NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
1.
SIGNIFICANT ACCOUNTING POLICIES
A
summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements
follows:
Business
and Basis of Presentation
chatAND,
Inc. was incorporated on May 14, 2010 under the laws of the State of Nevada and its wholly owned subsidiary CHATAND TECH, LLC
(“TECH”), a limited liability company organized in Nevada on May 13, 2011, (collectively referred to herein as “Chat&”
or the “Company”).
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, CHATAND TECH, LLC. All
significant inter-company transactions and balances have been eliminated in consolidation.
Nature
of business
The
Company intends to fully develop and place into service its investment asset with the relaunch of the Freeline Sports trademark
and patented in-line skating technology. We seek to enhance our brand image by controlling the distribution of our products.
Revenue
Recognition
The
Company’s revenue will initially consist of skateboards, wheels and bearings. Additional future products will include books,
street wear, outerwear snowboards, bindings and apparel. Other revenue sources are expected to develop as the business evolves.
The
Company will recognize revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC
605-10”) which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of
an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably
assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling
prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company
will defer any revenue for which the product or services has not been delivered or is subject to refund until such time that the
Company and the customer jointly determine that the product has been delivered or no refund will be required.
Cash
and cash equivalents
The
Company considers all cash on hand, cash in banks and all highly liquid debt instruments purchased with a maturity of three months
or less to be cash and cash equivalents. At times cash and cash equivalent balances at a limited number of banks and financial
institutions may exceed insurable amounts. The Company believes it mitigates its risks by depositing cash or investing in cash
equivalents in major financial institutions.
Website
Development Costs
The
Company will recognize website development costs in accordance with Accounting Standards Codification subtopic 350-50, Website
Development Costs (“ASC 350-50”). As such, the Company will expense all costs incurred that relate to the planning
and post implementation phases of development of its website. Direct costs incurred in the development phase will be capitalized
and recognized over the estimated useful life, generally three years. Costs associated with repair or maintenance for the website
will be included in cost of net revenues in the current period expenses. During the years ended December 31, 2015 and 2014, the
Company did not incur or capitalize any costs associated with website development.
chatAND,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
Research
and Development
The
Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10,
Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense
as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments
costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research
and development costs related to both present and future products are expensed in the period incurred. For the years ended December
31, 2015 and 2014, research and product development were
$-0-
and $5,300, respectively.
Property
and Equipment
Property
and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation
are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.
For financial statement purposes, computer equipment is recorded at cost and depreciated using the straight line method over their
estimated useful lives of five years.
Impairment
of long lived assets
The
Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”).
ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating
to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability
to achieve break-even operating results over an extended period.
The
Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in
value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows
resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of is reported at
the lower of the carrying amount or the fair value less costs to sell.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with generally accepted accounting principles 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Fair
Value of Financial Instruments
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as
of December 31, 2015 and 2014. The respective carrying value of certain on-balance-sheet financial instruments approximated their
fair values. These financial instruments include cash and accounts payable. Fair values were assumed to approximate carrying values
for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable
on demand.
chatAND,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
Derivative
Warrant Liability
The
Company accounts for derivative instruments in accordance with ASC 815, which establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments
or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship
designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as
hedge relationships and the types of relationships designated are based on the exposures hedged. At December 31, 2015 and 2014,
the Company did not have any derivative instruments that were designated as hedges.
Stock-Based
Compensation
The
Company accounts for its stock based awards in accordance with Accounting Standards Codification subtopic 718-10, Compensation
(“ASC 718-10”), which requires a fair value measurement and recognition of compensation expense for all share-based
payment awards made to its employees and directors, including employee stock options and restricted stock awards. The Company
estimates the fair value of stock options granted using the Black-Scholes valuation model. This model requires the Company to
make estimates and assumptions including, among other things, estimates regarding the length of time an employee will retain vested
stock options before exercising them, the estimated volatility of our common stock price and the number of options that will be
forfeited prior to vesting. The fair value is then amortized on a straight-line basis over the requisite service periods of the
awards, which is generally the vesting period. Changes in these estimates and assumptions can materially affect the determination
of the fair value of stock-based compensation and consequently, the related amount recognized in the Company’s consolidated
statements of operations.
