SPENDSMART NETWORKS, INC.
(Unaudited)
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,014,947
|
)
|
|
$
|
(2,242,677
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
231,587
|
|
|
|
189,260
|
|
Amortization of intangible asset
|
|
|
96,570
|
|
|
|
168,558
|
|
Amortization of debt discount
|
|
|
360,540
|
|
|
|
136,939
|
|
Stock-based compensation
|
|
|
691,607
|
|
|
|
854,301
|
|
Issuance of common stock for services
|
|
|
144,000
|
|
|
|
59,166
|
|
Change in fair value of financial instruments
|
|
|
(1,182,800
|
)
|
|
|
53,328
|
|
Accrued interest income on notes receivable from third party
|
|
|
-
|
|
|
|
(8,919
|
)
|
Accrued interest expenses on notes payable
|
|
|
31,755
|
|
|
|
18,648
|
|
Change in earn-out liability
|
|
|
-
|
|
|
|
(58,754
|
)
|
Inducement for exercise of warrants
|
|
|
3,560,958
|
|
|
|
-
|
|
Extinguishment of convertible debt
|
|
|
415,689
|
|
|
|
-
|
|
Provision for bad debt
|
|
|
62,792
|
|
|
|
434,877
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(293,612
|
)
|
|
|
(663,831
|
)
|
Customer short-term notes receivable
|
|
|
111,870
|
|
|
|
(330,146
|
)
|
Customer long-term notes receivable
|
|
|
72,584
|
|
|
|
(196,572
|
)
|
Deferred revenue
|
|
|
(124,717
|
)
|
|
|
(160,221
|
)
|
Prepaid insurance
|
|
|
(5,401
|
)
|
|
|
6,090
|
|
Other assets
|
|
|
-
|
|
|
|
(3,250
|
)
|
Accounts payable and accrued liabilities
|
|
|
(97,907
|
)
|
|
|
328,820
|
|
Net cash used in operating activities
|
|
|
(939,432
|
)
|
|
|
(1,160,731
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from short-term notes receivable from third party
|
|
|
-
|
|
|
|
110,000
|
|
Payment of deferred acquisition payable-Intellectual Capital Mgmt, LLC
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
Software development costs
|
|
|
(291,957
|
)
|
|
|
(545,900
|
)
|
Purchase of property and equipment
|
|
|
-
|
|
|
|
(305,326
|
)
|
Net cash used in investing activities
|
|
|
(301,957
|
)
|
|
|
(751,226
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from warrant liabilities related to tender offer
|
|
|
1,179,252
|
|
|
|
-
|
|
Repayment of notes
|
|
|
(70,262
|
)
|
|
|
-
|
|
Repayment of notes to related parties
|
|
|
(35,000
|
)
|
|
|
-
|
|
Repayment of convertible notes
|
|
|
(200,000
|
)
|
|
|
-
|
|
Proceeds from issuance of convertible debt
|
|
|
-
|
|
|
|
1,112,500
|
|
Net cash provided by financing activities
|
|
|
873,990
|
|
|
|
1,112,500
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(367,399
|
)
|
|
|
(1,053,109
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the period
|
|
|
470,341
|
|
|
|
1,242,155
|
|
Cash and cash equivalents at end of the period
|
|
$
|
102,942
|
|
|
$
|
189,046
|
|
|
|
|
|
|
|
|
|
|
Non-cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had conversion of 41,500 shares of Series C preferred stock into 166,000 shares of common stock during the six months ended June 30, 2015.
|
|
The Company issued 750,004 warrants in connection with convertible debt during the six months ended June 30, 2015.
|
|
The Company issued 26,479,217 warrants in connection with the exercise of tender offer warrants during the six months ended June 30, 2016.
|
|
The Company had a debt discount of $336,175 in connection with convertible debt during the six months ended June 30, 2015.
|
|
The Company had a debt discount of $50,738 in connection with convertible debt during the six months ended June 30, 2016.
|
|
The Company issued 17,895,859 shares of Common Stock in connection with the exercise of tender offer warrants during the six months ended June 30, 2016.
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
SPENDSMART NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
SpendSmart Networks, Inc. is a Delaware corporation (“the Company”). The Company brings value added products and mobile marketing solutions to consumers, merchants, and businesses. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary SpendSmart Networks, Inc., a California corporation (SpendSmart-CA). All material intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). All normal recurring adjustments which are necessary for the fair presentation of the results for the interim periods are reflected herein. Operating results for the six-month periods ended June 30, 2016 and 2015 are not necessarily indicative of results to be expected for a full year.
2. Liquidity and Going Concern
As of December 31, 2015, the Company’s audited consolidated financial statements included an opinion containing an explanatory paragraph as to the uncertainty of the Company’s ability to continue as a going concern at June 30, 2016. The Company has continued to incur net losses through June 30, 2016 and has yet to establish profitable operations. These factors among others create a substantial doubt about the Company’s ability to continue as a going concern. The Company’s unaudited consolidated financial statements as of and for the period ended June 30, 2016 do not contain any adjustments for this uncertainty.
In an effort to reduce overhead, the Company reduced salaries by 10% during the first half of 2016 and issued options equal to the value of the reduction. The Company also currently plans to attempt to raise additional required capital through the sale of unregistered shares of the Company’s preferred or common stock. All additional amounts raised will be used for our future investing and operating cash flow needs. However, there can be no assurance that we will be successful in consummating such financing. This description of our recent financing and future plans for financing does not constitute an offer to sell or the solicitation of an offer to buy our securities, nor shall such securities be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same.
