Notes
to the Condensed Consolidated Financial Statements
Three
Months Ended March 31, 2016 and 2015
(Unaudited)
Note
1 – Nature of Operations
Nature
of Operations
STL
Marketing Group, Inc., (the “Company”) has several business operations. The Company’s initial focus, renewable
energy, is currently on hold due to political delays in this industry in Costa Rica. The Company has pivoted to technology, a
core competency of its senior management team. The Company has sales and marketing operations in: (1) PhoneSuite Solutions, an
IP PBX product for the hospitality industry and (2) F3TCH, a patent pending technology, that virtualizes the hotel guest room
telephone to a guest’s smart phone or device.
STL
Marketing Group, Inc. (the “Company,” “our Company,” “we,” “us,” “our,”
or “STL,”) was incorporated under the laws of the State of Colorado on February 16, 1999 under the original name of
Fountain Colony Ventures, Inc. Fountain Colony Ventures, Inc. changed its name to SGT Ventures, Inc. in March 2006. In June 2006,
SGT Ventures, Inc. changed its name to Stronghold Industries, Inc. On October 30, 2007, Stronghold Industries, Inc. entered into
a share purchase and exchange agreement with Image Worldwide, Inc. The Company name was officially changed with the Secretary
of State to Image Worldwide, Inc. (“Image Worldwide”) on November 21, 2007. Image Worldwide entered into a share exchange
agreement with St. Louis Packaging Inc. and Image Worldwide Marketing, Inc., a Delaware corporation, on January 31, 2009. On November
27, 2009 the Company entered into an asset purchase agreement to sell all of its assets to Invicta Group, Inc., a Nevada corporation.
In April 2009, the Company changed its name to STL Marketing Group, Inc. On October 15, 2012, the Company transferred ownership
to Versant I, Inc., a Panamanian company owned by the current CEO. On February 4, 2013 the Company entered into a share exchange
and merged with Versant Corporation, a Delaware company whereby Versant became the Company’s wholly owned operating subsidiary.
The transaction was accounted for as a reverse merger.
Going
Concern
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying
consolidated financial statements, during the three months ended March 31, 2016, the Company incurred a net loss of $29,945, used
cash in operations of $36,710, and had a stockholders’ deficit of $6,065,405. These factors raise substantial doubt about
the Company’s ability to continue as a going concern. In addition, the Company’s independent registered public accounting
firm, in its report on the Company’s December 31, 2015 financial statements, has raised substantial doubt about the Company’s
ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s
ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
At
March 31, 2016, the Company had cash on hand in the amount of $12,917. Management estimates that the current funds on hand will
not be sufficient to continue operations. Management is currently seeking additional funds, primarily through the issuance of
debt and equity securities for cash to operate our business, and estimates that a significant amount of capital will be necessary
to advance the development of our projects to the point at which they will become commercially viable.
No
assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory
to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations,
in the case of debt financing or cause substantial dilution for our stockholders, in case of equity financing. The ability of
the Company to continue as a going concern is dependent on management’s plans, which include further implementation of its
business plan and continuing to raise funds through debt and/or equity raises.
Note
2 – Summary of Significant Accounting Policies
Principles
of Consolidation
The
financial statements include the accounts of STL Marketing Inc., and its wholly-owned subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation.
Estimates
The
preparation 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 expenses during the reporting period. The more significant
estimates and assumptions by management include, among others, the accrual of potential liabilities, and the assumptions used
in valuing derivatives and share-based instruments issued for services and financing. Actual results could differ from those estimates.
Share-Based
Compensation
The
Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for
services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based
on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) whereas the value of the award is measured
on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and
vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation
is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at
the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation
charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no
future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation
charge is recorded in the period of the measurement date.
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported in
the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded
as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified
in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could
be required within 12 months of the balance sheet date. To determine the number of authorized but unissued shares available to
satisfy outstanding convertible securities, the Company uses a sequencing method to prioritize its convertible securities as prescribed
by ASC 815-40-35. At each reporting date, the Company reviews its convertible securities to determine their classification is
appropriate.
Fair
Value of Financial Instruments
Under
current accounting guidance, fair value is defined as the price at which an asset could be exchanged or a liability transferred
in a transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability.
Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where
observable prices or parameters are not available, valuation models are applied. A fair value hierarchy prioritizes the inputs
used in measuring fair value into three broad levels as follows:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.