For
the year ended December 31, 2015 and 2014, the Company granted -0- and 5,370,000 stock options to employees. The fair value of
vested options granted during the year ended December 31, 2015 and 2014 of $-0- and $540,475, respectively, was recorded as a
current period charge to earnings.
Net
Loss per Common Share, basic and diluted
The
Company has adopted Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”) specifying
the computation, presentation and disclosure requirements of earnings per share information. Basic loss per share has been calculated
based upon the weighted average number of common shares outstanding. Convertible debt, stock options and warrants have been excluded
as common stock equivalents in the diluted loss per share because their effect is anti-dilutive on the computation. Fully diluted
shares outstanding were 125,141,875 and 45,860,805 for the years ended December 31, 2015 and 2014, respectively.
Income
Taxes
The
Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) which requires
the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included
in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the
difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting
purposes and income tax purposes consist primarily of derivative liability and stock compensation accounting versus basis differences.
Recent
Accounting Pronouncements
There
were various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to a have a material impact on the Company’s consolidated financial position,
results of operations or cash flows.
chatAND,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
2.
GOING CONCERN MATTERS
The
Company’s consolidated financial statements are prepared using generally accepted accounting principles applicable to a
going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The
Company has incurred significant recurring losses which have resulted in an accumulated deficit of $2,997,136, and working capital
deficiency (total current liabilities in excess of total current assets) of $340,695 at December 31, 2015, and the Company had
negative cash flow from operations of $116,556 for the year ended December 31, 2015, which raises substantial doubt about the
Company’s ability to continue as a going concern.
Continuation
as a going concern is dependent upon obtaining additional capital and upon the Company’s attaining profitable operations.
The Company will require a substantial amount of additional funds to complete the development of its products, to build a sales
and marketing organization, and to fund additional losses which the Company expects to incur over the next few years. The management
of the Company intends to seek additional funding through a Private Placement Offering which will be utilized to fund product
development and continue operations. The Company recognizes that, if it is unable to raise additional capital, it may find it
necessary to substantially reduce or cease operations. The accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that
might result from the outcome of this uncertainty.
3.
PROPERTY AND EQUIPMENT
The
Company’s property and equipment at December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Computer equipment
|
|
$
|
-
|
|
|
$
|
11,201
|
|
Less accumulated depreciation
|
|
|
-
|
|
|
|
(10,452
|
)
|
Property and equipment
|
|
$
|
-
|
|
|
$
|
749
|
|
4.
OTHER ASSETS
Intellectual
property
The
Freeline assets acquired but not yet placed into use consist of 3 patents and 15 copyrights and trademarks relating to sports
equipment. Specifically, we acquired patents 7,059,613, 8,308,171 and Des567,318 for supporting a user’s foot with a personal
transportation device.
At
December 31, 2014, the Company’s investment in the Freeline Assets and the Freeline Notes consisted of a cash payment of
$250,000 and 5,000,000 shares of the Company’s common stock, par value $0.00001, valued at $1,350,000, the closing price
of the stock on the date the transaction was completed (Note 8). The acquisition was completed on July 11, 2014. During 2015,
the valuation of the acquisition was allocated to intellectual property based on relevant accounting standards as they relate
to the United States Generally Accepted Accounting Principles (“GAAP”).
|
|
Amount
|
|
|
Useful life
|
|
No.
|
|
Trademarks
|
|
$
|
980,510
|
|
|
20 years
|
|
|
3
|
|
Patents
|
|
|
600,958
|
|
|
Renewable 7-10yrs
|
|
|
15
|
|
Total Intellectual Property
|
|
$
|
1,581,468
|
|
|
|
|
|
|
|
chatAND,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
5.
