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1.
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DESCRIPTION OF BUSINESS AND HISTORY
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Description of business
– Meganet Corporation, (the "Company" or "Meganet") is focused on the development of data security solutions for enterprise, large organizations and corporations around the globe, including the U.S. Department of Defense, Military Intelligence and the Federal Government. The Company's data security solutions include a patented encryption algorithm which enhances security exponentially. The Company out-sources the manufacture of its counter-IED products, including bomb jammers, dismounted backpack portable jammers and facility jammers. The Company also develops and sells cell phone, satellite and wireless interceptors. Other data security solutions include encrypted cell phones, land lines, fax, PDA, radio, and satellites. Intelligence and counter-intelligence solutions include the development of SPY and RAT phones and devices for intelligence gathering. Counter-intelligence solutions include bugs, bug detectors, bomb sniffers, miniature cameras and digital video recorders. The Company maintains technology development, executive and sales offices in Las Vegas, Nevada.
History
– Meganet Corporation was incorporated in Nevada on March 26, 2009. Prior to the formation of the current entity, a now dissolved entity under the name Meganet Corporation was incorporated in California with common ownership and similar business objectives. The integration of the Company's operations from the now dissolved California company to the Nevada company is considered a recapitalization due to the common ownership resulting in the assets and liabilities being recorded at a carryover basis as determined under accounting principles generally accepted in the United States of America. The former entity had been dissolved before incorporation on March 26, 2009.
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2.
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SUMMARY OF SIGNIFICANT POLICIES
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Basis of presentation
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation.
Use of estimates
– The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates and judgments are based on historical information, information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Cash and cash equivalents
– Cash and cash equivalents consist of cash and short-term investments with original maturities of less than 90 days. Cash equivalents are placed with high credit quality financial institutions and are primarily in money market funds. The carrying value of those investments approximates fair value.
Revenue recognition
– The Company's revenue consists primarily of revenue from the sale of jamming and interceptor hardware and data security software. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company's product sales, these criteria are met at the time the product is shipped. The Company recognizes revenue from the sale of hardware products (e.g., jammers and cell phone interceptors) and software included with hardware that is essential to the functionality of the hardware, in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software and (ii) sales of software upgrades.
Generally, the Company requires customers to deposit 50% of the gross sales price upon execution of a formal intent to sell with the remaining 50% due upon delivery of the product. The Company records deferred revenue when it receives payments in advance of the delivery of products.
MEGANET CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2016 and 2015
During the year ended March 31, 2015, the Company began purchasing GAW miners and leasing computing space in exchange for bitcoin currency. During April 2015, the Company and GAW miners entered into a settlement agreement for the repayment of a bitcoin dispute. The agreement calls for six equal monthly payments of $16,453 starting in March 2015, when the Company received its first payment. The Company recognizes GAW mining payments as bitcoin income as they are received on a cash basis. The Company has not received any payments since March 2015 and has fully allowed for past due payments due to questions of collectability. The Company recognized $7,867 and $44,805 in GAW income and $608 and $124,098 in GAW expenses during the years ended March 31, 2016 and 2015, respectively.
During the year ended March 31, 2016, the Company had revenue of $82,620, including $80,000 worth of jammer equipment sold to one customer, which was previously recorded as display assets with an original purchase cost of $21,725 and a net book value of $0 as of the time of sale. At March 31, 2016 and 2015, the Company had $0 and $40,000 of deferred revenue related to the sales of jammer equipment.
Costs of revenue
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Cost of revenue includes raw materials, component parts, and shipping supplies. Shipping and handling costs are not a significant portion of the cost of revenue.
Shipping costs
– Amounts billed to customers related to shipping and handling are classified as revenue, and the Company's shipping and handling costs are included in cost of revenue.
Software development costs
– Research and development costs are expensed as incurred. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. The Company's products are released soon after technological feasibility has been established. Therefore, costs incurred subsequent to achievement of technological feasibility are usually not significant, and software development costs have been expensed as incurred.
