NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and organization, asset
sale, and going concern and management’s plans:
Business and organization:
FastFunds Financial
Corporation (the “Company” or “FFFC”) is a holding company, and through January 31, 2006, operated primarily
through its wholly-owned subsidiary Chex Services, Inc. (“Chex”). FFFC was previously organized as Seven Ventures,
Inc. (“SVI”). Effective June 7, 2004, Chex merged with SVI (the “Merger”), a Nevada corporation formed
in 1985. At the date of the Merger, SVI was a public shell with no significant operations. The acquisition of Chex by SVI was recorded
as a reverse acquisition based on factors demonstrating that Chex represented the accounting acquirer. The historical stockholders’
equity of Chex prior to the exchange was retroactively restated (a recapitalization) for the equivalent number of shares received
in the exchange after giving effect to any differences in the par value of the SVI and Chex common stock, with an offset to additional
paid-in capital. The restated consolidated accumulated deficit of the accounting acquirer (Chex) has been carried forward after
the exchange. On June 29, 2004, SVI changed its name to FFFC.
Effective January 21, 2014, the
Board of Directors of the Company approved the issuance of 1,000 shares of Class C Preferred Stock (as defined and described below)
(the “Class C Preferred Stock Shares”) to Mr. Henry Fong, the Company’s sole officer and Director, or his assigns
in consideration for services rendered to the Company and continuing to work for the Company without receiving significant payment
for services and without the Company having the ability to issue shares of common stock as the Company does not have sufficient
authorized but unissued shares of common stock to allow for any such issuances.
As a result of the issuance of the
Class C Preferred Stock Shares to Mr. Fong, or his assigns and the Super Majority Voting Rights (described below), Mr. Fong obtained
voting rights over the Company’s outstanding voting stock which provides him the right to vote up to 51% of the total voting
shares able to vote on any and all shareholder matters. As a result, Mr. Fong will exercise majority control in determining
the outcome of all corporate transactions or other matters, including the election of Directors, mergers, consolidations, the sale
of all or substantially all of the Company’s assets, and also the power to prevent or cause a change in control. The interests
of Mr. Fong may differ from the interests of the other stockholders and thus result in corporate decisions that are adverse to
other shareholders. Additionally, it may be impossible for shareholders to remove Mr. Fong as an officer or Director
of the Company due to the Super Majority Voting Rights.
On January 21, 2014, the Company
formed Cannabis Angel, Inc. (“CA”) as a wholly-owned subsidiary. CA was formed to assist and provide angel funding,
business development and consulting services to Cannabis related projects and ancillary ventures. CA has entered into the following
agreements:
On January 28, 2014, CA entered
into a one year Consulting Agreement with Singlepoint, Inc. (“Singlepoint”) (the “Singlepoint Agreement”).
The Singlepoint Agreement automatically renews for succeeding one year periods, provided, that the CA can terminate the Singlepoint
Agreement at any time during the initial one year term or thereafter by giving Singlepoint not less than five (5) days’ notice
to terminate. CA is to provide consulting services including strategic and business planning, marketing and sales support, define
and support for product offerings, acquisition strategy and funding strategy. As of June 30, 2016, this agreement is still active
but no services have been provided and no further activity related to this agreement has occurred.
On February 7, 2014, CA entered
into a one year consulting agreement with Colorado Cannabis Business Solutions, Inc (“CCBS”). CA is to provide consulting
services to CCBS relating to business opportunities, corporate finance activities and general business development, in exchange
for 9.9% ownership in CCBS. As of June 30, 2016, this agreement is still active but no services have been provided and no further
activity related to this agreement has occurred.
On March 5, 2014, CA entered into
a five (5) year Strategic Alliance Agreement (“SAA”) with Worldwide Marijuana Investments, Inc. (“Worldwide”).
Pursuant to the SAA, Worldwide and CA have agreed to market and perform certain complementary business consulting services. The
SAA automatically renews for successive one year terms, unless either party gives written notice of termination at least thirty
(30) days prior to any expiration. The SAA can also be terminated by mutual agreement, or at any time by sixty (60) days written
notice from either party. As of June 30, 2016, this agreement is still active but no services have been provided and no further
activity related to this agreement has occurred.
On February 17, 2014, the Company
and CA entered into a consulting agreement with Merchant Business Solutions, Inc. (“MBS”). CA will provide consulting
services to MBS regarding seeking potential business opportunities, financial opportunities, and general business development in
exchange for 49% of Cannabis Angel. As of June 30, 2016, this agreement is still active but no services have been provided and
no further activity related to this agreement has occurred.
Cannabis Merchant Financial
Solutions, Inc. (“CMFS”) is a subsidiary of MBS. CMFS has had no activity through the date of this
report.
On April 3, 2014, the Company
and its wholly-owned subsidiary CA announced the launch of GreenEnergyMedia.TV. GreenEnergyMedia.TV caters to
broadcasting real-time news and social media feeds relating exclusively to the medical and recreational marijuana
communities. GreenEnergyMedia.TV broadcasts stock quotations and intraday charts on over 40 leading companies competing
within the medical marijuana industry. Operations related to GreenEnergyMedia.TV have been deferred pending the recruitment
and placement of personnel for this project, which has not occurred as of June 30, 2016.
On April 29, 2014, Cannabis Live
was launched, which will focus exclusively on hosting and broadcasting video of on-demand events. As this area of GreenEnergyMedia.TV’s
website progresses, the Company plans to include the development of an exclusive interactive online channel. This future development
will allow for several sources of revenue to be derived for the Company; including premium access membership fees, sponsorship
and endorsement fees, and advertising revenue. Operations related to Cannabis Live have been deferred pending the recruitment and
placement of personnel for this project, which has not occurred as of June 30, 2016.
On April 17, 2014, the Company and
its wholly-owned subsidiary CA announced a Merchant Payment Processing Agreement to offer a debit card payment solution for
retail cannabis dispensaries. This program will be offered through CMFS, the Company's 49% owned subsidiary. This payment
solution allows dispensaries to accept debit and credit cards by using the PIN number associated with the card being used. As of
June 30, 2016, the company has not yet offered this program to customers and there has been no activity related to this program.
On July 8, 2014, The Company announced
the formation of The 420 Development Corporation, a newly formed wholly owned subsidiary of the Company that will focus exclusively
on the acquisition of operational companies that support the development of the ever-expanding cannabis industry. The 420
Development Corporation will seek to identify acquisition candidates within the industry that have the potential to add significant
shareholder value once completed.
On July 24, 2014, the Company and
its wholly-owned subsidiary, The 420 Development Corporation, announced the closing of a purchase agreement with Ohio-based Brawnstone
Security, LLC (“Brawnstone”). Brawnstone is a licensed armed security, private investigation, security technology
solution provider and tactical training company servicing active accounts with several Government affiliated HUD housing establishments,
schools, and industrial facilities across the Ohio region. Under the terms of the purchase agreement, the Company, through its
subsidiaries, now owns a 70% interest in Brawnstone. The purchase price, disclosed in the Membership Interest Purchase Agreement
and Assignment of Membership Interest Agreement dated July 23, 2014, was $160,000. The Company remitted $100,000 in cash and issued
a $60,000 note payable bearing 8% interest to complete the purchase. The Company also assumed accrued expenses of $181,083. The
total purchase price of $341,083 was allocated to cash of $133,806, accounts receivable of $120,965, prepaid expenses of $950,
and goodwill of $85,312.
On November 14, 2014, FastFunds
Financial Corporation entered into a definitive licensing agreement with Nevada-based Chongson, Inc. pertaining to the production,
promotion and sale of the Tommy Chong branded Cannabis GreenCard product. Per the terms of the agreement, the Company is required
to pay Chongson Inc. a minimum of $5,000 per month in royalty fees in exchange for the the card branding. During the three months
ended June 30, 2016, the Company paid $15,000 in cash in royalty expenses.
On May 15, 2015, FastFunds Financial
Corporation (“FFFC”) acquired a 49% Limited Liability Company interest in Pure Grow Systems, LLC (“Pure Grow”)
for $250,000. Financing for this transaction was provided through a $128,000 convertible note issued to Carebourn Capital, LP on
May 15, 2015 and a $125,000 convertible note issued to Pure Energy Inc. on May 29, 2015. As of June 30, 2016, $232,000 has been
remitted by the company in acquisition of a minority stake of Pure Grow. Pure Grow Systems, LLC will be dedicated to the healthy
production of raw materials used for medicinal or other health-related purposes. The Company is developing a line of environmentally
friendly products using ingredients that have a strong track record of sanitation and disinfection in buildings, on furniture,
and other items found in medical, manufacturing and warehouse settings. Pure Grow has displayed its products at several trade shows
and has contacted interested distributors. During the second quarter 2016, Pure Grow had no operations and no revenues have been
generated from Pure Grow’s product lines through June 30, 2016
The Company currently has thirty-six
full and part time employees at Brawnstone Security. None of our employees are currently covered by collective bargaining agreements.
Going concern and management’s
plans:
In the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2015, the Report of the Independent Registered Public Accounting
Firm includes an explanatory paragraph that describes substantial doubt about the Company’s ability to continue as a going
concern. The Company’s interim financial statements for the three and six months ended June 30, 2016 and 2015 have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business.
The Company reported
a net loss of $942,187 for the six months ended June 30, 2016, and has a working capital deficit of $12,992,901 and an accumulated
deficit of $30,755,804 as of June 30, 2016.
These factors
raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not contain
any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
There can be no assurance that the
Company will have adequate resources to fund future operations, if any, or that funds will be available to the Company when needed,
or if available, will be available on favorable terms or in amounts required by the Company. Currently, the Company does not have
a revolving loan agreement with any financial institutions, nor can the Company provide any assurance it will be able to enter
into any such agreement in the future. The condensed consolidated financial statements do not include any adjustments relating
to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern
The Company evaluates,
on an ongoing basis, potential business acquisition/restructuring opportunities that become available from time to time, which
management considers in relation to its corporate plans and strategies.