SENIOR CONVERTIBLE DEBENTURES
The
Company issued $850,000 in Senior Convertible Debentures (“Debentures”) on June 17, 2011. The Debentures were convertible
into shares of the Company’s common stock at a conversion price of $0.10 per share; originally matured on June 17, 2012;
bear interest at the rate of 5% per annum; secured by a stock pledge by stockholders in the Company (other than the Investors)
of all of their holdings in the Company; and limitation on additional indebtedness. In February 2015 and effective January 16,
2015, the Company issued 15,712,459 additional shares to the Debenture holders in full satisfaction of the notes, the related
accrued interest and advances made by the shareholders to the Company.
The
Debenture Holders were issued Warrants to acquire a total of 4,250,000 shares of the Company’s common stock at an exercise
price of $0.15 per share for a five year term as a part of the original funding. The cash-less exercise of these Warrants plus
637,500 additional warrants acquired by the Debenture holders was included in the shares issued to the Debenture holders.
The
shares issued include 1,230,150 shares issued for liabilities, which were not convertible into common stock under their original
terms. These shares were valued at $307,538 and were exchanged for liabilities in the amount of $120,143, resulting in a loss
of $187,395 that was recognized on issuance of the common stock for the liabilities during the year ended December 31, 2014.
6.
NOTES PAYABLE
In
August 2015, we entered into three (3) 10% Convertible Promissory Notes in which we received proceeds of $6,500, $6,500 and $2,000
due in one year from the date of issuance and warrants to acquire 130,000, 130,000 and 40,000 shares of our common stock at an
exercise price of $0.10 for five years from the date of issuance.
In
October, we entered into a 10% Convertible Promissory Note in which we received proceeds of $5,000 and was repaid in full, plus
interest, by the due of January 2016.
In
November, we entered into a 10% Convertible Promissory Note in which we received proceeds of $15,000 and was repaid in full, plus
interest, by the due of February 2016.
In
December, we entered into two (2) a 10% Convertible Promissory Notes in which we received proceeds of $100,000 ($50,000 each)
due in one year from the date of issuance and warrants to acquire 5,000,000 (2,500,000 each) shares of our common stock at an
exercise price of $0.02 for five years from the date of issuance.
7.
WARRANT LIABILITY
In
2014, in connection with the sale of common stock, the Company issued an aggregate of 5,000,000 common stock purchase warrants
to purchase the Company’s common stock with an exercise prices of $0.10 to $0.15 per share for three years with anti-dilutive
(reset) provisions.
The
Company has identified embedded derivatives related to the issued warrants. The accounting treatment of derivative financial instruments
requires that the Company record allocated fair value of the derivatives as of the inception date and to fair value as of each
subsequent reporting date.
At
December 31, 2014, the fair value of the reset provision of $342,753 was determined using the Black-Scholes Option Pricing model
with the following assumptions: dividend yield: 0%; volatility: 141.85%; risk free rate: 0.67%; and expected life: 2.25 to 2.27
years. The Company recorded a loss on change in derivative liabilities of $142,753 during the year ended December 31, 2014.
chatAND,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
At
December 31, 2015, the fair value of the reset provision of $14,390 was determined using the Black-Scholes Option Pricing model
with the following assumptions: dividend yield: 0%; volatility: 126.29%; risk free rate: 0.56%; and expected life: 1.25 to 1.27
years. The Company recorded a gain on change in derivative liabilities of $328,363 during the year ended December 31, 2015.
8.
STOCKHOLDERS’ EQUITY
Preferred
stock
The
Company is authorized to issue up to 100,000,000 shares of preferred stock with a par value of $0.00001. At December 31, 2015
and 2014, no shares were issued and outstanding.
On
April 9, 2015, the Company filed a Form 8-K/A and Exhibit 10.1 Series A Convertible Preferred Stock Exchange Agreement. In this
filing the Company stated that it issued 4,807,309 shares of Series A Preferred Stock (the “Shares”) to 224 Stanhope
Note LLC (“Stanhope”) in exchange for 4,807,309 shares of common stock of the Company. However the Shares in fact
have not yet been issued pursuant to that certain Series A Convertible Preferred Stock Exchange Agreement (the “Agreement”),
dated April 2, 2015, between the Company and Stanhope because the Common Stock certificate has not yet been returned and therefore
the terms of the Agreement have not yet been met.