3. Reclassification
Certain reclassifications were made to the 2015 financial statement presentation to conform to the 2016 financial statement presentation. These reclassifications relate to balances from discontinued operations, which have been included in respective balances from continuing operations.
4. Summary of Significant Accounting Policies
The condensed consolidated financial statements have been prepared in accordance with GAAP.
Loans Receivable and Accounts Receivable
The Company extends credit to its licensees in the normal course of business and performs credit evaluations of its customers. Loans and accounts receivable are stated at amounts due from customer’s net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time loan and accounts receivable are past due and the customer's current ability to pay its obligation to the Company. The Company writes off loans and accounts receivable when they become uncollectible.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, fair value of financial instruments, at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include recoverability and useful lives of intangible assets, the valuation allowance related to the Company's deferred tax assets, the allowance for doubtful accounts related and notes and accounts receivable, the fair value of stock options and warrants granted to employees, consultants, directors, investors and placement agents, notes, derivative liabilities (conversion option) and warrant tender offer.
Revenue Recognition
The Company generates revenues primarily in the form of set up fees, license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services. License fees are charged monthly for support services. Set-up fees primarily consist of fees for website development services (including support and unspecified upgrades and enhancements when and if they are available), training and professional services that are not essential to functionality. The Company offers two licenses consisting of our Engage license and our Thrive license. The Company now offers both licenses in a combined package known as the Customer Loyalty System License (“CLS”). The revenues for Engage, Thrive, and CLS license set-up fees are recognized over the training and implementation periods of one month, respectively.
The Company recognizes revenues when all of the following conditions are met:
●
|
there is persuasive evidence of an arrangement;
|
●
|
the products or services have been delivered to the customer;
|
●
|
the amount of fees to be paid by the customer is fixed or determinable; and
|
●
|
The collection of the related fees is probable.
|
Signed agreements are used as evidence of an arrangement. Electronic delivery occurs when we provide the customer with access to the software. The Company assesses whether a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction. The Company offered extended payment terms in 2014 and 2015 with regards to the setup fee with typical terms of payment due between one and three years from delivery of license. The Company no longer offers extended payment terms. The Company assessed collectability of the set-up fee based on a number of factors such as collection history and creditworthiness of the licensee. If the Company determines that collectability is not probable, revenue is deferred until collectability becomes probable, generally upon receipt of cash.
License arrangements may also include set-up fees for website development, delivery of tablets, professional services and training services, which are typically delivered within 30-60 days of the contract term. In determining whether set-up fee revenues should be accounted for separately from license revenues, we evaluate whether the set-up fees are considered essential to the functionality of the license using factors such as the nature of our products; whether they are ready for use by the customer upon receipt; the nature of our implementation services, which typically do not involve significant customization to or development of the underlying software code; the availability of services from other vendors; whether the timing of payments for license revenues is coincident with performance of
services; and whether milestones or acceptance criteria exist that affect the realizability of the license fee. Substantially all of our set-up fee arrangements are recognized as the services are performed. Payments received in advance of services performed are deferred and recognized when the related services are performed.
We do not offer refunds and therefore have not recorded any sales return allowance for any of the periods presented. Upon a periodic review of outstanding accounts and notes receivable, amounts that are deemed to be uncollectible are written off against the allowance for doubtful accounts.
Deferred revenue consists substantially of amounts invoiced in advance of revenue recognition for our products and services described above. We recognize deferred revenue as revenue only when the revenue recognition criteria are met.
Cash and cash equivalents
The Company considers all investments with an original maturity of three months or less to be cash equivalents. Cash equivalents primarily represent funds invested in money market funds, bank certificates of deposit and U.S. government debt securities whose cost equals fair market value.
From time to time, the Company has maintained bank balances in excess of insurance limits. The Company has not experienced any losses with respect to cash. Management believes the Company is not exposed to any significant credit risk with respect to its cash and cash equivalents.
Property and Equipment
Property and equipment had been recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to five years). Costs incurred for maintenance and repairs are expensed as incurred and expenditures for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives. Depreciation expense for the three and six months ended June 30, 2016 and 2015 was $0 and $0, and $53,853 and $93,713, respectively. Property and equipment has been fully depreciated as of June 30, 2016.
Software Capitalization
The Company accounts for computer software used in the business in accordance with ASC 350 “Intangibles-Goodwill and Other”. ASC 350 requires computer software costs associated with internal use software to be charged to operations as incurred until certain capitalization criteria are met. Costs incurred during the preliminary project stage and the post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property, equipment and software. These costs generally consist of internal labor during configuration, coding, and testing activities. Capitalization begins when (i) the preliminary project stage is complete, (ii) management with the relevant authority authorizes and commits to the funding of the software project, and (iii) it is probable both that the project will be completed and that the software will be used to perform the function intended. We capitalized $291,957 and $545,900, respectively, in software development related to programming and coding for new product development for the six months ended June 30, 2016 and 2015. Software amortization expense for the three and six months ended June 30, 2016 and 2015 was $121,222 and $231,587, and $60,066 and $95,547, respectively.
Valuation of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the estimated fair value of the assets. There has not been any impairments recorded during the period ended June 30, 2016.
Income Tax Expense Estimates and Policies
As part of the income tax provision process of preparing the Company’s financial statements, the Company is required to estimate the Company’s provision for income taxes. This process involves estimating current tax liabilities together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Management then assesses the likelihood that the Company deferred tax assets will be recovered from future taxable income and to the extent believed that recovery is not likely, a valuation allowance is established. Further, to the extent a valuation allowance is established and changes occur to this allowance in a financial accounting period, such changes are recognized in the Company’s tax provision in the Company’s condensed consolidated statement of operations. The Company’s use of judgment in making estimates to determine the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance is recorded against our net deferred tax assets.