2. Summary of significant accounting
policies:
Basis of presentation
and principles of consolidation:
The accompanying
condensed consolidated financial statements have been prepared by the Company without audit and include the consolidated accounts
of Fastfunds Financial Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated
in consolidation. In the opinion of management, all adjustments necessary to present the financial position, results of operations
and cash flows for the stated periods have been made. Except as described below, these adjustments consist only of normal and recurring
adjustments. Certain information and note disclosures normally included in the Company’s annual financial statements prepared
in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These
condensed financial statements should be read in conjunction with a reading of the Company’s consolidated financial statements
and notes thereto included in the Company’s Form 10-K annual report filed with the Securities and Exchange Commission (SEC)
on May 24, 2016. Interim results of operations for the six months ended June 30, 2016 are not necessarily indicative of future
results for the full year. Certain amounts from the 2015 period have been reclassified to conform to the presentation used in the
current period.
Cash and cash
equivalents:
For the purpose of the financial
statements, the Company considers all highly-liquid investments with an original maturity three-months or less to be cash equivalents.
Fixed assets:
Fixed Assets are stated at historical cost less depreciation.
Cost of acquisition is inclusive of taxes, duties, freight, installation and allocated incidental expenditure during construction/
acquisition.
Accounts
receivables and revenue recognition:
Accounts receivables are stated
at cost plus refundable and earned fees (the balance reported to customers), reduced by allowances for refundable fees and losses.
Fees (revenues) are accrued monthly on active credit card accounts and included in accounts receivables, net of estimated uncollectible
amounts. Accrual of income is discontinued on credit card accounts that have been closed or charged off. Accrued fees on credit
card loans are charged off with the card balance, generally when the account becomes 90 days past due. The allowance for losses
is established through a provision for losses charged to expenses. Credit card receivables are charged against the allowance for
losses when management believes that collectability of the principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts
and prior loss experience. This evaluation also takes into consideration such factors as changes in the volume of the loan portfolio,
overall portfolio quality and current economic conditions that may affect the borrowers’ ability to pay. While management
uses the best information available to make its evaluations, this estimate is susceptible to significant change in the near term.
The Company recognizes sale
and service revenue when there is persuasive evidence of an arrangement with the customer which states a fixed or determinable
price and terms, delivery of the product has occurred or the service performed in accordance with the terms of the sale, and collectability
of the sale is reasonably assured. The Company has entered into agreements calling for services to be available to the customer
for a period of time. In these cases, revenue is recognized over the life of the agreement. Prepaid services are shown as deferred
revenues until services are performed.
Goodwill:
Goodwill represents the excess
of the purchase price over the fair value of the identifiable tangible and intangible assets acquired and the fair value of liabilities
assumed in an acquisition. Accounting Standards Codification (“ASC”)-350-30-50 “Goodwill and Other Intangible
Assets” requires the testing of goodwill and indefinite-lived intangible assets for impairment at least annually. The Company
tests goodwill for impairment in the fourth quarter of the fiscal year.
Investment in Unconsolidated
Investee
The Company accounts for investments
in which the Company owns more than 20% of the investee, using the equity method in accordance with ASC Topic 323, Investments—Equity
Method and Joint Ventures. Under the equity method, an investor initially records an investment in the stock of an investee at
cost, and adjusts the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee
after the date of acquisition. The amount of the adjustment is included in the determination of net income by the investor, and
such amount reflects adjustments similar to those made in preparing consolidated statements including adjustments to eliminate
intercompany gains and losses, and to amortize, if appropriate, any difference between investor cost and underlying equity in net
assets of the investee at the date of investment. The investment of an investor is also adjusted to reflect the investor's share
of changes in the investee's capital. Dividends received from an investee reduce the carrying amount of the investment. A series
of operating losses of an investee or other factors may indicate that a decrease in value of the investment has occurred which
is other than temporary and which should be recognized even though the decrease in value is in excess of what would otherwise be
recognized by application of the equity method.
Non-controlling interest:
On January
1, 2012, the Company adopted authoritative accounting guidance that requires the ownership interests in subsidiaries held by parties
other than the parent, and income attributable to those parties, be clearly identified and distinguished in the parent’s
consolidated financial statements. The Company’s non-controlling interest is now disclosed as a separate component of the
Company’s consolidated deficiency on the balance sheets. Earnings and other comprehensive income are separately attributed
to both the controlling and non-controlling interests. Earnings per share are calculated based on net income attributable
to the Company’s controlling interest.
Loss per share:
Loss per share of common stock is
computed based on the weighted average number of common shares outstanding during the period. Stock options, warrants, and common
stock underlying convertible promissory notes are not considered in the calculations for the six month periods ended June 30, 2016
and 2015, as the impact of the potential common shares related to convertible debt, warrants, and stock options, which total 27,490,332,814
and 3,527,664,150, respectively, would be anti-dilutive.
Use of estimates:
Preparation of the consolidated
financial statements in accordance with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the balance sheets and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. The Company’s significant estimates include the valuation of derivative
liabilities on stock based compensation and impairment analysis.
Fair value of
financial instruments:
The estimated fair value of financial
instruments has been determined by the Company using available market information and appropriate methodologies; however, considerable
judgment is required in interpreting information necessary to develop these estimates. Accordingly, the Company’s estimates
of fair values are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
The fair values of cash and cash
equivalents, current non-related party accounts receivable, and accounts payable approximate their carrying amounts because of
the short maturities of these instruments.
The fair values of notes and advances
receivable from non-related parties approximate their net carrying values because of the allowances recorded as well as the short
maturities of these instruments.
The fair values of notes and loans
payable to non-related parties approximate their carrying values because of the short maturities of these instruments. The fair
value of long-term debt to non-related parties approximates carrying values, net of discounts applied, based on market rates currently
available to the Company.
Fair value measurements
are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used
to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources
independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market
participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the
price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in
an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses
prices and other relevant information generated by market transactions involving identical or comparable assets (“market
approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset
or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority
is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant
to the fair value measurement.
The three hierarchy
levels are defined as follows:
Level 1 – Quoted
prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted
prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in
active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices
or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments
are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology
is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit
risk as observed in the credit default swap market.
Accounting for obligations and instruments potentially
settled in the Company’s common stock:
The Company accounts for obligations
and instruments potentially to be settled in the Company's stock in accordance with ASC Topic 815,
Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock.
This issue addresses the initial
balance sheet classification and measurement of contracts that are indexed to, and potentially settled in, the Company's stock.
Under ASC Topic 815, contracts are
initially classified as equity or as either assets or liabilities, depending on the situation. All contracts are initially measured
at fair value and subsequently accounted for based on the then current classification. Contracts initially classified as equity
do not recognize subsequent changes in fair value as long as the contracts continue to be classified as equity. For contracts classified
as assets or liabilities, the Company reports changes in fair value in earnings and discloses these changes in the financial statements
as long as the contracts remain classified as assets or liabilities. If contracts classified as assets or liabilities are ultimately
settled in shares, any previously reported gains or losses on those contracts continue to be included in earnings. The classification
of a contract is reassessed at each balance sheet date.
Stock-based compensation:
The Company has
one stock option plan approved by FFFC’s Board of Directors in 2004, and also grants options and warrants to consultants
outside of its stock option plan pursuant to individual agreements. The Company accounts for its stock based compensation under
ASC 718 “Compensation- Stock Compensation” using the fair value based method. Under this method, compensation cost
is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting
period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments
for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services
that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity
instruments. We use the Black Scholes model for measuring the fair value of options. The stock based fair value compensation is
determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and
is recognized over the vesting periods.
There were
no options granted during the three and six months ended June 30, 2016 and 2015.
The Company’s
stock option plan is more fully described in Note 9.
Income
Taxes
Deferred tax assets and liabilities
are determined based on the differences between the financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established
when necessary to reduce deferred tax assets to the amounts expected to be realized.
The Company accounts for income
taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
740, “Accounting for Income Taxes. It prescribes a recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result,
the Company has applied a more-likely-than-not recognition threshold for all tax uncertainties. The guidance only allows
the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the various
taxing authorities.
The Company classifies penalties
and interest related to unrecognized tax benefits as income tax expense in the Statements of Operations.
Reclassifications:
Certain prior period balances have
been reclassified to conform to the current period's financial statement presentation. These reclassifications had no impact on
previously reported results of operations or stockholders' deficiency.
Recent Accounting Pronouncements Not Yet
Adopted
:
As of the date of this report, there
are no recent accounting pronouncements that have not yet been adopted that we believe would have a material impact on our financial
statements.
3. Concentration of revenue:
A significant portion of the Company's
revenues for the three and six months ended June 30, 2016 were generated from five customers as follows:
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
% of Total Revenues
|
|
Accounts Receivable
as of June 30, 2016
|
|
|
|
|
|
Customer A
|
|
|
17.68
|
%
|
|
$
|
22,010
|
|
Customer B
|
|
|
15.56
|
%
|
|
$
|
5,722
|
|
Customer C
|
|
|
12.25
|
%
|
|
$
|
0
|
|
Customer D
|
|
|
10.18
|
%
|
|
$
|
3,482
|
|
Customer E
|
|
|
9.85
|
%
|
|
$
|
2,266
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
%
of Total Revenues
|
|
|
|
Accounts Receivable
as of June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
14.82
|
%
|
|
$
|
22,010
|
|
Customer B
|
|
|
14.30
|
%
|
|
$
|
5,722
|
|
Customer C
|
|
|
10.92
|
%
|
|
$
|
0
|
|
Customer D
|
|
|
9.07
|
%
|
|
$
|
3,482
|
|
Customer F
|
|
|
8.20
|
%
|
|
$
|
1,019
|
|
4. Long term investments:
On March 30, 2011, the Company and
Paymaster Limited (“Paymaster”) agreed to restructure a note receivable (the “Note”). Pursuant to the agreement,
the parties agreed to convert the remaining balance of $339,575 of the Note receivable into Cumulative Convertible Redeemable Preference
Shares (the Preference Shares”) with a value of $400,000, and an annual dividend of 7.5% over thirty-six (36) months. Paymaster,
at any time prior to maturity, may elect to redeem some or all of the Preference Shares at an effective dividend rate of 10% per
annum. The Company, upon maturity and with not less than ninety (90) days prior notice, may elect to convert some or all of Preference
Shares into the pro rata equivalent of 11,100 ordinary shares of Paymaster (equal to 10% of the issued and outstanding capital
of the Company based on the conversion of all Preference Shares on a fully diluted basis). The Company has recorded the investment
at $89,575, net of a valuation allowance of $250,000, the same historical carrying value on the Company’s balance sheet as
the note. The last dividend the Company has received was the quarterly dividend for the quarter ended June 30, 2012.