Property and equipment
- Property and equipment are stated at the lower of cost or fair value. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which do not exceed the lease term for leasehold improvements, as follows:
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Description
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Estimated Life
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Equipment
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5 years
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Computers
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5 years
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Office furniture
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7 years
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Leasehold improvements
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5 years
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The estimated useful lives are based on the nature of the assets as well as current operating strategy and legal considerations such as contractual life. Future events, such as property expansions, property developments, new competition, or new regulations, could result in a change in the manner in which the Company uses certain assets requiring a change in the estimated useful lives of such assets.
Maintenance and repairs that neither materially add to the value of the asset nor appreciably prolong its life are charged to expense as incurred. Gains or losses on disposition of property and equipment are included in the statements of operations. There were no dispositions during the periods presented.
The Company evaluates its property and equipment and other long-lived assets for impairment in accordance with related accounting standards. For assets to be held and used (including projects under development), fixed assets are reviewed for impairment whenever indicators of impairment exist. If an indicator of impairment exists, the Company first groups its assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (the "asset group"). Secondly, the Company estimates the undiscounted future cash flows that are directly associated with and expected to arise from the completion, use and eventual disposition of such asset group. The Company estimates the undiscounted cash flows over the remaining useful life of the primary asset within the asset group. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted cash flow model. If an asset is still under development, future cash flows include remaining construction costs. There were no impairments during the periods presented.
MEGANET CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2016 and 2015
Income taxes
– The Company records income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards. Accounting standards regarding income taxes requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance, if based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed at each reporting period based on a more-likely-than-not realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, the Company's experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives.
The Company recorded valuation allowances on the net deferred tax assets. Management will reassess the realization of deferred tax assets based on the accounting standards for income taxes each reporting period. To the extent that the financial results of operations improve and it becomes more likely than not that the deferred tax assets are realizable, the Company will be able to reduce the valuation allowance.
Significant judgment is required in evaluating the Company's tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Accounting standards regarding uncertainty in income taxes provides a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely, based solely on the technical merits, of being sustained on examinations. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.
Earnings (loss) per share
– Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if potentially dilutive securities had been issued. There were no potentially dilutive securities outstanding during the periods presented.
Stock-based compensation
– The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.
Concentration of credit risk
– Financial instruments that potentially expose the Company to significant concentrations of credit risk consist principally of cash. The Company places its cash with financial institutions with high-credit ratings.
Fair value of financial instruments
– The carrying amounts reflected in the balance sheets for cash, prepaid expenses, accounts payable and accrued expenses approximate the respective fair values due to the short maturities of these items.
Recent Accounting Pronouncements
– The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
MEGANET CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2016 and 2015
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception and has an accumulated deficit of $4,905,876 as of March 31, 2016. The Company requires capital for its contemplated operational and marketing activities. The Company's ability to raise additional capital through the future issuances of common stock is unknown. The obtainment of additional financing, the successful development of the Company's contemplated plan of operations, and its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
Management anticipates that that there will be sales sufficient to cover the next 12 months of cash operating expenses; however, there can be no surety that anticipated sales will materialize. In order to mitigate the risk related with this uncertainty, the CEO has agreed to contribute additional amounts to capital as needed to cover operating expenses.
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4.
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PROPERTY AND EQUIPMENT, NET
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Property and equipment consist of the following as of March 31, 2016 and 2015:
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March 31, 2016
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March 31, 2015
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Furniture and equipment
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$
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2,557,122
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$
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2,574,874
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Leasehold improvements
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99,094
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99,094
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Vehicles
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5,500
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5,500
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2,661,716
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2,679,468
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Less: accumulated depreciation
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(2,643,612
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)
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(2,622,958
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)
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$
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18,104
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$
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56,510
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During the year ended March 31, 2016, the Company purchased $3,975 of new computer equipment and sold two fully depreciated jammers for a total of $80,000. Depreciation expense, for the years ended March 31, 2016 and 2015 was $42,381 and $46,428, respectively.
