The accompanying notes are an integral part of the condensed financial statements
The accompanying notes are an integral part of the condensed financial statements
The accompanying notes are an integral part of the condensed financial statements
Notes to Condensed Financial Statements
Three Months Ended March 31, 2016
(Unaudited)
NOTE 1 – THE COMPANY
Freeze Tag, Inc. (the "Company") is a leading creator of mobile social games that are fun and engaging for all ages. Based on a free-to-play business model that has propelled games like Candy Crush Saga to worldwide success, the Company employs state-of-the-art data analytics and proprietary technology to dynamically optimize the gaming experience for revenue generation. Players can download and enjoy the Company's games for free, or they can purchase virtual items and additional features within the game to increase the fun factor. The Company's games encourage players to compete and engage with their friends on major social networks such as Facebook and Twitter.
NOTE 2 – GOING CONCERN
As shown in the accompanying financial statements, the Company incurred net losses of $350,562 and $497,001 for the three-month periods ended March 31, 2016 and 2015, respectively. As of March 31, 2016, the Company's accumulated deficit was $9,335,072. During the three months ended March 31, 2016 and the year ended December 3l, 2015, the Company experienced negative cash flows from operations largely due to its continued investment spending for product development of game titles for smartphones and tablets that are expected to benefit future periods. Those facts, along with our lack of access to a significant bank credit facility, create an uncertainty about the Company's ability to continue as a going concern. Accordingly, the Company is currently evaluating its alternatives to secure financing sufficient to support the operating requirements of its current business plan, as well as continuing to execute its business strategy of distributing game titles to digital distribution outlets, including mobile gaming app stores, online PC and Mac gaming portals, and opportunities for new devices such as tablet (mobile internet device) applications, mobile gaming platforms and international licensing opportunities.
The Company's ability to continue as a going concern is dependent upon its success in securing sufficient financing and in successfully executing its plans to return to positive cash flows during fiscal 2016. The Company's financial statements do not include any adjustments that might be necessary if it were unable to continue as a going concern.
NOTE 3 –
ACCRUED EXPENSES
Accrued liabilities consisted of the following at:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Accrued vacation
|
|
$
|
66,542
|
|
|
$
|
64,461
|
|
Accrued royalties
|
|
|
408,380
|
|
|
|
408,134
|
|
Technology payable
|
|
|
18,000
|
|
|
|
18,000
|
|
Other
|
|
|
450
|
|
|
|
1,417
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
493,372
|
|
|
$
|
492,012
|
|
Accrued royalties consist of amounts owed to other parties with whom the Company has revenue-sharing agreements or from whom it licenses certain trademarks or copyrights.
Unearned royalties consist of royalties received from licensees, which have not yet been earned. Unearned royalties were $193,347 and $195,033 at March 31, 2016 and December 31, 2015, respectively.
As of March 31, 2016 and December 31, 2015, the Company had technology payable of $18,000 resulting from a technology transfer agreement with an unrelated party entered into in June 2011, payable in 24 installments of $1,500 without interest.
NOTE 4 –
DEBT
Notes Payable
On February 1, 2016, the Company entered into a Game Marketing Agreement with an investor whereby the investor agreed, at its option, to loan up to $250,000 (the "Marketing Fund") to the Company to exclusively fund user acquisition efforts for the game Kitty Pawp (the "Game"). The investor will receive 50% of Net Receipts (as defined in the agreement) from the Game until the Marketing Fund is fully recouped. Once the Marketing Fund is recouped, the investor will receive 50% of Net Receipts from the Game until the investor receives a 50% return on the Marketing Funds advanced.
The Company has recorded Marketing Fund advances as notes payable in the accompanying condensed balance sheets. Upon receiving a Marketing Fund advance, the Company accrues the 50% return as interest expense and includes the obligation in accrued interest payable in the accompanying condensed balance sheets. As of March 31, 2016, total advances recorded as notes payable were $29,780 and accrued interest payable included a total of $14,890 of the 50% guaranteed return.