On March 21, 2016, the Company and
Paymaster Limited reached a settlement for the transfer of Paymaster’s Cumulative Convertible Redeemable Preference Shares
(the “Preferred Shares”) initially acquired by the Company on March 30, 2011. In the March 21, 2016 agreement, the
Company agreed to return the Preferred Shares to Paymaster in exchange for a one-time payment of $275,000. The company received
this cash payment during the first quarter of 2016 and recognized a gain of $185,425 on the sale of the long-term asset. No further
gains have been recognized during the six months ended June 30, 2016.
5. Equity-method
investment:
On May 15, 2015, the Company acquired
a 49% Limited Liability Company interest in Pure Grow Systems, LLC (“Pure Grow”) for $250,000 in cash. Financing for
this transaction was provided through a $128,000 convertible note issued to Carebourn Capital, LP on May 15, 2015 and a $125,000
convertible note issued to Pure Energy Inc. on May 29, 2015. As of June 30, 2016, $232,000 has been remitted by the Company in
acquisition of a minority stake of Pure Grow. The Company has accounted for its 49% interest in Pure Grow utilizing the equity
method of accounting. As of June 30, 2016, the carrying value in Pure Grow was $159,437. During the six months ended June 30, 2016,
$7,473 was recognized as an equity method loss.
Financial information for Pure Grow
as of and for the six months ended June 30, 2016 is as follows:
|
|
June 30,
|
|
|
2016
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
Accounts Payable
|
|
|
32,489
|
|
Inventory
|
|
|
23,202
|
|
Prepaid Assets
|
|
|
3,000
|
|
|
|
|
|
|
Total assets
|
|
$
|
58,691
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS'
EQUITY
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
10,685
|
|
Members' equity
|
|
|
63,258
|
|
Net Loss
|
|
|
(15,252
|
)
|
|
|
|
|
|
Total liabilities and
members' equity
|
|
$
|
58,691
|
|
|
|
3 months ended
June 30,
|
|
6 months ended
June 30,
|
|
|
2016
|
|
2016
|
|
|
|
|
|
|
|
|
|
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
2,000
|
|
Cost of sales
|
|
|
—
|
|
|
|
75
|
|
Gross profit
|
|
|
—
|
|
|
|
1,925
|
|
Operating expenses
|
|
|
—
|
|
|
|
17,177
|
|
Operating loss
|
|
|
—
|
|
|
|
(15,252
|
)
|
Other expense
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
—
|
|
|
$
|
(15,252
|
)
|
Ownership interest
(rounded)
|
|
|
49
|
%
|
|
|
49
|
%
|
Share of net loss
|
|
$
|
—
|
|
|
$
|
(7,473
|
)
|
Investment
|
|
$
|
159,437
|
|
|
$
|
159,437
|
|
6. Accrued liabilities:
Accrued liabilities at June 30, 2016 and December 31, 2015 were $4,556,828 and $4,303,883, respectively, and were comprised of:
|
|
2016
|
|
2015
|
Legal fees
|
|
$
|
23,594
|
|
|
$
|
23,594
|
|
Interest
|
|
|
4,096,502
|
|
|
|
3,850,583
|
|
Consultants and advisors
|
|
|
190,959
|
|
|
|
186,198
|
|
Registration rights
|
|
|
98,013
|
|
|
|
98,013
|
|
Other
|
|
|
147,760
|
|
|
|
145,495
|
|
|
|
$
|
4,556,828
|
|
|
$
|
4,303,883
|
|
7. Promissory notes, including related parties and debenture
payable:
Promissory notes, including
related parties at June 30, 2016 and December 31, 2015, consist of the following:
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Promissory notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various, including related parties of $17,617 (2016) and $50,767 (2015); interest rate ranging from 8% to 10%
[A]
|
|
$
|
59,392
|
|
|
$
|
113,842
|
|
|
|
|
|
|
|
|
|
|
Notes payable; interest rates ranging from 9% to 15%; interest payable quarterly; the notes are unsecured, matured on February 28, 2008; currently in default and past due
[B]
|
|
|
2,090,719
|
|
|
|
2,090,719
|
|
|
|
$
|
2,150,111
|
|
|
$
|
2,204,561
|
|
|
[A]
|
Pursuant to a November 4, 2011 Board of director resolution, these notes are convertible at conversion rates, determined
at the discretion of the board of directors. During the six months ended June 30, 2016 the Company issued notes of $96,350 (including
$0 to related parties) and made payments of $247,788 (including $9,950 to related parties). These notes are due on demand.
|
|
|
|
|
[B]
|
These notes payable (the “Promissory Notes”) originally became due on February 28,
2007. The Company renewed $283,000 of the Promissory Notes on the same terms and conditions as previously existed. In April 2007
the Company, through a financial advisor, restructured $1,825,000 of the Promissory Notes (the “Restructured Notes”).
The Company has accrued an expense of $36,500 to compensate the financial advisor 2% of the Restructured Notes as well as having
issued 150,000 shares of common stock to the financial advisor. The Restructured Notes carry a stated interest rate of 15% (a default
rate of 20%) and matured on February 28, 2008. The Company has not paid the interest due since June 2007, and no principal payments
on the Promissory Notes have been made since 2008 and accordingly, they are in default. Accrued interest on these notes total $3,854,686
and $3,644,686 as of June 30, 2016 and December 31, 2015, respectively is included in accrued expenses on the consolidated balance
sheets.
|
In January 2008, the Company
and the three guarantors received a complaint filed by the financial advisor (acting as agent for the holders of the Restructured
Notes) and the holders of the Restructured Notes. The claim is seeking $1,946,250 plus per diem interest beginning January 22,
2008 at the rate of twenty percent (20%) per annum plus $37,000 due the financial advisor for unpaid fees. The court has ruled
in favor of a motion for summary judgment filed by certain of the plaintiffs and a judgment was entered on August 18, 2009 in the
total amount of $2,482,922 in principal and interest on the notes, $40,920 in related claims and $124,972 in attorney’s fees
and expenses. The Company is not aware of any payments being made by any of the guarantors and accordingly, the Company includes
these liabilities on the June 30, 2016 and December 31, 2014 balance sheet items promissory notes payable and accrued expenses.
Subsidiary notes payable:
On August 24, 2015, the Company’s
70%-owned subsidiary, Brawnstone Security (“Brawnstone”), issued a $50,000 note payable to an unrelated lender. The
note bears interest at 63% and is due on February 24, 2016. Brawnstone received $49,005 after loan origination fees of $995, which
will be expensed over the period of the loan. The total payback amount for this note was $67,500. The company paid $31,349 in principal
and $10,972 in interest related to note during the year ended December 31, 2015. During the six months ended June 30, 2016, the
Company paid $25,179 in principal and interest. As of June 30, 2016, the principal balance of the note has been satisfied.
On October 27, 2015, Brawnstone
issued a $40,000 note payable to an unrelated lender. The note bears interest at 63% and is due on June 27, 2016. Brawnstone received
$39,205 after loan origination fees of $795, which will be expensed over the period of the loan. The total payback amount for this
note was $53,200. The company paid $9,286 and in principal and $3,064 in interest related to note during the year ended December
31, 2015. The company paid $15,238 and $30,000 in principal and $5,028 and $9,899 in interest during the three and six month periods
ended June 30, 2016. As of June 30, 2016, the remaining payback balance of the note is $950.
On January 13, 2016, Brawnstone
issued a $60,000 note payable to an unrelated lender. The note bears interest at 63% and is due on September 13, 2016. Brawnstone
received $58,800 after loan origination fees of $1,200, which will be expensed over the period of the loan. The total payback amount
for this note was $81,000. The company paid $22,857 and $42,143 in principal and $8,000 and $14,750 in interest related to note
during the three and six months ended June 30, 2016. As of June 30, 2016, the remaining payback balance of the note is $24,107.
Debenture
payable:
2012 Notes
On November 1, 2012, the Company
issued a convertible promissory note to David Schaper (“Schaper”) in the amount of $269,858 in exchange for previously
accrued legal fees. The note bears interest at 8% per annum, is due on demand and is convertible at a conversion price for each
share of common stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements) per share
of the Company’s common stock for the ten trading days immediately preceding the date of conversion. During the year ended
December 31, 2013, the Company issued 6,986,723 shares of common stock upon the conversion of $103,188 of the note. During the
year ended December 31, 2014, the note was sold to unrelated third party accredited investors, and Company issued 2,240,336 shares
of common stock upon the conversion of $163,670 of the Note. As of June 30, 2016 and December 31, 2015, the balance of the note
is $3,000.
2013 Notes
The following notes issued in 2013,
bear interest at 8% per annum and other than as described below are convertible at a conversion price for each share of common
stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements) per share of the Company’s
common stock for the ten trading days immediately preceding the date of conversion. The notes issued in 2013 are referred to as
the 2013 Notes.
