The accompanying notes are an integral part of
these audited consolidated financial statements
.
The accompanying
notes are an integral part of these audited consolidated financial statements.
The accompanying notes
are an integral part of these audited consolidated financial statements.
Notes
to Consolidated Financial Statements
1.
BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
Basis
of Presentation
The
accompanying financial statements present on a consolidated basis the accounts of the Company and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in consolidation
Nature
of Business Operations
Medefile
International, Inc. has developed and globally markets a proprietary, patient-centric, Internet-enabled Personal Health Record
(iPHR) system for gathering, digitizing, maintaining, accessing and sharing an individual’s actual medical records. Medefile's
goal is to revolutionize the medical industry by bringing patient-centric digital technology to the business of medicine. Medefile
intends to accomplish its objective by providing individuals with a simple and secure way to access their lifetime of actual medical
records in an efficient and cost-effective manner. Medefile's products and services are designed to provide healthcare providers
with the ability to reference their patients’ actual past medical records, thereby ensuring the most accurate treatment
and services possible while simultaneously reducing redundant procedures.
Interoperable
with most electronic medical record systems utilized by physician practices, clinics, hospitals and other care providers, the
highly secure, feature-rich MedeFile iPHR solution has been designed to gather all of its members’ actual medical records
on behalf of each member, and create a single, comprehensive Electronic Health Record (EHR). The member can access his/her records
24-hours a day, seven days a week – or authorize a third party user – on any web-enabled device (PC, cell phone, PDA,
e-reader, et al), as well as the portable MedeFile flash drive/keychain or branded UBS-bracelet.
By
subscribing to the MedeFile system, members empower themselves to take control of their own health and well-being, and empower
their healthcare providers to make sound and lifesaving decisions with the most accurate, up-to-date medical information available. In
addition, with MedeFile, members enjoy the peace of mind that comes from knowing that their medical records are protected from
fire, natural disaster, document misplacement or the closing of a medical or dental practice.
MedeFile
believes it enjoys a number of competitive advantages over other firms within the medical records marketplace, including that:
●
|
MedeFile
has developed products and services geared to the patient, while containing the depth and breadth of information required
by treating physicians and medical personnel.
|
●
|
MedeFile
does all the work of collecting and updating medical information on an ongoing basis; our products’ dependence on the
patient taking action is minimal – particularly when compared to patient action required to support competing solutions.
|
●
|
MedeFile
provides a complete medical record. Other companies claim complete longitudinal records, but in reality only provide histories
(usually completed by the member/patient), which are by no means complete or necessarily accurate records.
|
●
|
MedeFile
provides a coherent mix of services and products that are intended to improve the quality of healthcare by enabling the patient
to manage and access the information normally retained by doctors and other care providers.
|
Going
Concern
The accompanying financial statements
have been prepared contemplating a continuation of the Company as a going concern. However, the Company has reported a net loss
of $1,156,856 for the year ended December 31, 2015. During the comparable year ended 2014, the Company had a net income of
$341,554, as a direct result of the change in valuation of the Company’s derivative. The Company had an accumulated deficit
of $28,511,399 as of December 31, 2015. The Company has negative working capital of $3,770 as of December 31, 2015.
The
accompanying financial statements have been prepared assuming the Company will continue as a going concern. The operating losses
raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to obtain additional
financing depends on the availability of its borrowing capacity, the success of its growth strategy and its future performance,
each of which is subject to general economic, financial, competitive, legislative, regulatory, and other factors beyond the Company's
control.
We
will need additional investments in order to continue operations. Additional investments are being sought, but we cannot guarantee
that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities,
obtaining credit facilities, or other financing mechanisms.
However,
the trading price of our common stock could make it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses,
fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative
financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new
equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional
financing is not available or is not available on acceptable terms, we will have to curtail our operations.
Cash
and Cash Equivalents
For
purposes of these financial statements, cash and cash equivalents includes highly liquid debt instruments with maturity of less
than three months.
Concentrations
of Credit Risk
Financial
instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash
and cash equivalents. The Company places its cash and temporary cash investments with high credit quality institutions. At times,
such investments may be in excess of the FDIC insurance limit. Currently our operating account is not above the FDIC limit.
Advertising
The
Company follows the policy of charging the costs of advertising to expense as incurred. The Company incurred advertising costs
for the year ended December 31, 2015 and 2014 of approximately $0 and $0 respectively.
