U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer:
The aggregate market value of the voting
stock held by non-affiliates of the Registrant was approximately $49,700 based on the last sale price of the Registrant's common
stock as of the last business day of the Registrants’ second fiscal quarter, ($0.0006 per share as of June 30, 2015) as reported
on the Over-the-Counter Bulletin Board.
The Registrant has 4,764,481,179 shares of common stock outstanding
as of May 13, 2016.
THIS REPORT MAY CONTAIN CERTAIN “FORWARD-LOOKING”
STATEMENTS AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE SECURITIES AND EXCHANGE COMMISSION
IN ITS RULES, REGULATIONS AND RELEASES, WHICH REPRESENT THE REGISTRANT’S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED
TO, STATEMENTS CONCERNING THE REGISTRANT’S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION
STRATEGIES, INVESTMENTS, AND FUTURE OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS
OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH
AS “MAY”, “WILL”, “EXPECT”, “BELIEVE”, “ANTICIPATE”, “INTENT”,
“COULD”, “ESTIMATE”, “MIGHT”, OR “CONTINUE” OR THE NEGATIVE OR OTHER VARIATIONS
THEREOF OR COMPARABLE TERMINOLOGY ARE FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE REGISTRANT’S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON
A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING
GROWTH, THE OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS DISCUSSED IN THIS AND
OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and organization,
asset sale, and going concern and management’s plans:
Business and organization:
FastFunds Financial Corporation
(the “Company” or “FFFC”) is a holding company, and through January 31, 2006, operated primarily through
its wholly-owned subsidiary Chex Services, Inc. (“Chex”). FFFC was previously organized as Seven Ventures, Inc. (“SVI”).
Effective June 7, 2004, Chex merged with SVI (the “Merger”), a Nevada corporation formed in 1985. At the date of the
Merger, SVI was a public shell with no significant operations. The acquisition of Chex by SVI was recorded as a reverse acquisition
based on factors demonstrating that Chex represented the accounting acquirer. The historical stockholders’ equity of Chex
prior to the exchange was retroactively restated (a recapitalization) for the equivalent number of shares received in the exchange
after giving effect to any differences in the par value of the SVI and Chex common stock, with an offset to additional paid-in
capital. The restated consolidated accumulated deficit of the accounting acquirer (Chex) has been carried forward after the exchange.
On June 29, 2004, SVI changed its name to FFFC.
Effective January 21, 2014,
the Board of Directors of the Company approved the issuance of 1,000 shares of Class C Preferred Stock (as defined and described
below) (the “Class C Preferred Stock Shares”) to Mr. Henry Fong, the Company’s sole officer and Director, or
his assigns in consideration for services rendered to the Company and continuing to work for the Company without receiving significant
payment for services and without the Company having the ability to issue shares of common stock as the Company does not have sufficient
authorized but unissued shares of common stock to allow for any such issuances.
As a result of the issuance
of the Class C Preferred Stock Shares to Mr. Fong, or his assigns and the Super Majority Voting Rights (described below), Mr.
Fong obtained voting rights over the Company’s outstanding voting stock which provides him the right to vote up to 51% of
the total voting shares able to vote on any and all shareholder matters. As a result, Mr. Fong will exercise majority
control in determining the outcome of all corporate transactions or other matters, including the election of Directors, mergers,
consolidations, the sale of all or substantially all of the Company’s assets, and also the power to prevent or cause a change
in control. The interests of Mr. Fong may differ from the interests of the other stockholders and thus result in corporate decisions
that are adverse to other shareholders. Additionally, it may be impossible for shareholders to remove Mr. Fong as an
officer or Director of the Company due to the Super Majority Voting Rights.
On January 21, 2014, the Company
formed Cannabis Angel, Inc. (“CA”) as a wholly-owned subsidiary. CA was formed to assist and provide angel funding,
business development and consulting services to Cannabis related projects and ancillary ventures. CA has entered into the following
agreements:
On January 28, 2014, CA entered
into a one year Consulting Agreement with Singlepoint, Inc. (“Singlepoint”) (the “Singlepoint Agreement”).
The Singlepoint Agreement automatically renews for succeeding one year periods, provided, that the CA can terminate the Singlepoint
Agreement at any time during the initial one year term or thereafter by giving Singlepoint not less than five (5) days’
notice to terminate. CA is to provide consulting services including strategic and business planning, marketing and sales support,
define and support for product offerings, acquisition strategy and funding strategy. As of the year ended December 31, 2015, this
agreement is still active but no services have been provided and no further activity related to this agreement has occurred.
On
February 7, 2014, CA entered into a one year consulting agreement with Colorado Cannabis Business Solutions, Inc (“CCBS”).
CA is to provide consulting services to CCBS relating to business opportunities, corporate finance activities and general business
development, in exchange for 9.9% ownership in CCBS. As of the year ended December 31, 2015, this agreement is still active but
no services have been provided and no further activity related to this agreement has occurred.
On March 5, 2014, CA entered
into a five (5) year Strategic Alliance Agreement (“SAA”) with Worldwide Marijuana Investments, Inc. (“Worldwide”).
Pursuant to the SAA, Worldwide and CA have agreed to market and perform certain complementary business consulting services. The
SAA automatically renews for successive one year terms, unless either party gives written notice of termination at least thirty
(30) days prior to any expiration. The SAA can also be terminated by mutual agreement, or at any time by sixty (60) day written
notice from either party. As of the year ended December 31, 2015, this agreement is still active but no services have been provided
and no further activity related to this agreement has occurred.
On February 17, 2014, the Company
and CA entered into a consulting agreement with Merchant Business Solutions, Inc. (“MBS”). CA will provide consulting
services to MBS regarding seeking potential business opportunities, financial opportunities, and general business development in
exchange for 49% of Cannabis Angel. As of the year ended December 31, 2015, this agreement is still active but no services have
been provided and no further activity related to this agreement has occurred.
Merchant Financial Solutions,
Inc. (“CMFS”) a new subsidiary of MBS. CMFS has had no activity through the date of this report.
On April 3, 2014, the
Company and its wholly-owned subsidiary CA announced the launch of GreenEnergyMedia.TV. GreenEnergyMedia.TV caters
to broadcasting real-time news and social media feeds relating exclusively to the medical and recreational marijuana
communities. GreenEnergyMedia.TV broadcasts stock quotations and intraday charts on over 40 leading companies competing
within the medical marijuana industry. Operations related to GreenEnergyMedia.TV have been deferred pending the recruitment
and placement of personnel for this project, which has not occurred as of December 31, 2015.
On April 29, 2014, Cannabis
Live was launched, which will focus exclusively on hosting and broadcasting video of on-demand events. As this area of GreenEnergyMedia.TV’s
website progresses, the Company plans to include the development of an exclusive interactive online channel. This future development
will allow for several sources of revenue to be derived for the Company; including premium access membership fees, sponsorship
and endorsement fees, and advertising revenue. Operations related to Cannabis Live have been deferred pending the recruitment and
placement of personnel for this project, which has not occurred as of December 31, 2015.
On April 17, 2014, the Company
and its wholly-owned subsidiary CA announced a Merchant Payment Processing Agreement to offer a debit card payment solution
for retail cannabis dispensaries. This program will be offered through CMFS, the Company's 49% owned subsidiary. This
payment solution allows dispensaries to accept debit and credit cards by using the PIN number associated with the card being used. .
As of December 31, 2015, the company has not yet offered this program to customers and there has been no activity related to this
program.
On July 8, 2014, The Company
announced the formation of The 420 Development Corporation, a newly formed wholly owned subsidiary of the Company that will focus
exclusively on the acquisition of operational companies that support the development of the ever-expanding cannabis industry.
The 420 Development Corporation will seek to identify acquisition candidates within the industry that have the potential to add
significant shareholder value once completed.
On July 24, 2014, the Company
and its wholly-owned subsidiary, The 420 Development Corporation, announced the closing of a purchase agreement with Ohio-based
Brawnstone Security, LLC (“Brawnstone”). Brawnstone is a licensed armed security, private investigation, security
technology solution provider and tactical training company servicing active accounts with several Government affiliated HUD housing
establishments, schools, and industrial facilities across the Ohio region. Under the terms of the purchase agreement, the Company,
through its subsidiaries, now owns a 70% interest in Brawnstone. The purchase price, disclosed in the Membership Interest Purchase
Agreement and Assignment of Membership Interest Agreement dated July 23, 2014, was $160,000. The Company remitted $100,000 in
cash and issued a $60,000 note payable bearing 8% interest to complete the purchase. The Company also assumed accrued expenses
of $181,083. The total purchase price of $341,083 was allocated to cash of $133,806, accounts receivable of $120,965, prepaid
expenses of $950, and goodwill of $85,312.
On October 30, 2014, FastFunds
Financial Corporation announced that they have entered into a distribution and marketing agreement for its Cannabis GreenCard
product with WMII, Inc. ("WMII"). Through the Company's 49% ownership in Cannabis Merchant Financial Solutions, Inc.
("CMFS"), WMII has agreed to market the Company's Cannabis GreenCard through an extensive database developed over the
past several months that contains over 1,000 medical and recreational dispensaries throughout the Colorado, Washington State and
California regions. WMII has access to a large community of companies that service the cannabis industry. By leveraging these
existing relationships, WMII will allow CMFS to gain access to their extensive list of prospective customers for the Company's
Cannabis GreenCard product. As of December 31, 2015, the marketing and distribution agreement is not in effect as WMII is no longer
active.
On November 5, 2014, FastFunds Financial Corporation announced the acquisition of a 49% equity stake in WMII, Inc. ("WMII"),
a marketing and product distribution firm that specializes in cannabis related services. WMII is an early-stage company that is
currently not generating any revenues. WMII has ceased operations during the year ended December 31, 2015.
On November 14, 2014, FastFunds
Financial Corporation entered into a definitive licensing agreement with Nevada-based Chongson, Inc. pertaining to the production,
promotion and sale of the Tommy Chong branded Cannabis GreenCard product. Per the terms of the agreement, the Company is required
to pay Chongson Inc. a minimum of $5,000 per month in royalty fees in exchange for the the card branding. During the year ended
December 31, 2015, the Company paid $45,000 in cash against the $60,000 in accrued royalty expenses.
On May 15, 2015, FastFunds
Financial Corporation (“FFFC”) acquired a 49% Limited Liability Company interest in Pure Grow Systems, LLC (“Pure
Grow”) for $250,000. Financing for this transaction was provided through a $128,000 convertible note issued to Carebourn
Capital, LP on May 15, 2015 and a $125,000 convertible note issued to Pure Energy Inc. on May 29, 2015. As of December 31, 2015,
$222,000 has been remitted by the company in acquisition of a minority stake of Pure Grow. Pure Grow Systems, LLC will be dedicated
to the healthy production of raw materials used for medicinal or other health-related purposes. The Company is developing a line
of environmentally friendly products using ingredients that have a strong track record of sanitation and disinfection in buildings,
on furniture, and other items found in medical, manufacturing and warehouse settings. Pure Grow has displayed its products at several
trade shows and has contacted interested distributors. No revenues have been generated from Pure Grow’s product lines during
the year ended December 31, 2015
The Company currently has
thirty-six full and part time employees at Brawnstone Security. None of our employees are currently covered by collective bargaining
agreements.
