CITRINE GLOBAL, CORP. - Quarter Report: 2014 September (Form 10-Q)

Impact of recently issued accounting standards

In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The new guidance requires that share-based compensation that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards and that could be achieved after an employee completes the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation costs should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material impact on our financial position or results of operations.

In June 2014, the FASB issued ASU No. 2014-10: Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation , to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements of development stage entities. The amendments in this update remove all incremental financial reporting requirements from U.S. GAAP for development stage entities, thereby improving financial reporting by eliminating the cost and complexity associated with providing that information. The amendments in this Update also eliminate an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. The amendments to eliminate that exception simplify U.S. GAAP by reducing avoidable complexity in existing accounting literature and improve the relevance of information provided to financial statement users by requiring the application of the same consolidation guidance by all reporting entities. The elimination of the exception may change the consolidation analysis, consolidation decision, and disclosure requirements for a reporting entity that has an interest in an entity in the development stage. The amendments related to the elimination of inception-to-date information and the other remaining disclosure requirements of Topic 915 should be applied retrospectively except for the clarification to Topic 275, which shall be applied prospectively. For public companies, those amendments are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. Early adoption is permitted. The adoption of ASU 2014-10 is not expected to have a material impact on our financial position or results of operations.

In July 2013, FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." The provisions of ASU No. 2013-11 require an entity to present an unrecognized tax benefit, or portion thereof, in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, with certain exceptions related to availability. ASU No. 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of ASU No. 2013-11 is not expected to have a material impact on the Company's Consolidated Financial Statements.

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to:

Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and

Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.

The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 is not expected to have a material impact on our financial position or results of operations.

In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 is not expected to have a material impact on our financial position or results of operations.

Goodwill and Intangible Assets

Goodwill is tested for impairment at a minimum on an annual basis. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit's carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted cash flow approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit. We conducted our annual impairment tests of goodwill as of September 30, 2014. As a result of these tests, we recorded impairment charges to our goodwill during the year ended December 31, 2013 of $630,880.

Intangible assets consist of patents and trademarks, purchased customer contracts, purchased customer and merchant relationships, purchased trade names, purchased technology, and non-compete agreements. Intangible assets are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from two to twenty years. No significant residual value is estimated for intangible assets.

(2) Development Stage Activities and Going Concern

The Company is currently in the development stage, and has limited operations. The business plan of the Company transitioned from being a provider of online gaming software to the developer and provider of an intelligent decision support system ("IDSS") utilized by the agriculture breeding industry, we were able to utilize our software programming expertise. Our business efforts are now being directed toward offering our IDSS Software program to a wide variety of users engaged in plant breeding, primarily within the seed industry. We plan on marketing our IDSS Software to agro-breeders, providing them with the ability to better plan, manage and analyze their breeding data and to perform research activities quickly and effectively so as to significantly increase production and plant quality.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has not established any source of revenue to cover its operating costs, and as such, has incurred an operating loss since inception. These and other factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying 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.

(3) Common Stock

On June 7, 2010, the Company issued 15,250,000 shares of its common stock to individuals who are directors and officers of the company for $153 subscriptions receivable.

On June 7, 2010, the Company issued 14,750,000 shares of its common stock to individuals who are founders of the company for $147 subscriptions receivable.

On December 21, 2010, the Company issued 20,000,000 shares of its common stock to various individuals, for $100,000 in cash. Such funds were raised through public offering, in accordance with the terms and conditions of the Registration Statement.

In April 2011, the Company sold 150,000 restricted shares to Guy Levinson and 250,000 restricted shares to Shlomo Sharbat, both are non-US private investor, for $40,000.

On March 18, 2012, the Company issued 25,000 restricted shares of common stock in consideration for financial advisory services provided to the Company. The shares were valued at $7,950 based on the closing price of the Company's common stock on the date of grant.