Income
Taxes
The
Company accounts for
income
taxes under the asset and liability method, which
requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences
between the 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. The effect of a change in tax rates on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
The
Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized.
In making such determination, the Company considers all available positive and negative evidence, including future reversals of
existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.
A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the
Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded
amount, the Company would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
The
Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when
it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals
or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold
at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
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.
Minor additions and renewals are expensed in the year incurred. Major additions and renewals are capitalized and depreciated over
their estimated useful lives being 3 years up to 10 years.
Trademark
Costs
Trademark
costs incurred in the registration and acquisition of trademarks and trademark rights are capitalized. These costs will be amortized
over the legal life of the related trademark once the trademark is awarded. The Company performs an annual review of its identified
intangible assets to determine if facts and circumstances exist which indicate that the useful life is shorter than originally
estimated or that the carrying amount of the assets may not be recoverable.
The
Company expenses all software costs associated with the conceptual formulation and evaluation of alternatives until the application
development stage has been reached. Costs to improve or support the technology are expensed as these costs are incurred.
Website
Development
The Company's policy is to capitalize
website development costs at original cost and amortize the balance over the life of the product. The life of website is determined
at completion of the project. The Company reviews the amounts capitalized for impairment whenever events or circumstances indicate
that the carrying amounts of the assets may not be recoverable. During 2015, all website development costs were impaired resulting
in a loss of $182,195.
The
Company expenses all development costs associated with the conceptual formulation and evaluation of alternatives until the application
development stage has been reached. Costs to improve or support the technology are expensed as these costs are incurred.
Revenue
Recognition
The Company generates revenue from licensing
the right to utilize its proprietary software for the storage and distribution of healthcare information to individuals and affinity
groups and through fees charges for copying medical records. The Company recognizes revenue on four basic criteria which 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.
Deferred
Revenue
The Company generally receives subscription
fees for its services. From time to time, the Company will receive quarterly or annual subscriptions paid in advance and deferred
revenue is recorded at that time. The deferred revenue is amortized into revenue on a pro- rata basis each month. Customers with
quarterly or annual subscriptions may cancel their subscriptions and request a refund for future months' revenues at any time.
Therefore, a liability is recorded to reflect the amounts that are potentially refundable. At December 31, 2015 and December 31,
2014, deferred revenue totaled $439 and $684, respectively.
Reclassifications
Certain
reclassifications have been made in prior periods financial statements to conform to classifications used in the current period.
Recent
Accounting Pronouncements
In
August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updates (ASU) 2014-15 requiring an entity’s
management to evaluate whether there are conditions or events, considered in aggregate, that raise substantial doubt about entity’s
ability to continue as a going concern within one year after the date that the financial statements are issued (or within one
year after the date that the financial statements are available to be issued when applicable). The amendments in this Update are
effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application
is permitted.
Fair
Value of Financial Instruments
Cash
and Equivalents, Deposits In-Transit, Receivables, Prepaid and Other Current Assets, Accounts Payable, Accrued Salaries and Wages
and Other Current Liabilities
The
carrying amounts of these items approximated fair value.
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. To increase the comparability of fair value measures, Financial Accounting
Standards Board (“FASB”) ASC Topic 820-10-35 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements).
Level 1
—Valuations
based on quoted prices for identical assets and liabilities in active markets.
Level 2
—Valuations
based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities
in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs
that are observable or can be corroborated by observable market data.
Level 3
—Valuations
based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market
participants. These valuations require significant judgment.
The application of the three levels of the fair value hierarchy
under Topic 820-10-35 to our assets and liabilities are described below as of December 31, 2015:
|
|
Fair Value Measurements
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
|
|
-
|
|
|
|
-
|
|
|
|
19,067
|
|
|
|
19,067
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
19,067
|
|
|
$
|
19,067
|
|
Impairment
of Long Lived Assets
In
accordance with Accounting Standards Codification (“ASC”) 360-10, Accounting for the Impairment or Disposal of Long-Lived
Assets, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. ASC 360-10 relates to assets that can be amortized and the life can
be determinable. The Company reviews property and equipment and other long-lived assets for impairment annually, or whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by
comparison of the asset’s carrying amount to future undiscounted net cash flows the assets are expected to generate. Cash
flow forecasts are based on trends of historical performance and management's estimate of future performance, giving consideration
to existing and anticipated competitive and economic conditions. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future
cash flows arising from the assets or their fair values, whichever is more determinable.