Going concern and management’s
plans:
The Company’s
financial statements for the years ended December 31, 2015 and 2014 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.
The Company reported
a net loss of $2,537,158 for the year ended December 31, 2015, and has a working capital deficit of $12,452,826, and an accumulated
deficit of $29,813,617 as of December 31, 2015. Moreover, the Company presently has no significant ongoing business operations
or sources of revenue and has little resources with which to obtain or develop new operations.
These factors raise
substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not contain any
adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
There can be no
assurance that the Company will have adequate resources to fund future operations, if any, or that funds will be available to the
Company when needed, or if available, will be available on favorable terms or in amounts required by the Company. Currently, the
Company does not have a revolving loan agreement with any financial institutions, nor can the Company provide any assurance it
will be able to enter into any such agreement in the future. The condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
The Company evaluates,
on an ongoing basis, potential business acquisition/restructuring opportunities that become available from time to time, which
management considers in relation to its corporate plans and strategies.
2. Summary of significant
accounting policies:
Basis of presentation and
principles of consolidation:
The accompanying consolidated
financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America
(“USGAAP”). The consolidated financial statements of the Company include the Company and its subsidiaries. All inter-company
balances and transactions have been eliminated.
Cash and cash equivalents:
For the purpose of the financial
statements, the Company considers all highly-liquid investments with an original maturity three-months or less to be cash equivalents.
Fixed assets:
Fixed Assets are stated at
historical cost less depreciation. Cost of acquisition is inclusive of taxes, duties, freight, installation and allocated incidental
expenditure during construction/ acquisition.
Accounts receivables and
revenue recognition:
Accounts receivables are
stated at cost plus refundable and earned fees (the balance reported to customers), reduced by allowances for refundable fees and
losses. Fees (revenues) are accrued monthly on active credit card accounts and included in accounts receivables, net of estimated
uncollectible amounts. Accrual of income is discontinued on credit card accounts that have been closed or charged off. Accrued
fees on credit card loans are charged off with the card balance, generally when the account becomes 90 days past due. The allowance
for losses is established through a provision for losses charged to expenses. Credit card receivables are charged against the allowance
for losses when management believes that collectability of the principal is unlikely. The allowance is an amount that management
believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the
accounts and prior loss experience. This evaluation also takes into consideration such factors as changes in the volume of the
loan portfolio, overall portfolio quality and current economic conditions that may affect the borrowers’ ability to pay.
While management uses the best information available to make its evaluations, this estimate is susceptible to significant change
in the near term.
The Company recognizes
sale and service revenue when there is persuasive evidence of an arrangement with the customer which states a fixed or determinable
price and terms, delivery of the product has occurred or the service performed in accordance with the terms of the sale, and collectability
of the sale is reasonably assured. The Company has entered into agreements calling for services to be available to the customer
for a period of time. In these cases, revenue is recognized over the life of the agreement. Prepaid services are shown as deferred
revenues until services are performed.
Long-lived assets:
Long-lived
assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. During the year ended December 31, 2015, impairments totaling $37,050 were recognized related to the Company’s
investments in WMII Inc., which ceased operation during the year ended December 31, 2015.
Goodwill:
Goodwill represents the excess of the purchase price
over the fair value of the identifiable tangible and intangible assets acquired and the fair value of liabilities assumed in an
acquisition. Accounting Standards Codification (“ASC”)-350-30-50 “Goodwill and Other Intangible Assets”
requires the testing of goodwill and indefinite-lived intangible assets for impairment at least annually. The Company tests goodwill
for impairment at least annually.
Per
ASC 350, management has opted to follow the guidance provided by ASU 2011-08, the qualitative assessment for testing goodwill
for impairment that may allow companies to skip the annual two-step test. ASC 350 requires companies to test goodwill for impairment
annually, and more frequently if indicators of impairment exist. Testing goodwill for impairment requires companies to compare
the fair value of a reporting unit with its carrying amount, including goodwill. ASU 2011-08 allows companies to qualitatively
assess whether it is more likely than not (i.e., a likelihood of greater than 50%) that the fair value of a reporting unit is
less than its carrying amount. If that is the case, the company would have to perform the annual two-step impairment test.
Management analyzed macro and micro economic conditions that may affect
the Brawnstone reporting unit, as well as Brawnstone’s current and past financial performance. Taking the relevant events and circumstances
described in addition to the prescribed guidance of ASU 2011-08, Management does not believe it is more likely than not that the
carrying amount of the Brawnstone reporting unit exceeds its FV. As such, a Step 1 analysis is not required at this time and no
impairment has been recognized as of December 31, 2015.
Investment in Unconsolidated
Investee
The Company accounts for investments
in which the Company owns more than 20% of the investee, using the equity method in accordance with ASC Topic 323, Investments—Equity
Method and Joint Ventures. Under the equity method, an investor initially records an investment in the stock of an investee at
cost, and adjusts the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee
after the date of acquisition. The amount of the adjustment is included in the determination of net income by the investor, and
such amount reflects adjustments similar to those made in preparing consolidated statements including adjustments to eliminate
intercompany gains and losses, and to amortize, if appropriate, any difference between investor cost and underlying equity in net
assets of the investee at the date of investment. The investment of an investor is also adjusted to reflect the investor's share
of changes in the investee's capital. Dividends received from an investee reduce the carrying amount of the investment. A series
of operating losses of an investee or other factors may indicate that a decrease in value of the investment has occurred which
is other than temporary and which should be recognized even though the decrease in value is in excess of what would otherwise be
recognized by application of the equity method.
Noncontrolling interest:
On January
1, 2012, the Company adopted authoritative accounting guidance that requires the ownership interests in subsidiaries held by parties
other than the parent, and income attributable to those parties, be clearly identified and distinguished in the parent’s
consolidated financial statements. The Company’s noncontrolling interest is now disclosed as a separate component of the
Company’s consolidated deficiency on the balance sheets. Earnings and other comprehensive income are separately attributed
to both the controlling and noncontrolling interests. Earnings per share are calculated based on net income attributable
to the Company’s controlling interest.
Loss per share:
Loss
per share of common stock is computed based on the weighted average number of common shares outstanding during the period. Stock
options, warrants, and common stock underlying convertible promissory notes are not considered in the calculations for the years
ended December 31, 2015 and 2014, as the impact of the potential common shares, which total 25,179,598,731(2015) and 24,847,967
(2014), would be antidilutive.
Use
of estimates:
Preparation of the consolidated financial statements in accordance with accounting principles generally accepted
in the United States of America 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 dates of the balance sheets and the reported amounts
of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company’s significant
estimates include the valuation of derivative liabilities on stock based compensation and impairment analysis.
Fair
value of financial instruments:
The estimated fair value of
financial instruments has been determined by the Company using available market information and appropriate methodologies; however,
considerable judgment is required in interpreting information necessary to develop these estimates. Accordingly, the Company’s
estimates of fair values are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
The fair values of cash and
cash equivalents, current non-related party accounts receivable, and accounts payable approximate their carrying amounts because
of the short maturities of these instruments.
The fair values of notes and
advances receivable from non-related parties approximate their net carrying values because of the allowances recorded as well as
the short maturities of these instruments.
The fair values of notes and
loans payable to non-related parties approximate their carrying values because of the short maturities of these instruments.
Fair value measurements are
determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to
measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources
independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market
participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that
would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly
transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and
other relevant information generated by market transactions involving identical or comparable assets (“market approach”).
The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when
compared with normal activity to identify transactions that are not orderly.
The highest priority is given
to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant
to the fair value measurement.
The three hierarchy levels
are defined as follows:
Level 1 – Quoted
prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted
prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in
active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices
or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments are
applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is
consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit
risk as observed in the credit default swap market.
Accounting for obligations
and instruments potentially settled in the Company’s common stock:
The Company accounts for obligations
and instruments potentially to be settled in the Company's stock in accordance with ASC Topic 815,
Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock.
This issue addresses the initial
balance sheet classification and measurement of contracts that are indexed to, and potentially settled in, the Company's stock.
Under ASC Topic 815, contracts
are initially classified as equity or as either assets or liabilities, depending on the situation. All contracts are initially
measured at fair value and subsequently accounted for based on the then current classification. Contracts initially classified
as equity do not recognize subsequent changes in fair value as long as the contracts continue to be classified as equity. For
contracts classified as assets or liabilities, the Company reports changes in fair value in earnings and discloses these changes
in the financial statements as long as the contracts remain classified as assets or liabilities. If contracts classified as assets
or liabilities are ultimately settled in shares, any previously reported gains or losses on those contracts continue to be included
in earnings. The classification of a contract is reassessed at each balance sheet date.
Stock-based compensation:
The Company has one stock
option plan approved by FFFC’s Board of Directors in 2004, and also grants options and warrants to consultants outside of
its stock option plan pursuant to individual agreements. The Company accounts for its stock based compensation under ASC 718 “Compensation-
Stock Compensation” using the fair value based method. Under this method, 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. This guidance
establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services.
It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the
fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. The Company
uses the Black Scholes model for measuring the fair value of options.
The stock based fair value
compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement
date) and is recognized over the vesting periods.
There were no options granted during the years ended December 31, 2015 and 2014.
The Company’s stock option plan is more fully described in Note 11.
Income
Taxes
Deferred
tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A
valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.
The
Company accounts for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 740, “Accounting for Income Taxes. It prescribes a recognition threshold
and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. As a result, the Company has applied a more-likely-than-not recognition threshold for all tax uncertainties. The
guidance only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination
by the various taxing authorities. The Company’s tax years subsequent to 2006 remain subject to examination by federal and
state tax jurisdictions.
The
Company classifies penalties and interest related to unrecognized tax benefits as income tax expense in the Statements of Operations
Reclassifications:
Certain
prior period balances have been reclassified to conform to the current period's financial statement presentation. These reclassifications
had no impact on previously reported results of operations or stockholders' deficiency.
Recent
Accounting Pronouncements Not Yet Adopted:
As of the date of this report, there are no recent accounting pronouncements that
have not yet been adopted that we believe would have a material impact on our financial statements.
3. Concentration
of revenue:
A significant portion of the
Company's revenues for the year ended December 31, 2015 were generated from five customers as follows:
|
|
|
|
|
|
Accounts Receivable
|
|
|
% of Total Revenues
|
|
|
|
as of December 31, 2015
|
|
|
|
|
|
|
|
Customer A
|
|
13.04
|
%
|
|
$
|
—
|
Customer B
|
|
12.01
|
%
|
|
$
|
20,428
|
Customer C
|
|
9.14
|
%
|
|
$
|
13,936
|
Customer D
|
|
7.92
|
%
|
|
$
|
—
|
Customer E
|
|
6.62
|
%
|
|
$
|
1,711
|
4. Notes receivable:
On February 20, 2014, LG
Capital Funding, LLC (“LG”) issued a $40,000 collateralized secured promissory note to the Company. The note bears
interest at the rate of 8% and is due no later than November 20, 2014, unless the Company does not meet the current information
requirements required under Rule 144 of the Securities Act of 1933, as amended. This note was deemed uncollectible during the first
quarter 2015 and the entire amount of the note receivable was netted against an outstanding $40,00 convertible debenture payable
to LG.