On March 14,
2013 the Company issued a convertible promissory note for $46,000 to an accredited investor (the “March 2013
Note”). The March 2013 Note, was due eight months from issuance and bears an interest rate of 8% per annum, and in the
case of an event of default increases to 12% per annum (“the Default Rate”). The March 2013 Note matured November
14, 2013, is in default, and the Default Rate was effective at that date. During the year ended December 31, 2014, the
Company issued 516,194 shares of common stock upon conversion of $19,425 of the note. The balance of the March 2013 Note is
$26,575 as of June 30, 2016 and December 31, 2015.
On August 22, 2013, the Company
issued a $6,000 convertible promissory note to Schaper. During the year ended December 31, 2014, the Company issued 66,667 shares
of common stock upon conversion of $4,000 of this note. The outstanding principal balance on this note is $2,000 as of June 30,
2016 and December 31, 2015.
On October 1, 2013, the Company
issued a $3,000 convertible promissory note to an accredited investor. The outstanding principal on this note is $3,000 as of June
30, 2016 and December 31, 2015.
On October 18, 2013, the Company
issued four (4) convertible notes each in the amount of $25,625 to Gel (the “2013 Gel Notes”), with each note due on
demand. The conversion price for the 2013 Gel Notes is equal to 50% of the lowest closing bid price of the Common Stock as reported
on the exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future
with a floor of $0.0001 per share, for any of the five trading days including the day upon which a Notice of Conversion is received
by the Company. If the shares have not been delivered within 3 business days, the Notice of Conversion may be rescinded. Accrued
but unpaid interest shall be subject to conversion. No fractional shares or scrip representing fractions of shares will be issued
on conversion, but the number of shares issuable shall be rounded to the nearest whole share. Also on October 18, 2013, Gel
issued the Company two secured promissory notes, each in the amount of $25,000, due April 21, 2014. The Company received the $50,000
on March 6, 2014. During the year ended December 31, 2014, the Company issued 944,260 shares upon conversion of $83,295 of the
notes. During the year ended December 31, 2015, the Company issued 213,479,349 shares upon conversion of $26,705 in note principal
and $2,863 of accrued interest. As of December 31, 2015, the four initial convertible notes have been fully satisfied, while the
two subsequent convertible promissory notes in the aggregate of $38,900 of principal are outstanding. Additionally, during the
year ended December 31, 2015, the notes have been sold to a third party accredited investor. During the six months ended June 30,
2016 the Company issued 1,112,118,250 shares of common stock upon conversion of $38,900 of note principal and $5,585 in accrued
interest. As of June 30, 2016, the outstanding principal balance of these notes has been satisfied.
On November 22, 2013, the Company
issued a $35,000 (the Fong Note) and $30,000 (the Hollander Note) convertible note to Mr. Fong and Mr. Hollander, respectively,
for the cancellation of accrued and unpaid fees. These notes are due on demand. During the year ended December 31, 2014, the Company
issued 383,333 shares of common stock in satisfaction of $22,000 of the Hollander note. As of December 31, 2014, the outstanding
principal on these notes totaled $43,000. During the year ended December 31, 2015, the Company issued 93,361,463 shares of common
stock in satisfaction of $8,000 in principal and $1,767 in accrued interest of the Hollander note. The outstanding principal balance
of the Fong note is $35,000, while the Hollander note has been fully satisfied as of June 30, 2016 and December 31, 2015.
2014 Notes
The following notes issued in 2014,
bear interest at 8% per annum and other than as described below are convertible at a conversion price for each share of common
stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements) per share of the Company’s
common stock for the ten trading days immediately preceding the date of conversion. The notes issued in 2014 are referred to as
the 2014 Notes.
On January 28, 2014, the Company
issued a convertible promissory note to Mr. Fong for $25,500 in satisfaction of accrued and unpaid fees due Mr. Fong. Also on January
28, 2014, the Company entered into a Debt Settlement and Release Agreement (the “DSR”) with Mr. Fong, Mary Virginia
Knight (“Knight”) or Knight assigns. Pursuant to the DSR, the Company has issued 500,000 shares of common stock to
the Knight assign, in cancellation and satisfaction of $15,000 of the convertible note due Mr. Fong. As of June 30, 2016 and December
31, 2015, the outstanding principal balance of this note is $10,500.
On February 10, 2014, the Company
issued two (2) convertible promissory notes in the amounts of $95,814 and $95,813 in exchange for previously accrued legal fees.
The notes bear interest at 8% per annum. The notes matured February 10, 2015 and are in default. During the year ended December
31, 2014, the company issued 416,667 shares of common stock in settlement of $12,500 of the notes. As of December 31, 2014, the
balances of the notes totaled $179,127. During the year ended December 31, 2014, the company issued 416,667 shares of common stock
in settlement of $12,500 of the notes. During the year ended December 31, 2015, $35,000 in note principal was assigned to a third
party in the form of a new convertible promissory note, with the same terms as the prior note. During the year ended December 31,
2015, the Company issued 314,318,871 shares of common stock in satisfaction of $23,808 in principal and $277 of accrued and unpaid
interest of the third-party portion of the note. During the six months ended June 30, 2016, the Company issued 39,534,773 shares
of common stock in satisfaction of $1,876 in principal and $100 of accrued and unpaid interest of the third party portion of the
note. As of June 30, 2016, the balances of the notes are $144,127 to the original note holder and $10,396 to the third party purchaser,
totaling $154,523.
On March 27, 2014, the Company
issued an $831,000 secured convertible promissory note (the “Note”). The Note carries an original issuer discount
of $75,000. In addition, the Company agreed to pay $6,000 to cover the Lender’s legal and other fees. At the option of
the Lender, the note converts at $0.0025 per share. The conversion by the Lender of any portion of the Outstanding Balance
shall only be exercisable in ten (10) tranches (each, a “Tranche”), consisting of an initial Tranche in an amount
equal to $88,500 and nine (9) additional Tranches, each in the amount of $82,500, plus any interest, costs, fees or charges
accrued thereon or added thereto under the terms of this Note. The Note carries a ten (10) percent interest rate and matures
on the seventeenth month after funding. The lender funded $75,000 on April 1, 2014 and also delivered nine (9) secured
promissory notes to the Company, each in the amount of $75,000. Each payment received will constitute an “Issue
Date”. The Company also granted the lender the right to purchase at any time on or after each Issue Date until the date
which is the last calendar day of the month in which the fifth anniversary of the Issue Date occurs (the “Expiration
Date”), a number of fully paid and non-assessable shares (the “Warrant Shares”) of the Company’s
common stock, par value $0.001 per share equal to $41,250 divided by the Market Price (as defined in the Note). . The Company
recorded an initial derivative liability of 559,687, debt discount of $477,187 and derivative expense of $41,890. This note
matured April 1, 2015 and is in default. During the year ended December 31, 2014, the company issued 558,333 shares of common
stock upon conversion of $16,500 of the note. During the year ended December 30, 2015, the note was sold to an unrelated
third party accredited investor for $75,029, which included outstanding principal of $54,672 and accrued interest of $20,357.
During the year ended December 31, 2015, the company issued 4,405,110 shares of common stock upon conversion of $17,078 of
note principal and 130,531,699 shares upon conversion of $16,500 in warrants shares outstanding. During the six months ended
June 30, 2016, the Company issued 282,227,379 shares of common stock upon conversion of $11,502 in warrant shares
outstanding. As of June 30, 2016 the outstanding principal balance of this note is $75,029.
On April 1, 2014 ($15,000) and April
23, 2014 ($12,500), the Company issued convertible promissory notes to Carebourn Capital. ). The notes bear interest of 8% per
annum and matured six months after issuance. The Company recorded an initial derivative liability for these notes of $28,600, debt
discount of $27,500 and derivative expense of $1,100. The debt discount of $27,500 was amortized into interest expense over the
term of the note. As of December 31, 2014, the entire principal balance of the notes, $27,500 was outstanding. During the year
ended December 31, 2015 the Company issued 322,840,228 shares in satisfaction of $21,830 in convertible note principal. In addition,
$5,000 in note principal was sold to an unrelated investor. As of December 31, 2015, the principal balance of these notes was $5,670.
During the six months ended June 30, 2016, the Company issued 131,077,775 shares of common stock upon conversion of $3,170 in note
principal and $2,096 in accrued and unpaid interest. As of June 30, 2016, the principal balance of these notes is $2,500.
On July 16, 2014, the Company
issued a convertible promissory note for $50,000 to an unaffiliated accredited investor. The note is due on demand and bears
interest at 8%. The Company recorded an initial derivative liability of $52,000, debt discount of $50,000 and derivative
expense of $2,000. The debt discount of $50,000 was amortized into interest expense over the term of the note. The note
matured on April 16, 2015 and is in default. During the year ended December 31, 2015, the company issued 112,049,963 shares
of common stock upon conversion of $12,786 of note principal. Amortization for the year ended December 31, 2014, totaled
$45,833 and the carrying value of the note as of December 31, 2014, was $45,833, net of unamortized discount of $4,167.
Amortization for the year ended December 31, 2015, totaled $4,167 and the carrying value of the note as of December 31, 2015,
is $37,214, net of unamortized discount of $0. During the year ended December 31, 2015, the note was sold at its full value
of $50,000, before conversion, to an unrelated third party investor. During the six months ended June 30, 2016, the company
issued 138,415,000 shares of common stock upon conversion of $6,921 of note principal. As of June 30, 2016 a principal
balance of $30,293 remains outstanding
On July 22, 2014 ($52,500), August
28, 2014 ($27,500), September 19, 2014 ($27,500), and November 3, 2014 ($27,500) the Company issued convertible promissory notes
to Carebourn Capital. The notes are due on demand, bear interest at 12%. The Company received $125,000 after debt issuance costs
of $10,000, which was amortized over the earlier of the term of the Notes or any redemptions. The July note matured on April 22,
2015 and is in default. The rest of the notes matured on May 28, 2015 and are in default. The Company recorded an initial derivative
liability of $143,100, debt discount of $125,000 and derivative expense of $18,100. The debt discount of $125,000 was amortized
into interest expense over the term of the notes. Amortization for the year ended December 31, 2014, totaled $80,292 and the carrying
value of the notes as of December 31, 2014, was $80,292, net of unamortized discount of $27,208. Amortization for the year ended
December 31, 2015, totaled $27,208 and the carrying value of the notes as of December 31, 2015, is $135,000, net of unamortized
discount of $0. . During the six months ended June 30, 2016, the company issued 142,857,143 shares of common stock upon conversion
of $5,000 of note principal. As of June 30, 2016, the entire principal balance of $130,000 remains.