Inventory
Inventories
are stated at the lower of cost or market value. Cost is determined by the first-in, first-out basis and market being determined
as the lower of replacement cost or net realizable value. The Company records inventory write-downs for estimated obsolescence
of unmarketable inventory based upon assumptions about future demand and market conditions. For the year ended December 31, 2015
the Company had an inventory write off of $22,228. For the year ended December 31, 2014 the Company had an inventory write off
of $30,000.
Net
Loss per Share
Basic
and diluted loss per share amounts are computed based on net loss divided by the weighted average number of common shares outstanding.
Management
Estimates
The
presentation of 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 revenues and expenses during the reported period. Actual results
could differ from those estimates.
Stock
Based Compensation
The
Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation
cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually
the vesting period. The Company uses the Black-Scholes pricing model to calculate the fair value of options and warrants issued
to both employees and non-employees. Stock issued for compensation is valued using the market price of the stock on the date of
the related agreement.
2. ACCOUNTS
RECEIVABLE
Due
to the collection history of the Company, the Company does not maintain an allowance for doubtful accounts. Recognition
of a specific uncollectible account is written directly against the invoice in accounts receivable and expensed in the current
period.
3.
WEBSITE DEVELOPMENT
Website
development consists of the following:
|
|
December 31,
2015
|
|
|
December 31, 2014
|
|
Website development
|
|
$
|
328,738
|
|
|
$
|
324,285
|
|
Additional development
|
|
|
5,000
|
|
|
|
4,453
|
|
Impairment of website
|
|
|
(182,195
|
)
|
|
|
-
|
|
Accumulated amortization
|
|
|
(151,543
|
)
|
|
|
(62,946
|
)
|
Net website development
|
|
$
|
-
|
|
|
$
|
265,792
|
|
During May
2012 the Company began redesigning its website. Amortization is calculated over a three-year period. Amortization expense
for the year ending December 31, 2015 and 2014 is $88,597 and $62,946, respectively. The Company recognized an impairment of
the website in the amount of $182,195, as of December 31, 2015.
4.
FURNITURE AND EQUIPMENT
Furniture
and equipment consists of the following:
|
|
December 31, 2015
|
|
|
December 31,
2014
|
|
Computers and equipment
|
|
$
|
169,286
|
|
|
$
|
169,286
|
|
Furniture and fixtures
|
|
|
38,618
|
|
|
|
38,618
|
|
Subtotal
|
|
|
207,904
|
|
|
|
207,904
|
|
Less: accumulated depreciation
|
|
|
(207,904
|
)
|
|
|
(207,904
|
)
|
Net furniture and equipment
|
|
$
|
-
|
|
|
$
|
-
|
|
Depreciation
is calculated by using the straight-line method over the estimated useful life. Depreciation expense totaled $0 and $413
for the year ended December 31, 2015 and 2014, respectively.
5.
CONVERTIBLE DEBENTURE – RELATED PARTY
The Company entered into two 10% Secured
Convertible Debentures with a significant shareholder. The debentures carry a one year term. The debentures were issued in the
amount of $50,000 on November 4, 2013 and $60,000 on December 17, 2013. Both debentures have a conversion feature at a share price
of the lower of $1.00 or 80% of the previous day’s closing price. The Company recognized a beneficial conversion feature
(BCF) due to the intrinsic value of the conversion rate compared to the market price of the common stock as of the grant date.
A discount is computed based on the share value at the time of issuance and amortized over the period of the debenture. During
the year ended December 31, 2015, the lender converted $40,000 of the note principal and the Company made a payment of $70,000.
|
|
December 31, 2015
|
|
|
December 31,
2014
|
|
Convertible debenture – related party
|
|
$
|
122,538
|
|
|
$
|
122,538
|
|
Conversion
|
|
|
(40,000
|
)
|
|
|
-
|
|
Repayment
|
|
|
(70,000
|
)
|
|
|
-
|
|
Accumulated Interest
|
|
|
3,143
|
|
|
|
-
|
|
Convertible debenture, net of unamortized discount
|
|
$
|
15,681
|
|
|
$
|
122,538
|
|
6. DERIVATIVE LIABILITIES
In
connection with certain securities purchase agreements entered into during the third quarter of 2011 and the second quarter of
2012, the Company granted warrants with ratchet provisions. The warrants contain an expiration date of four years from the date
of grant. During the first two years of grant, if the Company issues any additional shares of common stock at a price per share
less than the exercise price in effect, the exercise price will be adjusted to equal the average price per share received by the
Company for the additional shares issued. After the first two years following the issuance date, if the Company issues any additional
shares of common stock at a price per share less than the exercise price in effect, the exercise price will be adjusted using
a formula based on the existing exercise price, the outstanding shares before and after the issuance of such shares, and the average
price during the issuance of such shares. In addition to the exercise price adjustment, the number of shares upon exercise of
the warrants is also subject to adjustment.