The Company recognizes the benefit of an uncertain tax position taken or expected to be taken on the Company’s income tax returns if it is “more likely than not” that such tax position will be sustained based on its technical merits. The Company does not have any unrecognized tax benefits or accrued penalties and interest. If such matters were to arise, the Company would recognize interest and penalties related to income tax matters in income tax expense.
Stock-Based Compensation
The Company accounts for stock based compensation arrangements through the measurement and recognition of compensation expense for all stock based payment awards to employees and directors based on estimated fair values. The Company uses the Black-Scholes option valuation model to estimate the fair value of the Company’s stock options and warrants at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of options and warrants. The Company uses historical company data among other information to estimate the expected price volatility and the expected forfeiture rate and not comparable company information.
Net Loss per Share
The Company calculates basic earnings per share (“EPS”) by dividing the Company’s net loss and comprehensive net loss applicable to common shareholders by the weighted average number of common shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss and comprehensive net loss applicable to common shareholders by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive.
Derivatives - Warrant Liability
The Company accounts for the common stock warrants granted and still outstanding as of June 30, 2016 in connection with certain financing transactions (“Transactions”) in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. The fair value of the warrants issued by the Company in connection with the Transactions has been estimated using a Monte Carlo simulation.
The Company accounts for certain of its outstanding warrants issued in fiscal 2010, 2012 and 2013 (“2010 Warrants,” “2012 Warrants” and “2013 Warrants, respectively) as derivative liabilities. The 2010 Warrants were determined to be ineligible for equity classification due to provisions of the respective instruments that may result in an adjustment to their conversion or exercise prices. The Company recognized gains of $0 and $27,988 in the fair value of derivatives for the six months ended June 30, 2016 and 2015, respectively. The Company recognized a gain of $0 and $1,942 in the fair value of derivatives for the three months ended June 30, 2016 and 2015, respectively. These derivative liabilities which arose from the issuance of the 2010 Warrants resulted in an ending balance of derivative liabilities of $0 as of June 30, 2016 and December 31, 2015, respectively. These warrants expired in November 2015.
The Company accounts for certain of its outstanding warrants issued in fiscal 2016 (“2016 Warrants”) as derivative liabilities. The 2016 Warrants were determined to be ineligible for equity classification due to provisions of the respective instruments that may result in an adjustment to their conversion or exercise prices. The Company recognized gains of $975,002 and $0 in the fair value of derivatives for the six months ended June 30, 2016 and 2015, respectively. The Company recognized gains of $471,897 and $0 in the fair value of derivatives for the three months ended June 30, 2016 and 2015, respectively. These derivative liabilities which arose from the issuance of the 2016 Warrants resulted in an ending balance of derivative liabilities of $3,124,340 as of June 30, 2016 and December 31, 2015, respectively.
Debt discount and issuance costs
Debt issuance costs, including the value of warrants issued in connection with debt financing and fees or costs paid to lender, are presented in the consolidated balance sheets as a direct deduction from the carrying amount of that debt.
The Company amortizes the discount to interest expense over the term of the respective debt using the effective interest method.
Derivatives – Bifurcated Conversion Option in Convertible Notes
The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued Convertible Notes with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815,
Accounting for Derivative Financial Instruments and Hedging Activities
, in certain instances, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.
The Convertible Notes issued during the year ended December 31, 2015 are subject to anti-dilution adjustments that allow for the reduction in the Conversion Price, as defined in the agreement, in the event the Company subsequently issues equity securities including Common Stock or any security convertible or exchangeable for shares of Common Stock for a price less than the current conversion price. The Company bifurcated and accounted for the
conversion
option in accordance with
ASC 815 as a derivative liability, since this conversion feature is not considered to be indexed to the Company’s own stock.
The Company’s derivative liability has been measured at fair value at June 30, 2016 using a Monte-Carlo Simulation. Inputs into the model require estimates, including such items as estimated volatility of the Company’s stock, estimated probabilities of additional financing, risk-free interest rate, and the estimated life of the financial instruments being fair valued. In addition, since the conversion price contains an anti-dilution adjustment, the probability that the Conversion Price of the Notes would decrease as the share price decreased was also incorporated into the valuation calculation.
The Company modified two existing Notes in March, 2016 and three existing Notes during the second quarter, 2016. According to FASB ASC 470-50, the modification is accounted for as a debt extinguishment, whereby the new debt instrument is initially recorded at fair value, and that amount is used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument. We recognized a loss on the extinguishment of debt of $415,689, of which $106,766 was related to the repricing of warrants for the six months ended June 30, 2016.
The Company recognized a gain of $207,799 and a loss of $81,316 in the fair value of derivatives for the six months ended June 30, 2016 and 2015, respectively. These derivative liabilities which arose from the issuance of the convertible notes resulted in an ending balance of derivative liabilities of $34,495 and $179 as of June 30, 2016 and December 31, 2015, respectively. Subsequent changes to the fair value of the derivative liabilities will continue to require adjustments to their carrying value that will be recorded as other income (in the event that their value decreases) or as other expense (in the event that their value increases). The fair value of these liabilities is estimated using Monte Carlo pricing models that are based on the individual characteristics of the Company’s warrants, preferred and common stock, as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread.