Convertible Notes Payable – Related Party
Convertible notes payable, related party consisted of the following at:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Convertible note payable to the Holland Family Trust, maturing on September 30, 2016, with interest at 10%
|
|
$
|
222,572
|
|
|
$
|
222,572
|
|
Convertible note payable to Craig Holland, maturing on September 30, 2016, with interest at 10%
|
|
|
813,602
|
|
|
|
813,602
|
|
Convertible note payable to Craig Holland, maturing on December 31, 2016, with interest at 10%
|
|
|
186,450
|
|
|
|
186,450
|
|
Convertible note payable to Mick Donahoo, maturing on December 31, 2016, with interest at 10%
|
|
|
186,450
|
|
|
|
186,450
|
|
Convertible note payable to Craig Holland, maturing on December 31, 2016, with interest at 10%
|
|
|
6,925
|
|
|
|
6,925
|
|
Convertible note payable to Mick Donahoo, maturing on December 31, 2016, with interest at 10%
|
|
|
31,042
|
|
|
|
31,042
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,447,041
|
|
|
$
|
1,447,041
|
|
The "Holland Family Trust Convertible Note" is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The "Variable Conversion Price" shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). "Market Price" means the average of the three lowest trading prices for the Company's common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the date of conversion. "Fixed Conversion Price" shall mean $0.00005.
The Company evaluated the Holland Family Trust Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash.
As of September 30, 2014, $72,107 of accrued interest was added to the note principal and $813,602 of the note was transferred to Craig Holland. A new convertible note for $222,572 was issued to the Holland Family Trust with the same terms as the previous note, with the exception of the maturity date, which was extended to September 30, 2016. As of March 31, 2016 and December 31, 2015, accrued interest related to the Holland Family Trust Convertible Note was $33,401 and $27,867, respectively.
On September 30, 2014, $813,602 principal balance (including interest) of the Holland Family Trust Convertible Note was transferred to Craig Holland (the "Holland Transferred Convertible Note"). The Holland Transferred Convertible Note retains the same terms as the original Holland Family Trust Convertible Note with the exception of the maturity date, which was extended to December 31, 2016. As of March 31, 2016 and December 31, 2015, accrued interest related to the Holland Transferred Convertible Note was $122,096 and $101,867, respectively.
On December 31, 2013, the Company converted $186,450 of accrued salaries due to Craig Holland into a convertible note (the "Holland Accrued Salary Note") and converted $186,450 of accrued salaries due to Mick Donahoo into a convertible note (the "Donahoo Accrued Salary Note"). The Holland Accrued Salary Note and the Donahoo Accrued Salary Note are convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The "Variable Conversion Price" shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). "Market Price" means the average of the three lowest trading prices for the Company's common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. "Fixed Conversion Price" shall mean $0.00005.
The Company evaluated the Holland Accrued Salary Note and the Donahoo Accrued Salary Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, the conversion feature does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. As of March 31, 2016 and December 31, 2015, there was $41,926 and $37,290, respectively, of accrued interest related to each of the notes.
On December 31, 2013, the Company converted a note payable to Mick Donahoo of $55,250 and accrued interest of $15,399 into a new convertible related party note in the amount of $70,649 (the "Mick Donahoo Convertible Note").
On December 31, 2013, the Company converted a note payable to Craig Holland of $35,100 and accrued interest of $11,432 into a new convertible related party note in the amount of $46,532 (the "Craig Holland Convertible Note").
The Mick Donahoo Convertible Note and the Craig Holland Convertible Note are convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The "Variable Conversion Price" shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). "Market Price" means the average of the three lowest trading prices for the Company's common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. "Fixed Conversion Price" shall mean $0.00005.
The Company evaluated the Mick Donahoo Convertible Note and the Craig Holland Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreements modified the debt to make it convertible into common stock of the Company. As of March 31, 2016 and December 31, 2015, there was accrued interest payable related to these notes totaling $6,090 and $5,146, respectively.