The
preferred shares previously and first reported on the June 30, 2015 Form 10-Q have been removed.
Common
stock
The
Company is authorized to issue up to 500,000,000 shares of common stock with a par value of $0.00001. At December 31, 2015 and
2014 there were 39,936,875 and 38,875,805 shares issued and outstanding, respectively. (See escrow shares below).
Escrow
shares
In
connection with the Debenture issuance, the Company issued 5,000,000 shares of its common stock to the principal
shareholders of the Company in escrow. The shares may be released from escrow to the principal shareholders (or their
designees) in accordance with a release schedule. The schedule provides that 3,300,000 shares will be released upon the
Company reaching $1,000,000 in audited revenues over any consecutive 12 month period with the remaining shares released when
the Company reaches $3,000,000 in audited revenues over any consecutive 12 month period. If either of the revenue goals has
not been reached by June 30, 2016, the remaining shares will be cancelled. The escrow shares were issued solely in connection
with the Debenture issuance, and accordingly, while disclosed as issued they are not considered outstanding and no accounting
has yet been made. The escrow shares were cancelled as a part of the Debenture conversion discussed in Note 5.
Freeline
Notes
On
June 6, 2014, the Company entered into a Promissory Note Assignment Agreement with a stockholder of the Company, whereby the stockholder
sold, assigned and transferred to the Company the stockholder’s rights under a series of promissory notes issued to the
stockholder by Freeline with a face value of $1,269,500. Specifically, the Company purchased: (i) one 5% Senior Promissory Note,
due August 4, 2011, in the principal amount of $200,000, (ii) one 5% Senior Promissory Note, due November 17, 2011, in the principal
amount of $200,000, (iii) one 5% Senior Promissory Note, due January 10, 2012, in the principal amount of $119,500 and (iv) one
5% Senior Promissory Note, due August 4, 2011, in the principal amount of $750,000 (together, the “Freeline Notes”).
The Freeline Notes were issued in connection with a Bridge Loan financing to Freeline and are all currently in default. The Freeline
Notes were acquired to allow the Company to complete the Freeline Acquisition discussed in Note 4. The Company issued 5,000,000
shares of its $0.00001 par value common stock in exchange for the notes which were valued at $1,350,000, based on the trading
price of the Company’s common stock on the date of the transaction.
chatAND,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
Employee
options
Pursuant
to Board of Directors and stockholder approval, the Company adopted its 2011 Equity Incentive Plan effective June 1, 2011 (the
“Plan”) whereby it reserved for issuance up to 10,000,000 shares of its common stock. The purpose of the Plan is to
provide directors, officers and employees of, and consultants, to the Company with additional incentives by increasing their ownership
interest in the Company. Directors, officers, employees and consultants of the Company are eligible to participate in the Plan.
Options
in the form of Incentive Stock Options (“ISO”) and Non-Statutory Stock Options (“NSO”) may be granted
under the Plan. Restricted Stock may also be granted under the Plan. As of December 31, 2015, 5,370,000 shares had been granted
and there were still 4,630,000 shares of our common stock reserved and available for future grants of options and other awards
under our Plan.