Fair value of assets and liabilities
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value for applicable assets and liabilities, we consider the principal or most advantageous market in which we would transact and we consider assumptions market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:
●
|
Level 1: Observable inputs such as quoted prices in active markets;
|
●
|
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
●
|
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The Company’s financial instruments are cash and cash equivalents, accounts receivable, notes receivable, notes payable, accounts payable and derivative liabilities. The recorded values of cash equivalents, accounts receiveable, notes receiveable and accounts payable approximate their fair values based on their short-term nature. The fair value of derivative liabilities is estimated using option pricing models that are based on the individual characteristics of our warrants, preferred and common stock, the derivative liability on the valuation date as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread. The derivative liabilities and earn-out liabilities are the only Level 3 fair value measures.
A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of June 30, 2016 and December 31, 2015 is as follows:
A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s conversion options that are categorized within Level 3 of the fair value hierarchy as of June 30, 2016 is as follows:
Date of Valuation
|
|
June 30, 2016
|
|
Stock Price
|
|
$
|
0.09
|
|
Volatility (Annual)
|
|
|
100.9
|
%
|
Strike Price
|
|
$
|
0.15 and $0.75
|
|
Risk-free Rate
|
|
|
0.39 and 0.66%
|
|
Maturity Date
|
|
10/2/16 - 10/15/19
|
|
At June 30, 2016 and December 31, 2015, the estimated Level 3 fair values of the liabilities measured on a recurring basis are as follows:
|
|
|
|
|
Fair Value Measurements at June 30, 2016:
|
|
|
|
Carrying Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability-warrants liability
|
|
$
|
3,124,340
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,124,340
|
|
Derivative liability – convertible options
|
|
$
|
34,495
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
34,495
|
|
Total securities
|
|
$
|
3,158,835
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,158,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2015:
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
Level 3
|
|
Earn-out liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivative liability – convertible options
|
|
$
|
179
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
179
|
|
Total securities
|
|
$
|
179
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
179
|
|
The following tables present the activity for Level 3 liabilities for the six months ended June 30, 2016:
Fair Value Measurements Using Level 3 Inputs
|
|
Warrant
|
|
|
Conversion
|
|
|
Earn-out
|
|
|
|
|
|
|
Derivative Liability
|
|
Notes
|
|
|
Liability
|
|
|
Total
|
|
Balance - December 31, 2015
|
|
$
|
-
|
|
|
|
179
|
|
|
|
-
|
|
|
$
|
179
|
|
Additions during the period
|
|
|
4,099,342
|
|
|
|
242,114
|
|
|
|
-
|
|
|
|
4,341,456
|
|
Total Unrealized (gains) or losses include in net loss
|
|
|
(975,002
|
)
|
|
|
(207,798
|
)
|
|
|
-
|
|
|
|
(1,182,800
|
)
|
Settlements during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Transfers in and/or out of Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance - June 30, 2016
|
|
$
|
3,124,340
|
|
|
|
34,495
|
|
|
|
-
|
|
|
$
|
3,158,835
|
|
Advertising
The Company expenses advertising costs as incurred. The Company has no existing arrangements under which the Company provides or receives advertising services from others for any consideration other than cash. Advertising expenses (primarily in the form of Internet direct marketing) totaled $44,261 and $82,750 for the three months ended June 30, 2016 and 2015, respectively. Advertising expenses (primarily in the form of Internet direct marketing) totaled $76,070 and $152,568 for the six months ended June 30, 2016 and 2015, respectively.
Litigation
From time to time, the Company may become involved in litigation and other legal actions. The Company estimates the range of liability related to any pending litigation where the amount and range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated losses with no best estimate in the range, the Company records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.
Intangible assets
Intangible assets consist of intellectual property/technology, customer lists, and trade-name/marks acquired in business combinations under the purchase method of accounting are recorded at fair value net of accumulated amortization since the acquisition date. Amortization is calculated using the straight line method over the estimated useful lives at the following annual rates:
|
|
Useful Lives
|
|
IP/technology
|
|
|
10
|
|
Trade-name/marks
|
|
|
10
|
|
The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of finite-lived intangible asset may not be recoverable. Recoverability of a finite-lived intangible asset is measured by a comparison of its carrying amount to the undiscounted future cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is determined based on discounted cash flows. Amortization of intangible assets was $96,570 and $168,558 for the six months ended June 30, 2016 and 2015, respectively, and $48,285 and $84,660 for the three months ended June 30, 2016 and 2015, respectively.
According to the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 360 (“ASC 360”), a long-lived asset (group) that is held and used should be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount (book value) of the long-lived asset (group) might not be recoverable (i.e. information indicates that an impairment might exist). As a result, companies are not required to perform an impairment analysis (i.e. test the asset (group) for recoverability and potentially measure an impairment loss) if indicators of impairment are not present. Instead, entities would assess the need the need for an impairment write-down only if an indicator of impairment is present. Companies are responsible for routinely assessing whether impairment indicators are present.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases which amended guidance for lease arrangements in order to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. The guidance, which is required to be adopted in the first quarter of 2019, will be applied on a modified retrospective basis beginning with the earliest period presented. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), with an effective date for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, for public business entities, certain not-for-profit entities, and certain employee benefit plans. The effective date for ASU 2014-09 was deferred by one year through the issuance of ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact, if any, the pronouncement will have on our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements—Going Concern
(“ASU 2014-15”)
,
which states management should evaluate whether there are conditions or events, considered in the aggregate, that raise a substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known and likely to occur at the date that the financial statements are issued. ASU 2014-15 will be effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter, however, early application is permitted. Management does not expect the adoption of ASU 2014-15 to have a material impact on the Company’s consolidated financial statements, although there may be additional disclosures upon adoption.
On March 30, 2016, the FASB issued ASU
2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”)
.
ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early application permitted. Management does not expect the adoption of ASU 2016-09 to have a material impact on the Company’s consolidated financial statements, although there may be additional disclosures upon adoption.
Segments
The Company operates in one reportable segment. Accordingly, no segment disclosures have been presented herein.
5. Accounts Receivable, Short-Term and Long-Term Notes Receivable
Management reviews accounts receivable, short-term and long-term notes receivable on a monthly basis to determine if any receivables are potentially uncollectible. An allowance for doubtful accounts is determined based on a combination of historical experience, length of time outstanding, customer credit worthiness, and current economic trends. We recorded a bad debt expense of $62,792 during the six months ended June 30, 2016 and wrote off uncollectable accounts during the six months ended June 30, 2016 in the amount of $39,364. As of June 30, 2016, the Company had an allowance for doubtful accounts of $1,414,111.
Notes receivable aged over 30 days past due are considered delinquent and notes receivable aged over 60 days past due with known collection issues are placed on non-accrual status. Interest revenue is not recognized on notes receivable while on non-accrual status. Cash payments received on non-accrual receivables are applied towards the principal. When notes receivable on non-accrual status are again less than 60 days past due, recognition of interest revenue for notes receivable is resumed. The Company charges interest rates on notes receivable averaging 14%. The Company recorded $25,206 in interest income for the six months ended June 30, 2016.
The allowance for doubtful accounts on long-term receivables is the Company's best estimate of the amount of probable credit losses related to the Company's existing note receivables. The allowance for doubtful accounts is the Company's best estimate of probable credit losses related to trade receivables and notes receivable based upon the aging of the receivables, historical collection data, internal assessments of credit quality and the economic conditions in the business subprime industry, as well as in the economy as a whole. The Company charges off uncollectable amounts against the reserve in the period in which it determines they are uncollectable. Unearned income on notes receivable is amortized using the effective interest method. The Company determines the allowance for doubtful accounts related to notes receivable based upon a reserve for known collection issues, as well as a reserve based upon aging, both of which are based upon history of such losses and current economic conditions. Based upon the Company's methodology, the notes receivable balances with reserves and the reserves associated with those balances are as follows:
|
|
June 30, 2016
|
|
|
|
Gross
|
|
|
Reserve
|
|
|
Net
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
Customer Notes Receivable
|
|
|
893,214
|
|
|
|
467,696
|
|
|
|
752,695
|
|
|
|
340,611
|
|
|
|
140,519
|
|
|
|
127,085
|
|
Accounts Receivable
|
|
|
735,566
|
|
|
|
-
|
|
|
|
320,805
|
|
|
|
-
|
|
|
|
414,761
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Gross
|
|
|
Reserve
|
|
|
Net
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
Customer Notes Receivable
|
|
|
908,590
|
|
|
|
661,371
|
|
|
|
632,422
|
|
|
|
461,702
|
|
|
|
276,168
|
|
|
|
199,669
|
|
Accounts Receivable
|
|
|
437,589
|
|
|
|
-
|
|
|
|
295,759
|
|
|
|
-
|
|
|
|
141,830
|
|
|
|
-
|
|
The roll forward of the allowance for doubtful accounts related to notes receivable and accounts receivable is as follows:
|
|
Notes Receivable
|
|
|
Accounts Receivable
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
Balance at December 31, 2015
|
|
$
|
632,422
|
|
|
$
|
461,702
|
|
|
$
|
295,759
|
|
|
|
-
|
|
Incremental Provision
|
|
|
120,273
|
|
|
|
(121,091
|
)
|
|
|
63,610
|
|
|
|
-
|
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
800
|
|
|
|
-
|
|
Charge offs
|
|
|
-
|
|
|
|
-
|
|
|
|
(39,364
|
)
|
|
|
-
|
|
Balance at June 30, 2016
|
|
$
|
752,695
|
|
|
$
|
340,611
|
|
|
$
|
320,805
|
|
|
|
-
|
|
The allowance for doubtful accounts as a percentage of total receivables was approximately 67% as of June 30, 2016 and approximately 69% as of December 31, 2015.
The Company received a Secured Convertible Promissory Note (the “Note”) for a principal amount of $410,000 from a third party in September 2014. The Note bears interest at the rate of 5.25% per annum and matured in four months. For the six months ended June 30, 2015, the Company had recorded $8,919 of interest income from this Note. $110,000 of the principal amount was paid during six months ended 2015. The remaining Note balance of $322,513 was written off as of the year ended December 31, 2015.
6. Common Stock and Warrants
Common stock
During the six months ended June 30, 2016, the company issued 17,895,859 shares of common stock related to the tender offer and 1,561,266 shares of common stock and the Company recognized expense of $144,000 for services rendered. No shares of Series C Stock converted to common shares during the six months ended June 30, 2016.
During the six months ended June 30, 2015, the company didn’t issue any common stock for services. 41,500 shares of Series C Stock converted to 166,000 common shares during the six months ended June 30, 2016.
Tender Offer and Debt Conversion
Between December 11, 2015 and February 3, 2016, the Company entered into agreements with investors, pursuant to which on February 3, 2016, warrant holders exercised 12,270,846 Warrants to purchase an aggregate of 12,270,846 shares of our common stock for gross proceeds of $1.84 million. The Company issued new warrants to purchase an aggregate of 26,479,217 shares of common stock at an exercise price of $0.15 per share, in consideration for the immediate exercise of the warrants.