Upon
grant, the Company assesses the fair value of the warrants using the Black Scholes pricing model and records a warrant liability
for the value. The Company then assesses the fair value of the warrants quarterly based on the Black Scholes Model and increases
or decreases the warrant liability to the new value, and records a corresponding gain or loss (see below for variables used in
assessing the fair value). The Company uses expected volatility based primarily on historical volatility using weekly pricing
observations for recent periods that correspond to the expected life of the warrants. The risk-free interest rate is based on
U.S. Treasury securities rates.
Due
to the ratchet provisions, the Company treats the warrants as a derivative liability in accordance with the provisions of ASC
815 “Derivatives and Hedging” (ASC 815). ASC 815 applies to any freestanding financial instruments or embedded features
that have the characteristics of a derivative and to any freestanding financial instruments that potentially settle in an entity’s
own common stock.
In
July 2011 the company issued 90,426 warrants in connection with the sale of 1,773 shares of common stock. As of July 2015, these
warrants have expired.
Warrant
liability for the outstanding warrants amounted to $0 for the year ending December 31, 2015, compared to $51 for the year ended
December 31, 2014. As of December 31, 2015, these warrants include the following:
Warrants
granted during April 2012 in connection with the sale of 5,000 shares of the Company’s preferred stock to a significant
shareholder and brother of the then-Chief Executive Officer with the right to purchase up to 10,000 shares of the Company’s
common stock with an exercise price of $10. Fair value was determined using the following variables:
|
|
Grant Date
|
|
|
December 31, 2015
|
|
Risk-free interest rate at grant date
|
|
|
0.64
|
%
|
|
|
0.00
|
%
|
Expected stock price volatility
|
|
|
174.3
|
%
|
|
|
143.1
|
%
|
Expected dividend payout
|
|
|
-
|
|
|
|
-
|
|
Expected option in life-years
|
|
|
4
|
|
|
|
1.28
|
|
Warrants
granted during April 2012 in connection with the sale of 50,000 shares of the Company’s common stock with an exercise price
of $10.
|
|
Grant Date
|
|
|
December 31, 2014
|
|
Risk-free interest rate at grant date
|
|
|
0.63
|
%
|
|
|
0.00
|
%
|
Expected stock price volatility
|
|
|
174.8
|
%
|
|
|
143.1
|
%
|
Expected dividend payout
|
|
|
-
|
|
|
|
-
|
|
Expected option in life-years
|
|
|
4
|
|
|
|
1.3
|
|
Transactions
involving warrants with ratchet provisions are as follows:
|
|
Number of Warrants
|
|
|
Weighted-Average Price Per Share
|
|
Outstanding at December 31, 2013
|
|
|
150,426
|
|
|
$
|
10
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled or expired
|
|
|
-
|
|
|
|
-
|
|
Additional due to ratchet trigger
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2014
|
|
|
150,426
|
|
|
|
10
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled or expired
|
|
|
90,426
|
|
|
|
10
|
|
Addition due to ratchet trigger
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2015
|
|
|
60,000
|
|
|
$
|
10
|
|
During the years ended December 31, 2014 and December 31,
2015, the warrant liability consisted of the following:
|
|
December 31, 2015
|
|
|
December 31,
2014
|
|
Warrant liability (beginning balance)
|
|
$
|
51
|
|
|
$
|
1,062,141
|
|
Additional liability due to new grants
|
|
|
-
|
|
|
|
-
|
|
Loss (gain) on changes in fair market value of warrant liability
|
|
|
1,220
|
|
|
|
(1,062,090
|
)
|
Net warrant liability
|
|
$
|
1,271
|
|
|
$
|
51
|
|
Change in fair market value of warrant
liability resulted in a loss of $1,220 and a gain of $1,062,090 for the years ended December 31, 2015 and 2014, respectively
The
Company entered into two 10% Secured Convertible Debentures with a significant shareholder. The debentures carry a one year term.
