than not that the Company will not be able to utilize these assets. The change in the valuation allowance for the nine months ended November 30, 2012 was an increase of $196,662.
As of November 30, 2012, the Company has not performed an IRC Section 382 study to determine the amount, if any, of its net operating losses that may be limited as a result of the ownership change percentages during 2011. However, the Company will complete the study prior to the utilization of any of its recorded net operating losses.
8. Related Party Transactions
In support of the Company's efforts and cash requirements, it is relying on advances from related parties until such time that the Company can support its operations or attains adequate financing through sales of its equity or traditional debt financing. Amounts represent advances or amounts paid in satisfaction of certain liabilities as they come due. The advances are considered temporary in nature and have not been formalized by a promissory note. Shareholder advances are considered payable on demand and is non-interest bearing. The Company owed $17,500 to a shareholder as of November 30, 2012. No interest has been accrued or imputed on these debts, as management believes that interest expense would be immaterial during the interim periods.
The majority shareholder has pledged his support to fund continuing operations; however, there is no written commitment to this effect. The Company is dependent upon the continued support of this shareholder.
The Company does not have employment contracts with its key employees, including the majority shareholder who is the Chief Executive, Chief Accounting, and Chief Technical Officer.
The amounts and terms of the above transactions may not necessarily be indicative of the amounts and terms that would have been incurred had comparable transactions been entered into with independent third parties.
9. Commitments and Contingencies
Our offices are located at 815 John Street, Suite 150, Evansville, Indiana. We have a Lease Agreement which expires in December 2014 for approximately 5,000 square feet at a monthly rental of $2,300. We are responsible,
with others, for common area maintenance. We believe that the space is adequate for our current operations and additional space is available, if required, at approximately the same cost and expense.
Some of the officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities that become available. They may face a conflict in selecting between the Company and other business interests. The Company has not formulated a policy for the resolution of such conflicts.
From time to time the Company may become a party to litigation matters involving claims against the Company. Management believes that there are no current matters that would have a material effect on the Company's financial position or results of operations.
The Company is not currently a party to any pending legal proceedings. In the ordinary course of business the Company may become a party to various legal proceedings generally involving contractual matters, infringement actions, product liability claims and other matters.
10. Subsequent Events
On December 4, 2012, the Company was notified of Asher Enterprise, Inc. conversion of $5,900 of principal for 26,818,182 shares of Company common stock. The board of directors authorized the issuance of common shares for the principal amount of $5,900.
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