The Warrants have a cash settlement feature; as a result, they were classified as a derivative liability and recorded at fair value. Fair value of the Warrants, in the total amount of $3,918,924 was calculated using the Monte-Carlo model, using the following assumptions: 68.7% expected volatility, a risk-free interest rate of 0.91%, estimated life of 3 years and no dividend yield. The fair value of the common stock was $0.148. The transaction was accounted for as an inducement. ASC 470-20-40 addresses the accounting for altered conversion privileges, including the issuance of warrants or other securities (not provided for in the original conversion terms) to induce conversion. As a result of this transaction, the Company recognized an inducement expense of $3,560,958 equal to the fair value of all securities and other consideration transferred in the transaction in excess of the fair value of securities issuable pursuant to the original conversion terms, as of the date of the conversion.
In connection with the tender offer, investors converted $843,751 in Convertible Notes at a conversion price of $0.15 per share into 5,625,013 shares of our common stock.
7. Convertible Promissory Notes
On March 30 and 31, 2015, the Company closed on a private offering and issued and sold 11.25 units (the “Units”) to investors with each such Unit consisting of a 9% Convertible Promissory Note with the principal face value of $50,000 (the “Notes”) and a warrant to purchase 66,667 shares of the Company’s common stock (the “Warrant”). The Company also agreed to provide piggy-back registration rights to the holders of the Units. The Notes have a term of twelve (12) months, pay interest semi-annually at 9% per annum and can be voluntarily converted by the holder into shares of common stock at an exercise price of $0.75 per share, subject to adjustments for stock dividends, splits, combinations and similar events as described in the Notes. In addition, if the Company issues or sells common stock at a price below the conversion price then in effect, the conversion price of the Notes shall be adjusted downward to such price but in no event shall the conversion price be reduced to a price less than $0.50 per share. The Warrants have an exercise price of $1.00 per share and have a term of four years. The holders of the Warrants may exercise the Warrants on a cashless basis for as long as the shares of common stock underlying the Warrants are not registered on an effective registration statement. The Company raised gross proceeds of $562,500 and issued warrants to acquire 750,004 shares of common stock. The relative fair value ascribed to the 750,004 warrants issued was $171,875 and was recorded to additional paid-in capital.
The embedded conversion feature was bifurcated and accounted for as a derivative liability at $164,300 on the day of issuance. The remaining proceeds were allocated based on the relative fair value of the debt and the warrant, and accordingly, $336,175 of debt discount was recorded at issuance and was amortized over the term of the debt using the effective interest method. The amount of debt discount amortized for the six months ended June 30, 2016 was $119,479.
On March 29, 2016, the Company amended the March 30, 2015 9% Convertible Promissory Note with a principal amount of $300,000 as follows: the maturity date was extended to September 29, 2016, the conversion price was lowered to $0.15 per share, the provision limiting the conversion price adjustment to that of the Series C Preferred Stock was removed, and an option to be repaid prior to the maturity date in the event the Company raises capital in excess of three million dollars was added. The Company also amended the warrant issued in conjunction with the Convertible Promissory Note reducing the exercise price to $0.15 and issued a new warrant to purchase 400,002 shares of the Company's common stock with a $0.15 exercise price and a three year expiration. According to FASB ASC 470-50, the modification is accounted for as a debt extinguishment, whereby the new debt instrument is initially recorded at fair value, and that amount is used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument. We recognized a loss on the extinguishment of debt of $147,566 for the six months ended June 30, 2016.
On March 30, 2016, the Company amended the March 30, 2015 9% Convertible Promissory Note with a principal amount of $262,500 as follows: the maturity date was extended to September 30, 2016, the conversion price was lowered to $0.15 per share, the provision limiting the conversion price adjustment to that of the Series C Preferred Stock was removed, and an option to be repaid prior to the maturity date in the event the Company raises capital in excess of three million dollars was added. The Company also amended the warrant issued in conjunction with the Convertible Promissory Note reducing the exercise price to $0.15 and issued a new warrant to purchase 350,002 shares of the Company's common stock with a $0.15 exercise price and a three year expiration. According to FASB ASC 470-50, the modification is accounted for as a debt extinguishment, whereby the new debt instrument is initially recorded at fair value, and that amount is used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument. We recognized a loss on the extinguishment of debt of $141,052 for the six months ended June 30, 2016.
During the second quarter 2015, the Company closed on private offerings and issued and sold 11.00 units (the “Units”) to investors with each such Unit consisting of a 9% Convertible Promissory Note with the principal face value of $50,000 (the “Notes”) and a warrant to purchase 66,667 shares of the Company’s common stock (the “Warrant”). The Company also agreed to provide piggy-back registration rights to the holders of the Units. The Notes have a term of twelve (12) months, pay interest semi-annually at 9% per annum and can be voluntarily converted by the holder into shares of common stock at an exercise price of $0.75 per share, subject to adjustments for stock dividends, splits, combinations and similar events as described in the Notes. In addition, if the Company issues or sells common stock at a price below the conversion price then in effect, the conversion price of the Notes shall be adjusted downward to such price but in no event shall the conversion price be reduced to a price less than $0.50 per share. The Warrants have an exercise price of $1.00 per share and have a term of four years. The holders of the Warrants may exercise the Warrants on a cashless basis for as long as the shares of common stock underlying the Warrants are not registered on an effective registration statement. The Company raised gross proceeds of $550,000 and issued warrants to acquire 733,336 shares of common stock. The relative fair value ascribed to the 750,004 warrants issued was $171,875 and was recorded to additional paid-in capital.
The embedded conversion feature was bifurcated and accounted for as a derivative liability at $228,700 on the day of issuance. The remaining proceeds were allocated based on the relative fair value of the debt and the warrant, and accordingly, $394,345 of debt discount was recorded at issuance and is being amortized over the term of the debt using the effective interest method. The amount of debt discount amortized for the six months ended June 30, 2016 was $164,290.