On March 19, 2014, the Company
advanced $25,000 to Worldwide Marijuana Investments, Inc. (“WMI”) in exchange for a $25,000 promissory note. Interest
of 12% per annum is payable in monthly installments, along with a monthly principal amount of $500 beginning April 1, 2014 for
twelve months, at which time the remaining principal amount and interest will be due in full. As of December 31, 2015, this note
has been deemed uncollectible and the remaining amount of the note, $22,050, was expensed.
5. Long term investments:
On March 30, 2011, the Company
and Paymaster Limited (“Paymaster”) agreed to restructure a note receivable (the “Note”). Pursuant to the
agreement, the parties agreed to convert the remaining balance of $339,575 of the Note receivable into Cumulative Convertible Redeemable
Preference Shares (the Preference Shares”) with a value of $400,000, and an annual dividend of 7.5% over thirty-six (36)
months. Paymaster, at any time prior to maturity, may elect to redeem some or all of the Preference Shares at an effective dividend
rate of 10% per annum. The Company, upon maturity and with not less than ninety (90) days prior notice, may elect to convert some
or all of Preference Shares into the pro rata equivalent of 11,100 ordinary shares of Paymaster (equal to 10% of the issued and
outstanding capital of the Company based on the conversion of all Preference Shares on a fully diluted basis). The Company has
recorded the investment at $89,575, net of a valuation allowance of $250,000, the same historical carrying value on the Company’s
balance sheet as the note. The last dividend the Company has received was the quarterly dividend for the quarter ended June 30,
2012. In March 2016, the company received $275,000 for the redemption of the preferred shares. See note 15, Subsequent Events.
On July 24, 2014, the Company, through its wholly-owned
subsidiary, The 420 Development Corporation, acquired a 70% interest in Brawnstone. Brawnstone is a licensed armed security, private
investigation, security technology solution provider and tactical training company servicing active accounts with several Government
affiliated HUD housing establishments, schools, and industrial facilities across the Ohio region. The purchase price, disclosed
in the Membership Interest Purchase Agreement and Assignment of Membership Interest Agreement dated July 23, 2014, was $160,000.
The Company remitted $100,000 in cash and issued a $60,000 note payable bearing 8% interest in the closing of the acquisition.
On the acquisition date, the company assumed the assets of Brawnstone, including $133,806 in cash and cash equivalents, $120,965
in accounts receivable, all of which is classified as current and collectable, and $950 in other assets, as well as liabilities
including accounts payable of $181,083. The Company also recognized goodwill of $85,312, included on the December 31, 2015 and
2014 balance sheet, as a result of the acquisition. During the year ended December 31, 2015, the balance of this goodwill was analyzed
for impairment based on the guidelines provided by ASC 350, “Goodwill and Other Intangible Assets”.
Per
ASC 350, management has opted to follow the guidance provided by ASU 2011-08, the qualitative assessment for testing goodwill for
impairment that may allow companies to skip the annual two-step test. ASC 350 requires companies to test goodwill for impairment
annually, and more frequently if indicators of impairment exist. Testing goodwill for impairment requires companies to compare
the fair value of a reporting unit with its carrying amount, including goodwill. ASU 2011-08 allows companies to qualitatively
assess whether it is more likely than not (i.e., a likelihood of greater than 50%) that the fair value of a reporting unit is less
than its carrying amount. If that is the case, the company would have to perform the annual two-step impairment test.
Management
analyzed macro and micro economic conditions that may affect the Brawnstone reporting unit, as well as Brawnstone’s current and
past financial performance. Taking the relevant events and circumstances described in addition to the prescribed guidance of ASU
2011-08, Management does not believe it is more likely than not that the carrying amount of the Brawnstone reporting unit exceeds
its FV. As such, a Step 1 analysis is not required at this time and no impairment has been recognized as of December 31, 2015.
On November 5, 2014, the
company acquired a 49% equity stake in WMII, Inc. ("WMII"), a marketing and product distribution firm that specializes
in cannabis related services. WMII is an early-stage company that is currently not generating any revenues or expenses. The company
paid $15,000 in cash in closing the acquisition, which was included in the investment in unconsolidated investee line of the 2014
balance sheet. During the year ended December 31, 2015, WMII ceased operations and the $15,000 investment in unconsolidated investee
was written off.
6. Equity-method
investment:
On May 15, 2015, the Company
acquired a 49% Limited Liability Company interest in Pure Grow Systems, LLC (“Pure Grow”) for $250,000 in cash. Financing
for this transaction was provided through a $128,000 convertible note issued to Carebourn Capital, LP on May 15, 2015 and a $125,000
convertible note issued to Pure Energy Inc. on May 29, 2015. As of December 31, 2015, $222,000 has been remitted by the Company
in acquisition of a minority stake of Pure Grow. The Company has accounted for its 49% interest in Pure Grow utilizing the equity
method of accounting. As of December 31, 2015, the carrying value in Pure Grow was $166,910. During the year ended December 31,
2015, $55,090 was recognized as an equity method loss.
Financial information for Pure
Grow as of, and for the period from May 15, 2015 through December 31, 2015 is as follows:
|
|
December
31,
|
|
|
2015
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
90,463
|
|
Accounts
Payable
|
|
|
40,482
|
|
Inventory
|
|
|
23,202
|
|
Prepaid
Assets
|
|
|
3,000
|
|
|
|
|
|
|
Total
assets
|
|
$
|
81,023
|
|
|
|
|
|
|
LIABILITIES
AND MEMBERS' EQUITY
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
12,251
|
|
Members'
equity
|
|
|
181,200
|
|
Net
Loss
|
|
|
(112,428
|
)
|
|
|
|
|
|
Total
liabilities and members' equity
|
|
$
|
81,023
|
|
|
|
For
the Period from
May
15, 2015
Through
December
31,
|
|
|
2015
|
|
|
|
|
|
STATEMENT
OF OPERATIONS
|
|
|
|
|
Revenues
|
|
$
|
20
|
|
Cost
of sales
|
|
|
13,500
|
|
Gross
profit
|
|
|
(13,480
|
)
|
Operating
expenses
|
|
|
98,948
|
|
Operating
loss
|
|
|
(112,428
|
)
|
Other
expense
|
|
|
—
|
|
Net
loss
|
|
$
|
(112,428
|
)
|
Ownership
interest (rounded)
|
|
|
49
|
%
|
Share
of net loss
|
|
$
|
(55,090
|
)
|
Investment
|
|
$
|
166,910
|
|
7. Accrued liabilities:
Accrued liabilities at December
31, 2015 and December 31, 2014 were $4,303,883 and $3,734,029, respectively, and were comprised of:
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
|
Legal fees
|
|
$
|
23,594
|
|
|
$
|
23,594
|
|
Interest
|
|
|
3,850,583
|
|
|
|
3,336,669
|
|
Consultants and advisors
|
|
|
186,198
|
|
|
|
157,024
|
|
Registration rights
|
|
|
98,013
|
|
|
|
98,013
|
|
Other
|
|
|
145,495
|
|
|
|
118,729
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,303,883
|
|
|
$
|
3,734,029
|
|
8. Promissory notes, including related
parties, notes payable and debenture payable:
Promissory notes, including related parties at December 31, 2015 and December
31, 2014, consist of the following:
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
|
Promissory notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various, including related parties of $50,767 (2015) and $74,397 (2014); interest rate ranging from 8% to 10%
[A]
|
|
$
|
113,842
|
|
|
$
|
107,672
|
|
|
|
|
|
|
|
|
|
|
Notes payable; interest rates ranging from 9% to 15%; interest payable quarterly; the notes are unsecured, matured on February 28, 2008; currently in default and past due
[B]
|
|
|
2,090,719
|
|
|
|
2,090,719
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,204,561
|
|
|
$
|
2,198,391
|
|
|
|
|
|
|
|
|
|
|
|
[A]
|
Pursuant
to a November 4, 2011 Board of director resolution, these notes are convertible at conversion rates, determined at the
discretion of the board of directors. During the year ended December 31, 2015 the Company issued notes of $158,361
(including related parties of $26,900) and made payments of $145,924 (including $78,030 to related parties). These notes are
due on demand.
|
|
|
|
|
[B]
|
These notes payable (the “Promissory Notes”) originally became due on February 28,
2007. The Company renewed $283,000 of the Promissory Notes on the same terms and conditions as previously existed. In April 2007
the Company, through a financial advisor, restructured $1,825,000 of the Promissory Notes (the “Restructured Notes”).
The Company has accrued an expense of $36,500 to compensate the financial advisor 2% of the Restructured Notes as well as having
issued 150,000 shares of common stock to the financial advisor. The Restructured Notes carry a stated interest rate of 15% (a default
rate of 20%) and matured on February 28, 2008. The Company has not paid the interest due since June 2007, and no principal payments
on the Promissory Notes have been made since 2008 and accordingly, they are in default. Accrued interest on these notes total $3,644,686
and $3,224,686 as of December 31, 2015 and 2014, respectively is included in accrued expenses on the consolidated balance sheets.
|
The chairman of the board
of the Company has personally guaranteed up to $1 million of the Restructured Notes and two other non-related individuals each
guaranteed $500,000 of the Restructured Notes. In consideration of their guarantees the Company granted warrants to purchase a
total of 1,600,000 shares of common stock of the Company at an exercise price of $0.50 per share. The warrants expired in March
2010.
In January 2008, the
Company and the three guarantors received a complaint filed by the financial advisor (acting as agent for the holders of the Restructured
Notes) and the holders of the Restructured Notes. The claim is seeking $1,946,250 plus per diem interest beginning January 22,
2008 at the rate of twenty percent (20%) per annum plus $37,000 due the financial advisor for unpaid fees. The court has ruled
in favor of a motion for summary judgment filed by certain of the plaintiffs and a judgment was entered on August 18, 2009 in the
total amount of $2,487,250 in principal and interest on the notes, $40,920 in related claims and $124,972 in attorney’s fees
and expenses. The Company is not aware of any payments being made by any of the guarantors and accordingly, the Company includes
these liabilities on the December 31, 2015 and 2014 consolidated balance sheets in promissory notes payable and accrued expenses.
Subsidiary notes payable:
On August 24, 2015, the Company’s
70%-owned subsidiary, Brawnstone Security (“Brawnstone”), issued a $50,000 note payable to an unrelated lender. The
note bears interest at 60% and is due on February 24, 2016. Brawnstone received $49,005 after loan origination fees of $995, which
will be expensed over the period of the loan. The total payback amount for this note was $67,500. The company paid $31,349 in principal
and $10,972 in interest related to note during the year ended December 31, 2015. As of December 31, 2015, the remaining principal
balance of the note is $25,179.
