During the six months ended June 30, 2016, the Company issued a total of 1,083,332 warrants in connection with a new convertible note and an extension to an existing convertible note. The warrants have exercise prices ranging from $0.02 to $0.03 and expiration dates ranging from 2 to 3 years from the date of issuance. The fair values of the warrants were determined using the Black-Scholes option pricing model with the following assumptions:
The Company may be involved in legal proceedings in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance.
On October 10, 2013, GACOM settled a complaint with the National Futures Association for a fine of $50,000 for certain noncompliance with Commodity Futures Trading Commission regulations. The fine has not been paid and is included in accounts payable and accrued expenses at June 30, 2106 and December 31, 2015.
Named directors, officers, employees and/or registered representatives of GACC have been called before FINRA for on-the-record interviews in connection with certain FINRA inquiries. GACC has responded to multiple requests for documents and FINRA has taken on-the-record testimony. On October 27, 2014, FINRA indicated that it might recommend enforcement proceedings against GACC, our chairman John Matthews and Brian Joseph Hagerman, the former president and chief compliance officer of GACC. FINRAs action is commonly referred to as a Wells Notice and is a preliminary determination by FINRA staff to recommend disciplinary action against GACC and these individuals. FINRA is not proposing disciplinary action against the Company. The allegations are against GACC and these individuals and assert that there were violations of Sections 17(a)(2) and 5 of the Securities Act of 1933 (Securities Act); NASD Rules 3010 and 3040; and FINRA Rules 2010, 5122(b)(2) and 5122(b)(1)(B). GACC and Messrs. Matthews and Hagerman are responding to this Wells Notice and believe that they have meritorious arguments.
On April 10, 2014, the Legal Section of FINRA formally notified GACC that it had made a preliminary determination to recommend that disciplinary action be brought against GACC for (1) failing to buy and sell corporate bonds at prices that were fair; and (2) failing to have in place a supervisory system that was reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules. GACC has responded and intends to contest this matter.
On February 11, 2015, John S. Matthews was advised by the staff of FINRAs Department of Enforcement (the Staff) that they intended to recommend that FINRA commence a disciplinary action against Mr. Matthews, in his former capacity as an executive of GACC for a violation of FINRA Rules 2010 and 8210 by failing to provide information to the Staff in what the Staff considered to be a timely manner. Mr. Matthews provided additional materials to FINRA subsequent to the February 11, 2015 notice and submitted a response to the Staffs allegations on February 25, 2015, disputing the proposed charges against him. Mr. Matthews has at all times cooperated with the Staffs inquiries and continues to do so.
On December 1, 2015, John S. Matthews, the chief executive officer and director, signed a "Letter of Acceptance, Waiver and Consent ("AWC") with FINRA consenting to the entry of findings by FINRA, without admitting or denying any wrongdoing, that he did not provide any written disclosures to, or receive any written approval from, his member firm prior to selling promissory notes issued by the Company, some of the investors were not qualified purchasers as defined in Section 2(a)(51)(A) of the Investment Company Act, and the sales were not exempt from the requirements of FINRA Rule 5122, and he willfully failed to disclose an unsatisfied $25,590 federal tax lien within 30 days. The AWC was accepted by FINRA on December 2, 2015.
As a result of the AWC, Mr. Matthews is subject to a six-month suspension from association with any FINRA member, and a fine of $25,000. As such, Mr. Matthews is statutorily disqualified with respect to association with a FINRA member.
As a result of the AWC, the registrant is statutorily disqualified from relying in the future on certain exemptions from registration of its securities promulgated under Rule 506 of the Securities Act of 1933 (the "Act") for the length of the suspension as long as Mr. Matthews remains an officer and/or director and/or holder of 10% or more of the voting securities of the registrant.
On November 5, 2015, one of the Companys prior attorneys commenced an action against GAHI, seeking payment of $27,518 in unpaid legal fees. This amount is included in accounts payable. At this time, management is unable to determine what the ultimate outcome of these proceedings will be and whether there will be a material impact on the Companys operations or the consolidated financial statements.
On December 23, 2014, one of the Companys prior attorneys commenced an action against GACC, GAHI, and PMC Capital seeking payment of $150,019 in unpaid legal fees. This amount is included in accounts payable. At this time, management is unable to determine what the ultimate outcome of these proceedings will be and whether there will be a material impact on the Companys operations or the consolidated financial statements.