From October 16, 2013 through December 30, 2013, the Company sold to 22 non-US private accredited investors, a total of 15,750,260 units for cash consideration of $787,513 at a price of $0.05 (the "Units"), each unit comprised of one share of common stock, one class A warrant with 18 months term and one class B warrant with 24 month term, exercisable at a price of $0.055 and $0.065 respectively; of this total 4,500,000 units were sold to directors and officers. The relative fair value of the stock with attached warrants was $246,084 for the common stock, $266,967 for class A warrants and $274,462 for class B warrants.

On November 1, 2013 the Company issued 300,000 restricted shares of common stock in consideration for investor relations (IR) services provided to the Company. The shares were valued at $19,500 based on the closing price of the Company's common stock on the date of grant.

On November 18, 2013 the Company issued 1,000,000 restricted shares of common stock and 1,000,000 warrants with a term of 18 months, exercisable at $0.05 per share in consideration for investor relations (IR) services provided to the Company. The shares were valued at $112,000 based on the closing price of the Company's common stock on the date of grant. The warrants were valued using the Black-Scholes model with 117% volatility and 0.22% discount rate for a total of $78,861.

On November 19, 2013 the Company issued 1,600,000 restricted shares of common stock and 600,000 warrants with a term of 18 months, exercisable at $0.05 per share in consideration for investor relations (IR) services provided to the Company. The shares were valued at $182,400 based on the closing price of the Company's common stock on the date of grant. The warrants were valued using the Black-Scholes model with 117% volatility and 0.22% discount rate for a total of $47,316.

On December 10, 2013 the Company issued 350,000 restricted shares of common stock in consideration for investor relations (IR) services provided to the Company. The shares were valued at $42,000 based on the closing price of the Company's common stock on the date of grant.

On November 18, 2013 the Company issued 375,000 warrants with a term of 18 months, exercisable at $0.05 per share in consideration for investor relations (IR) services provided to the Company. The warrants were valued using the Black-Scholes model with 117% volatility and 0.22% discount rate for a total of $29,573.

During 2013 three shareholders converted $18,200 of debt and $2,972 of accrued interest to 1,058,602 shares at a conversion price of $0.02 per share. The conversion occurred within the terms of the convertible note agreements with no gain or loss recorded.

On March 3, 2014 the Company issued 1,000,000 restricted shares of common stock in consideration for investor relations (IR) services provided to the Company. The shares were valued at $480,000 based on the closing price of the Company's common stock on the date of grant.

From January 23, 2014 to September 30, 2014 the Company sold to 10 non-US private accredited investors a total of 6,461,666 shares for cash consideration of $923,000 at an average price of $0.143.

From March 10, 2014 through September 30, 2014, the Company sold to 12 non-US private accredited investors, a total of 3,270,000 units for cash consideration of $667,750 at an average price of $0.204 (the "Units"), each unit comprised of one share of common stock, one class C warrant with 24 months term exercisable at a price of $0.35; The relative fair value of the stock with attached warrants was $189,300 for the common stock, $478,450 for class C warrants.

On February 24, 2014 and March 13, 2014 3 share and warrant holders exercised warrants and were issued 1,144,262 shares for cash consideration of $48,000.

On February 18, 2014 the Company issued to Dr. Oded Sagee minority owner and founder of BreedIT Ltd., 2,200,000 shares of our common stock valued based on the closing market price on the acquisition date at $151,800; 2,200,000 Class A options for the purchase of 2,200,000 shares of our common stock at $0.055 per share valued using the black-scholes model with volatility of 122% and a discount rate of 0.23% for a total value of $84,967; and 2,200,000 Class B options for the purchase of 2,200,000 shares of our common stock at $0.065 per share valued using the black-scholes model with volatility of 122% and a discount rate of 0.23% for a total value of $84,680.

During the period from February 19, 2014 to March 4, 2014, the Company granted a total of 5,050,000 stock options (the "Options") to 4 Company directors and officers who are also minatory owners. The Options, which are fully vested, are exercisable at a price of $0.05 per Share. 1,400,000 options were valued using the Black-Scholes model with 128% volatility and 2.17% discount rate and 3,650,000 were valued using the Black-Scholes model with 154% volatility and 2.17% discount rate for a total of $2,594,210.