On October 27, 2015, the
Company’s 70%-owned subsidiary, Brawnstone Security (“Brawnstone”), issued a $40,000 note payable to an unrelated
lender. The note bears interest at 60% and is due on June 27, 2016. Brawnstone received $39,205 after loan origination fees of
$795, which will be expensed over the period of the loan. The total payback amount for this note was $53,200. The company paid
$9,286 in principal and $3,064 in interest related to note during the year ended December 31, 2015. As of December 31, 2015, the
remaining payback balance of the note is $40,850.
Debenture payable:
2012 Notes
On November 1, 2012, the
Company issued a convertible promissory note to David Schaper (“Schaper”) in the amount of $269,858 in exchange for
previously accrued legal fees. The note bears interest at 8% per annum, is due on demand and is convertible at a conversion price
for each share of common stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements)
per share of the Company’s common stock for the ten trading days immediately preceding the date of conversion. During the
year ended December 31, 2013, the Company issued 6,986,723 shares of common stock upon the conversion of $103,188 of the note.
During the year ended December 31, 2014, the note was sold to unrelated third party accredited investors, and Company issued 2,240,336
shares of common stock upon the conversion of $163,670 of the Note. As of December 31, 2015 and 2014, the balance of the note is
$3,000.
2013 Notes
The following notes issued
in 2013, bear interest at 8% per annum and other than as described below are convertible at a conversion price for each share of
common stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements) per share of the
Company’s common stock for the ten trading days immediately preceding the date of conversion. The notes issued in 2013 are
referred to as the 2013 Notes.
On March 14,
2013 the Company issued a convertible promissory note for $46,000 to an accredited investor (the “March 2013
Note”). The March 2013 Note, was due eight months from issuance and bears an interest rate of 8% per annum, and in the
case of an event of default increases to 12% per annum (“the Default Rate”). The March 2013 Note matured November
14, 2013, is in default, and the Default Rate was effective at that date. During the year ended December 31, 2014, the
Company issued 516,194 shares of common stock upon conversion of $19,425 of the note. The balance of the March 2013 Note is
$26,575 as of December 31, 2015 and 2014.
On August 22, 2013, the Company
issued a $6,000 convertible promissory note to Schaper. During the year ended December 31, 2014, the Company issued 66,667 shares
of common stock upon conversion of $4,000 of this note. The outstanding principal balance on this note is $2,000 as of December
31, 2015 and 2014.
On October 1, 2013, the Company
issued a $3,000 convertible promissory note to an accredited investor. The outstanding principal on this note is $3,000 as of December
31, 2015 and 2014.
On October 18, 2013,
the Company issued four (4) convertible notes each in the amount of $25,625 to Gel (the “2013 Gel Notes”), with
each note due on demand. The conversion price for the 2013 Gel Notes is equal to 50% of the lowest closing bid price of the
Common Stock as reported on the exchange which the Company’s shares are traded or any exchange upon which the Common
Stock may be traded in the future with a floor of $0.0001 per share, for any of the five trading days including the day upon
which a Notice of Conversion is received by the Company. If the shares have not been delivered within 3 business days, the
Notice of Conversion may be rescinded. Accrued but unpaid interest shall be subject to conversion. No fractional shares or
scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded to
the nearest whole share. Also on October 18, 2013, Gel issued the Company two secured promissory notes, each in the
amount of $25,000, due April 21, 2014. The Company received the $50,000 on March 6, 2014. During the year ended December 31,
2014, the Company issued 944,260 shares upon conversion of $83,295 of the notes. During the year ended December 31, 2015, the
Company issued 25,979,349 shares upon conversion of $19,205 in note principal and $2,863 of accrued interest. As of December
31, 2014, the outstanding principal on these notes was $69,205. As of December 31, 2015, the four initial convertible notes
have been fully satisfied, while the two subsequent convertible promissory notes in the aggregate of $50,000 of principal are
outstanding. Additionally, during the year ended December 31, 2015, the notes have been sold to a third party accredited
investor.
On November 22, 2013, the
Company issued a $35,000 (the Fong Note) and $30,000 (the Hollander Note) convertible note to Mr. Fong and Mr. Hollander, respectively,
for the cancellation of accrued and unpaid fees. These notes are due on demand. During the year ended December 31, 2014, the Company
issued 383,333 shares of common stock in satisfaction of $22,000 of the Hollander note. As of December 31, 2014, the outstanding
principal on these notes totaled $43,000. During the year ended December 31, 2015, the Company issued 93,361,463 shares of common
stock in satisfaction of $8,000 in principal and $1,767 in accrued interest of the Hollander note. The outstanding principal balance
of the Fong note is $35,000, while the Hollander note has been fully satisfied as of December 31, 2015.
2014 Notes
The following notes issued
in 2014, bear interest at 8% per annum and other than as described below are convertible at a conversion price for each share of
common stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements) per share of the
Company’s common stock for the ten trading days immediately preceding the date of conversion. The notes issued in 2014 are
referred to as the 2014 Notes.
On January 28, 2014, the
Company issued a convertible promissory note to Mr. Fong for $25,500 in satisfaction of accrued and unpaid fees due Mr. Fong. Also
on January 28, 2014, the Company entered into a Debt Settlement and Release Agreement (the “DSR”) with Mr. Fong, Mary
Virginia Knight (“Knight”) or Knight assigns. Pursuant to the DSR, the Company has issued 500,000 shares of common
stock to the Knight assign, in cancellation and satisfaction of $15,000 of the convertible note due Mr. Fong. As of December 31,
2015 and 2014, the outstanding principal balance of this note is $10,500.
On February 10, 2014, the
Company issued two (2) convertible promissory notes in the amounts of $95,814 and $95,813 in exchange for previously accrued legal
fees. The notes bear interest at 8% per annum. The notes matured February 10, 2015 and are in default. During the year ended December
31, 2014, the company issued 416,667 shares of common stock in settlement of $12,500 of the notes. As of December 31, 2014, the
balances of the notes totaled $179,127. During the year ended December 31, 2014, the company issued 416,667 shares of common stock
in settlement of $12,500 of the notes. During the year ended December 31, 2015, $35,000 in note principal was assigned to a third
party in the form of a new convertible promissory note, with the same terms as the prior note. During the year ended December 31,
2015, the Company issued 314,318,871 shares of common stock in satisfaction of $23,808 in principal and $277 of accrued and unpaid
interest of the third-party portion of the note. As of December 31, 2015, the balances of the notes are $144,127 to the original
note holder and $11,199 to the third party purchaser, totaling $155,319.
On
February 20, 2014, the Company issued two (2) convertible promissory notes, each in the amount of $40,000 to LG Capital (“LG”).
The Company received $38,000 after debt issuance costs of $2,000 and a $40,000 secured promissory note.. The debt issuance costs
will be amortized over the earlier of the twelve month term of the Note or any redemptions and $2,000 was expensed as debt issuance
costs (included in interest expense) for the year ended December 31, 2014. This note matured February 20, 2015. During the year
ended December 31, 2014, the Company issued 1,391,990 shares of common stock in satisfaction of $40,000 in convertible note principal
and $1,759 of accrued and unpaid interest.
During the year ended
December 31, 2015, the $40,000 promissory note was deemed uncollectible and was netted against the remaining promissory note, therefore,
as of December 31, 2015 the outstanding principal balance of these notes has been satisfied.
On March 3, 2014, the Company
issued a $52,500 convertible promissory note to Carebourn Capital. The note is due on demand, bears interest at 8%. The conversion
price cannot exceed 250% of the market price as of the date of the executed term sheet by the parties. The Company received $50,000
after debt issuance costs of $2,500 which will be amortized over the six month term of the Note or any redemption. The Company
recorded an initial derivative liability of $54,600, debt discount of $52,500 and derivative expense of $2,100. As of December
31, 2014, the entire principal balance of the note, $52,500 was outstanding. During the year ended December 31, 2015, the Company
issued 344,079,139 shares of common stock in satisfaction of the entire $52,500 in principal and $3,656 of accrued and unpaid interest.
As of December 31, 2015, the balance of the note has been satisfied.
On March 27, 2014, the
Company issued an $831,000 secured convertible promissory note (the “Note”). The Note carries an original issuer
discount of $75,000. In addition, the Company agreed to pay $6,000 to cover the Lender’s legal and other fees. At the
option of the Lender, the note converts at $0.0025 per share. The conversion by the Lender of any portion of the Outstanding
Balance shall only be exercisable in ten (10) tranches (each, a “Tranche”), consisting of an initial Tranche in
an amount equal to $88,500 and nine (9) additional Tranches, each in the amount of $82,500, plus any interest, costs, fees or
charges accrued thereon or added thereto under the terms of this Note. The Note carries a ten (10) percent interest rate and
matures on the seventeenth month after funding. The lender funded $75,000 on April 1, 2014 and also delivered nine (9)
secured promissory notes to the Company, each in the amount of $75,000. Each payment received will constitute an “Issue
Date”. The Company also granted the lender the right to purchase at any time on or after each Issue Date until the date
which is the last calendar day of the month in which the fifth anniversary of the Issue Date occurs (the “Expiration
Date”), a number of fully paid and non-assessable shares (the “Warrant Shares”) of the Company’s
common stock, par value $0.001 per share equal to $41,250 divided by the Market Price (as defined in the Note). The Company
recorded an initial derivative liability of 559,687, debt discount of $477,187 and derivative expense of $41,890. This note
matured April 1, 2015 and is in default. During the year ended December 31, 2014, the company issued 558,333 shares of common
stock upon conversion of $16,500 of the note. During the year ended December 30, 2015, the note was sold to an unrelated
third party accredited investor for $75,029, which included outstanding principal of $54,672 and accrued interest of $20,357.
During the year ended December 31, 2015, the company issued 4,405,110 shares of common stock upon conversion of $17,078 of
note principal and 130,531,699 shares upon conversion of $16,500 in warrants shares outstanding. As of December 31, 2015, the
outstanding principal balance of this note is $75,029. Amortization for the year ended, totaled $39,600 and the
carrying value of the note as of December 31, 2015, is $54,672, net of unamortized discount of $0.
On April 1, 2014 ($15,000)
and April 23, 2014 ($12,500), the Company issued convertible promissory notes to Carebourn Capital. ). The notes bear interest
of 8% per annum and matured six months after issuance. The Company recorded an initial derivative liability for these notes of
$28,600, debt discount of $27,500 and derivative expense of $1,100. The debt discount of $27,500 was amortized into interest expense
over the term of the note. As of December 31, 2014, the entire principal balance of the notes, $27,500 was outstanding. During
the year ended December 31, 2015 the Company issued 322,840,228 shares in satisfaction of $21,830 in convertible note principal.
As of December 31, 2015, the principal balance of these notes is $5,670.