The
following table summarizes the stock option activity for the years ended December 31, 2015 and 2014:
|
|
|
|
|
Weighted-Average
|
|
|
Weighted-Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value
|
|
Outstanding at January 1, 2014
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant
|
|
|
5,370,000
|
|
|
$
|
0.19609
|
|
|
|
7.0
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures or expirations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
5,370,000
|
|
|
$
|
0.19609
|
|
|
|
6.2
|
|
|
|
|
|
Outstanding at January 1, 2015
|
|
|
5,370,000
|
|
|
$
|
0.19609
|
|
|
|
6.2
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures or expirations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2015
|
|
|
5,370,000
|
|
|
$
|
0.19609
|
|
|
|
5.2
|
|
|
$
|
-
|
|
Exercisable at December 31, 2015
|
|
|
5,370,000
|
|
|
$
|
0.19609
|
|
|
|
5.2
|
|
|
$
|
-
|
|
The
following table presents information related to employee stock options at December 31, 2015:
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
|
Options
|
|
|
In Years
|
|
|
Options
|
|
$
|
0.15
|
|
|
|
420,000
|
|
|
|
0.72
|
|
|
|
420,000
|
|
$
|
0.20
|
|
|
|
4,950,000
|
|
|
|
5.52
|
|
|
|
4,950,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,370,000
|
|
|
|
5.97
|
|
|
|
5,370,000
|
|
chatAND,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
Warrants
The
following table summarizes information with respect to outstanding warrants to purchase common stock of the Company, all of which
were exercisable, at December 31, 2015:
Exercise
|
|
|
Number
|
|
|
Expiration
|
Price
|
|
|
Outstanding
|
|
|
Date
|
$
|
0.10
|
|
|
|
2,500,000
|
|
|
March 2017 to April 2017
|
$
|
0.15
|
|
|
|
2,500,000
|
|
|
March 2017 to April 2017
|
$
|
0.10
|
|
|
|
475,000
|
|
|
October 2019
|
$
|
0.10
|
|
|
|
175,000
|
|
|
February 2020 to March 2020
|
$
|
0.10
|
|
|
|
300,000
|
|
|
August 2020
|
$
|
0.02
|
|
|
|
5,000,000
|
|
|
December 2020
|
|
|
|
|
|
10,950,000
|
|
|
|
The
following table summarizes the warrant activity for the two years ended December 31, 2015:
|
|
|
|
|
Weighted-Average
|
|
|
Weighted-Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value
|
|
Outstanding at January 1,
2014
|
|
|
8,500,000
|
|
|
$
|
0.150
|
|
|
|
4.50
|
|
|
$
|
-
|
|
Issued
|
|
|
5,000,000
|
|
|
$
|
0.125
|
|
|
|
2.26
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures or expirations
|
|
|
(8,500,000
|
)
|
|
|
(0.150
|
)
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2015
|
|
|
5,000,000
|
|
|
|
0.125
|
|
|
|
2.26
|
|
|
|
|
|
Grants
|
|
|
5,950,000
|
|
|
$
|
0.047
|
|
|
|
1.49
|
|
|
$
|
-
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures or expirations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
10,950,000
|
|
|
$
|
0.08
|
|
|
|
1.84
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected
to vest at December 31, 2015
|
|
|
10,950,000
|
|
|
$
|
0.08
|
|
|
|
1.84
|
|
|
$
|
-
|
|
Exercisable at December 31, 2015
|
|
|
10,950,000
|
|
|
|
$
0. 08
|
|
|
|
1.84
|
|
|
$
|
-
|
|
As
a part of the Debenture issuance, warrants to acquire 4,250,000 shares of common stock were issued to the Debenture Investors
and warrants to acquire 4,250,000 shares of common stock were issued to the existing shareholders. All of the warrants are exercisable
at $0.15 per share. The total of 8,500,000 warrants includes 3,612,500 issued to employee shareholders, 4,250,000 issued to the
Debenture Investors and 637,500 issued to non-employee shareholders. In connection with the conversion of the Debenture, the warrants
were canceled.
The
fair value of each group of warrants on the date issued was estimated using the Black-Scholes valuation model. The following assumptions
were used for the warrants granted in June 2011. In November 2012, the term of the warrants owned by the Investors in the Debentures
was extended from five to seven years.
Expected term remaining
|
|
|
2.25
and 2.27 years
|
|
Expected average volatility
|
|
|
141.85
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
3.50
|
%
|
In
conjunction with the sale of common stock, the Company issued 5,950,000 common stock purchase warrants during the year ended December
31, 2015 with exercise prices from $0.024 to $0.02 and expiring five years from the date of issuance. Of the 5,950,000, 275,000
common stock purchase warrants with exercise prices of $0.24 were issued for the year ended December 31, 2014. Each warrant contains
standard anti-dilution protection and a cashless exercise provision that will be effective following a one-year holding period.