On March 12, 2014 the Company issued 30,000 warrants with term of 36 months, exercisable at $0.60 per share to 1 entity in consideration for public relations services provided to the company. The warrants were valued using the Black-Scholes model with 117% volatility and 0.22% discount rate for a total of $16,134.

On April 1, 2014 and April 7, 2014 the Company sold to 2 private accredited investors, a total of 1,215,000 units for cash consideration of $250,150 at an average price of $0.206 (the "Units"), each unit comprised of one share of common stock, one class C warrant with 24 months term exercisable at a price of $0.35; The relative fair value of the stock with attached warrants was $61,984 for the common stock, $188,166 for class C warrants.

On May 8, 2014 the Company sold to 1 private accredited investor, a total of 666,667 units for cash consideration of $200,001 at a price of $0.30 (the "Units"), each unit comprised of one share of common stock, one class H warrant with 3 months term exercisable at a price of $0.30 and one class I warrant with 18 month term exercisable at price of $0.45; The relative fair value of the stock with attached warrants was $69,916 for the common stock, $130,085 for warrants.

On April 12, 2014 the Company issued 1,00,000 warrants, vesting over 12 quarters in equal amounts starting July 1, 2014 with term of 36 months from vesting date, exercisable at $0.35 per share to 1 entity in consideration for serving on the company's scientific advisory board. The warrants were valued using the Black-Scholes model with 273% volatility and 0.80% discount rate for a total of $391,335 of this amount $42,938 was expensed during the quarter with balance to be expensed over the remaining term.

On April 14, 2014 and on June 22, 2014 2 share and warrant holders exercised warrants for cash consideration of $140,000, in return 2,600,000 shares were issued.

During Q2 2014 one shareholder converted $4,000 of debt and accrued interest to 200,000 shares at a conversion price of $0.02 per share. The conversion occurred within the terms of the convertible note agreements with no gain or loss recorded.

On August 17, 2014 the Company issued 70,000 restricted shares of common stock in consideration for investor relations (IR) services provided to the Company. The shares were valued at $16,800 based on the closing price of the Company's common stock on the date of grant.

On September 9, 2014 and September 22, 2014 2 share and warrant holders exercised warrants for cash consideration of $46,400, in return 400,000 shares were issued and as of balance sheet date 500,000 shares are to be issued.

Share based payment transactions were accounted for in accordance with the requirements of ASC 505-50 Equity Based Payments to Non Employees. Paragraph 505-50-30-6 establishes that share-based payment transactions with nonemployees shall 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 Company measured share-based payment transactions at the fair value of the shares issued at date of grant, the Company believes that the value of the shares is more reliably measurable.

On March 1, 2012, the Company filed a Certificate of Amendment to its Certificate of Incorporation effecting a forward stock split of the Company's issued and outstanding shares of Common Stock at a ratio of ten-to-one (the "Forward Split").  The Certificate of Amendment provides that each outstanding share of the Company's Common Stock, par value $0.0001 per share, will be split and converted, automatically, without further action, into ten (10) shares of Common Stock of $0.00001 par value per share. The Forward Split has been reflected in the Company's financial statements for year ended December 31, 2013 and 2012.

(4) Revenue Recognition

On July 1 2011 and on July 10, 2011, the Company signed license agreements with two separate corporations in Israel and Luxemburg (the "Licensees"). Subject to the terms and condition of each agreement the Company granted each Licensee a license to use the Company's proprietary online gaming platform in certain parts of the world.  Each license is, in general, non-exclusive, except for certain countries specified within each agreement.  The agreements grant each Licensee the right to develop and operate websites offering online games based on the Company's proprietary technology for a period of 5 years as of the respective agreement's effective date. In the event that by the eighteenth-month anniversary of the each agreement's effective date the respective Licensee fails to have at least one active website in each of the countries that comprise the exclusive territory of the agreement, the Company shall be entitled to either terminate exclusivity for these countries or terminate the entire agreement. In consideration of these agreements, and of support services to be provided by the Company through the license period, the Licensees have paid the Company non-refundable, one-time license fees totaling $119,000. In addition to such license fees, once each Licensee realizes revenues at a certain level specified in its respective agreement from its use of the Company's platform, it shall pay the Company a royalty in the amount of 50% of gross revenues realized from its use of this platform.