On May 16, 2014, the
Company issued a $27,000 convertible promissory note, bearing interest at 12% per annum, to WHC Capital, LLC. The Company
received $25,000 after debt issuance costs of $2,000, which was amortized over the earlier of the one year term of the Note
or any redemption. The Company recorded an initial derivative liability of $28,600, debt discount of $27,000 and derivative
expense of $1,600. The note matured on February 16, 2015. During the year ended December 31, 2014, the company issued 291,667
shares of common stock upon conversion of $8,575 of note principal, and the outstanding balance of the note at December 31,
2014 totaled $18,425. During the year ended December 31, 2015, the company issued 42,974,921 shares of common stock upon
conversion of $18,425 of note principal. As of December 31, 2015, the principal balance of this note has been fully
satisfied.
On July 11, 2014, the Company
issued a $42,750 convertible promissory note to Auctus Private Equity Fund, LLC. . The note is due on demand, bears interest at
8% and is convertible at a 45% discount of the average of the two lowest day’s closing prices for the twenty five (25) days
preceding conversion. The conversion price may be adjusted downward if, within three (3) business days of the transmittal of the
Notice of Conversion, the Common Stock has a closing bid which is 5% or lower than that set forth in the Notice of Conversion.
The company received $37,750 after debt issuance costs of $5,000, which was amortized over the earlier of the 9 month term of the
Note or any redemptions. Accordingly, $288 and $4,722 have been expensed for the years ended December 31, 2015 and December 31,
2014, respectively, as debt issuance costs (included in interest expense). The Company recorded an initial derivative liability
of $44,460, debt discount of $42,750 and derivative expense of $1,710. The debt discount of $42,750 was amortized into interest
expense over the term of the note. The note matured on April 11, 2015 and is in default.. During the year ended December 31, 2015,
the company issued 2,564,562 shares of common stock upon conversion of $7,028 of note principal and $2,155 of accrued note interest.
As of December 31, 2015, a principal balance of $35,676 remains outstanding. Amortization for the year ended December 31, 2014,
totaled $40,333 and the carrying value of the note at year end was $40,333, net of unamortized discount of $2,372. Amortization
for the year ended December 31, 2015, totaled $2,372 and the carrying value of the note at year end is $35,676, net of unamortized
discount of $0. The note was sold during the year ended December 31, 2015 to an unrelated accredited investor for $35,676.
On July 16, 2014, the
Company issued a convertible promissory note for $50,000 to an unaffiliated accredited investor. The note is due on demand
and bears interest at 8%. The Company recorded an initial derivative liability of $52,000, debt discount of $50,000 and
derivative expense of $2,000. The debt discount of $50,000 was amortized into interest expense over the term of the note. The
note matured on April 16, 2015 and is in default. During the year ended December 31, 2015, the company issued 112,049,963
shares of common stock upon conversion of $12,786 of note principal. As of December 31, 2015, a principal balance of $37,214
remains outstanding. Amortization for the year ended December 31, 2014, totaled $45,833 and the carrying value of the note as
of December 31, 2014, was $45,833, net of unamortized discount of $4,167. Amortization for the year ended December 31, 2015,
totaled $4,167 and the carrying value of the note as of December 31, 2015, is $37,214, net of unamortized discount of $0.
During the year ended December 31, 2015, the note was sold at its full value of $50,000, before conversion, to an unrelated
third party investor.
On July 22, 2014 ($52,500),
August 28, 2014 ($27,500), September 19, 2014 ($27,500), and November 3, 2014 ($27,500) the Company issued convertible promissory
notes to Carebourn Capital. The notes are due on demand, bear interest at 12%. The Company received $125,000 after debt issuance
costs of $10,000, which was amortized over the earlier of the term of the Notes or any redemptions. The July note matured on April
22, 2015 and is in default. The rest of the notes matured on May 28, 2015 and are in default. The Company recorded an initial derivative
liability of $143,100, debt discount of $125,000 and derivative expense of $18,100. The debt discount of $125,000 was amortized
into interest expense over the term of the notes. As of December 31, 2015, the entire principal balance of $135,000 remains. Amortization
for the year ended December 31, 2014, totaled $80,292 and the carrying value of the notes as of December 31, 2014, was $80,292,
net of unamortized discount of $27,208. Amortization for the year ended December 31, 2015, totaled $27,208 and the carrying value
of the notes as of December 31, 2015, is $135,000, net of unamortized discount of $0.
On October 9, 2014, the
Company issued a convertible promissory note for $26,500 to LG Capital (“LG”). The note bears interest at 8% and
is convertible at a 50% discount of the lowest closing price for the ten (10) days preceding conversion. The Company recorded
an initial derivative liability of $28,090, debt discount of $26,500 and derivative expense of $1,590. The debt discount of
$26,500 was amortized into interest expense over the term of the note. The Company received $25,000 after debt issuance costs
of $1,500. The debt issuance costs will be amortized over the earlier of the twelve month term of the Note or any redemptions
and accordingly $1,158 and $341 have been expensed as debt issuance costs (included in interest expense) for the year ended
December 31, 2015 and 2014, respectively. The note matured on October 9, 2015 and is currently in default. During the year
ended December 31, 2015, the company issued 63,288,178 shares of common stock upon conversion of $26,500 of note principal
and $1,317 of accrued interest. As of December 31, 2015, the note has been fully satisfied. Amortization for the year ended
December 31, 2014, totaled $12,072 and the carrying value of the notes as of December 31, 2014, was $12,072, net of
unamortized discount of $14,428 Amortization for the year ended December 31, 2015, totaled $14,428 and the carrying value of
the notes as of December 31, 2015, is $0, net of unamortized discount of $0.
On December 2, 2014,
the Company issued a convertible promissory note for $25,000 to an unaffiliated accredited investor. The note bears interest
at 8%. Company recorded an initial derivative liability of $26,000, debt discount of $25,000 and derivative expense of
$1,000. The debt discount of $25,000 is being amortized into interest expense over the term of the note. The note matured on
September 2, 2015 and is in default. Amortization for the year ended December 31, 2014, totaled $3,889 and the carrying value
of the notes as of December 31, 2014, was $3,889, net of unamortized discount of $21,111. Amortization for the year ended
December 31, 2015, totaled $21,111 and the carrying value of the notes as of December 31, 2015, is $25,000, net of
unamortized discount of $0. As of December 31, 2015, the full principal balance of $25,000 remains outstanding.
On December 4, 2014, the
Company issued a $38,000 convertible promissory note to Carebourn Capital. The note is due on demand, bears interest at 12%. The
Company recorded an initial derivative liability of $39,520, debt discount of $38,000 and derivative expense of $1,520. The debt
discount of $40,500 is being amortized into interest expense over the term of the note. The note matured on December 4, 2015 and
is in default. Amortization for the year ended December 31, 2015, totaled $38,000 and the carrying value of the notes as of December
31, 2015, is $38,000, net of unamortized discount of $0. As of the years ended December 31, 2015 and 2014, the full principal balance
of $38,000 remains outstanding.
On December 23, 2014, the
Company issued a $7,500 convertible promissory note to Carebourn Capital. The note is due on demand, bears interest at 8%. During
the year ended December 31, 2015, the Company paid $7,500 in settlement of the note principal and $190 in settlement of accrued
interest. As of December 31, 2015, this note has been fully satisfied.
On December 29, 2014,
the Company issued a $25,000 convertible promissory note to Pure Energy 714, a New Jersey LLC. The proceeds from this note
were received on January 6, 2015 . The note is due on demand, bears interest at 10% and matured on September 29, 2015. The
Company recorded an initial derivative liability of $26,250, debt discount of $25,000 and derivative expense of $1,250. The
debt discount of $25,000 is being amortized into interest expense over the term of the note. Amortization for the year ended
December 31, 2014, totaled $139 and the carrying value of the note as of December 31, 2014, is $139, net of unamortized
discount of $24,861. Amortization for the year ended December 31, 2015, totaled $16,697 and the carrying value of the notes
as of December 31, 2015, is $0, net of unamortized discount of $0. During the year ended December 31, 2015, the note was
purchased at $26,521, its full book value of $25,000 in addition to $1,521 of accrued interest, by an unrelated third party
accredited investor. During the year ended December 31, 2015, the company issued 670,039,250 shares of common stock upon
conversion of $26,251 of note principal and $281 of accrued interest. As of December 31, 2015, the principal balance of the
note has been fully satisfied.
2015 Notes
On February 6, 2015, the
Company issued a convertible promissory note for $26,500 to LG Capital (“LG”). The Company received $25,000 after
debt issuance costs of $1,500. The debt issuance costs will be amortized over the earlier of the twelve month term of the
Note or any redemptions and accordingly $1,500 has been expensed as debt issuance costs (included in interest expense) for
the year ended December 31, 2015. The Company recorded an initial derivative liability of $28,620, debt discount of $26,500
and derivative expense of $2,120. The debt discount of $26,500 is being amortized into interest expense over the term of the
note. The note bears interest at 8% and is convertible at a 50% discount of the lowest closing price for the ten (10) days
preceding conversion and matures February 6, 2016. Amortization for the year ended December 31, 2015, totaled $24,574 and the
carrying value of the notes as of December 31, 2015, is $17,074, net of unamortized discount of $1,926. The note was sold to
an unrelated third party at the face value of the note. During the year ended December 31, 2015, the Company issued
187,500,000 shares of common stock upon conversion of $7,500 of note principal. As of December 31, 2015, the outstanding
principal balance of this note is $19,000.
On February 21 2015 ($5,000) and March 21, 2015
($5,000), the Company issued convertible promissory notes for $10,000 in total to an unrelated third party per a service contract
signed between the company and the unrelated service provider. The notes bear interest at 12% and are convertible at a 50% discount
of the average of the three lowest day’s closing for the ten (10) days preceding conversion and each note matures 6 months
after issuance. The debt issuance costs will be amortized over the earlier of the six month term of the Note or any redemptions
and accordingly. The notes are currently in default. The Company recorded an initial derivative liability of $11,200, debt discount
of $10,000 and derivative expense of $1,200. The debt discount of $10,000 is being amortized into interest expense over the term
of the note. Amortization for the year ended December 31, 2015, totaled $10,000 and the carrying value of the notes as of December
31, 2015, is $10,000, net of unamortized discount of $0. As of December 31, 2015, the outstanding principal balance of these notes
is $10,000.
On April 10, 2015, the Company issued a $43,500
convertible promissory note to Carebourn Capital. The April 10th Carebourn Note carries an original issuer discount of $3,000.The
note bears interest at 12% and is convertible at a 50% discount of the average of the three lowest day’s closing prices for
the ten (10) days preceding conversion. The Company recorded an initial derivative liability of $45,360, debt discount of $40,500
and derivative expense of $4,860. The debt discount of $40,500 is being amortized into interest expense over the term of the note.
The note matures on January 10, 2016. As of December 31, 2015, the full principal balance of $40,500 remains outstanding. Amortization
for the year ended December 31, 2015, totaled $39,027, and the carrying value of the note as of December 31, 2015, is $39,027,
net of unamortized discount of $1,473.