On October 23, 2014, Craig Holland converted $35,000 principal and $2,836 accrued interest into 39,829,849 shares of the Company's common stock.
On October 23, 2014, Mick Donahoo converted $35,000 principal and $2,836 accrued interest into 39,829,849 shares of the Company's common stock.
On October 8, 2015, Craig Holland converted $4,607 principal and $2,028 accrued interest into 12,637,860 shares of the Company's common stock.
On October 8, 2015, Mick Donahoo converted $4,607 principal and $2,028 accrued interest into 12,637,860 shares of the Company's common stock.
Effective October 15, 2015, the Company entered into an Amendment to Convertible Promissory Note with each of Craig Holland and Mick Donahoo with respect to the Craig Holland Convertible Note and the Mick Donahoo Convertible Note. The parties agreed to modify the terms of the notes such that in the event the lender issues a valid conversion notice and the conversion notice results in a conversion price less than the then-par value of the Company's common stock, the conversion will be effected at par value with additional principal amounts added to the note equal to the value of the common shares that were not able to be issued due to the conversion price being less than the par value of the Company's common stock. As the amendment did not alter the shares received by converting the notes, no additional value was recorded by the Company as a result of these amendments.
Total accrued interest payable for the related party convertible notes was $245,439 and $209,461 as of March 31, 2016 and December 31, 2015, respectively.
Convertible Notes Payable – Non-Related Party
Convertible notes payable – non-related party consisted of the following at:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Convertible note payable to Robert Cowdell, maturing on December 31, 2016, with interest at 10%
|
|
$
|
61,443
|
|
|
$
|
61,443
|
|
Convertible note payable to an accredited investor, maturing on September 30, 2016, with interest at 10%
|
|
|
26,726
|
|
|
|
31,126
|
|
Convertible note payable to an accredited investor, maturing on September 30, 2016, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on September 30, 2016, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on September 30, 2016, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on September 30, 2016, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
100,000
|
|
|
|
100,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
70,000
|
|
|
|
70,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
30,000
|
|
|
|
30,000
|
|
Convertible note payable to an accredited investor, maturing on November 11, 2016, with interest at 10%
|
|
|
30,000
|
|
|
|
30,000
|
|
Convertible note payable to an accredited investor, maturing on November 11, 2016, with interest at 10%
|
|
|
40,000
|
|
|
|
40,000
|
|
Convertible note payable to an accredited investor, maturing on November 11, 2016, with interest at 10%
|
|
|
110,000
|
|
|
|
110,000
|
|
Convertible note payable to an accredited investor, maturing on November 11, 2016, with interest at 10%
|
|
|
88,000
|
|
|
|
88,000
|
|
Convertible note payable to an accredited investor, maturing on November 11, 2016, with interest at 10%
|
|
|
90,000
|
|
|
|
90,000
|
|
Convertible note payable to an accredited investor, maturing on November 11, 2016, with interest at 10%
|
|
|
90,000
|
|
|
|
90,000
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
65,000
|
|
|
|
65,000
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
65,000
|
|
|
|
65,000
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
60,000
|
|
|
|
60,000
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
55,000
|
|
|
|
55,000
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
25,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
55,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
50,000
|
|
|
-
|
|
Total
|
|
|
1,711,169
|
|
|
|
1,585,569
|
|
Less discount
|
|
(164,087
|
)
|
|
(180,208
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
1,547,082
|
|
|
|
1,405,361
|
|
Less current portion
|
|
|
736,169
|
|
|
|
718,923
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
810,913
|
|
|
$
|
686,438
|
|
On December 31, 2013, the Company converted $55,429 of convertible debt and $6,014 in accrued interest due to Robert Cowdell (the "Convertible Cowdell Note") into a convertible note. The Convertible Cowdell Note is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The "Variable Conversion Price" shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). "Market Price" means the average of the three lowest trading prices for the Company's common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. "Fixed Conversion Price" shall mean $0.00005. The Convertible Cowdell Note had accrued interest of $13,816 and $12,289 as of March 31, 2016 and December 31, 2015, respectively.