The debentures were issued in the amount of $50,000 on November 4, 2013 and $60,000 on December 17, 2013. Both debentures have
a conversion feature at a share price of the lower of $1.00 or 80% of the previous day’s closing price
The
Company assesses the fair value of the convertible debenture using the Black Scholes pricing model and records a derivative expense
for the value. The Company then assesses the fair value of the warrants quarterly based on the Black Scholes Model and increases
or decreases the liability to the new value, and records a corresponding gain or loss. The Company uses expected volatility based
primarily on historical volatility using weekly pricing observations for recent periods that correspond to the expected life of
the warrants. The risk-free interest rate is based on U.S. Treasury securities rates.
Due to the variable conversion rates,
the Company treats the convertible debenture as a derivative liability in accordance with the provisions of ASC 815 “Derivatives
and Hedging” (ASC 815). ASC 815 applies to any freestanding financial instruments or embedded features that have the characteristics
of a derivative and to any freestanding financial instruments that potentially settle in an entity’s own common stock. The
fair value of the conversion options was determined using the Black-Scholes Option Pricing Model and the following significant
assumptions during 2015:
|
|
December 31, 2015
|
|
Risk-free interest rate at grant date
|
|
|
.08
|
%
|
Expected stock price volatility
|
|
|
190
|
%
|
Expected dividend payout
|
|
|
-
|
|
Expected option in life-years
|
|
|
.50
|
|
As of December 31, 2015, the fair value
of the derivative liability for this note is $17,796 and the change in the fair value for the derivative liability was a loss of
$60,333 for the year ended December 31, 2015. $40,000 of the note was converted to common stock during 2015 resulting in the resolution
of derivative liabilities of $42,537 which was reclassified as additional paid-in capital.
7.
EQUITY
Common
Stock
On October 8, 2012, the Company filed
a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Nevada, pursuant to which (i) the Company
effected a 5,000-to-1 reverse split of its common stock and (ii) the number of authorized shares of the Company’s common
stock decreased from 75,000,000,000 to 100,000,000. The market effective date of the reverse split was October 9, 2012. The effect
of the stock split has been applied retroactively. On December 19, 2013 the Company increased its authorized shares of common stock
from 100,000,000 to 500,000,000. On February 10, 2015 the Company increased its authorized shares of common stock from 500,000,000
to 700,000,000. On July 6, 2015, the Company effected a 20-to-1 reverse split of its common stock. The effect of the stock split
has been applied retroactively.
2014
On
April 17, 2014, the Company issued an aggregate of 7,506,483 shares of common stock to certain shareholders of the Company, in
accordance with anti-dilution rights held by such shareholders, including 6,279,210 shares to Lyle Hauser and 1,227,273 shares
to purchasers under Securities Purchase Agreements entered into by the Company in July 2011. Lyle Hauser is the Company's largest
shareholder.
On
July 3, 2014, the Company entered into a Securities Purchase Agreement with accredited investors pursuant to which the Company
sold 750,000 shares of common stock for an aggregate purchase price of $200,000.
On
July 6, 2014, the Company entered into a Securities Purchase Agreement with accredited investors pursuant to which the Company
sold 1,000,000 shares of common stock for an aggregate purchase price of $150,000.
2015
During the first quarter of 2015, the
Company issued an aggregate of 13,954,955 shares of common stock to purchasers under the securities purchase agreements entered
into by the Company in January and February 2015 for an aggregate price of $620,000, at $0.0445 per share
On March 18, 2015 the Company issued
900,901 shares of common stock in exchange for $40,000 of debt owed by the Company. The Company recognized a loss on the conversion
of $32,072 and a resolution of derivative liabilities of $42,537 in relation to the derivative for the convertible debt.
On May 11, 2015 the Company issued 2,500,000
shares of common stock to its CEO and a consultant for a total expense of stock based compensation of $250,000.
During 2015, the Company issued 102,137 common shares for
a stock payable.
Preferred
Stock
On
April 10, 2012, the Company filed a certificate of designation of Series B Preferred Stock (the “Series B Certificate of
Designation”) with the Secretary of State of Nevada, pursuant to which 100,000 shares of the Company’s preferred stock
were designated as Series B Convertible Preferred Stock (the “Series B Preferred Stock”). Pursuant to the Series B
Certificate of Designation, the Series B Preferred Stock:
●
|
Has
a liquidation preference over the common stock equal to the stated value of $1.00 per share.
|
|
|
●
|
Votes
as a single class with the common stock and entitles its holders, for each share of Series B Preferred Stock, to cast such
number of votes equal to 0.00051% of the total number of votes entitled to be cast. Accordingly, a holder of all 100,000 shares
of Series B Preferred Stock will have the right to cast 51% of the total number of votes entitled to be cast.
|
|
|
●
|
Will
automatically convert into common stock at a ratio of 2 shares of common stock for each share of Series B Preferred Stock,
effective upon the Company’s filing of a certificate of amendment to its articles of incorporation.
|
On
April 12, 2012, the Company entered into a securities purchase agreement with Lyle Hauser (the “Preferred Stock Investor”).