On April 15, 2015, the
Company issued a convertible promissory note for $26,500 to LG Capital (“LG”). The note bears interest at 8% and
is convertible at a 50% discount of the lowest closing price for the ten (10) days preceding conversion. The Company recorded
an initial derivative liability of $28,090, debt discount of $26,500 and derivative expense of $1,590. The debt discount of
$26,500 is being amortized into interest expense over the term of the note. The Company received $25,000 after debt issuance
costs of $1,500. The debt issuance costs will be amortized over the earlier of the twelve month term of the Note or any
redemptions and accordingly $1,383 has been expensed as debt issuance costs (included in interest expense) for the year ended
December 31, 2015. The note matured on October 9, 2015. Amortization for the year ended December 31, 2015, totaled $26,500
and the carrying value of the note as of December 31, 2015, is $5,000, net of unamortized discount of $0. During the year
ended December 31, 2015, the company issued 317,819,240 shares of common stock upon conversion of $21,500 of note principal
and $710 of accrued note interest. As of December 31, 2015, the outstanding principal balance of this note is $5,000.
On May 6, 2015, the
Company issued a $40,000 convertible promissory note to Pure Energy 714, a New Jersey LLC. The note bears interest at 12% and
is convertible at a 50% discount of the average of the three lowest day’s closing prices for the ten (10) days
preceding conversion and matures November 6, 2015. The Company received $37,500 after debt issuance costs of $2,500. The debt
issuance costs will be amortized over the earlier of the five month term of the Note or any redemptions and accordingly
$2,500 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. The
Company recorded an initial derivative liability of $42,400, debt discount of $40,000 and derivative expense of $2,450. The
debt discount of $40,000 is being amortized into interest expense over the term of the note. Amortization for the year ended
December 31, 2015, totaled $40,000 and the carrying value of the notes as of December 31, 2015, is $40,000, net of
unamortized discount of $0. During the year ended December 31, 2015, the company issued 138,552,216 shares of common stock
upon conversion of $39,477 of note principal. As of December 31, 2015, the outstanding principal balance is $523.
On May 15, 2015, the
Company issued a $128,000 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at
a 50% discount of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion
and matures February 15, 2016. The Company received $125,000 after debt issuance costs of $3,000. The debt issuance costs
will be amortized over the earlier of the nine month term of the Note or any redemptions and accordingly $2,500 has been
expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. The Company recorded an
initial derivative liability of $143,360, debt discount of $128,000 and derivative expense of $15,360. The debt discount of
$128,000 is being amortized into interest expense over the term of the note. Amortization for the year ended December 31,
2015, totaled $106,667 and the carrying value of the notes as of December 31, 2015, is $106,667, net of unamortized discount
of $21,333. As of December 31, 2015, the outstanding principal balance of this note is $128,000.
On May 27, 2015, the
Company issued a $28,000 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at
a 50% discount of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion
and matures February 27, 2016. The Company received $25,000 after debt issuance costs of $3,000. The debt issuance costs will
be amortized over the earlier of the nine month term of the Note or any redemptions and accordingly $2,370 has been expensed
as debt issuance costs (included in interest expense) for the year ended December 31, 2015. The Company recorded an initial
derivative liability of $31,360, debt discount of $28,000 and derivative expense of $3,360. The debt discount of $28,000 is
being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015, totaled
$22,116 and the carrying value of the notes as of December 31, 2015, is $22,116 net of unamortized discount of $5,884. As of
December 31, 2015, the outstanding principal balance of this note is $28,000.
On May 29, 2015, the Company issued a $125,000
convertible promissory note to Pure Energy 714, a New Jersey LLC. The note bears interest at 12%, is convertible at a 60% discount
of the average of the three lowest day’s closing prices for the fifty (50) days preceding conversion and matured on November
29, 2015. The note has matured during the year ended December 31, 2015 and is currently in default. The Company recorded an initial
derivative liability of $132,500, debt discount of $125,000 and derivative expense of $7,500. The debt discount of $125,000 is
being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015, totaled $125,000
and the carrying value of the notes as of December 31, 2015, is $125,000, net of unamortized discount of $0. As of December 31,
2015, the outstanding principal balance of this note is $125,000.
On June 9, 2015, the Company issued a $28,000
convertible promissory note to Pure Energy 714, a New Jersey LLC. The note bears interest at 12%, is convertible at a 50% discount
of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures February
27, 2016. The Company received $25,000 after debt issuance costs of $3,000. The debt issuance costs will be amortized over the
earlier of the seven month term of the Note or any redemptions and accordingly $2,338 has been expensed as debt issuance costs
(included in interest expense) for the year ended December 31, 2015. The Company recorded an initial derivative liability of $29,680,
debt discount of $28,000 and derivative expense of $1,680. The debt discount of $28,000 is being amortized into interest expense
over the term of the note. Amortization for the year ended December 31, 2015, totaled $21,825 and the carrying value of the notes
as of December 31, 2015, is $21,825, net of unamortized discount of $6,175. As of December 31, 2015, the outstanding principal
balance of this note is $28,000.
On June 19, 2015, the
Company issued a convertible promissory note for $36,750 to LG Capital (“LG”). The note bears interest at 8%, is
convertible at a 50% discount of the lowest closing price for the ten (10) days preceding conversion and matures on June 19,
2016. The Company recorded an initial derivative liability of $39,690, debt discount of $36,750 and derivative expense of
$1,590. The debt discount of $26,500 is being amortized into interest expense over the term of the note. The Company received
$25,000 after debt issuance costs of $1,500. The debt issuance costs will be amortized over the earlier of the twelve month
term of the Note or any redemptions and accordingly $982 has been expensed as debt issuance costs (included in interest
expense) for the year ended December 31, 2015. Amortization for the year ended December 31, 2015, totaled $19,580, and the
carrying value of the notes as of December 31, 2015, is $19,580, net of unamortized discount of $17,170. As of December 31,
2015, the outstanding principal balance of this note is $36,750.
On June 24, 2015, the Company issued a convertible
promissory note for $25,000 to Service Trading Company, LLC (“SVC”). The note is bears interest at 8%, is convertible
at a 50% discount of the lowest closing price for the ten (10) days preceding conversion and matures on June 24, 2016. The Company
received $23,500 after debt issuance costs of $1,500. The debt issuance costs will be amortized over the earlier of the twelve
month term of the Note or any redemptions and accordingly $800 has been expensed as debt issuance costs (included in interest expense)
for the year ended December 31, 2015. The Company recorded an initial derivative liability of $27,000, debt discount of $25,000
and derivative expense of $2,000. The debt discount of $25,000 is being amortized into interest expense over the term of the note.
Amortization for the year ended December 31, 2015, totaled $12,978 and the carrying value of the notes as of December 31, 2015,
is $12,978, net of unamortized discount of $12,022. As of December 31, 2015, the outstanding principal balance of this note is
$25,000.
On June 26, 2015, the Company issued a $15,500
convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at a 50% discount of the average
of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures March 26, 2016. The Company
received $12,500 after debt issuance costs of $3,000. The debt issuance costs will be amortized over the earlier of the nine month
term of the Note or any redemptions and accordingly $2,000 has been expensed as debt issuance costs (included in interest expense)
for the year ended December 31, 2015. The Company recorded an initial derivative liability of $17,360, debt discount of $15,500
and derivative expense of $1,860. The debt discount of $15,500 is being amortized into interest expense over the term of the note.
Amortization for the year ended December 31, 2015, totaled $10,635 and the carrying value of the notes as of December 31, 2015,
is $10,635, net of unamortized discount of $4,865. As of December 31, 2015, the outstanding principal balance of this note is $15,500.
On July 20, 2015, the Company
issued a $15,500 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at a 50% discount
of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures April 20,
2016. The Company received $12,500 after debt issuance costs of $3,000. The debt issuance costs will be amortized over the earlier
of the nine month term of the Note or any redemptions and accordingly $2,000 has been expensed as debt issuance costs (included
in interest expense) for the year ended December 31, 2015. The Company recorded an initial derivative liability of $17,360, debt
discount of $15,500 and derivative expense of $1,860. The debt discount of $15,500 is being amortized into interest expense over
the term of the note. Amortization for the year ended December 31, 2015, totaled $9,244 and the carrying value of the notes as
of December 31, 2015, is $9,244, net of unamortized discount of $6,256. As of December 31, 2015, the outstanding principal balance
of this note is $15,500.
On December 3, 2015, the Company issued a convertible
promissory note for $30,000 to SBI Investments, LLC. The note is due on demand, bears interest at 12% and is convertible at a 50%
discount of the lowest trading price for the twenty (20) days preceding conversion and matures on August 1, 2016. The Company recorded
an initial derivative liability of $32,400, debt discount of $30,000 and derivative expense of $2,400. The debt discount of $30,000
is being amortized into interest expense over the term of the note. The Company received $27,500 after debt issuance costs of $2,500.
The debt issuance costs will be amortized over the earlier of the twelve month term of the Note or any redemptions and accordingly
$259 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. Amortization
for the year ended December 31, 2015, totaled $3,471, and the carrying value of the notes as of December 31, 2015, is $3,471, net
of unamortized discount of $26,529. As of December 31, 2015, the outstanding principal balance of this note is $30,000.
On December 4, 2015, the Company issued a convertible
promissory note for $35,200 to LG Capital (“LG”). The note bears interest at 8%, is convertible at a 50% discount of
the lowest trading price for the twenty (20) days preceding conversion and matures on December 4, 2016. The Company recorded an
initial derivative liability of $38,016, debt discount of $35,200 and derivative expense of $2,816. The debt discount of $35,200
is being amortized into interest expense over the term of the note. The Company received $30,000 after debt issuance costs of $2,000
and an original issuer discount of 10% ($3,520). The debt issuance costs will be amortized over the earlier of the twelve month
term of the Note or any redemptions and accordingly $520 has been expensed as debt issuance costs (included in interest expense)
for the year ended December 31, 2015. Amortization for the year ended December 31, 2015, totaled $2,597, and the carrying value
of the notes as of December 31, 2015, is $12,597, net of unamortized discount of $32,603. As of December 31, 2015, the outstanding
principal balance of this note is $35,200.
On December 21, 2015, the
Company issued a $20,000 convertible promissory note to More Capital. The note bears interest at 3% per month and matures April
20, 2016. The note is convertible at the market price of the Company’s common stock on the day of conversion. As of December
31, 2015, the outstanding principal balance of this note is $20,000.
On December 22, 2015, the
Company issued a $50,000 convertible promissory note to Carebourn Capital. The note bears interest at 3% per month and matures
February 22, 2016. The note is convertible at the market price of the company’s common stock on the day of conversion. As
of December 31, 2015, the outstanding principal balance of this note is $50,000.
On December 30, 2015, the
Company issued a $10,000 convertible promissory note to More Capital. The note is due on demand, bears interest at 3% per month
and matures March 2, 2016. The note is convertible at the market price of the company’s common stock on the day of conversion.
As of December 31, 2015, the outstanding principal balance of this note is $10,000.
The Company has determined
that the conversion features of the 2012, 2013, 2014 and the 2015 Notes represent embedded derivatives since the Notes are convertible
into a variable number of shares upon conversion. Accordingly, the Notes are not considered to be conventional debt under EITF
00-19 and the embedded conversion features must be bifurcated from the debt hosts and accounted for as derivative liabilities.