(See Note 7).
chatAND,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
9.
RELATED PARTY TRANSACTIONS
At
December 31, 2015 advances from shareholders and employees were granted 411,070 shares of common stock. These shares had an aggregate
grant fair date value of $77,367. This was in conjunction with the release and settlement agreements for Daniel and Michael Lebor.
Pursuant to Unanimous Board Written Consent dtd 12/29/15, it was determined that Msssrs. Lebor were never issued Options for their
2012 and 2013 Cash Advanced to the Company. During the 12/29/15 Board meeting it was determined stock be issued with a $0.15 per
share price.
|
|
2015
|
|
|
2014
|
|
Michael Lebor, Chief Executive Officer
|
|
$
|
20,094
|
|
|
$
|
11,180
|
|
Former employees
|
|
|
57,273
|
|
|
|
3,510
|
|
|
|
$
|
77,367
|
|
|
$
|
14,690
|
|
Employment
agreements
As
of December 31, 2015, the Company does not have any employee accounts.
10.
COMMITMENTS AND CONTINGENCIES
Litigation
In
the normal course of business the Company may be involved in legal proceedings, claims and assessments arising in the ordinary
course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Legal fees
for such matters are expensed as incurred and we accrue for adverse outcomes as they become probable and estimable.
11.
INCOME TAXES
The
Company follows Accounting Standards Codification subtopic 740, Income Taxes (“ASC 740”) which requires the recognition
of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial
statements or tax returns. Under such method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse.
Actual
income tax expense (benefit) applicable to net income (loss) before income taxes is reconciled with statutory or “normally
expected” federal income tax for the years ended December 31, 2015 and 2014 as follows:
|
|
2015
|
|
|
2014
|
|
“Normally expected” income tax benefit
|
|
$
|
52,000
|
|
|
$
|
(127,800
|
)
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
State income taxes net of federal tax benefit
|
|
|
6,000
|
|
|
|
(15,000
|
)
|
Permanent and temporary differences
|
|
|
(80,000
|
)
|
|
|
2,100
|
|
Valuation allowance
|
|
|
22,000
|
|
|
|
140,700
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
chatAND,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
Components
of deferred tax assets (liabilities) consist of the following as of December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Federal and state net
|
|
$
|
819,200
|
|
|
$
|
731,400
|
|
Operating loss:
|
|
|
|
|
|
|
-
|
|
Accrued expenses
|
|
|
-
|
|
|
|
68,500
|
|
Property and equipment
|
|
|
-
|
|
|
|
(2,700
|
)
|
|
|
|
819,200
|
|
|
|
797,200
|
|
Valuation allowance
|
|
|
(819,200
|
)
|
|
|
(797,200
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of December 31, 2015, the Company had a U.S. federal net operating loss carry forwards of approximately $2,156,000, which expire
at various dates from 2030 through 2035. This net operating loss carry forwards may be used to offset future taxable income and
thereby reduce the Company’s U.S. federal income taxes. Section 382 of the Internal Revenue Code of 1986 (the “Code”)
imposes an annual limit on the ability of a corporation that undergoes a greater than 50% ownership change to use its net operating
loss carry forwards to reduce its tax liability. If in the future the Company issues common stock or additional equity instruments
convertible in common shares which result in an ownership change exceeding the 50% limitation threshold imposed by section 382
of the Code, the Company’s net operating loss carry-forwards may be significantly limited as to the amount of use in a particular
years. In addition, all or a portion of the Company’s net operating loss carry forwards may expire unutilized.
The
Company has provided a full valuation allowance against its net deferred tax assets, since in the opinion of management based
upon the earnings history of the Company; it is more likely than not that the benefits of these assets will not be realized.
The
Company complies with the provisions of ASC 740-10 in accounting for its uncertain tax positions. ASC 740-10 addresses the determination
of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under
ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely that not that the
tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Management
has determined that the Company has no significant uncertain tax positions requiring recognition under ASC 740-10.