During the second quarter 2016, the Company amended three of the outstanding 9% Convertible Promissory Notes with principal amounts of $275,000, $75,000 and $150,000 as follows: the maturity dates were extended to November 5, 2016, September 2, 2016, and September 26, 2016, respectively; the conversion price was lowered to $0.15 per share, the provision limiting the conversion price adjustment to that of the Series C Preferred Stock was removed, and an option to be repaid prior to the maturity date in the event the Company raises capital in excess of three million dollars was added. The Company also amended the warrant issued in conjunction with the Convertible Promissory Note reducing the exercise price to $0.15 and issued new warrants to purchase 666,669 shares of the Company's common stock with a $0.15 exercise price and a three year expiration. According to FASB ASC 470-50, the modification is accounted for as a debt extinguishment, whereby the new debt instrument is initially recorded at fair value, and that amount is used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument. We recognized a loss on the extinguishment of debt of $127,071 for the quarter.
On July 15, 2015, the Company issued a Convertible Promissory Note in the principal amount of $400,000 inclusive of interest. The Note was for a term of six months. The Note bears interest at twelve percent per annum. The Note is secured by the assets of the Company. The Note may be converted into shares of the Company’s common stock at $0.75 per share. The Company also issued the holder warrants to purchase 500,000 shares of the Company’s common stock. The proceeds were allocated based on the relative fair value of the debt and the warrant. The warrants have an exercise price of $0.75 per share and have a term of two years. The relative fair value ascribed to the 500,000 warrants issued was approximately $49,000 and was recorded to additional paid-in capital. This amount which was recorded as a debt discount was amortized over the term of the debt using the effective interest method. As part of the closing of the Tender Offer, $200,000 of these notes converted into 1,333,334 shares of common stock and the investor received common stock and 1,333,333 warrants with a three year term at an exercise price of $0.15. The remaining $200,000 of notes was paid in February 2016.
On October 5, 2015, the Company issued a Convertible Promissory Note to an investor in the principal amount of $150,000. The Note features a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Note bears interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the note was bifurcated and accounted for as a derivative liability at approximately $17,127 on the day of issuance. As part of the closing of the Tender Offer, these notes converted into 1,029,918 shares of common stock and the investor received 3,089,754 warrants with a three year term at an exercise price of $0.15.
On November 12, 2015, the Company issued a Convertible Promissory Note to an investor in the principal amount of $150,000. The Note features a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Note bears interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the note was bifurcated and accounted for as a derivative liability at approximately $50 on the day of issuance. As part of the closing of the Tender Offer, these notes converted into 1,000,987 shares of common stock and the investor received 3,002,961 warrants with a three year term at an exercise price of $0.15.
On November 13, 2015, the Company issued Convertible Promissory Notes to five investors in the principal amount of $287,333. The Notes feature a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Notes bears interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the notes was bifurcated and accounted for as a derivative liability at approximately $172 on the day of issuance. As part of the closing of the Tender Offer, these notes converted into 1,937,105 shares of common stock and the investors received 5,811,315 warrants with a three year term at an exercise price of $0.15.
On November 16, 2015, the Company issued a Convertible Promissory Note to an investor in the principal amount of $48,000. The Note features a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Note bears interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the note was bifurcated and accounted for as a derivative liability at approximately $30 on the day of issuance. As part of the closing of the Tender Offer, these notes converted into 323,669 shares of common stock and the investor received 971,007 warrants with a three year exercise term at an exercise price of $0.15.
8. Convertible Preferred Stock
Series A Preferred Stock
At June 30, 2016 and December 31, 2015, the Company had 0 shares of Series A Cumulative Convertible Preferred Stock (the “Series A Stock”) outstanding.
Series B Preferred Stock
At June 30, 2016 and December 31, 2015, the Company had 0 shares of Series B convertible preferred stock (“Series B Stock”) outstanding.
Series C Convertible Preferred Stock
At June 30, 2016 and December 31, 2015, the Company had 3,700,729 shares of Series C convertible preferred stock (“Series C Stock”) outstanding that were issued to investors for $3.00 per share. No shares of Series C Stock converted to common shares during the six months ended June 30, 2016.
9. Net Loss per Share Applicable to Common Stockholders
Options, warrants, and convertible debt outstanding were all considered anti-dilutive for the six months ended June 30, 2016 and 2015 due to net losses.
