NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2011
(UNAUDITED)
1.
BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with both generally accepted
accounting principles for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial
statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal
recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the
interim periods presented. Interim results are not necessarily indicative of results for a full year.
2.
ORGANIZATION AND BUSINESS BACKGROUND
Exercise
For Life Systems Inc. (the “Company”) was originally incorporated in the State of North Carolina on October 2, 2006
as A.J. Glaser, Inc. On June 12, 2008, the Company filed Articles of Amendment to change the name of the Company to Exercise For
Life Systems Inc
.
On
February 10, 2011, the Company entered into a Plan of Exchange agreement with MediaMatic Ventures Inc., a privately-held company
incorporated under the laws of the Province of Alberta, Canada (“MMV”), and the shareholders of MMV (“MMV Shareholders”).
Pursuant to the agreement, the Company purchased all 15,685,692 of the issued and outstanding common shares of MMV from the MMV
shareholders in exchange for issuing 28,000,000 shares of the Company’s common stock to MMV shareholders, which gave
MMV shareholders an interest in the Company representing approximately 70% of the then issued and outstanding shares of the Company.
The Company and MMV were hereby reorganized, such that the Company acquired 100% the ownership of MMV, and MMV became a wholly-owned
subsidiary of the Company.
The
stock exchange transaction has been accounted for as a reverse acquisition and recapitalization of the Company whereby MMV is
deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquiree (legal acquirer). The
accompanying consolidated financial statements are in substance those of MMV, with the assets and liabilities, and revenues and
expenses, of the Company being included effective from the date of stock exchange transaction. The Company is deemed
to be a continuation of the business of MMV, which is the providing of multimedia kiosks throughout Canada. Accordingly,
the accompanying consolidated financial statements include the following:
(1) The
balance sheet consists of the net assets of the accounting acquirer at historical cost and the net assets of the accounting acquiree
at historical cost;
(2) The
financial position, results of operations, and cash flows of the accounting acquirer for all periods presented as if the recapitalization
had occurred at the beginning of the earliest period presented and the operations of the accounting acquiree from the date of
stock exchange transaction.
Exercise
For Life Systems Inc. and
MMV
are hereinafter referred to as (the
“Company”).
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) under the accrual basis of accounting.
Use
of Estimates
Financial
statements prepared in accordance with GAAP require management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, 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.
Basis
of Consolidation
The
consolidated financial statements include the financial statements of the Company and its subsidiaries.
All
significant inter-company balances and transactions within the Company and subsidiary have been eliminated upon consolidation.
Foreign
currency translation
The
reporting currency is the U.S. dollar. The functional currency of the Company is the local currency, the Canadian Dollar
(CAD). The financial statements of the Company are translated into United States dollars in accordance with Statement
of Financial Accounts Standards (“SFAS”) No. 52 (ASC830), “Foreign Currency Translation”, using year-end
rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and
historical rates for the equity. Translation adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining comprehensive income. At March 31, 2011 and December
31, 2010, the cumulative translation adjustment of $131,649 and $131,649, respectively, was classified as an item of other comprehensive
income in the stockholders’ equity section of the consolidated balance sheets.
Cash
and Cash Equivalents
Cash
equivalents are comprised of certain highly liquid investments with maturities of three months or less when purchased. The Company
maintains its cash in bank deposit accounts, which at times, may exceed federally insured limits. The Company has cash and cash
equivalents of $23,410 and $44,213 as of March 31, 2011 and December 31, 2010, respectively.
Inventory
Inventory
is comprised of our DVD rental library and merchandise inventories held for resale. Inventory, which is considered finished
goods, is stated at the lower of cost or market. DVDs are initially recorded at cost and are amortized over the estimated
useful life to their estimated salvage value. Estimated salvage value is based on the amounts that we have
historically recovered on disposal of DVDs. Inventory will be amortized over a 12 month period using a
straight-line methodology. Inventory, net of amortization, at March 31, 2011 and December 31, 2010 was $1,261,100
and $882,772, respectively.
Equipment,
net
Equipment
is stated at cost. Capital expenditures for improvements and upgrades to existing equipment are also capitalized. Maintenance
and repairs are expensed as incurred. Equipment is depreciated over the estimated useful life of five years on straight-line basis. Depreciation
expense for the three month periods ended March 31, 2011 and 2010 was $264,158 and $61,917, respectively.