The
Company is subject to income tax in the U.S., and certain state jurisdictions. The Company has not been audited by the U.S. Internal
Revenue Service, or any states in connection with income taxes. The periods from December 31, 2007 to December 31, 2015 remain
open to examination by the U.S. Internal Revenue Service, and state tax authorities. In addition,; federal and state tax authorities
can generally reduce a net operating loss (but not create taxable income) for a period outside the statute of limitations in order
to determine the correct amount of net operating loss which may be allowed as a deduction against income for a period within the
statute of limitations.
The
Company recognizes interest and penalties related to unrecognized tax benefits, if incurred, as a component of income tax expense.
chatAND,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
12.
FAIR VALUE MEASUREMENT
The
Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC
825-10”) on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining
the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company
considers the principal or most advantageous market in which it would transact and considers assumptions that market
participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of
nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs
that may be used to measure fair value:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in
markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level
3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or
liabilities.
All
items required to be recorded or measured on a recurring basis are based upon level 3 inputs.
To
the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
Upon
adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial
statements.
The
carrying value of the Company’s cash, accounts payable, short-term borrowings and other current assets and liabilities approximate
fair value because of their short-term maturity.
As
of December 31, 2015 or 2014, the Company did not have any items that would be classified as level 1 or 2 disclosures.
The
Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in Note 7. While
the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that
the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in
a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values
using the methods discussed in Note 7 are that of volatility and market price of the underlying common stock of the Company.
As
of December 31, 2015 and 2014, the Company did not have any derivative instruments that were designated as hedges.
The
derivative liability as of December 31, 2015, in the amount of $14,390 has a level 3 classification.
The
following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of December
31, 2015:
chatAND,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
|
|
Warrant
|
|
|
|
Liability
|
|
Balance, December 31, 2014
|
|
$
|
342,753
|
|
Total (gains) losses
|
|
|
-
|
|
Mark-to-market at December 31, 2015
|
|
|
(328,363
|
)
|
Balance, December 31, 2015
|
|
$
|
14,390
|
|
Net Gain for the period included in earnings relating to the liabilities held at December 31, 2015
|
|
|
328,363
|
|
13.
SUBSEQUENT EVENTS
Common
stock:
On
December 29, 2015, the Board determined that it is advisable and in the best interests of the Company and its shareholders to
approve and ratify equity incentive grants pursuant to the Company’s 2011 Equity Incentive Plan (the “Plan”)
to certain current and former employees, directors and consultants (“Optionees”) of the Company for the 2015 fiscal
year end.
Pursuant
to the terms of the Plan, all Optionees were ratified, approved and granted non-statutory stock options to purchase a specified
number of shares (the “Option Grants”) in accordance with the Non-Statutory Stock Option Grant and Agreement (the
“Option Agreement”). Additionally, Exchange Agreements were executed on February 29, 2016 and common stock was issued.
Each
of the Option Grants have the following terms:
1.
|
100% of
the shares shall vest and become exercisable immediately; and
|
|
|
2.
|
the option
price shall equal $0.10 per share; and
|
|
|
3.
|
that each
of the Option Grants for the fiscal year ended 2015 shall, with the consent of each of the option holders, be deemed to have been
exercised on a cashless basis and exchanged for 50% of the Company’s common stock, as follows:
|
2015
Stock Option Grant Approval
|
|
Number of
Option
Shares
|
|
|
Number of
Exchanged
Shares
|
|
Richard Rosenblum
|
|
|
1,000,000
|
|
|
|
500,000
|
|
David Berger
|
|
|
600,000
|
|
|
|
300,000
|
|
Michael Lebor
|
|
|
500,000
|
|
|
|
250,000
|
|
Victoria Rudman
|
|
|
500,000
|
|
|
|
250,000
|
|
Jeffrey Quick
|
|
|
300,000
|
|
|
|
150,000
|
|
TOTALS
|
|
|
2,900,000
|
|
|
|
1,450,000
|
|
The
1,450,000 common stock shares were issued on February 29, 2016 with a strike price of $0.02 per share.
This
increased the common stock at December 31, 2015 from 39,936,875 to 41,386,875.