Lyle Hauser is the Company’s largest shareholder and the brother of Kevin Hauser, the Company’s then-chief executive
officer. Pursuant to the purchase agreement, on April 12, 2012, the Company sold 100,000 shares of Series B Preferred Stock to
the Preferred Stock Investor for an aggregate purchase price of $100,000, and the Company issued four-year warrants to purchase
10,000 shares of common stock to the Preferred Stock Investor with an exercise price of $0.50. On April 23, 2012, 100,000 Series
B Preferred shares were converted to 10,000 shares of common stock
Stock
Options
2008
Amended and Restated Incentive Stock Plan
In
November 2008, our Board of Directors adopted the 2008 Equity Incentive Plan and subsequently amended it in January 2009, June
2009 and July 2009 (the “2008 Plan”). The purpose of the 2008 Plan was to provide an incentive to attract and retain
directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship
and to stimulate an active interest of such persons into our development and financial success. Under the 2008 Plan, the Company
is authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options,
stock appreciation rights, performance shares, restricted stock and long term incentive awards. The 2008 Plan will be administered
by our Board of Directors until such time as such authority has been delegated to a committee of the board of directors.
2010
Incentive Stock Plan
In
December 2009, our Board of Directors adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The purpose of the
2010 Plan was to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services
are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons into our development
and financial success. Under the 2010 Plan, we are authorized to issue incentive stock options intended to qualify under Section 422
of the Code, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long term incentive
awards. The 2010 Plan will be administered by our Board of Directors until such time as such authority has been delegated to a
committee of the Board of Directors.
Other
Warrants
Transactions
involving warrants (excluding those that include ratchets as discussed above) are summarized as follows:
|
|
Number of Warrants
|
|
|
Weighted-Average Price Per Share
|
|
Outstanding at December 31, 2013
|
|
|
1,450
|
|
|
|
600
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
1,350
|
|
|
|
500
|
|
Canceled or expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2014
|
|
|
100
|
|
|
$
|
1,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled or expired
|
|
|
(100
|
)
|
|
|
(2,000
|
)
|
Outstanding at December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
8. INCOME TAXES
Deferred
income taxes are determined using the liability method for the temporary differences between the financial reporting basis and
income tax basis of the Company's assets and liabilities. Deferred income taxes are measured based on the tax rates expected to
be in effect when the temporary differences are included in the Company's tax return. Deferred tax assets and liabilities are
recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts
of assets and liabilities and their respective tax bases.
The
Company is subject to US taxes. Historically, the Company has had no net taxable income, and therefore has paid no income tax.
As of December 31, 2015 and 2014, the
Company had a net operating loss (NOL) carryforward of approximately $17,105,047 and $16,259,744. The NOL carryforward begins to
expire in various years through 2017. Because management is unable to determine that it is more likely than not that the Company
will realize the tax benefit related to the NOL carryforward, by having future taxable income, a full valuation allowance has been
established at December 31, 2015 to reduce the tax benefit asset value to zero.
Components
of net deferred tax assets, including a valuation allowance, are as follows at December 31st:
|
|
2015
|
|
|
2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Federal deferred tax assets
|
|
|
5,986,766
|
|
|
|
5,690,910
|
|
Valuation allowance
|
|
|
(5,986,766
|
)
|
|
|
(5,690,910
|
)
|
Total deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The valuation allowance for deferred
tax assets as of December 31, 2015 and 2014 was $5,986,766 and $5,690,910, respectively. In assessing the recovery of the deferred
tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which
those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment. As a result, management determined it was
more likely than not the deferred tax assets would not be realized as of December 31, 2015 and 2014, and recorded a full valuation
allowance.
9.
RELATED PARTY TRANSACTIONS
The
Company entered into two 10% Secured Convertible Debentures with a significant shareholder. See Note 5.
10. SUBSEQUENT
EVENTS
The Company entered
into a two 7% Promissory Notes with a term of four months, with a significant shareholder. Each note is in the amount of $50,000
with funds received February 8, 2016 and March 30, 2016.