Level
3 – Unobservable inputs based on the Company’s assumptions.
The
Company is required to use observable market data if such data is available without undue cost and effort. As of March 31, 2016,
the amounts reported for cash, accounts payable and accrued liabilities approximated fair value because of their short-term maturities.
At
March 31, 2016 and December 31, 2015, derivative liabilities of $2,921,919 and $3,037,500, respectively, were valued using Level
2 inputs.
Reverse
Stock Split
In
October 2014, the Company’s board of directors and stockholders approved an amended and restated certificate of incorporation
to affect a reverse split of shares of our common stock at a 1-for-15 ratio. The reverse split became effective in March 2015.
The par value and the authorized shares of the common and convertible preferred stock were not adjusted as a result of the reverse
split. All issued and outstanding common stock and per share amounts contained in the financial statements have been retroactively
adjusted to reflect this reverse split for all periods presented.
Net
Loss per Common Share
Basic
loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of outstanding
common shares during the period. Diluted loss per share is computed by dividing the net loss applicable to common stockholders
by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding
if all dilutive potential common shares had been issued. Potential common shares are excluded from the computation when their
effect is anti-dilutive.
Common
stock equivalents are as follows:
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Convertible Debt
|
|
|
29,513,440,733
|
|
|
|
4,034,389,339
|
|
|
Liability to be paid in shares
|
|
|
395,872,093
|
|
|
|
68,125,000
|
|
|
Liability to be paid in shares (30% discount)
|
|
|
1,029,526,857
|
|
|
|
139,728,327
|
|
|
Common stock equivalents
|
|
|
30,938,839,683
|
|
|
|
4,242,242,666
|
|
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from
Contracts with Customers
. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing
revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition.
ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in
the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and
cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from
costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December
15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods
therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of
the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements
and disclosures.
In
August 2014, the FASB issued Accounting Standards Update No. 2014-15,
Disclosure of Uncertainties about an Entity’s Ability
to Continue as a Going Concern,
which provides guidance on determining when and how to disclose going-concern uncertainties
in the financial statements. ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability
to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain
disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. ASU
2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.
The Company is currently evaluating the impact the adoption of ASU 2014-15 on the Company’s financial statements and disclosures.
In
February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02,
Leases.
ASU 2016-02 requires a lessee to
record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12
months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption
is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at,
or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical
expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements
and disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
Note
3 – Notes Payable
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
In October 2010, a third party loaned the Company $50,000 under a demand note bearing
zero interest. At March 31, 2016 and December 31, 2015, this note is in default.
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
In March 2011, third parties loaned the Company $10,000 under a demand
note bearing zero interest. The note was acquired in the merger. At March 31, 2016 and December 31, 2015, this note is in
default.
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
$
|
60,000
|
|
|
$
|
60,000
|
|
Note
4 – Notes Payable-Related Party
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
The Company’s officers and shareholders have made various promissory notes
to the Company to fund operations. During the three months ended March 31, 2016, three notes were issued for $48,834 to related
parties. The notes are unsecured, and bear interest at 6% per annum. At March 31, 2016, $121,446 of the notes are past due
and in default, and the balance of $77,710 are due through September 1, 2016.
|
|
$
|
199,156
|
|
|
$
|
150,322
|
|
Note
5 – Convertible Notes Payable
At
March 31, 2016 and December 31, 2015, convertible notes consisted of the following:
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
Unsecured convertible notes payable
|
|
$
|
930,352
|
|
|
$
|
942,144
|
|
|
Debt discount
|
|
|
(3,560
|
)
|
|
|
(14,152
|
)
|
|
Notes payable, net of discount
|
|
$
|
926,792
|
|
|
$
|
927,992
|
|
From
2009 to 2015, the Company issued Convertible Promissory Notes (“Notes”) to various accredited investors. The Notes
bear interest ranging from 8% to 12% per annum and mature on various dates from February 2010 to September 2016. The Company is
currently in default of payment for Notes in the aggregate principal amount of $884,133.
At
March 31, 2016, the notes are convertible into shares of common stock of the Company at the option of the holder at price per
share discounts ranging from 10% to 75% of the Company’s common stock trading market price during a certain time period
(usually 10-20 days) as defined in the notes. In addition, the conversion prices are subject to adjustment in certain events,
such as in conjunction with any sale, conveyance or disposition of all or substantially all of the Company’s assets or consummation
of a transaction or series of related transactions in which the Company is not the surviving entity.