The Company evaluated the Convertible Cowdell Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company.
The convertible notes to an accredited investor (the "Accredited Investor") with outstanding balances at March 31, 2016 were issued in $50,000 tranches in January, February, March, April, May, June, July, August, September, October and December 2014, and tranches of $100,000 in November 2014, $70,000 in January 2015, two $30,000 tranches in February 2015, $40,000 in February 2015, $110,000 in March 2015, $88,000 in April 2015, $90,000 in May and June 2015, $65,000 in July and August 2015, $60,000 in September 2015, $50,000 in October and November 2015, $55,000 in December 2015, $25,000 in January 2016, $55,000 in February 2016 and $50,000 in March 2016. Each note is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The "Variable Conversion Price" shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). "Market Price" means the average of the three lowest trading prices for the Company's common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. "Fixed Conversion Price" shall mean $0.00005. The notes also include conversion price reset features that are triggered when the Company issues certain new equity instruments; as a result, this feature caused the Company to consider this feature a derivative liability.
The maturity date of the notes is generally one year from the date of funding, with the maturity date of the tranches issued in February 2015 through March 2016 nine months from the date of funding. The due date of the note that includes tranches funded through May 2014 with outstanding principal balances totaling $226,726 as of March 31, 2016 was extended to September 30, 2016. The due date of the note that includes tranches funded from June 2014 through February 2015 with outstanding principal balances totaling $500,000 as of March 31, 2016 was extended to June 25, 2017. The due date of the note that includes tranches funded from February 2015 through June 2015 with outstanding principal balances totaling $448,000 as of March 31, 2016 was extended to November 11, 2016, and the due date of the note that includes tranches funded from July 2015 through March 2016 with outstanding principal balances totaling $475,000 as of March 31, 2016 was extended to April 28, 2017.
The January 2014 derivative was valued as of January 6, 2014 at $44,493, of which all was recorded as a debt discount. The debt discount was fully amortized to interest expense at March 31, 2016. The January 2014 note had accrued interest of $5,585 and $5,814 as of March 31, 2016 and December 31, 2015, respectively.
The February 2014 derivative was valued as of February 18, 2014 at $44,556, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at March 31, 2016. The February 2014 note had accrued interest of $10,572 and $9,329 as of March 31, 2016 and December 31, 2015, respectively.
The March 2014 derivative was valued as of March 26, 2014 at $77,884, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at March 31, 2016. The March 2014 note had accrued interest of $10,079 and $8,836 as of March 31, 2016 and December 31, 2015, respectively.
The April 2014 derivative was valued as of April 25, 2014 at $90,605, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at March 31, 2016. The April 2014 note had accrued interest of $9,668 and $8,425 as of March 31, 2016 and December 31, 2015, respectively.
The May 2014 derivative was valued as of May 21, 2014 at $95,029, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at March 31, 2016. The May 2014 note had accrued interest of $9,312 and $8,068 as of March 31, 2016 and December 31, 2015, respectively.
The June 2014 derivative was valued as of June 25, 2014 at $83,184, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at March 31, 2016. The June 2014 note had accrued interest of $8,818 and $7,575 as of March 31, 2016 and December 31, 2015, respectively.
The July 2014 derivative was valued as of July 15, 2014 at $73,999, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at March 31, 2016. The July 2014 note had accrued interest of $8,545 and $7,301 as of March 31, 2016 and December 31, 2015, respectively.
The August 2014 derivative was valued as of August 19, 2014 at $64,104, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at March 31, 2016. The August 2014 note had accrued interest of $8,079 and $6,836 as of March 31, 2016 and December 31, 2015, respectively.
The September 2014 derivative was valued as of September 17, 2014 at $62,915, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at March 31, 2016. The September 2014 note had accrued interest of $7,681 and $6,438 as of March 31, 2016 and December 31, 2015, respectively.