Accordingly, the fair value of these derivative instruments have been recorded as liabilities on the consolidated balance sheet
with the corresponding amounts recorded as a discounts to the Notes. Such discounts will be accreted from the date of issuance
to the maturity dates of the Notes. The change in the fair value of the liabilities for derivative contracts will be recorded to
other income or expenses in the consolidated statement of operations at the end of each quarter, with the offset to the derivative
liability on the balance sheet.
The fair value of the conversion
features embedded in the 2015 Notes as of their dates of issuance and in their entirety as of December 31, 2015 was determined
to approximate their fair intrinsic value due to the terms of conversion.
The inputs used to estimate
the fair value of the derivative liabilities are considered to be level 3 inputs within the fair value hierarchy.
A summary of the derivative
liabilities related to convertible notes as of December 31, 2015 and December 31, 2014 is as follows:
Derivative
Liability Balance
12/31/14
|
|
Initial Derivative
Liability
|
|
Redeemed
convertible notes
|
|
Fair value
change-
Year ended
12/31/15
|
|
Derivative
Liability Balance
12/31/15
|
$
|
1,057,602
|
|
|
|
668,956
|
|
|
|
(1,028,790
|
)
|
|
|
662,074
|
|
|
$
|
1,359,843
|
|
A summary of debentures payable
as of December 31, 2015 and December 31, 2014 is as follows:
|
|
2015
Face Value
|
|
2014
Face Value
|
2012 and 2013 Notes
|
|
$
|
80,075
|
|
|
$
|
88,075
|
|
2014 Notes
|
|
$
|
507,619
|
|
|
$
|
709,999
|
|
2015 Notes
|
|
$
|
599,597
|
|
|
$
|
—
|
|
Note discount
|
|
$
|
(137,106
|
)
|
|
$
|
(135,431
|
)
|
Total
|
|
$
|
1,050,135
|
|
|
$
|
662,643
|
|
9.
Commitments
and contingencies:
Litigation:
The Forest County Potawatomi
Community (“FCPC”) has initiated an action against Chex, an inactive subsidiary of the Company, in the FCPC tribal
court asserting that Chex breached a contract with FCPC during the 2002 to 2006 time period. Chex is inactive and did not defend
this action. On October 1, 2009 a judgment was entered against Chex in the FCPC Tribal Court in the amount of $2,484,922. The Company
has included $2,484,922 in litigation contingency on the consolidated balance sheets as of December 31, 2015 and December 31, 2014.
The Company is involved in various
claims and legal actions arising in the ordinary course of business. The ultimate disposition of these matters may have a material
adverse impact either individually or in the aggregate on future consolidated results of operations, financial position or cash
flows of the Company.
10. Income taxes:
The operations of the Company
for periods subsequent to its acquisition by HPI and through August 2004, at which time HPI’s ownership interest fell below
80% are included in consolidated federal income tax returns filed by HPI. Subsequent to August 2004 and through January 29, 2006
the Company will file a separate income tax return. As of January 30, 2006, HPI’s ownership interest again exceeded 80%
and the operations of the Company will be included in a consolidated federal income tax from that date through October 29, 2006
when the ownership fell below 80%. As of October 30, 2006, the Company will be filing separate income tax returns. For financial
reporting purposes, the Company’s provision for income taxes has been computed, and current and deferred taxes have been
allocated on a basis as if the Company has filed a separate income tax return for each year presented. Management assesses the
realization of its deferred tax assets to determine if it is more likely than not that the Company's deferred tax assets will
be realizable. The Company adjusts the valuation allowance based on this assessment.
Income tax expense for 2015
and 2014 is as follows:
|
|
2015
|
|
2014
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,134,000
|
|
|
|
1,445,000
|
|
State
|
|
|
124,000
|
|
|
|
158,000
|
|
Valuation allowance
|
|
|
(1,258,000
|
)
|
|
|
(1,603,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following is a summary of the Company’s deferred tax assets and liabilities at December 31, 2015 and 2014:
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
|
Deferred tax assets - current:
|
|
|
|
|
|
|
|
|
Stock-based compensation and other
|
|
$
|
—
|
|
|
$
|
980,000
|
|
Net operating loss carry forwards
|
|
|
3,334,000
|
|
|
|
2,524,000
|
|
|
|
|
3,334,000
|
|
|
|
3,504,000
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(5,858,000
|
)
|
|
|
(3,504,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
A
reconciliation between the expected tax expense (benefit) and the effective tax rate for the years ended December 31, 2015 and
204 are as follows:
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate
|
|
|
(34
|
%)
|
|
|
(34
|
%)
|
State taxes, net of federal income tax
|
|
|
(4
|
%)
|
|
|
(4
|
%)
|
Effect of change in valuation allowance
|
|
|
(7
|
%)
|
|
|
(7
|
%)
|
Non deductible expenses and other
|
|
|
45
|
%
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
0
|
%
|
As of December 31, 2015, the Company had a tax net operating loss carry forward of approximately $12,851,000. Any unused portion of this carry forward expires in 2030. Utilization of this loss may be limited in the event of an ownership change pursuant to IRS Section 382.
11. Stockholders’ deficit:
Common stock:
During the year ended on
December 31, 2014, the Company issued 12,427,352 shares of common stock upon the conversion of $822,767 of debentures payable and
accrued and unpaid interest.
During the year ended on
December 31, 2015, the Company issued 2,810,437,696 shares of common stock upon the conversion of $369,138 of debentures payable
and accrued and unpaid interest and the cashless exercise of warrants.
Effective February 2, 2015,
the Company completed a one share for six hundred share (1 for 600) reverse split of its common stock. All per share figures in
these statements have been adjusted to reflect the effects of the reverse split.
Preferred stock
The Company is authorized
to issue 5,000,000 shares of preferred stock. On October 19, 2012,
the Board of Directors
approved the filing of a Certificate of Designation (“COD”) establishing the designations, preferences, limitations
and relative rights for 1,000,000 shares of the Company’s Class A Preferred Stock.
As of December 31, 2013 there
were 819,000 shares of Class A preferred stock outstanding. The shares have been pledged as collateral by CCC (the sole holder
of the shares) and subsequently pledged the 819,000 shares of Class A Preferred stock they own as collateral in conjunction with
the issuance of the $50,000 convertible note issued to Flux Carbon Starter Fund, LLC.
The COD for Class A Preferred
stock states; each share of the Class A Preferred Stock shall be entitled to a number of votes determined at any time and from
time to time determined as follows: any holder of Class A Preferred Stock can vote such shares as if converted based on the Conversion
Rights in below. The Class A Preferred Stock shall have a right to vote on all matters presented or submitted to the Corporation’s
stockholders for approval in pari passu with holders of the Corporation’s common stock, and not as a separate class. Each
share of the Class A Preferred Stock shall automatically convert (the “Conversion”) into shares of the Corporation’s
common stock at the moment there are sufficient authorized and unissued shares of common stock to allow for the Conversion. The
number of shares of common stock to which a holder of Class A Preferred Stock shall be entitled upon a conversion shall equal the
product obtained by (a) multiplying the number of fully diluted common shares by twenty five hundredths (0.25), then (b) multiplying
the result by a fraction, the numerator of which will be the number of shares of Class A Preferred stock being converted and the
denominator of which will be the number of authorized shares of Class A Preferred stock. As of December 31, 2014 and 2015 there
are 819,000 shares of Class A Preferred stock outstanding.
On December 14, 2012,
Board
of Directors approved the filing of a COD establishing the designations, preferences, limitations and relative rights of the Company’s
Class B Preferred Stock. The COD allows the Board of Directors in its sole discretion to issue up to 2,000,000 shares of Class
B Preferred Stock.
The COD for Class B Preferred stock states; each share of the Class B Preferred Stock shall be entitled
to a number of votes determined at any time and from time to time determined as follows: any holder of Class B Preferred Stock
can vote such shares as if converted based on the Conversion Rights in below. The Class B Preferred Stock shall have a right to
vote on all matters presented or submitted to the Corporation’s stockholders for approval in pari passu with holders of the
Corporation’s common stock, and not as a separate class. Each share of the Class B Preferred Stock shall automatically convert
(the “Conversion”) into shares of the Corporation’s common stock at the moment there are sufficient authorized
and unissued shares of common stock to allow for the Conversion. The Class B Preferred Stock will convert in their entirety, simultaneously
to equal the amount of shares of common stock resulting from the amount of series B Preferred Stock outstanding multiplied by sixty
(60). The Conversion shares will be issued pro rata so that each holder of the Class B Preferred Stock will receive the appropriate
number of shares of common stock equal to their percentage ownership of their Class B Preferred Stock. As of December 31, 2014
and 20154 there are 1,791,667 and 1,791,667, respectively, shares of Class B Preferred stock outstanding.
Effective January 21, 2014,
the Board of Directors of the Company approved the issuance of 1,000 shares of Class C Preferred Stock (as defined and described
below) (the “Class C Preferred Stock Shares”) to Mr. Fong or his assigns in consideration for services rendered to
the Company and continuing to work for the Company without receiving significant payment for services and without the Company having
the ability to issue shares of common stock as the Company does not have sufficient authorized but unissued shares of common stock
to allow for any such issuances.
As a result of the issuance
of the Class C Preferred Stock Shares to Mr. Fong, or his assigns and the Super Majority Voting Rights (described below), Mr. Fong
obtained voting rights over the Company’s outstanding voting stock which provides him the right to vote up to 51% of the
total voting shares able to vote on any and all shareholder matters. As a result, Mr. Fong will exercise majority control
in determining the outcome of all corporate transactions or other matters, including the election of Directors, mergers, consolidations,
the sale of all or substantially all of the Company’s assets, and also the power to prevent or cause a change in control.
The interests of Mr. Fong may differ from the interests of the other stockholders and thus result in corporate decisions that are
adverse to other shareholders. Additionally, it may be impossible for shareholders to remove Mr. Fong as an officer
or Director of the Company due to the Super Majority Voting Rights. The Class C preferred stock provides no other rights to their
holder(s) other than voting rights.
The Company valued the 1,000
shares of Class B preferred stock at $106,673, based on an estimated control premium determined with reference to a third party
study, that may be realized upon the sale of common stock, primarily similar to voting control as of the grant date.
Stock options:
The Company has a stock option
plan (the “Plan”) which was approved by the Board of Directors in July 2004 and which permits the grant of shares
to attract, retain and motivate employees, directors and consultants of up to 3,000 shares of common stock. Options are generally
granted with an exercise price equal to the Company’s market price of its common stock on the date of the grant and vest
immediately upon issuance.
There were no options granted
during the years ended December 31, 2015 and 2014.
All options outstanding at December 31, 2015 are fully vested and exercisable.