As
of December 31, 2015, the balance of the Notes was $942,144. During the three months ended March 31, 2016, the Company did not
issue any new unsecured convertible notes. During the three months ended March 31, 2016, note holders converted $11,791 of principal
and $92 of accrued interest into 85,088,539 shares of the Company’s common stock. At March 31, 2016, the principal balance
of the Notes was $930,352.
As
of December 31, 2015, the debt discount related to issuance of the Notes was $14,152. During the three months ended March 31,
2016, the Company recorded discount amortization of $10,592. As of March 31, 2016, debt discount was $3,560. The remainder of
the valuation discount will be amortized as interest expense over the remaining term of the note of approximately six months.
The
Company considered the current FASB guidance on derivative accounting. As the ultimate determination of shares to be issued upon
conversion of these notes could exceed the current number of available authorized shares, the conversion feature of these notes
is recorded as a derivative liability (See Note 7).
Management
and legal counsel have reviewed previous agreements and believe, pursuant to the Stock Purchase and Share Exchange Agreement effective
as of January 31, 2009 (the “2009 Agreement”) entered into by the Company (then known as Image Worldwide, Inc., a
Colorado corporation). Image Worldwide Marketing, Inc., a Delaware corporation and subsidiary of the Company (“Image Worldwide
Marketing Delaware”), and St. Louis Packaging, Inc., an Illinois corporation, that Image Worldwide Delaware should have
assumed all liabilities of the Company as of or prior to the 2009 Agreement. Management believes this amounts to $308,333 of debt
(including $265,000 of convertible debt), plus its related interest and derivatives. The Company is currently reviewing and weighing
its options and will proceed accordingly. At March 31, 2016 and December 31, 2015, this debt is included on the accompanying consolidated
financial statements.
Note
6 – Liabilities Payable in Shares
At
March 31, 2016 and December 31, 2016, the Company has recorded $114,500 of liabilities payable in shares of its Common Stock for
services received from three unrelated parties in 2012 and 2014. Of the total, $60,000 is payable in shares at a price at 70%
of the average of the lowest three closing bid prices, as defined, $15,000 is payable in shares using the average of the last
five trading days from date of service, as defined, and $39,500 is payable at the current price of the Company shares, as defined.
At March 31, 2016, the balance of $114,500 is convertible into 1,425,398,950 shares of Common Stock.
The
Company considered the current FASB guidance on derivative accounting. As the ultimate determination of shares to be issued upon
payment of these liabilities could exceed the current number of available authorized shares, the conversion feature of these liabilities
is recorded as a derivative liability (See Note 7).
Note
7 – Derivative Liabilities
Under
authoritative guidance issued by the FASB debt instruments, which do not have fixed settlement provisions, are deemed to be derivative
instruments. The conversion feature of the Company’s convertible notes payable and liabilities payable in shares (described
in Note 5 and 6 above) did not have fixed settlement provisions because the ultimate determination of shares to be issued could
exceed current available authorized shares.
In
accordance with the FASB authoritative guidance, the conversion feature of the financial instruments was separated from the host
contract and recognized as a derivative instrument. The conversion feature of the financial instruments had been characterized
as a derivative liability and was re-measured at the end of every reporting period with the change in value reported in the statement
of operations.
The
derivative liability was valued at the following dates using a probability weighted Black-Scholes-Merton model with the following
assumptions:
|
|
|
March
31, 2016
|
|
|
December 31, 2015
|
|
|
Conversion feature:
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.21
|
%
|
|
|
0.03
|
%
|
|
Expected volatility
|
|
|
244
|
%
|
|
|
290%-959
|
%
|
|
Expected life (in years)
|
|
|
1
year
|
|
|
|
1
year
|
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
2,921,919
|
|
|
$
|
3,037,500
|
|
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected life of the conversion feature
of the notes was based on the remaining terms of the financial instruments. The expected dividend yield was based on the fact
that the Company has not customarily paid dividends to its common stockholders in the past and does not expect to pay dividends
to its common stockholders in the future.