On July 2, 2014, an action was commenced by a group of individuals against GACC, the Company, and the chief executive officer of the Company, which asserts claims for minimum wage and overtime violations under New York State Labor Law, and seeks damages in an amount to be determined at trial, plus interest, attorneys fees and costs. At this time, the Company is unable to determine the ultimate outcome of the demand or whether it will result in a formal proceeding or action against the Company or any of its officers.
The Company and certain of its officers were named in connection with a demand for repayment of $695,000 by PMC LLC, in a letter dated October 16, 2014 relating to the Stock Purchase Agreement by and among GAHI and PMC Capital, LLC and Barbara Desiderio, dated as of August 5, 2014. The demand seeks repayment for expenditures made by GACC prior to the sale and the failure to meet certain minimum requirements in the Stock Purchase Agreement. At this time, the Company is unable to determine the ultimate outcome of the demand or whether it will result in a formal proceeding or action against the Company or any of its officers.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
Statements in this Managements Discussion and Analysis of Financial Condition and Results of Operation, as well as in certain other parts of this quarterly report on Form 10-Q (as well as information included in oral statements or other written statements made or to be made by the Company) that look forward in time, are forward-looking statements made pursuant to the safe harbor provisions of the Private Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, expectations, predictions, and assumptions and other statements that are other than statements of historical facts. Although the Company believes such forward-looking statements are reasonable, it can give no assurance that any forward-looking statements will prove to be correct. Such forward-looking statements are subject to, and are qualified by, known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by those statements. These risks, uncertainties and other factors include, but are not limited to the Companys ability to estimate the impact of competition and of industry consolidation and risks, uncertainties and other factors set forth in the Companys filings with the Securities and Exchange Commission, including without limitation to this quarterly report on Form 10-Q.
GAHI undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q.
Critical Accounting Policies
The Companys financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management's applications of accounting policies. Critical accounting policies for the Company include revenue recognition, valuation of convertible promissory notes and related warrants, stock and stock option compensation, estimates, and derivative financial instruments.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of GAHI and its wholly-owned and majority owned subsidiaries, GES, GAHI Acquisition Corp., GAIM, and GACOM. All significant intercompany accounts and transactions have been eliminated in consolidation.
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Revenue Recognition
The Companys revenue recognition policies comply with SEC revenue recognition rules and the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605-10-S99. The Company earns revenues through various services it provides to its clients. GESs income is recognized at the presentation date of the certification of the election results. The payments received in advance are recorded as deferred revenue on the balance sheet. Should an election not proceed, all non-refundable deferred revenue will be recognized as revenue.
Convertible Debt
Convertible debt is accounted for under FASB ASC 470, Debt Debt with Conversion and Other Options. The Company records a beneficial conversion feature (BCF) related to the issuance of convertible debt that has conversion features at fixed or adjustable rates that are in-the-money when issued and records the relative fair value of any warrants issued with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to the warrants and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features, both of which are credited to additional paid-in capital. The Company calculates the fair value of warrants issued with the convertible instruments using the Black-Scholes valuation method, using the same assumptions used for valuing stock options, except that the contractual life of the warrant is used.
Under these guidelines, the Company allocates the value of the proceeds received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value of the BCF and warrants are recorded as a debt discount and is accreted over the expected term of the convertible debt as interest expense.
The Company accounts for modifications of its embedded conversion features in accordance with the ASC which requires the modification of a convertible debt instrument that changes the fair value of an embedded conversion feature and the subsequent recognition of interest expense or the associated debt instrument when the modification does not result in a debt extinguishment.
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Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The Company uses the Black-Scholes-Merton model to value the derivative instruments. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.
Share-Based Compensation
The Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing costs. The Company accounts for share-based payments under the guidance as set forth in the Share-Based Payment Topic of the FASB Accounting Standards Codification, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, officers, directors, and consultants, including employee stock options, based on estimated fair values. The Company estimates the fair value of share-based payment awards to employees and directors on the date of grant using an option-pricing model, and the value of the portion of the award that is ultimately expected to vest is recognized as expense over the required service period in the Company's Statements of Operations. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance where the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) the date at which the necessary performance to earn the equity instruments is complete. Stock-based compensation is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures differ from those estimates.
Recent Accounting Pronouncements
Recent accounting pronouncements issued by the FASB and the SEC did not have, are not believed by management to have, a material impact, or are currently evaluating the potential impact of updated authoritative guidance on the Companys present or future consolidated financial statements.