On December 2, 2014, the
Company issued a convertible promissory note for $25,000 to an unaffiliated accredited investor. The note bears interest at
8%. Company recorded an initial derivative liability of $26,000, debt discount of $25,000 and derivative expense of $1,000.
The debt discount of $25,000 is being amortized into interest expense over the term of the note. The note matured on
September 2, 2015 and is in default. Amortization for the year ended December 31, 2014, totaled $3,889 and the carrying value
of the notes as of December 31, 2014, was $3,889, net of unamortized discount of $21,111. Amortization for the year ended
December 31, 2015, totaled $21,111 and the carrying value of the notes as of December 31, 2015, is $25,000, net of
unamortized discount of $0. As of June 30, 2016 and December 31, 2015, the full principal balance of $25,000 remains
outstanding.
On December 4, 2014, the Company
issued a $38,000 convertible promissory note to Carebourn Capital. The note is due on demand, bears interest at 12%. The Company
recorded an initial derivative liability of $39,520, debt discount of $38,000 and derivative expense of $1,520. The debt discount
of $40,500 is being amortized into interest expense over the term of the note. The note matured on December 4, 2015 and is in default.
Amortization for the year ended December 31, 2015, totaled $38,000 and the carrying value of the notes as of December 31, 2015,
is $38,000, net of unamortized discount of $0. As of June 30, 2016 and December 31, 2015, the full principal balance of $38,000
remains outstanding.
2015 Notes
On February 6, 2015, the
Company issued a convertible promissory note for $26,500 to LG Capital (“LG”). The Company received $25,000 after
debt issuance costs of $1,500. The debt issuance costs will be amortized over the earlier of the twelve month term of the
Note or any redemptions and accordingly $1,500 has been expensed as debt issuance costs (included in interest expense) for
the year ended December 31, 2015. The Company recorded an initial derivative liability of $28,620, debt discount of $26,500
and derivative expense of $2,120. The debt discount of $26,500 is being amortized into interest expense over the term of the
note. The note bears interest at 8% and is convertible at a 50% discount of the lowest closing price for the ten (10) days
preceding conversion and matures February 6, 2016. Amortization for the year ended December 31, 2015, totaled $24,574 and the
carrying value of the notes as of December 31, 2015, is $24,574, net of unamortized discount of $1,926. . Amortization for
the three and six months ended June 30, 2016, totaled $0 and $1,926, respectively and the carrying value of the notes as of
June 30, 2016, is $26,500, net of unamortized discount of $0. The note was sold to an unrelated third party at the face value
of the note during 2015. As of June 30, 2016 and December 31, 2015, the outstanding principal balance of this note is
$26,500
On February 21 2015 ($5,000) and
March 21, 2015 ($5,000), the Company issued convertible promissory notes for $10,000 in total to an unrelated third party per a
service contract signed between the company and the unrelated service provider. The notes bear interest at 12% and are convertible
at a 50% discount of the average of the three lowest day’s closing for the ten (10) days preceding conversion and each note
matures 6 months after issuance. The debt issuance costs will be amortized over the earlier of the six month term of the Note or
any redemptions and accordingly. The notes are currently in default. The Company recorded an initial derivative liability of $11,200,
debt discount of $10,000 and derivative expense of $1,200. The debt discount of $10,000 is being amortized into interest expense
over the term of the note. Amortization for the year ended December 31, 2015, totaled $10,000 and the carrying value of the notes
as of December 31, 2015, was $10,000, net of unamortized discount of $0. As of June 30, 2016 and December 31, 2015, the outstanding
principal balance of these notes is $10,000.
On April 10, 2015, the Company
issued a $43,500 convertible promissory note to Carebourn Capital. The April 10th Carebourn Note carries an original issuer
discount of $3,000. The note bears interest at 12% and is convertible at a 50% discount of the average of the three lowest
day’s closing prices for the ten (10) days preceding conversion. The Company recorded an initial derivative liability
of $48,720, debt discount of $43,500 and derivative expense of $5,220. The debt discount of $43,500 is being amortized into
interest expense over the term of the note. The note matures on January 10, 2016. Amortization for the year ended December
31, 2015, totaled $42,027, and the carrying value of the note as of December 31, 2015, was $42,027, net of unamortized
discount of $1,473. Amortization for the three and six months ended June 30, 2016, totaled $0 and $1,473, respectively and
the carrying value of the note as of June 30, 2016, is $43,500, net of unamortized discount of $0. As of June 30, 2016 and
December 31, 2015, the full principal balance of $43,500 remains outstanding.
On April 15, 2015, the Company
issued a convertible promissory note for $26,500 to LG Capital (“LG”). The note bears interest at 8% and is
convertible at a 50% discount of the lowest closing price for the ten (10) days preceding conversion. The Company recorded an
initial derivative liability of $28,090, debt discount of $26,500 and derivative expense of $1,590. The debt discount of
$26,500 is being amortized into interest expense over the term of the note. The Company received $25,000 after debt issuance
costs of $1,500. The debt issuance costs will be amortized over the earlier of the twelve month term of the Note or any
redemptions and accordingly $1,383 has been expensed as debt issuance costs (included in interest expense) for the year ended
December 31, 2015. The note matured on October 9, 2015. Amortization for the year ended December 31, 2015, totaled $26,500
and the carrying value of the note as of December 31, 2015, is $5,000, net of unamortized discount of $0. During the year
ended December 31, 2015, the company issued 317,819,240 shares of common stock upon conversion of $21,500 of note principal
and $710 of accrued note interest. As of December 31, 2015, the outstanding principal balance of this note was $5,000. During
the six months ended June 30, 2016, the company issued 106,115,000 shares of common stock upon conversion of $5,000 of note
principal and $306 of accrued note interest. As of June 30, 2016 the principal balance of this note has been fully
satisfied.
On May 6, 2015, the Company
issued a $40,000 convertible promissory note to Pure Energy 714, a New Jersey LLC. The note bears interest at 12% and is
convertible at a 50% discount of the average of the three lowest day’s closing prices for the ten (10) days preceding
conversion and matures November 6, 2015. The Company received $37,500 after debt issuance costs of $2,500. The debt issuance
costs will be amortized over the earlier of the five month term of the Note or any redemptions and accordingly $2,500 has
been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. The Company
recorded an initial derivative liability of $42,400, debt discount of $40,000 and derivative expense of $2,450. The debt
discount of $40,000 is being amortized into interest expense over the term of the note. Amortization for the year ended
December 31, 2015, totaled $40,000 and the carrying value of the notes as of December 31, 2015, is $40,000, net of
unamortized discount of $0. As of June 30, 2016 and December 31, 2015, the outstanding principal balance is $40,000.
On May 15, 2015, the Company
issued a $128,000 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at a 50%
discount of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and
matures February 15, 2016. The Company received $125,000 after debt issuance costs of $3,000. The debt issuance costs will be
amortized over the earlier of the nine month term of the Note or any redemptions and accordingly $2,500 has been expensed as
debt issuance costs (included in interest expense) for the year ended December 31, 2015. The Company recorded an initial
derivative liability of $143,360, debt discount of $128,000 and derivative expense of $15,360. The debt discount of $128,000
is being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015,
totaled $106,667 and the carrying value of the notes as of December 31, 2015, was $106,667, net of unamortized discount of
$21,333. Amortization for the three and six months ended June 30, 2016 totaled $0 and $21,333, respectively and the carrying
value of the notes as of June 30, 2016, was $128,000, net of unamortized discount of $0. As of June 30, 2016 and December 31,
2015, the outstanding principal balance of this note is $128,000.
On May 27, 2015, the Company
issued a $28,000 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at a 50%
discount of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and
matures February 27, 2016. The Company received $25,000 after debt issuance costs of $3,000. The debt issuance costs will be
amortized over the earlier of the nine month term of the Note or any redemptions and accordingly $2,370 has been expensed as
debt issuance costs (included in interest expense) for the year ended December 31, 2015. The Company recorded an initial
derivative liability of $31,360, debt discount of $28,000 and derivative expense of $3,360. The debt discount of $28,000 is
being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015, totaled
$22,116 and the carrying value of the notes as of December 31, 2015, was $22,116 net of unamortized discount of $5,884.
Amortization for the three and six months ended June 30, 2016, totaled $0 and $5,884, respectively and the carrying value of
the notes as of June 30, 2016, is $28,000 net of unamortized discount of $0. As of June 30, 2016 and December 31, 2015, the
outstanding principal balance of this note is $28,000.
On May 29, 2015, the Company issued
a $125,000 convertible promissory note to Pure Energy 714, a New Jersey LLC. The note bears interest at 12%, is convertible at
a 60% discount of the average of the three lowest day’s closing prices for the fifty (50) days preceding conversion and matured
on November 29, 2015. The note has matured during the year ended December 31, 2015 and is currently in default. The Company recorded
an initial derivative liability of $132,500, debt discount of $125,000 and derivative expense of $7,500. The debt discount of $125,000
is being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015, totaled
$125,000 and the carrying value of the notes as of December 31, 2015, is $125,000, net of unamortized discount of $0. As of June
30, 2016 and December 31, 2015, the outstanding principal balance of this note is $125,000.