Long-Lived
Assets
In
accordance with ASC 350-30 (formerly SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
), the
Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their then carrying
values may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future
cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying
amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available,
or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. The Company’s
management currently believes there is no impairment of its long-lived assets. There can be no assurance however, that market
conditions will not change or demand for the Company’s products under development will continue. Either of these could result
in future impairment of long-lived assets.
Fair
Value of Financial Instruments
ASC
820-10 (formerly SFAS No. 157,
Fair Value Measurements
) requires entities to disclose the fair value of financial instruments,
both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value.
ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. As of March 31, 2011 and December 31, 2010, the carrying value of certain financial instruments
such as accounts receivable, accounts payable, accrued expenses, and amounts due to/from related party approximates fair value
due to the short-term nature of such instruments.
Revenue
Recognition
The
Company recognizes net revenue from DVD movie rentals on a ratable basis during the term of a consumer’s rental transaction.
Revenue from a direct sale out of the kiosk of previously rented movies is recognized at the time of sale. On rental transactions
for which the related DVDs have not yet been returned to the kiosk at month-end, revenue is recognized with a corresponding receivable
recorded in the balance sheet, net of a reserve for potentially uncollectible amounts. We record revenue net of refunds and applicable
sales taxes collected from consumers. The Company additionally recognizes revenues from the sale of franchises to third parties.
The Company pays out franchise fees at 55% of total net revenues per machine; these are recorded net against the revenues for
the three months ended March 31, 2011 and 2010. The received franchise fees are recorded at inception since the Company had no
obligation for performance, the franchised boxes operated profitably, and the franchisee had not involvement or ownership in the
franchised box. For the three months ended March 31, 2011 and 2010 the Company recorded revenues from franchise sales
of $0 and $550,000, respectively.
Income
taxes
As
a result of the implementation of certain provisions of ASC 740,
Income
Taxes, (formerly FIN 48,
Accounting for
Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109) ,
(“ASC 740”), which clarifies
the accounting and disclosure for uncertainty in tax positions, as defined. ASC 740 seeks to reduce the diversity in
practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. We
adopted the provisions of ASC 740 as of January 1, 2007, and have analyzed filing positions in the Canadian jurisdiction where
the Company is required to file income tax returns, as well as all open tax years in these jurisdictions. We have identified
Alberta, Canada as our "major" tax jurisdictions. Generally, we remain subject to Canadian examination of
our income tax returns.
We
believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that
will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions
have been recorded pursuant to ASC 740. In addition, we did not record a cumulative effect adjustment related to the
adoption of ASC 740. Our policy for recording interest and penalties associated with income-based tax audits is to
record such items as a component of income taxes.
Our
tax provision for interim periods is determined using an estimate of our annual effective tax rate based on rates established
within Canada and, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter
we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment. The
2011 annual effective tax rate is estimated to be 28% Canadian statutory rate primarily due to anticipated earnings of the Company. The
Company had income tax payable of $38,171 as of March 31, 2011 and December 31, 2010, respectively.
Net
(Loss) Income per Common Share – Basic and Diluted
Net
(loss) income per common share is computed based on the weighted average number of shares outstanding for the period. As of March
31, 2011 and December 31, 2010, the Company had 40,000,000 shares outstanding. Additionally, there were no adjustments to net
income to determine net income available to common stockholders. As such, basic net income per common share equals
net income, as reported, divided by the weighted average common shares outstanding for the respective periods. There
were no dilutive common stock equivalents as of March 31, 2011 and December 31, 2010.
Related parties
Parties,
which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly,
to control the other party or exercise significant influence over the other party in making financial and operating decisions.
Companies are also considered to be related if they are subject to common control or common significant influence. A material
related party transaction has been identified in Note 8 in the financial statements.
Recent
Accounting Pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption
of any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the consolidated
results of its operations.
Credit
Quality of Financing Receivables and the Allowance for Credit Losses
In
July 2010, the Financial Accounting Standards Board (“FASB”) amended the requirements for
Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses
. As a result of these amendments, an entity is
required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about
its financing receivables and related allowance for credit losses. The new disclosures as of the end of the reporting period are
effective for the fiscal year ending December 31, 2010, while the disclosures about activity that occurs during a reporting period
are effective for the first fiscal quarter of 2011. The adoption of this guidance did not impact the Company’s consolidated
results of operations or financial position.