On December 26, 2011, the corporation from Luxemburg announced the termination of the agreement due to the economic situation in Europe. As a result, the entire license fee in the amount of $90,000 was recognized immediately as revenues.

As of the three and nine months ended September 30, 2014, the Company recognized a total sum of $1,462 and $4,362 compared to $1,462 and $4,338 respectively, for the three and nine months ended September 30, 2013 out of the total $119,000 license fees paid for both of the aforementioned agreements. The contract in the amount of $90,000 was canceled by the client; therefore we recognized the whole sum as revenues according to the terms of the agreement. The second contract grants the client licenses for a period of 5 years, the remaining sum of $10,114 was deferred on the Company's balance sheet, $5,800 as current and $4,314 as long term liabilities, and is expected to be recognized over the remaining period of the agreements.

As of September 30, 2014 and 2013, no royalties have been paid by or recognized in connection with the aforementioned agreements.

One of the aforementioned Licensees is beneficially owned by an individual who holds 25,000 shares of the Company's common stock.

(5) Acquisitions during Fiscal Year Ended December 31, 2013

We completed the acquisition of 66.6% of BreedIT Ltd. in furtherance of our strategy to acquire small, privately owned enterprises in the software sector through asset purchase structures. We made the acquisitions to expand our market presence and product offerings in areas that complement our experience in software platforms.

The purchase consideration for the acquisition was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated consideration recorded as goodwill. An independent valuation expert assisted us in determining these fair values.

We have included the financial results of these acquisitions in our consolidated financial statements from the date of acquisition.

BreedIT Ltd.

We acquired 66.67% of BreedIT Ltd, in October 2013 pursuant to an asset purchase agreement. The assets acquired consisted of all application software, licensing agreement with academic institution for marketing the software and brands. We assumed some liabilities in the transaction as described below. BreedIT Ltd. was established on July 4th, 2013 by Dr. Oded Sagee.

The purchase consideration for 66.67% totaling $566,447 consisted of: (1) $245,000 in cash; (2) 2,200,000 shares of our common stock valued based on the closing market price on the acquisition date at $151,800; (3) 2,200,000 Class A options for the purchase of 2,200,000 shares of our common stock at $0.055 per share valued using the black-scholes model with volatility of 122% and a discount rate of 0.23% for a total value of $84,967; and (4) 2,200,000 Class B options for the purchase of 2,200,000 shares of our common stock at $0.065 per share valued using the black-scholes model with volatility of 122% and a discount rate of 0.23% for a total value of $84,680. The total net assets of the company including the non controlling interest was $849,671 on the date of acquisition.

The allocation of the purchase consideration to the assets and liabilities acquired was as follows:

(6) Goodwill and Intangible Assets

Goodwill

The following table presents goodwill and impairment for the years ended December 31, 2013 and 2012:

We conducted our annual impairment test of goodwill as of December 31, 2013, which resulted in impairment charges of $630,880.

(7) Related Party Transactions

As described in Note 3, on June 7, 2010, the Company issued 15,250,000 shares of its common stock to directors and officers for $153 subscriptions receivable. 

In addition as described in Note 3, From October 16, 2013 through December 30, 2013, the Company sold to 22 non-US private investor, a total of 15,750,260 million units for cash consideration of $787,513 at a price of $0.05 (the "Units"), each unit comprised of one share of common stock, one class A warrant and one class B warrant, exercisable at a price of $0.055 and $0.065 respectively; of this total 4,500,000 units were sold to directors and officers for $225,000 subscriptions receivable. The relative fair value of the stock with attached warrants was $219,707 for the common stock, $280,826 for class A warrants and $286,981 for class B warrants.