The October 2014 derivative was valued as of October 13, 2014 at $63,347, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at March 31, 2016. The October 2014 note had accrued interest of $7,312 and $6,069 as of March 31, 2016 and December 31, 2015, respectively.
The November 2014 derivative was valued as of November 7, 2014 at $99,757, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at March 31, 2016. The November 2014 note had accrued interest of $14,130 and $11,644 as of March 31, 2016 and December 31, 2015, respectively.
The December 2014 derivative was valued as of December 17, 2014 at $58,456, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at March 31, 2016. The December 2014 note had accrued interest of $6,421 and $5,178 as of March 31, 2016 and December 31, 2015, respectively.
The January 2015 derivative was valued as of January 14, 2015 at $29,360, which was recorded as a debt discount. During the three months ended March 31, 2016, $1,126 was amortized from the debt discount. The debt discount was fully amortized to interest expense at March 31, 2016. The January 2015 note had accrued interest of $8,491 and $6,751 as of March 31, 2016 and December 31, 2015, respectively.
The first February 2015 derivative was valued as of February 10, 2015 at $23,984, which was recorded as a debt discount. During the three months ended March 31, 2016, $2,694 was amortized from the debt discount. The debt discount was fully amortized to interest expense at March 31, 2016. The first February 2015 note had accrued interest of $3,417 and $2,671 as of March 31, 2016 and December 31, 2015, respectively.
The second February 2015 derivative was valued as of February 11, 2015 at $18,003, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at March 31, 2016. The second February 2015 note had accrued interest of $3,409 and $2,663 as of March 31, 2016 and December 31, 2015, respectively.
The third February 2015 derivative was valued as of February 25, 2015 at $19,494, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at March 31, 2016. The third February 2015 note had accrued interest of $6,588 and $5,096 as of March 31, 2016 and December 31, 2015, respectively.
The March 2015 derivative was valued as of March 10, 2015 at $31,885, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at March 31, 2016. The March 2015 note had accrued interest of $11,686 and $8,951 as of March 31, 2016 and December 31, 2015, respectively.
The April 2015 derivative was valued as of April 17, 2015 at $31,397, which was recorded as a debt discount. During the three months ended March 31, 2016, $1,941 was amortized from the debt discount. The debt discount was fully amortized to interest expense at March 31, 2016. The April 2015 note had accrued interest of $8,432 and $6,244 as of March 31, 2016 and December 31, 2015, respectively.
The May 2015 derivative was valued as of May 22, 2015 at $36,550, which was recorded as a debt discount. During the three months ended March 31, 2016, $7,019 was amortized from the debt discount. The debt discount was fully amortized to interest expense at March 31, 2016. The May 2015 note had accrued interest of $7,761 and $5,523 as of March 31, 2016 and December 31, 2015, respectively.
The June 2015 derivative was valued as of June 23, 2015 at $41,878, which was recorded as a debt discount. During the three months ended March 31, 2016, $12,686 was amortized from the debt discount. The debt discount was fully amortized to interest expense at March 31, 2016. The June 2015 note had accrued interest of $6,974 and $4,734 as of March 31, 2016 and December 31, 2015, respectively.
The July 2015 derivative was valued as of July 28, 2015 at $38,600, which was recorded as a debt discount. During the three months ended March 31, 2016, $12,773 was amortized from the debt discount. The debt discount had a balance at March 31, 2016 of $3,930. The July 2015 note had accrued interest of $4,412 and $2,796 as of March 31, 2016 and December 31, 2015, respectively.
The August 2015 derivative was valued as of August 21, 2015 at $37,269, which was recorded as a debt discount. During the three months ended March 31, 2016, $12,378 was amortized from the debt discount. The debt discount had a balance at March 31, 2016 of $6,937. The August 2015 note had accrued interest of $3,985 and $2,369 as of March 31, 2016 and December 31, 2015, respectively.