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5.
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ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
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Accounts payable and accrued liabilities consist of the following as of March 31, 2016 and 2015:
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March 31, 2016
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March 31, 2015
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Accounts payable
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$
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190,314
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$
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186,023
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Accrued payroll
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871,317
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743,054
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Other accrued expenses
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78,136
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-
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$
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1,139,767
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$
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929,077
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Lease obligations
– On January 1, 2010, the Company entered into a 60 month lease for its 10,000 square foot office space located in Las Vegas, Nevada. The lease required no security deposit and provides for monthly payments of $10,000. The lease provides for a 60 month renewal period at the expiration to the lease period which the Company anticipates to exercise, but the lease is currently month-to-month. The amount of rent due, included in accounts payable, as of March 31, 2016, and March 31, 2015, was $173,765 and $156,265 respectively.
Rental expense, for the years ended March 31, 2016 and 2015 was $120,131 and $120,000, respectively.
MEGANET CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2016 and 2015
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7.
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RELATED PARTY TRANSACTIONS
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Officer loan
– During the years ended March 31, 2016 and 2015, the Company received cash advances from its president in the amount of $151,175 and $188,824, respectively, and repaid the president $56,935 and $62,657, respectively. All amounts advanced to the Company are unsecured, non-interest bearing and due upon demand by the president. At March 31, 2016 and 2015, the Company owes its president $760,285 and $666,045, respectively.
In accordance with FASB ASC 835-30 "Imputation of Interest", interest has been imputed on all advances made to Company by the president. During the years ended March 31, 2016 and 2015, interest has been imputed and charged to additional paid-in capital in the amount of $72,424 and $59,503, respectively.
Employment agreements
– as of March 31, 2015 the Company had only one employment agreement which was with the President and majority shareholder. The employment agreement stipulates that the President is to receive a base salary of $120,000 per annum. The agreement also contains a provision allowing for a commission to be paid equal to 10% of gross sales achieved by the President. The total expense related to this agreement for the years ended March 31, 2016 and 2015 was $128,262 and $122,232, respectively. As of March 31, 2016 and 2015, $871,317 and $743,054, respectively, of total compensation and related payroll taxes was unpaid and accrued in current liabilities. Included in the accrued payroll is an accrued liability for payroll taxes in the amount of $73,714 as of March 31, 2016 and 2015, respectively. These accruals inlude $4,935 in interest and penalties related to the late status of these payments. Nonetheless, the Company anticipates that it will reasonably be able to negotiate the total past due amount of payroll taxes in order to effectively eliminate penalties and interest.
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax assets consist of the following components as of March 31, 2016 and 2015:
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March 31, 2016
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March 31, 2015
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Deferred tax assets:
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Net operating loss carry forward
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$
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755,663
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$
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698,073
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Valuation allowance
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(755,663
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)
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(698,073
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)
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Net deferred tax asset
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$
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-
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$
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-
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The federal income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate of 34% to pretax income from continuing operations for the years ended March 31, 2016 and 2015 due to the following:
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March 31, 2016
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March 31, 2015
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Pre-tax book income (loss)
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$
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(130,979
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)
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$
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(171,269
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)
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Unpaid salaries
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44,892
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42,000
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Tax depreciation under (over) book
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2,847
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4,263
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Non-deductible portion of meals and entertainment
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337
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95
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Imputed interest on officer loan
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25,348
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20,826
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Net operating loss carry forward
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755,663
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698,073
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Valuation allowance
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(698,108
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)
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(593,988
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)
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Federal income tax
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$
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-
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$
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-
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The Company had net operating losses of approximately $2,159,038 that expire in years through 2026. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
9.
SUBSEQUENT EVENTS
Subsequent to the balance sheet date the Company received cash advances from its President in the amount of $4,797 in order to cover certain obligations that were due and repaid $1,490. All amounts advanced to the Company are unsecured, non-interest bearing and due upon demand by the president.