On June 9, 2015, the Company issued
a $28,000 convertible promissory note to Pure Energy 714, a New Jersey LLC. The note bears interest at 12%, is convertible at a
50% discount of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures
February 27, 2016. The Company received $25,000 after debt issuance costs of $3,000. The debt issuance costs will be amortized
over the earlier of the seven month term of the Note or any redemptions and accordingly $2,338 has been expensed as debt issuance
costs (included in interest expense) for the year ended December 31, 2015. The Company recorded an initial derivative liability
of $29,680, debt discount of $28,000 and derivative expense of $1,680. The debt discount of $28,000 is being amortized into interest
expense over the term of the note. Amortization for the year ended December 31, 2015, totaled $21,825 and the carrying value of
the notes as of December 31, 2015, was $21,825, net of unamortized discount of $6,175. Amortization for the three and six months
ended June 30, 2016 totaled $0 and $6,175, respectively, and the carrying value of the notes as of December 31, 2015, is $28,000,
net of unamortized discount of $0. As of June 30, 2016 and December 31, 2015, the outstanding principal balance of this note is
$28,000.
On June 19, 2015, the Company issued
a convertible promissory note for $36,750 to LG Capital (“LG”). The note bears interest at 8%, is convertible at a
50% discount of the lowest closing price for the ten (10) days preceding conversion and matures on June 19, 2016. The Company recorded
an initial derivative liability of $39,690, debt discount of $36,750 and derivative expense of $1,590. The debt discount of $26,500
is being amortized into interest expense over the term of the note. The Company received $25,000 after debt issuance costs of $1,500.The
debt issuance costs will be amortized over the earlier of the twelve month term of the Note or any redemptions and accordingly
$982 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. Amortization
for the year ended December 31, 2015, totaled $19,580, and the carrying value of the notes as of December 31, 2015, was $19,580,
net of unamortized discount of $17,170. As of December 31, 2015, the outstanding principal balance of this note was $36,750. Amortization
for the three and six months ended June 30, 2016, totaled $7,432 and $17,170, respectively, and the carrying value of the notes
as of June 30, 2016, was $34,000, net of unamortized discount of $0. During the six months ended June 30, 2016, the company issued
57,626,200 shares of common stock upon conversion of $2,750 of note principal and $133 of accrued note interest. As of June 30,
2016, the outstanding principal balance of this note is $34,000.
On June 24, 2015, the Company issued
a convertible promissory note for $25,000 to Service Trading Company, LLC (“SVC”). The note is bears interest at 8%,
is convertible at a 50% discount of the lowest closing price for the ten (10) days preceding conversion and matures on June 24,
2016. The Company received $23,500 after debt issuance costs of $1,500. The debt issuance costs will be amortized over the earlier
of the twelve month term of the Note or any redemptions and accordingly $375 has been expensed as debt issuance costs (included
in interest expense) for the six months ended June 30, 2016. The Company recorded an initial derivative liability of $27,000, debt
discount of $25,000 and derivative expense of $2,000. The debt discount of $25,000 is being amortized into interest expense over
the term of the note. Amortization for the year ended December 31, 2015, totaled $12,978 and the carrying value of the notes as
of December 31, 2015, was $12,978, net of unamortized discount of $12,022. Amortization for the three and six months ended June
30, 2016, totaled $5,806 and $12,022 and the carrying value of the notes as of June 30, 2016, was $25,000, net of unamortized discount
of $0. As of June 30, 2016 and December 31, 2015, the outstanding principal balance of this note is $25,000.
On June 26, 2015, the Company issued
a $15,500 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at a 50% discount of
the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures March 26,
2016. The Company received $12,500 after debt issuance costs of $3,000. The debt issuance costs will be amortized over the earlier
of the nine month term of the Note or any redemptions and accordingly $1,000 has been expensed as debt issuance costs (included
in interest expense) for the six months ended June 30, 2016. The Company recorded an initial derivative liability of $17,360, debt
discount of $15,500 and derivative expense of $1,860. The debt discount of $15,500 is being amortized into interest expense over
the term of the note. Amortization for the year ended December 31, 2015, totaled $10,635 and the carrying value of the notes as
of December 31, 2015, is $10,635, net of unamortized discount of $4,865. Amortization for the six months ended June 30, 2016, totaled
$4,865 and the carrying value of the notes as of June 30, 2016, was $15,500, net of unamortized discount of $0. As of June 30,
2016 and December 31, 2015, the outstanding principal balance of this note is $15,500.
On July 20, 2015, the Company issued
a $15,500 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at a 50% discount of
the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures April 20,
2016. The Company received $12,500 after debt issuance costs of $3,000. The debt issuance costs will be amortized over the earlier
of the nine month term of the Note or any redemptions and accordingly $933 has been expensed as debt issuance costs (included in
interest expense) for the six months ended June 30, 2016. The Company recorded an initial derivative liability of $17,360, debt
discount of $15,500 and derivative expense of $1,860. The debt discount of $15,500 is being amortized into interest expense over
the term of the note. Amortization for the year ended December 31, 2015, totaled $9,244 and the carrying value of the notes as
of December 31, 2015, is $9,244, net of unamortized discount of $6,256. Amortization for the three and six months ended June 30,
2016, totaled $6,256 and the carrying value of the notes as of June 30, 2016, was $15,500, net of unamortized discount of $0. As
of June 30, 2016 and December 31, 2015, the outstanding principal balance of this note is $15,500.
On December 3, 2015, the Company
issued a convertible promissory note for $30,000 to SBI Investments, LLC. The note is due on demand, bears interest at 12% and
is convertible at a 50% discount of the lowest trading price for the twenty (20) days preceding conversion and matures on August
1, 2016. The Company recorded an initial derivative liability of $32,400, debt discount of $30,000 and derivative expense of $2,400.
The debt discount of $30,000 is being amortized into interest expense over the term of the note. The Company received $27,500 after
debt issuance costs of $2,500. The debt issuance costs will be amortized over the earlier of the twelve month term of the Note
or any redemptions and accordingly $833 and $1,666 has been expensed as debt issuance costs (included in interest expense) for
the three and six months ended June 30, 2016, respectively. Amortization for the year ended December 31, 2015, totaled $3,471,
and the carrying value of the notes as of December 31, 2015, was $3,471, net of unamortized discount of $26,529. Amortization for
the three and six months ended June 30, 2016, totaled $11,145 and $22,610, respectively and the carrying value of the notes as
of June 30, 2016, was $25,846, net of unamortized discount of $3,919. As of December 31, 2015, the outstanding principal balance
of this note was $30,000. During the six months ended June 30, 2016, the company issued 72,514,000 shares of common stock upon
conversion of $362 of note principal. As of June 30, 2016, the outstanding principal balance of this note was $29,637.
On December 4, 2015, the
Company issued a convertible promissory note for $35,200 to LG Capital (“LG”). The note bears interest at 8%, is
convertible at a 50% discount of the lowest trading price for the twenty (20) days preceding conversion and matures on
December 4, 2016. The Company recorded an initial derivative liability of $38,016, debt discount of $35,200 and derivative
expense of $2,816. The debt discount of $35,200 is being amortized into interest expense over the term of the note. The
Company received $30,000 after debt issuance costs of $2,000 and an original issuer discount of 10% ($3,520). The debt
issuance costs will be amortized over the earlier of the twelve month term of the Note or any redemptions and accordingly
$1,733 and $3,791 has been expensed as debt issuance costs (included in interest expense) for the three and six months ended
June 30, 2016, respectively. Amortization for the year ended December 31, 2015, totaled $2,597, and the carrying value of the
notes as of December 31, 2015, was $2,597, net of unamortized discount of $32,603. Amortization for the three and six months
ended June 30, 2016, totaled $8,752 $17,504, respectively and the carrying value of the notes as of June 30, 2016, was
$20,101, net of unamortized discount of $15,099. As of June 30, 2016 and December 31, 2015, the outstanding principal balance
of this note is $35,200.
On December 21, 2015, the Company
issued a $20,000 convertible promissory note to More Capital. The note bears interest at 3% per month and matures April 20, 2016.
The note is convertible at the market price of the Company’s common stock on the day of conversion. As of December 31, 2015,
the outstanding principal balance of this note was $20,000. During the six months ended June 30, 2016, the Company paid $20,000
in complete settlement of the outstanding note principal.
On December 22, 2015, the Company
issued a $50,000 convertible promissory note to Carebourn Capital. The note bears interest at 3% per month and matures February
22, 2016. The note is convertible at the market price of the company’s common stock on the day of conversion. As of December
31, 2015, the outstanding principal balance of this note is $50,000. During the six months ended June 30, 2016, the Company paid
$50,000 in complete settlement of the outstanding note principal.
On December 30, 2015, the Company
issued a $10,000 convertible promissory note to More Capital. The note is due on demand, bears interest at 3% per month and matures
March 2, 2016. The note is convertible at the market price of the company’s common stock on the day of conversion. As of
December 31, 2015, the outstanding principal balance of this note is $10,000. During the six months ended June 30, 2016, the Company
paid $10,000 in complete settlement of the outstanding note principal.
2016 Notes
On January 27, 2016, the Company
issued an $18,000 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at a 50% discount
of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures October
27, 2016. The Company received $15,000 after debt issuance costs of $3,000. The debt issuance costs will be amortized over the
earlier of the nine month term of the Note or any redemptions and accordingly $1,000 and $667 has been expensed as debt issuance
costs (included in interest expense) for the three and six months ended June 30, 2016, respectively. The Company recorded an initial
derivative liability of $19,620, debt discount of $18,000 and derivative expense of $1,620. The debt discount of $18,000 is being
amortized into interest expense over the term of the note. Amortization for the three and six months ended June 30, 2016 totaled
$5,978 and $10,182, respectively and the carrying value of the notes as of June 30, 2016, is $10,182, net of unamortized discount
of $7,818. As of June 30, 2016 the outstanding principal balance of this note is $18,000.