At
December 31, 2015, the balance of the derivative liabilities was $3,037,500. During the three months ended March 31, 2016, convertible
notes and accrued interest totaling $11,883 were converted into shares of common stock and the Company recorded a gain of $7,490
related to the extinguishment of the corresponding derivative liability. As of March 31, 2016, the Company re-measured the derivative
liabilities and determined the fair value to be $2,921,919, and for the three months ended March 31, 2016, recorded a gain on
the change in fair value of derivatives of $108,092.
Note
8 – Common Stock
For
the three months ended March 31 2016, 85,088,539 shares of common stock were issued to holders of various convertible notes that
converted $11,883 of principal and accrued interest.
Note
9 – Related Party Transactions
(A)
Accounts Payable and Accrued Liabilities – Related Party
Since
April 8, 2010 through March 31, 2016, management and board members have been advancing funds to the Company, paying expenses on
behalf of the Company, and deferring salaries and consulting fees. As of March 31, 2016 and December 31, 2015, accounts payable
and accrued liabilities due to board members and companies owned by board members totaled $446,080 and $436,123, respectively.
These amounts are unsecured, non-interest bearing, and due on demand.
(B)
Related Party Consulting Services
The
Company incurred consulting expenses to a company that is owned by a board member, and for the three months ending March 31, 2016
and 2015 the amounts were $7,500 and $7,500 respectively.
Note
10 – Commitments and Contingencies
Payable
to Tarpon Bay Partners LLC
In
2014, Tarpon Bay Partners LLC (Tarpon) assumed $519,282 of past due accounts payable of the Company from various creditors of
the Company. Tarpon then commenced an action against the Company to recover the aggregate of the past due accounts. On March 19,
2014, the Circuit Court of the Second Judicial Circuit for Leon County, Florida approved an agreement between the Company and
Tarpon, in which the Company agreed to issue shares of the Company’s common stock to Tarpon sufficient to generate proceeds
equal to the aggregate of the past due accounts. In addition, Tarpon will receive a fee of approximately 33% based on the proceeds.
The Company will record the fees as the shares are issued and the past due accounts are paid. The past due amounts assumed are
recorded as current liabilities of the Company until settled under the assignment agreement.
During
the three months ended March 31, 2016 and 2015, the Company did not issue any shares of common stock to Tarpon in connection with
the agreement. At March 31, 2016 and December 31, 2015, the balance due of $354,525 is included in accounts payable and accrued
liabilities on the accompanying balance sheets. A portion of the fees that Tarpon has received in 2014, has not been fully documented
by Tarpon to the Company as requested, and therefore are in dispute and are pending. For purposes of presentation in the accompanying
financial statements, we have recorded these fees as fees paid to Tarpon.
As
part of the agreement with Tarpon, the Company issued to Tarpon two convertible notes aggregating $50,000, which were due in May
2014 and September 2014. At March 31, 2016 and December 31, 2015, the notes total $41,680 and are included in the balance of convertible
notes payable, net of discount on the accompanying balance sheets. The notes are currently in default. At March 31, 2016, the
amounts outstanding on the notes plus accrued interest was $49,218, and are convertible into 984,350,800 shares of the Company’s
common stock.
Litigations,
Claims and Assessments
The
Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise that may harm its business.
Other than the below litigation with the Costa Rican Investment Bank, the Company is currently not aware of any such legal proceedings
or claims that they believe will have, individually or in the aggregate, a material adverse affect on its business, financial
condition or operating results.
In
2012, the Company filed an arbitration claim with the “Centro Internacional de Conciliacion y Arbitraje” or “CICA”
alleging that Grupo Aldesa, S.A., its then investment bank, withheld $195,400 of investor funds from the Company in mid-2011 for
its own use and benefit and contrary to the executed agreement between the companies. The case claims that Aldesa received funds
from two investors and remitted 50% of those funds and keeping the balance without authorization. Additionally, the Company did
notify the Federal Bureau of Investigation (FBI), as well as, the State Attorney General of both Delaware and Colorado in mid-2012.
Grupo Aldesa appealed to the Sala Primera de la Corte Suprema (the Supreme Court over these types of legal matters) in October
of 2012 claiming CICA did not have subject matter jurisdiction or the right to adjudicate the case. In a strongly worded opinion
Sala Primera rejected Aldesa’s appeal in the Company’s favor. CICA has received the official notice from the Sala
Primera regarding the opinion and has taken up the case from where we were before the appeal.
The
CICA process has reached its final legal stage and we are awaiting the final judgment.