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Trends and Uncertainties
The Company currently has minimal revenues and operations and is investigating potential businesses and companies for acquisition to create and/or acquire a sustainable business. Our ability to acquire or create a sustainable business may be adversely affected by our current financial conditions, availability of capital and/ or loans, general economic conditions which can be cyclical in nature along with prolonged recessionary periods, and other economic and political situations.
The Company has generated recurring losses and cash flow deficits from its operations since inception and has had to continually borrow to continue operations. These matters raise substantial doubt about the Companys ability to continue as a going concern. The continued operations of the Company are dependent upon its ability to raise additional capital, obtain additional financing and/or generate positive cash flows from operations. As further described in Liquidity and Capital Resources, management believes that it will be successful in obtaining additional financing, from which the proceeds will be primarily used to execute its new operating plans. The Company plans to use its available cash and new financing to develop and execute its new business plan and hopefully create and maintain a self-sustaining business. However, the Company can give no assurances that it will be successful in achieving its plans or if financing will be available or, if available, on terms acceptable to the Company, or at all. Should the Company not be successful in obtaining the necessary financing to fund its operations, and ultimately achieve adequate profitability and cash flows from operations, the Company would need to curtail certain or all of its operating activities.
There are no trends, events or uncertainties that have had or are reasonably expected to have a material impact on the net sales or revenues or income from continuing operations. There are no significant elements of income or loss that do not arise from our continuing operations except for the fair value change on derivative financial instruments and settlement on arbitration.
The rapid advances in computing and telecommunications technology over the past several decades have brought with them increasingly sophisticated methods of delivering financial services through electronic channels. Along with these advances, though, have come risks regarding the integrity and privacy of data, and these risks apply to financial institutions, probably more than any other industry, falling into the general classification of cybersecurity. While it is not possible for anyone to give an absolute guarantee that data will not be compromised, when applicable, the Company shall utilize third-party service providers to secure the Companys financial and personal data; the Company believes that third-party service providers provide reasonable assurance that the financial and personal data that they hold are secure.
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Liquidity and Capital Resources
As of June 30, 2016, the Company has an accumulated deficit of $20,426,578 and a working capital deficiency of $7,148,686. Our ability to continue as a going concern depends upon whether we can ultimately attain profitable operations, generate sufficient cash flow to meet our obligations, and obtain additional financing as needed.
For the six months ended June 30, 2016, the Company recorded a net loss of $3,201,406. We recorded an amortization of debt discount of $268,636 and debt modification expense of $61,845. We recorded a financing costs associated with the issuance convertible promissory notes payable of $547,659 and took a charge to earnings of $194,137 for penalty interest on certain convertible promissory notes payable. We recorded a loss for the change in fair value of derivative liability of $2,001,198. We had an increase in prepaid expenses of $20,200, an increase in accounts payable and accrued expenses of $134,385, and a decrease in deferred revenue of $378,410. As a result, we had net cash used in operating activities of $351,756 for the six months ended June 30, 2016.
For the six months ended June 30, 2015, the Company recorded a net loss of $2,341,692. We recorded an amortization of debt discount of $879,208, stock based compensation of $6,152, a write off of subsidiary goodwill of $33,900, and a change in fair value of derivative liability of $484,400. We had an increase in prepaid expenses and other current assets of $12,337, an increase in deferred revenue of $241,000 and an increase in accounts payable and accrued expenses of $305,305. As a result, we had net cash used in operating activities of $379,390 for the six months ended June 30, 2015.
For the six months ended June 30, 2016, we paid an additional $10,000 as payment for proposed acquisition and $698 for the purchase of other assets. As a result, we had net cash used in investing activities of $10,698 for the period.
For the six months ended June 30, 2015, we received $7,300 as an advance from related parties, resulting in net cash provided by investing activities of $7,300 for the period.
For the six months ended June 30, 2016, we received $307,500 as proceeds from the issuance of convertible promissory notes payable and we received $130,000 from the issuance of our common stock. We repaid convertible promissory notes of $111,000. As a result, we had net cash provided by financing activities of $326,500 for the period.
For the six months ended June 30, 2015, we received $29,505 as a result of a bank overdraft and $411,500 as proceeds from promissory notes payable. As a result, we had net cash provided by financing activities of $441,005 for the period.