The September 2015 derivative was valued as of September 24, 2015 at $37,820, which was recorded as a debt discount. During the three months ended March 31, 2016, $12,561 was amortized from the debt discount. The debt discount had a balance at March 31, 2016 of $11,732. The September 2015 note had accrued interest of $3,379 and $1,763 as of March 31, 2016 and December 31, 2015, respectively.
The October 2015 derivative was valued as of October 23, 2015 at $35,290, which was recorded as a debt discount. During the three months ended March 31, 2016, $11,720 was amortized from the debt discount. The debt discount had a balance at March 31, 2016 of $14,683. The October 2015 note had accrued interest of $2,202 and $959 as of March 31, 2016 and December 31, 2015, respectively.
The November 2015 derivative was valued as of November 30, 2015 at $36,448, which was recorded as a debt discount. During the three months ended March 31, 2016, $12,422 was amortized from the debt discount. The debt discount had a balance at March 31, 2016 of $19,794. The November 2015 note had accrued interest of $1,682 and $438 as of March 31, 2016 and December 31, 2015, respectively.
The December 2015 derivative was valued as of December 21, 2015 at $37,163, which was recorded as a debt discount. During the three months ended March 31, 2016, $12,298 was amortized from the debt discount. The debt discount had a balance at March 31, 2016 of $23,514. The December 2015 note had accrued interest of $1,533 and $166 as of March 31, 2016 and December 31, 2015, respectively.
The January 2016 derivative was valued as of January 22, 2016 at $30,855, of which $25,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the three months ended March 31, 2016, $6,296 was amortized from the debt discount. The debt discount had a balance at March 31, 2016 of $18,704. The January 2016 note had accrued interest of $478 as of March 31, 2016.
The February 2016 derivative was valued as of February 8, 2016 at $37,835, which was recorded as a debt discount. During the three months ended March 31, 2016, $7,180 was amortized from the debt discount. The debt discount had a balance at March 31, 2016 of $30,655. The February 2016 note had accrued interest of $781 as of March 31, 2016.
The March 2016 derivative was valued as of March 7, 2016 at $37,402, which was recorded as a debt discount. During the three months ended March 31, 2016, $3,264 was amortized from the debt discount. The debt discount had a balance at March 31, 2016 of $34,138. The March 2016 note had accrued interest of $328 as of March 31, 2016.
Total accrued interest payable for the non-related party convertible notes was $195,556 and $154,925 as of March 31, 2016 and December 31, 2015, respectively.
The Company recorded total interest expense, including debt discount and beneficial conversion feature amortization, for all debt of $214,674 and $217,748 for the three months ended March 31, 2016 and 2015, respectively.
NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted FASB ASC 820 on October 1, 2008. Under this FASB, 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 (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company has various financial instruments that must be measured under the new fair value standard including: cash and debt. The Company currently does not have non-financial assets or non-financial liabilities that are required to be measured at fair value on a recurring basis. The Company's financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The fair value of the Company's cash is based on quoted prices and therefore classified as Level 1.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
Cash, accounts receivable, capitalized production costs, prepaid royalties, prepaid expenses, accounts payable, accrued compensation, accrued royalties, accrued interest, accrued expenses, unearned royalties, notes payable – related party and technology payables reported on the balance sheet are estimated by management to approximate fair market value due to their short term nature.
The following tables provide a summary of the fair values of assets and liabilities measured on a non-recurring basis as of March 31, 2016 and December 31, 2015:
March 31, 2016
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Losses (Gains)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
884,259
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
884,259
|
|
|
$
|
(54,979
|
)
|
December 31, 2015
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Losses (Gains)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
841,677
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
841,677
|
|
|
$
|
(106,543
|
)
|
NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS
As discussed in Note 4, the Company issued convertible notes payable to non-related parties that contain anti-dilutive, or down round, price protection. Pursuant to ASC 815-15 Embedded Derivatives and ASC 815-40 Contracts in Entity's Own Equity, the Company recorded a derivative liability for the price protection provisions issued within the convertible debt transactions.