The following securities were not included in the diluted net income (loss) per share calculation because their effect was anti-dilutive as of the periods presented:
|
|
For the six months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Convertible notes
|
|
|
7,311,721
|
|
|
|
1,483,334
|
|
Common stock options
|
|
|
19,684,296
|
|
|
|
8,778,333
|
|
Investor warrants
|
|
|
37,695,779
|
|
|
|
23,404,094
|
|
Compensation warrants
|
|
|
2,098,333
|
|
|
|
1,933,858
|
|
Excluded potentially dilutive securities
|
|
|
66,790,129
|
|
|
|
35,599,619
|
|
10. Stockholders’ Equity
Stock Options and Warrants
Warrant activity (including warrants issued to investors and for consulting and advisory services) for the six months ended June 30, 2016 and 2015 was as follows:
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning balance outstanding
|
|
|
26,397,410
|
|
|
|
23,933,922
|
|
Warrants issued during the year:
|
|
|
|
|
|
|
|
|
Expired during the year
|
|
|
(1,928,333
|
)
|
|
|
(80,310
|
)
|
Exercised during the year
|
|
|
(12,270,853)
|
|
|
|
-
|
|
Issued in connection with issuance of convertible notes
|
|
|
1,116,671
|
|
|
|
1,483,340
|
|
Issued in connection with tender offer exercise
|
|
|
26,479,217
|
|
|
|
-
|
|
Ending balance outstanding
|
|
|
39,794,112
|
|
|
|
25,336,952
|
|
The numbers and exercise prices of all options and warrants outstanding at June 30, 2016 are as follows:
Shares Outstanding
|
|
Weighted Average Exercise Price
|
|
Expiration Fiscal Period
|
625
|
|
9.00
|
|
3rd Qtr, 2016
|
475,142
|
|
7.54
|
|
4th Qtr, 2016
|
34,749
|
|
7.99
|
|
1st Qtr, 2017
|
1,349,183
|
|
6.90
|
|
2nd Qtr, 2017
|
536,500
|
|
1.14
|
|
3rd Qtr, 2017
|
1,162,088
|
|
6.45
|
|
4th Qtr, 2017
|
10,000
|
|
6.60
|
|
1st Qtr, 2018
|
750,000
|
|
0.25
|
|
4th Qtr, 2018
|
37,573,317
|
|
0.42
|
|
1st Qtr, 2019
|
1,906,257
|
|
0.46
|
|
2nd Qtr, 2019
|
1,080,000
|
|
1.16
|
|
3rd Qtr, 2019
|
2,603,000
|
|
1.15
|
|
4th Qtr, 2019
|
505,000
|
|
0.92
|
|
1st Qtr, 2020
|
1,704,446
|
|
0.19
|
|
4th Qtr, 2020
|
6,836,016
|
|
0.12
|
|
1st Qtr, 2021
|
2,818,751
|
|
0.09
|
|
2nd Qtr, 2019
|
133,334
|
|
7.05
|
|
4th Qtr, 2022
|
59,478,408
|
|
|
|
|
Stock-based Compensation
Results of operations for the three months ended June 30, 2016 and 2015 include stock based compensation costs totaling $258,427 and $263,364, respectively, all of which was charged to personnel related expenses.
Results of operations for the six months ended June 30, 2016 and 2015 include stock based compensation costs totaling $691,607 and $854,301, respectively, all of which was charged to personnel related expenses.
For purposes of accounting for stock based compensation, the fair value of each option and warrant award is estimated on the date of grant using the Black-Scholes-Merton option pricing formula. Compensation expense is recognized over the service period. The following weighted average assumptions were utilized for the calculations during the six months ended June 30, 2016 and 2015:
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Expected life (in years)
|
|
2.70 years
|
|
|
2.89 years
|
|
Weighted average volatility
|
|
|
133.90
|
%
|
|
|
108.92
|
%
|
Forfeiture rate
|
|
|
17.77
|
%
|
|
|
14.21
|
%
|
Risk-free interest rate
|
|
|
.89
|
%
|
|
|
.97
|
%
|
Expected dividend rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The weighted average expected option and warrant term for employee stock options granted reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107,
Share-Based Payment
(SAB 107). The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all options. The Company utilized this approach as its historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term. Expected volatilities are based on the historical volatility of the Company’s stock. The Company estimated the forfeiture rate based on our expectation for future forfeitures and (for the purpose of computing stock based compensation given the contractual vesting of the Company’s options and warrants outstanding) the Company assumes that all options and warrants will vest. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at or near the time of grant. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.
As of June 30, 2016, $1,105,613 of total unrecognized compensation cost related to unvested stock based compensation arrangements is expected to be recognized over a weighted-average period of 17.8 months.
11. Notes Payable
On August 26, 2015, the Company entered into a Business Promissory Note and Security Agreement with Bank of Lake Mills for the principal sum of $200,000 and a daily interest rate of .22%. The total repayment amount including interest and principal was $244,637 to be paid pro-rata weekly ending February 22, 2016. For the three and six months ended June 30, 2016, we recorded interest expense related to the note of $0 and $4,947, respectively. As of February 25, 2016, the note has been fully repaid.
12. Due to Related Party
On August 14, 2015 and September 28, 2015, the Company entered into Loan Agreements with Alex Minicucci for the principal sum of $65,000 and $35,000, respectively. The Loans include an interest rate of 7%. The $35,000 Loan was repaid in February 2016. For the three and six months ended June 30, 2016, we recorded interest expense related to the loans of $1,138 and $2,481, respectively.
13. Subsequent Events
Effective July 5, 2016, Cary Sucoff resigned as a Director of SpendSmart Networks, Inc.
Effective July 13, 2016, Francis J. Liddy joined the compensation committee.
On July 19, 2016, the Company issued the following Convertible Promissory Notes: Joe Proto ($40,000), John Eyler ($40,000), Francis J. Liddy ($20,000), Isaac Blech ($40,000), and Transpac Investments Ltd. ($40,000). All of the individuals listed are members of the board of directors. The Convertible Promissory Notes bear interest at the rate of 9%, have a six month maturity date, and a mandatory conversion into an upcoming financing in the event the Company closes the financing and receives gross proceeds totaling at least $200,000.
Effective July 22, 2016, the Company cancelled the following stock and stock options granted to its board of directors on March 21, 2016: (a) Joseph Proto, 350,000 restricted shares of common stock; (b) John Eyler, options to purchase 464,331 shares of common stock; (c) Pat Kolenik 350,000 restricted shares of common stock; (d) Chris Leong, options to purchase 464,331 shares of common stock, and (e) Isaac Blech, options to purchase 663,330 shares of common stock.