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Management believes that it will be able to continue its operations and further advance its acquisition plans. However, management cannot give assurances that such plans will materialize and be successful in the near term or on terms advantageous to the Company, or at all. Should the Company not be successful in its new business plans or obtain additional financing, the Company would need to curtail certain or all of its operating activities.
The Companys continuation as a going concern is dependent upon its ability to ultimately attain profitable operations, generate sufficient cash flow to meet its obligations, and obtain additional financing as may be required. Our auditors have included a going concern modification in their auditors report dated May 6, 2016. A going concern modification may make it more difficult for us to raise funds when needed. The outcome of this uncertainty cannot presently be determined.
The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. There can be no assurance that management will be successful in implementing its business plan or that the successful implementation of such business plan will actually improve our operating results
Results of Operations
Results of Operations for the Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015
Revenues for the three months ended June 30, 2016 were $322,502 compared to $234,467 for the three months ended June 30, 2015, an increase of $88,035. The significant increase is due to us growing our election services business which began in the second quarter of 2015.
Salaries and benefits and stock-based compensation totaled $60,377 for the three months ended June 30, 2016 compared to $127,764 for the three months ended June 30, 2015, a decrease of $67,387 due to the reduced number of employees.
Professional fees for the three months ended June 30, 2016 amounted to $128,359 compared to $152,438 for the three months ended June 30, 2015, a decrease of $24,079. The decrease is due to lower legal fees.
For the three months ended June 30, 2016, we had occupancy expenses of $15,822, business development expenses of $90,465, and office and other expenses of $107,257, totaling $213,544. Comparatively, for the three months ended June 30, 2015, we had occupancy expenses of $41,693, business development expenses of $49,486, and office and other expenses of $192,248 totaling $283,427. Decrease in these expenses was $69,883 principally due to a decrease in office and other expenses due to management focusing on reducing costs.
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Total operating expenses for the three months ended June 30, 2016 were $402,280 compared to $563,629 for the three months ended June 30, 2015, a decrease of $161,349 principally due to reasons discussed above.
During the three months ended June 30, 2016, we paid interest expense and financing costs of $453,881 and a change in fair value of derivative liability of $2,171,537, compared to interest expense and financing costs of $856,116, loss on the sale of subsidiaries of $38,099, and a change in fair value of derivative liability of $98,100for the three months ended June 30, 2015. The $1,633,103 difference was a result of a greatly increased change in fair value of derivative liability.
Net loss for the three months ended June 30, 2016 was $2,705,195 compared to the net loss of $1,321,477 for the three months ended June 30, 2015, an increase of $1,383,719 principally due to the reasons discussed above.
Results of Operations for the Six Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015
Revenues for the six months ended June 30, 2016 were $989,034 compared to $245,122 for the six months ended June 30, 2015, an increase of $743,912. The significant increase is due to us growing our election services business.
Salaries and benefits and stock-based compensation totaled $122,107 for the six months ended June 30, 2016 compared to $202,422 for the six months ended June 30, 2015, a decrease of $80,315 due to the reduced number of employees.
Professional fees for the six months ended June 30, 2016 amounted to $252,888 compared to $332,175 for the six months ended June 30, 2015, a decrease of $79,287. The decrease is due to lower legal fees.
For the six months ended June 30, 2016, we had occupancy expenses of $29,211, business development expenses of $200,604, and office and other expenses of $372,826, totaling $602,641. Comparatively, for the six months ended June 30, 2015, we had occupancy expenses of $85,435, business development expenses of $140,342, and office and other expenses of $207,575 totaling $433,352. Increase in these expenses was $169,289 principally due to the increased expenses from our election services operations.
Total operating expenses for the six months ended June 30, 2016 were $977,636 compared to $967,949 for the six months ended June 30, 2015, an increase of $9,687 principally due to reasons discussed above.
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During the six months ended June 30, 2016, we paid interest expense and financing costs of $1,211,606 and a change in fair value of derivative liability of $2,001,198, compared to interest expense and financing costs of $1,096,366, loss on the sale of subsidiaries of $38,099, and a change in fair value of derivative liability of $484,400 for the six months ended June 30, 2015. The $1,593,939 difference was a result of a greatly increased change in fair value of derivative liability.
Net loss for the six months ended June 30, 2016 was $3,201,406 compared to the net loss of $1,618,865 for the six months ended June 30, 2015, an increase of $859,714 principally due to the reasons discussed above.