The fair values of the Company's derivative liabilities are estimated at the issuance date and are revalued at each subsequent reporting date using a multinomial lattice model simulation discussed below. At March 31, 2016 and December 31, 2015, the Company recorded current derivative liabilities of $884,259 and $841,677, respectively. The net change in fair value of the derivative liabilities resulted in a gain of $54,979 for the three months ended March 31, 2016 and a loss of $8,753 for the three months ended March 31, 2015, which are reported as other income (expense) in the statements of operations.
The following table presents details of the Company's derivative liabilities for the three months ended March 31, 2016:
Balance, December 31, 2015
|
|
$
|
841,677
|
|
Increases in derivative value due to new issuances of notes
|
|
|
106,092
|
|
Derivative adjustment due to debt conversion
|
|
|
(8,531
|
)
|
Change in fair value of derivative liabilities
|
|
|
(54,979
|
)
|
|
|
|
|
|
Balance, March 31, 2016
|
|
$
|
884,259
|
|
The Company calculated the fair value of the compound embedded derivatives using a multinomial lattice model simulation. The model is based on a probability weighted discounted cash flow model using projections of the various potential outcomes.
Key inputs and assumptions used in valuing the Company's derivative liabilities are as follows for issuances of notes:
|
·
|
Stock prices on all measurement dates were based on the fair market value
|
|
|
|
|
·
|
Down round protection is based on the subsequent issuance of common stock at prices less than the conversion feature
|
|
|
|
|
·
|
The probability of future financing was estimated at 100%
|
|
|
|
|
·
|
Computed volatility ranging from 281% to 280%
|
See Note 5 for a discussion of fair value measurements.
NOTE 7 – STOCKHOLDERS' DEFICIT
Stock Issuances
The Company is authorized to issue up to 2,000,000,000 shares of its $0.00001 par value common stock, and up to 10,000,000 shares of its $.001 par value preferred stock.
As of March 31, 2016 and December 31, 2015, the Company had common stock payable of $16,800 resulting from a technology transfer agreement with an unrelated party that obligated the Company to issue a total of 96,000 shares of its common stock, payable in 8 quarterly installments of 12,000 shares.
During the three months ended March 31, 2016, the Company issued a total of 11,915,495 shares of its common stock to an accredited investor in conversion of $4,400 principal and $962 accrued interest payable at a conversion price of $0.00045 per share and settled $8,531 of derivative liabilities. As a result of the debt conversion and derivative settlement, common stock was increased by $120 and additional paid-in capital was increased by $13,773.
2006 Stock Option Plan
The 2006 Stock Option Plan was adopted by our Board of Directors in March of 2006. A total of 550,000 shares of Common Stock have been reserved for issuance to employees, consultants and directors upon exercise of incentive and non-statutory options and stock purchase rights which may be granted under the Company's 2006 Stock Plan (the "2006 Plan"). On October 15, 2009, 235,000 of those options were exercised, leaving 315,000 shares available for issuance to employees. Because of the 5.31-for-one forward stock split of the Company's common stock on October 15, 2009, there are now 1,512,650 shares available for issuance as a part of this stock plan. As of March 31, 2016, there were 560,000 options outstanding to purchase shares of Common Stock, and no shares of Common Stock had been issued pursuant to stock purchase rights under the 2006 Plan.
Under the 2006 Plan, options may be granted to employees, directors, and consultants. Only employees may receive "incentive stock options," which are intended to qualify for certain tax treatment, and consultants and directors may receive "non-statutory stock options," which do not qualify for such treatment. A holder of more than 10% of the outstanding voting shares may only be granted options with an exercise price of at least 110% of the fair market value of the underlying stock on the date of the grant, and if such holder has incentive stock options, the term of the options must not exceed five years.