On June 3, 2016, the Company issued
a $13,000 convertible promissory note to More Capital. The note bears interest at 12%, is convertible at a 45% discount of the
average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures February 2, 2017.
The Company received $10,000 after debt issuance costs of $3,000. The debt issuance costs will be amortized over the earlier of
the eight month term of the Note or any redemptions and accordingly $375 has been expensed as debt issuance costs (included in
interest expense) for the three and six months ended June 30, 2016. The Company recorded an initial derivative liability of $31,212,
a debt discount of $13,000 and derivative expense of $18,212. The debt discount of $18,000 is being amortized into interest expense
over the term of the note. Amortization for the three and six months ended June 30, 2016 totaled $1,486 and the carrying value
of the notes as of June 30, 2016, is $1,486, net of unamortized discount of $11,514. As of June 30, 2016, the outstanding principal
balance of this note was $13,000.
On June 30, 2016, the Company issued
a $224,318 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at a 50% discount of
the lowest day’s closing prices for the twenty (20) days preceding conversion and matures November 30, 2017. The Company
received $189,559 after an original issue discount of $29,318 and debt issuance costs of $5,000. The debt issuance costs will be
amortized over the earlier of the seventeen month term of the Note or any redemptions. The Company recorded an initial derivative
liability of $525,084, debt discount of $224,318 and derivative expense of $300,766. The debt discount of $224,318 is being amortized
into interest expense over the term of the note. The carrying value of the notes as of June 30, 2016, is $0, net of unamortized
discount of $224,318. As of June 30, 2016 the outstanding principal balance of this note is $224,318.
The Company has determined that
the conversion features of the 2012, 2013, 2014, 2015 and the 2016 Notes represent embedded derivatives since the Notes are convertible
into a variable number of shares upon conversion. Accordingly, the Notes are not considered to be conventional debt under EITF
00-19 and the embedded conversion features must be bifurcated from the debt hosts and accounted for as derivative liabilities.
Accordingly, the fair value of these derivative instruments have been recorded as liabilities on the consolidated balance sheet
with the corresponding amounts recorded as a discounts to the Notes. Such discounts will be accreted from the date of issuance
to the maturity dates of the Notes. The change in the fair value of the liabilities for derivative contracts will be recorded to
other income or expenses in the consolidated statement of operations at the end of each quarter, with the offset to the derivative
liability on the balance sheet.
The fair value of the conversion
features embedded in the 2015 Notes as of their dates of issuance and in their entirety as of June 30, 2016 was determined to approximate
their fair intrinsic value due to the terms of conversion.
The inputs used to estimate the
fair value of the derivative liabilities are considered to be level 3 inputs within the fair value hierarchy.
A summary of the derivative liabilities
related to convertible notes as of June 30, 2016 and December 31, 2015 is as follows:
Derivative
Liability Balance
12/31/15
|
Initial Derivative Liability
|
Redeemed
convertible notes
|
Fair value change- six months ended
6/30/16
|
Derivative
Liability Balance
6/30/16
|
|
$ 1,359,843
|
330,061
|
(218,563)
|
180,468
|
$ 1,651,809
|
|
|
|
|
|
|
|
|
|
|
|
A summary of debentures payable as of June
30, 2016 and December 30, 2015 is as follows:
|
2016
Face Value
|
2015
Face Value
|
2012 and 2013 Notes
|
$ 80,075
|
$ 80,075
|
2014 Notes
|
$ 455,282
|
$ 507,619
|
2015 Notes
|
$ 583,837
|
$ 599,597
|
2016 Notes
|
$ 255,318
|
—
|
Note discount
|
$(262,668)
|
$ (137,106)
|
Total
|
$1,111,844
|
$ 1,050,135
|
8.
Commitments and contingencies:
Litigation:
The Forest County Potawatomi
Community (“FCPC”) has initiated an action against Chex, an inactive subsidiary of the Company, in the FCPC tribal
court asserting that Chex breached a contract with FCPC during the 2002 to 2006 time period. Chex is inactive and did not defend
this action. On October 1, 2009 a judgment was entered against Chex in the FCPC Tribal Court in the amount of $2,484,922. The Company
has included $2,484,922 in litigation contingency on the consolidated balance sheets as of June 30, 2016 and December 31, 2015.
The Company is involved in
various claims and legal actions arising in the ordinary course of business. The ultimate disposition of these matters may have
a material adverse impact either individually or in the aggregate on future consolidated results of operations, financial position
or cash flows of the Company.
9. Income taxes:
The
operations of the Company for periods subsequent to its acquisition by HPI and through August 2004, at which time HPI’s ownership
interest fell below 80% are included in consolidated federal income tax returns filed by HPI. Subsequent to August 2004 and through
January 29, 2006 the Company will file a separate income tax return. As of January 30, 2006, HPI’s ownership interest again
exceeded 80% and the operations of the Company will be included in a consolidated federal income tax from that date through October
29, 2006 when the ownership fell below 80%. As of October 30, 2006, the Company will be filing separate income tax returns. For
financial reporting purposes, the Company’s provision for income taxes has been computed, and current and deferred taxes
have been allocated on a basis as if the Company has filed a separate income tax return for each year presented. M
anagement
assesses the
realization of its deferred tax assets to determine if it is more likely than not
that the Company's deferred tax assets will be realizable. The Company adjusts the valuation allowance based on this assessment.
As
of June 30, 2016, the Company had a tax net operating loss carry forward of approximately $13,350,000
.
Any unused portion of this carry forward expires in 2031. Utilization of this loss may be limited in the event of an ownership
change pursuant to IRS Section 382.
10. Stockholders’
deficiency:
Common stock:
During the six
months ended June 30, 2016, the Company issued 2,082,485,529 shares of common stock upon the conversion of $78,702 of debentures
payable, accrued and unpaid interest and the cashless exercise of warrants.
Preferred stock:
There were no
shares of Class A or B preferred stock issued during the six months ended June 30, 2016.
The COD for Class
A Preferred stock states; each share of the Class A Preferred Stock shall be entitled to a number of votes determined at any time
and from time to time determined as follows: any holder of Class A Preferred Stock can vote such shares as if converted based on
the Conversion Rights in below. The Class A Preferred Stock shall have a right to vote on all matters presented or submitted to
the Corporation’s stockholders for approval in pari passu with holders of the Corporation’s common stock, and not as
a separate class. Each share of the Class A Preferred Stock shall automatically convert (the “Conversion”) into shares
of the Corporation’s common stock at the moment there are sufficient authorized and unissued shares of common stock to allow
for the Conversion. The number of shares of common stock to which a holder of Class A Preferred Stock shall be entitled upon a
conversion shall equal the product obtained by (a) multiplying the number of fully diluted common shares by twenty five hundredths
(0.25), then (b) multiplying the result by a fraction, the numerator of which will be the number of shares of Class A Preferred
stock being converted and the denominator of which will be the number of authorized shares of Class A Preferred stock. As of June
30, 2016 there are 819,000 shares of Class A Preferred stock outstanding.
On December 14, 2012, Board of Directors
approved the filing of a COD establishing the designations, preferences, limitations and relative rights of the Company’s
Class B Preferred Stock. The COD allows the Board of Directors in its sole discretion to issue up to 2,000,000 shares of Class
B Preferred Stock. The COD for Class B Preferred stock states; each share of the Class B Preferred Stock shall be entitled to a
number of votes determined at any time and from time to time determined as follows: any holder of Class B Preferred Stock can vote
such shares as if converted based on the Conversion Rights in below. The Class B Preferred Stock shall have a right to vote on
all matters presented or submitted to the Corporation’s stockholders for approval in pari passu with holders of the Corporation’s
common stock, and not as a separate class. Each share of the Class B Preferred Stock shall automatically convert (the “Conversion”)
into shares of the Corporation’s common stock at the moment there are sufficient authorized and unissued shares of common
stock to allow for the Conversion. The Class B Preferred Stock will convert in their entirety, simultaneously to equal the amount
of shares of common stock resulting from the amount of series B Preferred Stock outstanding multiplied by sixty (60). The Conversion
shares will be issued pro rata so that each holder of the Class B Preferred Stock will receive the appropriate number of shares
of common stock equal to their percentage ownership of their Class B Preferred Stock. As of June 30, 2016 there are 1,791,667,
shares of Class B Preferred stock outstanding.
Effective January 21, 2014, the
Board of Directors of the Company approved the issuance of 1,000 shares of Class C Preferred Stock (as defined and described below)
(the “Class C Preferred Stock Shares”) to Mr. Fong or his assigns in consideration for services rendered to the Company
and continuing to work for the Company without receiving significant payment for services and without the Company having the ability
to issue shares of common stock as the Company does not have sufficient authorized but unissued shares of common stock to allow
for any such issuances.
As a result of the issuance of the
Class C Preferred Stock Shares to Mr. Fong, or his assigns and the Super Majority Voting Rights (described below), Mr. Fong obtained
voting rights over the Company’s outstanding voting stock which provides him the right to vote up to 51% of the total voting
shares able to vote on any and all shareholder matters. As a result, Mr. Fong will exercise majority control in determining
the outcome of all corporate transactions or other matters, including the election of Directors, mergers, consolidations, the sale
of all or substantially all of the Company’s assets, and also the power to prevent or cause a change in control. The interests
of Mr. Fong may differ from the interests of the other stockholders and thus result in corporate decisions that are adverse to
other shareholders. Additionally, it may be impossible for shareholders to remove Mr. Fong as an officer or Director
of the Company due to the Super Majority Voting Rights. The Class C preferred stock provides no other rights to their holder(s)
other than voting rights.
Stock options:
The Company has
a stock option plan (the “Plan”) which was approved by the Board of Directors in July 2004 and which permits the grant
of shares to attract, retain and motivate employees, directors and consultants of up to 3,000 shares of common stock. Options are
generally granted with an exercise price equal to the Company’s market price of its common stock on the date of the grant
and vest immediately upon issuance.
There were
no options granted during the six months ended June 30, 2016 and all options have expired.