A summary of outstanding balances at December 31, 2014 and 2015 is as follows:
|
|
|
|
Weighted-
|
|
|
|
Weighted-
Average
|
|
Average
Remaining
|
|
Aggregate
Intrinsic
|
Options
|
|
exercise price
|
|
contractual life
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,650
|
|
|
$
|
0.34
|
|
|
|
0.98
|
|
|
$
|
0
|
|
Warrants:
In conjunction with the March
27, 2014 convertible note, the Company also granted the lender the right to purchase at any time on or after each Issue Date until
the date which is the last calendar day of the month in which the fifth anniversary of the Issue Date occurs (the “Expiration
Date”), a number of fully paid and non-assessable shares (the “Warrant Shares”) of the Company’s common
stock, par value $0.001 per share equal to $41,250 divided by the Market Price (as defined in the Note). These warrants shares
were sold to two unrelated third parties during the year ended December 31, 2015
The warrant shares expire
on the five year anniversary of the issuance and had an exercise price of of $0.0025 per share at issuance. The Company estimated
the fair value of the warrant shares on the date of issuance at $26 based on the Black Scholes Option pricing method utilizing
following assumptions:
Estimated market value of common
stock on measurement date: $0.0003
Exercise price: $0.00004
Risk free interest rate: 1.6%
Term in years: 3.28 years
Expected volatility: 482%
Expected dividends: 0.00%
A summary of warrant activity is shown in the table below:
|
|
Number of
Warrant Shares
Outstanding
|
|
|
|
|
Fair value at Issuance March 27, 2014
|
|
|
|
105,514
|
|
|
Fair Value at December 31, 2014
|
|
|
|
105,514
|
|
|
Cashless exercise of warrants
|
|
|
|
(17,500
|
)
|
|
Fair value at December 31, 2015
|
|
|
|
88,014
|
|
12
.
Prior events:
Asset sale:
On December 22, 2005, FFFC and
Chex entered into an Asset Purchase Agreement (the “APA”) with Game Financial Corporation (“Game”), pursuant
to which FFFC and Chex agreed to sell all of its cash access contracts and certain related assets, which represented substantially
all the assets of Chex. Such assets also represented substantially all of the operating assets of the Company on a consolidated
basis. On January 31, 2006, FFFC and Chex completed the sale (the “Asset Sale”) for $14 million pursuant to the APA
and received net cash proceeds of $12,642,784, after certain transaction related costs and realized a pre-tax book gain of $4,145,835.
As a result of the Asset Sale, the Company has no substantial continuing operations. Therefore, the Company is not reporting and
accounting for the sale of Chex’s assets as discussed in discontinued operations.
Additionally, FFFC and Chex
entered into a Transition Services Agreement (the “TSA”) with Game pursuant to which FFFC and Chex agreed to
provide certain services to Game to ensure a smooth transition of the sale of the cash-access financial services business.
Pursuant
to the APA and the TSA, FFFC and Chex owed Game approximately $300,000. Game, FFFC and Chex agreed to settle the balance due for
$275,000 (included in accounts payable on the balance sheet presented herein) with payment terms. FFFC and Chex have not made
any of the payments stipulated in the settlement and subsequently Game filed a complaint against Chex, FFFC and Hydrogen Power
Inc. (“HPI”) seeking approximately $318,000. The Company has agreed to a judgment of $329,146, comprised of the $275,000,
attorney fees of $15,277 (included in accounts payable on the balance sheet presented herein, and attorney fees of $38,869 (included
in accrued liabilities on the balance sheet presented herein). FFFC and Chex have agreed to indemnify HPI.
13. Related party transactions:
Management and director
fees:
For the years ended December
31, 2015 and 2014, the Company accrued expenses of $150,000 and $127,500, respectively, for our Chairman, Mr. Fong’s services.
Mr. Fong received $159,695 and $110,941 in cash payments for the years ended December 31, 2015 and 2014, respectively. In November
2013, the Company issued a convertible promissory note to Mr. Fong in payment of $35,000 of accrued and unpaid fees. As of December
31, 2015, Mr. Fong is owed $25,500 for these services, included in accrued expenses on the balance sheet.
Notes payable:
As disclosed in Note 5, the
Company has issued notes payable to various related parties. All additions and payments are made in cash, and no
conversions
occurred during the years ended December 31, 2014 and 2015. The balances of December 31, 2014 and 2015, and the activity for the
years ended December 31, 2014 and 2015 follows:
Noteholder
|
|
Balance
12/31/13
|
|
Additions
|
|
Payments
|
|
Balance
12/31/14
|
Gulfstream
Financial Partners (1)
|
|
$
|
1,750
|
|
|
$
|
—
|
|
|
$
|
1,750
|
|
|
$
|
—
|
|
HPI
Partners (1)
|
|
|
144,725
|
|
|
|
—
|
|
|
|
81,000
|
|
|
|
63,725
|
|
AFPW
(1)
|
|
|
6,953
|
|
|
|
—
|
|
|
|
6,953
|
|
|
|
—
|
|
Henry
Fong (2)
|
|
|
2,088
|
|
|
|
15,000
|
|
|
|
17,088
|
|
|
|
—
|
|
HF
Services (1)
|
|
|
4,150
|
|
|
|
—
|
|
|
|
4,150
|
|
|
|
—
|
|
SurgLine
Int’l (1)
|
|
|
10,672
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,672
|
|
Total
|
|
$
|
170,338
|
|
|
$
|
15,000
|
|
|
$
|
110,941
|
|
|
$
|
74,397
|
|
Noteholder
|
|
Balance
12/31/14
|
|
Additions
|
|
Payments
|
|
Sold
|
|
Balance
12/31/15
|
MV
Knight (3)
|
|
$
|
—
|
|
|
$
|
8,900
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,900
|
|
HPI
Partners (1)
|
|
|
63,725
|
|
|
|
—
|
|
|
|
63,330
|
|
|
|
—
|
|
|
|
395
|
|
Henry
Fong (2)
|
|
|
—
|
|
|
|
3,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,000
|
|
HF
Services (1)
|
|
|
—
|
|
|
|
15,000
|
|
|
|
14,700
|
|
|
|
—
|
|
|
|
300
|
|
SurgLine
Int’l (1)
|
|
|
10,672
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,672
|
|
Total
|
|
$
|
74,397
|
|
|
$
|
26,900
|
|
|
$
|
78,030
|
|
|
$
|
—
|
|
|
$
|
23,267
|
|
All
of the notes are due on demand and have interest rates of 8% to 10% per annum.
|
(1)
|
Mr.
Henry Fong, an officer and director of the Company, is also an officer, director or control
person of these entities.
|
|
(2)
|
An
officer or director of the Company.
|
|
(3)
|
Related
to an officer and director of the company
|
14
.
Segment reporting:
During
the years ended December 31, 2015 and 2014,
the Company operated in two reportable segments: Brawnstone and Nova.
Brawnstone, in which the
Company owns a 70% interest, is a licensed armed security, private investigation, security technology solution provider and tactical
training company servicing active accounts with several Government affiliated HUD housing establishments, schools, and industrial
facilities across the Ohio region.
Nova, a wholly owned subsidiary
of the Company, was formed to design, market and service credit card products aimed at the sub-prime market consisting mainly
of consumers who may not qualify for traditional credit card products. Nova charges a monthly fee on active cards and receives
proceeds, if any, from Merrick Bank after their bank charges for servicing the cred
it
cards. The accounting policies of the segments are the same as those described in the Note 1. The Company’s reportable
segments are strategic business units that offer products.
For
the year ended December 31, 2014, segment results are as follows:
|
|
Brawnstone
(from
acquisition
on
July
24, 2014)
|
|
Nova
|
|
Corporate
|
|
Total
|
Net
Revenues
|
|
$
|
535,629
|
|
|
$
|
27,246
|
|
|
$
|
—
|
|
|
$
|
562,875
|
|
Cost of sales
|
|
|
439,820
|
|
|
|
25,483
|
|
|
|
—
|
|
|
|
465,303
|
|
Operating costs
|
|
|
150,136
|
|
|
|
—
|
|
|
|
572,860
|
|
|
|
722,996
|
|
Other non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
—
|
|
|
|
—
|
|
|
|
2,055,576
|
|
|
|
2,055,576
|
|
Segment income or
(loss)
|
|
|
(54,327
|
)
|
|
|
1,763
|
|
|
|
(2,628,436
|
)
|
|
|
(2,681,000
|
)
|
Segment assets
|
|
$
|
146,873
|
|
|
$
|
41,046
|
|
|
$
|
288,519
|
|
|
$
|
476,438
|
|
For
the year ended December 31, 2015, segment results are as follows:
|
|
Brawnstone
|
|
Nova
|
|
Corporate
|
|
Total
|
Net
Revenues
|
|
$
|
797,929
|
|
|
$
|
24,244
|
|
|
$
|
—
|
|
|
$
|
822,173
|
|
Cost of sales
|
|
|
574,606
|
|
|
|
25,052
|
|
|
|
—
|
|
|
|
599,691
|
|
Operating costs
|
|
|
257,047
|
|
|
|
—
|
|
|
|
369,588
|
|
|
|
626,635
|
|
Other non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
8,729
|
|
|
|
—
|
|
|
|
2,136,712
|
|
|
|
2,145,441
|
|
Segment loss
|
|
|
(42,453
|
)
|
|
|
(841
|
)
|
|
|
(2,506,300
|
)
|
|
|
(2,549,594
|
)
|
Segment assets
|
|
$
|
76,620
|
|
|
$
|
51,047
|
|
|
$
|
370,853
|
|
|
$
|
498,520
|
|
15
.
Subsequent events:
On March 21, 2016, the Company
and Paymaster Limited reached a settlement for the transfer of Paymaster’s Cumulative Convertible Redeemable Preference Shares
(the “Preferred Shares”) initially acquired by the Company on March 30, 2011. The Preferred Shares were initially transferred
to the Company in exchange for an agreement to restructure a note receivable (the “Note”). Pursuant to the agreement,
the parties agreed to convert the remaining balance of $339,575 of the Note receivable into the Preferred Shares with a value of
$400,000, and an annual dividend of 7.5% over thirty-six (36) months.
The Company has recorded
the investment at $89,575, net of a valuation allowance of $250,000, the same historical carrying value on the Company’s
balance sheet as the note. The last dividend the Company has received was the quarterly dividend for the quarter ended June 30,
2012.
In the March 21, 2016 agreement,
the Company agreed to return the Preferred Shares to Paymaster in exchange for a one-time payment of $275,000. The company received
this cash payment during the first quarter of 2016 and will report a gain on the transaction.
Between January 1, 2016 and
May 13, 2016, 1,936,628,386 shares of common stock were issued upon conversion of $77,516 in debentures payable and $2,637 in accrued
and unpaid interest.
From January 1, 2016 through
May 31, 2016, the Company received $15,000 from the issuance of an $18,000 convertible promissory note, which may cause dilution
to our stockholders. The conversion price for this note is equal to 50% of the average of the three lowest closing bid prices of
the Common Stock as reported on the exchange which the Company’s shares are traded, for any of the twenty previous trading
days including the day upon which a Notice of Conversion is received by the Company.
Management has determined
that there are no further events subsequent to the balance sheet date that should be disclosed in these financial statements.