Options and stock purchase rights granted under the 2006 Plan generally vest ratably over a four year period (typically 1⁄4 or 25% of the shares vest after the 1st year and 1/48 of the remaining shares vest each month thereafter); however, alternative vesting schedules may be approved by the Board of Directors in its sole discretion. Any unvested portion of an option or stock purchase right will accelerate and become fully vested if a holder's service with the Company is terminated by the Company without cause within twelve months following a Change in Control (as defined in the 2006 Plan).
All options must be exercised within ten years after the date of grant. Upon a holder's termination of service for any reason prior to a Change in Control, the Company may repurchase any shares issued to such holder upon the exercise of options or stock purchase rights. The Board of Directors may amend the 2006 Plan at any time. The 2006 Plan will terminate in 2016, unless terminated sooner by the Board of Directors.
The Company did not grant any stock options or warrants during the three months ended March 31, 2016, and did not record any stock-based compensation expense during the three months ended March 31, 2016 and 2015.
A summary of the status of the options and warrants issued by the Company as of March 31, 2016, and changes during the three months then ended is presented below:
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
560,000
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Canceled / Expired
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2016
|
|
|
560,000
|
|
|
$
|
0.10
|
|
NOTE 8 – LOSS PER COMMON SHARE
The computation of basic earnings per common share is based on the weighted average number of shares outstanding during the period. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the weighted average common stock equivalents which would arise from the exercise of stock options, warrants and rights outstanding using the treasury stock method and the average market price per share during the period.
For the three months ended March 31, 2016 and 2015, the diluted weighted average number of shares is the same as the basic weighted average number of shares as the conversion of debt, options and warrants would be anti-dilutive.
NOTE 9 – RELATED PARTY TRANSACTIONS
The Company had convertible notes payable to related parties totaling $1,447,041 as of March 31, 2016 and December 31, 2015. See Note 4 for a detailed disclosure of this related party debt, including interest rates, terms of conversion and other repayment terms. Accrued interest payable to related parties was $245,439 and $209,461 as of March 31, 2016 and December 31, 2015, respectively.
NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)". The amendments in this ASU revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018 and are to be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are currently unable to determine the impact on our financial statements of the adoption of this new accounting pronouncement.
NOTE 11 – SUBSEQUENT EVENTS
Subsequent to March 31, 2016, the Company issued a total of 5,235,921 shares of common stock in the conversion of convertible notes payable principal totaling $2,000 and accrued interest payable totaling $356.16.
On April 7, 2016, the Company entered into a Convertible Promissory Note (the "Note") with an accredited investor (the "Accredited Investor") under which the Accredited Investor agreed to loan up to $500,000. The Note bears interest at 10% per annum and matures on April 7, 2017. Under the terms of the Note, the Accredited Investor agreed to loan the Company $60,000 upon execution of the Note and can loan the Company the additional amounts up to $500,000 at any time in its sole discretion. The Accredited Investor has the right, at any time after April 7, 2016, at its election, to convert all or part of the amounts due to it under the Note into shares of the Company's common stock. The conversion price shall be the lesser of (a) $0.003 per share of common stock or (b) 50% of the average of the three lowest trade prices on three separate trading days of the common stock recorded after April 7, 2016, or (c) the lowest effective price per share granted to any person or entity after April 7, 2016 to acquire the common stock or adjust, whether by operation of purchase price adjustment, settlement agreements, exchange agreements, reset provision, floating conversion or otherwise, any outstanding warrant, option or other right to acquire common stock or outstanding common stock equivalents, excluding any lower price per share offered to any of the Company's officers and directors. However, the Accredited Investor may not convert the amounts due under the Note into shares of common stock if such conversion would cause it to own more than 4.99% of the Company's then-outstanding common stock. The Note also contains piggyback registration rights. In the event the Company defaults under the terms of the Note, the Company would owe 150% of the principal amount then due under the Note immediately.
On May 10, 2016, we received additional proceeds of $45,000 from the April 7, 2016 Convertible Promissory Note to an Accredited Investor. The note bears interest at 10% per annum and matures 12 months from its effective date.