Fair
Value Measurements and Disclosures
In
January 2010, the FASB issued authoritative guidance regarding fair value measures and disclosures. The guidance requires
disclosure of significant transfers between level 1 and level 2 fair value measurements along with the reason for the
transfer. An entity must also separately report purchases, sales, issuances and settlements within the level 3 fair value
roll forward. The guidance further provides clarification of the level of disaggregation to be used within the fair value measurement
disclosures for each class of assets and liabilities and clarified the disclosures required for the valuation techniques and inputs
used to measure level 2 or level 3 fair value measurements. This new authoritative guidance is effective for the Company
in fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this
guidance did not impact the Company’s consolidated results of operations or financial position.
4.
CONCENTRATIONS
The
Company had one major DVD Kiosk supplier during the three months ended March 31, 2011 and 2010, which accounted for approximately
100% and 56% of the Company’s DVD Kiosk purchases for the periods, respectively. There was no amount due to this
vendor as of March 31, 2011 and December 31, 2010, respectively.
The
Company places its DVD Kiosks in strategic convenient store locations throughout Calgary, Toronto, Vancouver, Nova Scotia and
northern Alberta. The Company has a high concentration of kiosk machines located in one major franchise chain of convenient
stores located throughout Canada. The Company had approximately 54% of its kiosks located in franchise chain stores
as of March 31, 2011 and approximately 12% of its kiosks as of December 31, 2010.
5.
EQUIPMENT - NET
Equipment,
net consists of the following as of March 31, 2011 and December 31, 2010:
|
|
March 31, 2011
|
|
December 31, 2010
|
Computers
|
|
$
|
50,215
|
|
|
$
|
50,215
|
|
Kiosk equipment
|
|
|
4,785,690
|
|
|
|
4,785,690
|
|
Less accumulated depreciation
|
|
|
(999,992
|
)
|
|
|
(735,834
|
)
|
Total equipment – net
|
|
$
|
3,835,913
|
|
|
$
|
4,100,071
|
|
Kiosk
equipment is stated at cost and depreciated on a straight-line basis over an estimated useful life of 5 years. Depreciation
expense for the three months ended March 31, 2011 and 2010 amounted to $264,158 and $61,917, respectively.
6
.
NOTES PAYABLE
As
of March 31, 2011, the Company had notes payable of $525,000, consisting of the following:
(a)
The Company entered into a convertible promissory note (“Note #1”) in the amount of $275,000 in 2010, due on April
15, 2011. Pursuant to Note #1, interest will be accrued at the rate of 12% per annum, and the holder has an option to convert
all or any portion of the accrued interest and unpaid principal balance of Note #1 into the common stock of the Company or its
successors, at One Cent ($.01) per share or some other price determined by the Board of Directors as reasonable. As of March 31,
2011, the balance of Note #1 was $275,000.
(b)
The Company entered into a convertible promissory note (“Note #2”) in the amount of $175,000 during the first quarter
of 2011, due on August 3, 2011. Pursuant to Note #2, interest will be accrued at the rate of 12% per annum, and the holder has
an option to convert all or any portion of the accrued interest and unpaid principal balance of Note #2 into the common stock
of the Company or its successors, at One Cent ($.01) per share or some other price determined by the Board of Directors as reasonable.
As of March 31, 2011, the balance of Note #2 was $175,000.
(c)
Effective February 11, 2011, the Company issued a secured note in the amount of $75,000 (“Note #3”) to the former
president of the Company pursuant to the Plan of Exchange, which was secured by 375,000 shares of common stock of the Company.
Note #3 is interest-free and due on August 9, 2011. As of March 31, 2011, the balance of Note #3 was $75,000.
7.
COMMON STOCK
(a) Common
stock issued per plan of exchange
On
February 10, 2011, the Company issued 28,000,000 shares of common stock to MMV shareholders pursuant to the Plan of Exchange, which
gave
MMV shareholders an interest in the Company representing approximately 70% of the then
issued and outstanding shares of the Company. The Company and MMV were hereby reorganized, such that the Company acquired 100%
the ownership of MMV, and MMV became a wholly-owned subsidiary of the Company.