Warrants:
A summary of warrant activity
for the six months ended June 30, 2016 is shown in the table below:
|
|
Number of
Warrant Shares
Outstanding
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
|
88,014
|
|
|
Cashless exercise of warrants
|
|
|
|
(11,502
|
)
|
|
Exercise price
|
|
|
|
$0.00004
|
|
|
Remaining Term
|
|
|
|
2.78 years
|
|
|
Balance at June 30, 2016
|
|
|
|
76,512
|
|
11.
Prior events:
Asset sale:
On December 22, 2005, FFFC and Chex
entered into an Asset Purchase Agreement (the “APA”) with Game Financial Corporation (“Game”), pursuant
to which FFFC and Chex agreed to sell all of its cash access contracts and certain related assets, which represented substantially
all the assets of Chex. Such assets also represented substantially all of the operating assets of the Company on a consolidated
basis. On January 31, 2006, FFFC and Chex completed the sale (the “Asset Sale”) for $14 million pursuant to the APA
and received net cash proceeds of $12,642,784, after certain transaction related costs and realized a pre-tax book gain of $4,145,835.
As a result of the Asset Sale, the Company has no substantial continuing operations. Therefore, the Company is not reporting and
accounting for the sale of Chex’s assets as discussed in discontinued operations.
Additionally, FFFC and Chex entered
into a Transition Services Agreement
(the “TSA”) with Game pursuant to which
FFFC and Chex agreed to provide certain services to Game to ensure a smooth transition of the sale of the cash-access financial
services business.
Pursuant to the APA and the TSA,
FFFC and Chex owed Game approximately $300,000. Game, FFFC and Chex agreed to settle the balance due for $275,000 (included in
accounts payable on the balance sheet presented herein) with payment terms. FFFC and Chex have not made any of the payments stipulated
in the settlement and subsequently Game filed a complaint against Chex, FFFC and Hydrogen Power Inc. (“HPI”) seeking
approximately $318,000. The Company has agreed to a judgment of $329,146, comprised of the $275,000, attorney fees of $15,277 (included
in accounts payable on the balance sheet presented herein, and attorney fees of $38,869 (included in accrued liabilities on the
balance sheet presented herein). FFFC and Chex have agreed to indemnify HPI.
12. Related party transactions:
Management and director
fees:
For the three and six months ended
June 30, 2016 and June 30, 2015, the Company accrued expenses of $37,500 and $75,000, respectively, for Mr. Fong, the Company’s
President and Chairman. Mr. Fong received $43,100 and $51,095 in cash payments for the three months ended June 30, 2016 and June
30, 2015, respectively and $77,250 and $80,595 for the six months ended June 30, 2016 and June 30, 2015, respectively. In January
2014, the Company issued a convertible note to Mr. Fong in payment of $25,500 of accrued and unpaid fees. As of June 30, 2016,
Mr. Fong is owed $25,500 for these services, included in accrued expenses on the consolidated balance sheet.
Acquisition
of Carbon Capture:
On May 25,
2012, the Company’s newly formed subsidiary ATD acquired Carbon Capture USA (“Carbon”) from Carbon Capture Corporation,
a Colorado corporation ("CCC"). CCC is privately held by Mr. Henry Fong, a director of the Company and is the control
person of CCC. Pursuant to the Agreement, ATD acquired from CCC all of the issued and outstanding common stock of Carbon in exchange
for one-hundred fifty thousand (150,000) newly issued unregistered shares of the Company’s common stock. As of December 31,
2013, Carbon has exchanged the 150,000 shares of common stock for 1,500,000 shares of Class B preferred stock. The Class B preferred
stock automatically converts to 150,000 shares of common stock whenever there are sufficient shares of common stock to allow for
the conversion. Pursuant to the terms and conditions of the preferred stock, the Company determined there were not any additional
costs to be recognized.
Notes payable:
As disclosed in Note 6, the Company
has issued notes payable to various related parties. The activity for the three months ended June 30, 2016 follows:
Noteholder
|
|
Balance
3/31/16
|
|
Additions
|
|
Payments
|
|
Sold
|
|
Balance
6/30/16
|
MV Knight (3)
|
$
|
8,900
|
$
|
—
|
$
|
5,500
|
$
|
—
|
$
|
3,400
|
HPI Partners (1)
|
|
395
|
|
—
|
|
—
|
|
—
|
|
395
|
HF Services (1)
|
|
2,900
|
|
—
|
|
2,750
|
|
—
|
|
150
|
Henry Fong (2)
|
|
3,000
|
|
—
|
|
—
|
|
—
|
|
3,000
|
SurgLine Int’l (1)
|
|
10,672
|
|
—
|
|
—
|
|
—
|
|
10,672
|
Total
|
$
|
25,867
|
$
|
—
|
$
|
8,250
|
$
|
—
|
$
|
17,617
|
The activity for the six months
ended June 30, 2016 is as follows:
Noteholder
|
|
Balance
12/31/15
|
|
Additions
|
|
Payments
|
|
Sold
|
|
Balance
6/30/16
|
MV Knight (3)
|
$
|
8,900
|
$
|
—
|
$
|
5,500
|
$
|
—
|
$
|
3,400
|
HPI Partners (1)
|
|
395
|
|
—
|
|
—
|
|
—
|
|
395
|
HF Services (1)
|
|
300
|
|
4,300
|
|
4,450
|
|
—
|
|
150
|
Henry Fong (2)
|
|
3,000
|
|
—
|
|
—
|
|
—
|
|
3,000
|
SurgLine Int’l (1)
|
|
10,672
|
|
—
|
|
—
|
|
—
|
|
10,672
|
Total
|
$
|
23,267
|
$
|
4,300
|
$
|
9,950
|
$
|
—
|
$
|
17,617
|
All of the notes are due on demand
and have interest rates of 8% to 10% per annum.
|
(1)
|
Mr. Henry Fong, an officer and director of the Company, is also an officer, director or control
person of these entities.
|
|
(2)
|
An officer or director of the Company.
|
|
(3)
|
Related to an officer and director of the company
|
13
.
Segment reporting:
During the six months ended June
30 2016 and the year ended December 31, 2015, the Company operated in two reportable segments: Brawnstone and Nova.
Brawnstone, in which the Company
owns a 70% interest, is a licensed armed security, private investigation, security technology solution provider and tactical training
company servicing active accounts with several Government affiliated HUD housing establishments, schools, and industrial facilities
across the Ohio region.
Nova, a wholly owned subsidiary
of the Company, was formed to design, market and service credit card products aimed at the sub-prime market consisting mainly
of consumers who may not qualify for traditional credit card products. Nova charges a monthly fee on active cards and receives
proceeds, if any, from Merrick Bank after their bank charges for servicing the credit ca
rds.
The accounting policies of the segments are the same as those described in the Note 1. The Company’s
reportable segments are strategic business units that offer products.
For
the three months ended June 30, 2016, segment results are as follows:
|
|
Brawnstone
|
|
Nova
|
|
Corporate
|
|
Total
|
Net Revenues
|
|
$
|
127,478
|
|
|
$
|
5,439
|
|
|
$
|
—
|
|
|
$
|
132,917
|
|
Operating costs
|
|
|
74,112
|
|
|
|
5,591
|
|
|
|
—
|
|
|
|
79,703
|
|
Selling, general, and administrative
|
|
|
65,633
|
|
|
|
—
|
|
|
|
75,329
|
|
|
|
140,962
|
|
Other non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
—
|
|
|
|
—
|
|
|
|
399,789
|
|
|
|
399,789
|
|
Other income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Segment income or (loss)
|
|
|
(12,266
|
)
|
|
|
(109
|
)
|
|
|
(475,162
|
)
|
|
|
(487,537
|
)
|
Segment assets
|
|
$
|
46,996
|
|
|
$
|
38,700
|
|
|
$
|
227,304
|
|
|
$
|
363,000
|
|
For
the six months ended June 30, 2016, segment results are as follows:
|
|
Brawnstone
|
|
Nova
|
|
Corporate
|
|
Total
|
Net Revenues
|
|
$
|
297,231
|
|
|
$
|
10,772
|
|
|
$
|
—
|
|
|
$
|
308,003
|
|
Operating costs
|
|
|
166,686
|
|
|
|
11,040
|
|
|
|
—
|
|
|
|
177,726
|
|
Selling, general, and administrative
|
|
|
124,912
|
|
|
|
—
|
|
|
|
153,821
|
|
|
|
278,733
|
|
Other non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
4,979
|
|
|
|
—
|
|
|
|
974,024
|
|
|
|
979,003
|
|
Other income
|
|
|
—
|
|
|
|
—
|
|
|
|
185,425
|
|
|
|
185,425
|
|
Segment income or (loss)
|
|
|
654
|
|
|
|
(225
|
)
|
|
|
(942,420
|
)
|
|
|
(941,991
|
)
|
Segment assets
|
|
$
|
46,996
|
|
|
$
|
38,700
|
|
|
$
|
227,304
|
|
|
$
|
363,000
|
|
14.
Subsequent events:
From
July 1, 2016, through August 30, 2016, the Company has issued 108,569,800 shares of common stock upon conversion of $5,000 of convertible
promissory note principal, and $428 of accrued interest.
Effective
August 11, 2016, the Company completed the execution of a Purchase and Assignment of Membership Interests agreement (the “Agreement”)
made and entered into as of August 1, 2016, by and among Daniel Unsworth, Brawnstone Security Co, Inc., and Brawnstone Security,
LLC; through which the Company acquired the remaining 30% membership interest in Brawnstone Security, LLC from Mr. Unsworth. Accordingly,
with this purchase, the Company, through its wholly owned subsidiary Brawnstone Security Co, Inc., now owns 100% of the outstanding
membership interests in Brawnstone Security, LLC effective on August 1, 2016.
Management has determined that there are no
further events subsequent to the balance sheet date that should be disclosed in these financial statements.