During 2013 forgiveness of Accrued Debt by related parties was recorded in the amount of $49,000.

In 2013 $2,305 accrued liability was recorded for consulting fees due to a related party.

On February 18, 2014 the Company issued to Dr. Oded Sagee minority owner and founder of BreedIT Ltd., 2,200,000 shares of our common stock valued based on the closing market price on the acquisition date at $151,800; 2,200,000 Class A options for the purchase of 2,200,000 shares of our common stock at $0.055 per share valued using the black-scholes model with volatility of 122% and a discount rate of 0.23% for a total value of $84,967; and 2,200,000 Class B options for the purchase of 2,200,000 shares of our common stock at $0.065 per share valued using the black-scholes model with volatility of 122% and a discount rate of 0.23% for a total value of $84,680.

During the period from February 19, 2014 to March 4, 2014, the Company granted a total of 5,050,000 stock options (the "Options") to 4 Company directors and officers who are also minority owners. The Options, which are fully vested, are exercisable at a price of $0.05 per Share. 1,400,000 options were valued using the Black-Scholes model with 128% volatility and 2.17% discount rate and 3,650,000 were valued using the Black-Scholes model with 154% volatility and 2.17% discount rate for a total of $2,594,210.

On April 14, 2014 1 related share and warrant holder exercised warrants and was issued 2,000,000 shares for cash consideration of $110,000.

Related Parties payable as of September 30, 2014 and December 31, 2013 are $27,000 and $2,305 respectively the increase is due to an increase in liabilities to related party.

(8) Convertible and non-convertible notes payable

During the year ended December 31, 2013, we received $6,900 through the issuance of two convertible notes, bearing interest at the rate of 15% per annum, have a maturity date of 12 months and are convertible into common stock at $0.02 per share. The $6,900 of debt along with $729 of accrued interest was converted to 381,453 shares of common stock at $0.02 per share. The conversion occurred within the terms of the convertible note agreements with no gain or loss recorded on the conversion.

During the year ended December 31, 2013, a convertible note of $11,300 along with $2,243 of accrued interest was converted to 677,149 shares of common stock at $0.02 per share. The conversion occurred within the terms of the convertible note agreement with no gain or loss recorded on the conversion.

During the year ended December 31, 2013, we received $130,000 through the issuance of two convertible notes, bearing interest at the rate of 10% per annum, have a maturity date of 12 months and are convertible into common stock at $0.05 per share.

During the year ended December 31, 2013, we received $10,020 through the issuance of non-convertible notes bearing interest at a rate of one (1%) per annum and which have maturity date of 12 months.

During Q2 2014 one shareholder converted $4,000 of debt and accrued interest to 200,000 shares at a conversion price of $0.02 per share. The conversion occurred within the terms of the convertible note agreements with no gain or loss recorded.

For the three and nine months ended September 30, 2014 the Company recorded amortization expenses related to the beneficial conversion features of $32,767 and $97,233 as compared to $12,264 and $55,614 for the three and nine months ended September 30, 2013, respectively.

The Company recorded interest expense in the amount of $5,953 and $18,748 for the three and nine months ended September 30, 2014 as compared to $3,668 and $10,295 for the three and nine months ended September 30, 2013, respectively.

(9) Investments

Investments in Trading Securities as of September 30, 2014 and December 31, 2014 are summarized below:

As of September 30, 2014 and December 31, 2013 the company owns no shares of Gefen Biomed Investments, a publicly traded company. During the year ended December 31, 2013, the Company recorded a realized loss of $114,752 due to their decreased market value as compared to December 31, 2012.

(10) Subsequent Events

As defined in FASB ASC 855-10, "Subsequent Events", subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued.

500,000 shares of common stock were issued after period end to one investor which had exercised warrants on September 9, 2014 and 66,000 shares of common stock were issued in consideration of legal services provided to the Company.