The
transactions qualify and meet the Internal Revenue Code requirements for a tax free reorganization, in which there is no corporate
gain or loss recognized by the parties, with reference to Internal Revenue Code (IRC) sections 354 and 368.
(b) Common
stock cancelled per plan of exchange
Pursuant
to the Plan of Exchange, 9,884,730 shares of common stock owned by the former president were returned to the Treasury for cancellation.
(c) Common
stock issued for service rendered
On
February 10, 2011, the Company issued 3,980,000 shares of common stock to its consultant for business advisory services rendered
during the first quarter of 2011. The fair value of this stock issuance was $79,600 determined using the fair value of the Company’s
common stock on the grant date, at a market quoted price of $.02.
On
February 10, 2011, the Company issued 876,946 shares of common stock to its former president for the services rendered during
the first quarter of 2011. The fair value of this stock issuance was $17,539 determined using the fair value of the Company’s
common stock on the grant date, at a market quoted price of $.02.
On
February 10, 2011, the Company issued 3,375,734 shares of common stock to its consultants. The fair value of this stock issuance
was $67,515 determined using the fair value of the Company’s common stock on the grant date, at a market quoted price of
$.02, of which $45,079 was the reimbursement to the consultants for the expenses paid in advance by the consultants, and $22,436
was consulting fees for the business advisory services rendered during the first quarter of 2011.
(d)
Common stock issued to settle convertible loan
On
February 10, 2011, the Company issued 2,100,000 shares of its common stock to settle the loan of $21,000 from a third party, which
were accrued expenses due to the services rendered in connection with a reverse merger transaction and SEC compliance 10-K, 10-Q
and Edgarization.
The
loan holder had the option to convert the loan into common stock of the Company at the price of $.01 per share by August 2, 2011.
The
fair value of this stock issuance was $42,000 determined using the fair value of the Company’s common stock on the grant
date, at a market quoted price of $.02. The difference between the fair market value and the conversion price of $.01 per share
was recognized as loss on extinguishment of convertible debt.
8.
RELATED PARTY TRANSACTIONS
The
Company had amounts due to a company owned by a majority shareholder and CEO, and due to the majority shareholder himself, as
well as other former shareholders of MMV. The total due as of March 31, 2011 is $642,666. The interest on these amounts range
from 0% to 10%;
9.
COMMITMENTS AND CONTINGINCIES
The
Company leased its facility in Cochrane, Alberta under an operating lease from an unrelated party. The Company has signed a new
three year lease for a different warehouse commencing on January 1, 2011 through January 1, 2014. The Company is required
to pay monthly rental payments of $5,250. Future minimum payments are as follows:
2011
|
|
|
$
|
63,000
|
|
2012
|
|
|
|
63,000
|
|
2013
|
|
|
|
63,000
|
|
Thereafter
|
|
|
|
—
|
|
|
|
|
|
|
|
Total Minimum Lease Payments
|
|
|
$
|
189,000
|
|
Litigation
The
Company is subject to claims and contingencies related to lawsuits and other matters arising out of the normal course of business. Management
believes the ultimate liabilities associated with such claims and contingencies may have a material adverse effect on the financial
position or results of the Company. The potential claims and contingencies associated with the Company are as follows:
On
May 5, 2010, the Company had a claim filed against them from a franchisee. The claim named the Company as a defendant
and the franchisee as a plaintiff. The plaintiff is seeking a rescission of the franchise agreement and a refund of
franchise funds paid in the amount of $325,000, together with a claim for additional damages of $500,000. There has
been a judgment registered with Canada’s Queens Bench in the amount of $325,000. The Company’s management
estimates that they can settle the claim in the amount of $325,000 and have recorded a contingency loss in expectation of this
settlement.
On
May 11, 2010, the Company commenced a lawsuit against former sales agents of the Company due to the fact that the defendants started
a competing business in violation of a contract which is alleged they entered into with the Company. The amount of
the lawsuit is yet to be determinable regarding the settlement amount of the lawsuit as of the date of these financial statements.
On
May 13, 2010, the Company had a civil claim filed against them from a franchisee for alleged additional net profits owed to them
during the time that the Company operated video kiosks in its stores. The claim named the Company as the defendant
and the franchisee as the plaintiff. The claim amount is for $25,000. The Company’s management estimates
that they can settle the civil claim for the amount of $25,000 and have recorded a contingency loss in expectation of this settlement.
On
August 18, 2010, the Company had a Statement of Claim filed against them from multiple franchisees alleging that the Company sold
a franchise to them and that the Company breached the requirements of the
Franchises Act
of Alberta, Canada. The
claim named the Company as a defendant and the multiple franchisees as a plaintiff. The plaintiffs are also seeking
rescission of the franchise purchase contracts together with a refund of their monies, or alternatively damages for loss of profits
aggregating $2,100,000. The plaintiffs further claim alternatively that there was a fraudulent misrepresentation made
by the Company and claim damages in the amount of approximately $5,700,000. The Company’s management estimates
that they can settle the claims for the amount of $2,100,000 and have recorded a contingency loss in expectation of this settlement.
The Company currently is in Settlement Discussions
On
August 25, 2010, a vendor of the Company issued a Statement of Claim against the Company in the amount of $1,354 for alleged merchandise
purchase by the Company and not paid to the third party vendor. The Company’s management estimates that they
can settle the claim in the amount of $1,354 and have recorded a contingency loss in expectation of this settlement.
On
September 7, 2010, the Company had a Statement of Claim filed against them from a franchisee. The claim named the
Company as a defendant and the franchisees as the plaintiff. The claim alleges that the Company breached the
franchise contract and a breach of the
Franchises Act
of Alberta, Canada whereby the plaintiff claims recession of the
Franchise Agreement and recovery of net losses in the amount of $55,000. There was a judgment filed with
Canada’s Queen’s Bench on December 3, 2010 for no specified amount. The judgment gave the
plaintiffs claim against the owner’s personal residence. The plaintiffs have informed the owner that they
would consider settlement for the Company’s public shares and discharge the judgment filed. The
Company’s management estimates that they can settle the claim in the amount of $55,000 and have recorded a contingency
loss in expectation of this settlement.
On
September 29, 2010, there was a Statement of Claim filed against the Company from franchisees. The claim named the
Company as a defendant and the franchisees as a plaintiff. The claim alleges that the Company breached the
Franchises
Act
of Alberta, Canada. The plaintiffs are claiming $250,000 in damages and lost profits. The plaintiffs
have indicated to the Company and council that they would settle for the Company’s public shares in exchange of settlement
of lawsuits. The Company filed a Statement of Defense on December 17, 2010. The Company’s management
estimates that they can settle the claim in the amount of $250,000 and have recorded a contingency loss in expectation of this
settlement.
On
October 18, 2010, there was a Statement of Claim filed against the Company. The claim named the Company as a defendant
and a former equipment leasing vendor as a plaintiff. The plaintiff claimed that the Company breached a lease equipment
contract. The Company’s management estimates that they can settle the claim in the amount of $17,000 and have
recorded a contingency loss in expectation of the settlement.
On
November 19, 2010, the Company won a settlement, in the amount of $5,000, filed against a former promotion company. The
Company filed the lawsuit due to the fact that the promotion company did not perform adequate services related to the contract
signed by the Company.
10.
GOING CONCERN UNCERTAINTIES
These
consolidated financial statements have been prepared assuming that Company will continue as a going concern, which contemplates
the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
As
of March 31, 2011, the Company had working capital deficit of $3,788,798, and accumulated deficit of $2,209,421. Management has
taken certain action and continues to implement changes designed to improve the Company’s financial results and operating
cash flows. The actions involve certain cost-saving initiatives and growing strategies, including (a) reductions in
headcount and corporate overhead expenses; and (b) expansion into new market. Management believes that these actions
will enable the Company to improve future profitability and cash flow in its continuing operations through December 31, 2011. As
a result, the 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 outcome of the Company’s
ability to continue as a going concern.
11.
SUBSEQUENT EVENTS
Subsequent
to the first quarter of 2011, the Board of Directors of the Company authorized to issue total 2,822,500 shares of common stock
to its directors and consultants for business advisory services rendered in 2011. The fair value of this stock issuance was $56,450
determined using the fair value of the Company’s common stock on the grant date, at a market quoted price of $.02.