SPENDSMART
NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
For the nine months ended
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
Net loss
|
$
(4,838,064
)
|
$
(5,058,318
)
|
Adjustments to reconcile net loss to net cash
used in operating activities
|
|
|
Depreciation expense
|
360,262
|
807,002
|
Amortization of intangible asset
|
144,855
|
253,219
|
Amortization of debt discount
|
388,683
|
325,910
|
Stock-based compensation
|
884,449
|
1,053,508
|
Issuance of common stock for
services
|
91,500
|
293,166
|
Change in fair value of financial
instruments
|
(1,995,669
)
|
(233,235
)
|
Accrued interest income on notes receivable from
third party
|
-
|
(27,339
)
|
Accrued interest expenses on notes
payable
|
50,087
|
28,648
|
Change in earn-out liability
|
-
|
(58,754
)
|
Inducement for exercise of warrants
|
3,560,958
|
-
|
Extinguishment of convertible debt
|
415,689
|
-
|
Provision for bad debt
|
163,323
|
1,313,349
|
Changes in operating assets and
liabilities:
|
|
|
Accounts receivable
|
(651,880
)
|
(783,913
)
|
Customer short-term notes
receivable
|
78,573
|
(334,023
)
|
Customer long-term notes receivable
|
170,362
|
(137,461
)
|
Deferred revenue
|
62,152
|
(158,118
)
|
Prepaid insurance
|
(47,289
)
|
6,090
|
Other assets
|
-
|
(18,741
)
|
Accounts payable and accrued
liabilities
|
27,680
|
688,687
|
Net cash used in operating
activities
|
(1,134,329
)
|
(2,040,323
)
|
|
|
|
Cash flows from investing activities:
|
|
|
Proceeds
from short-term notes receivable from third party
|
-
|
121,000
|
Payment
of deferred acquisition payable-Intellectual Capital Mgmt,
LLC
|
(10,000
)
|
(10,000
)
|
Software
development costs
|
(291,957
)
|
(732,533
)
|
Purchase
of property and equipment
|
-
|
(305,326
)
|
Net cash used in investing activities
|
(301,957
)
|
(926,859
)
|
|
|
|
Cash flows from financing activities:
|
|
|
Net
proceeds from warrant exercises related to tender
offer
|
1,179,252
|
-
|
Proceeds
from issuance of notes
|
-
|
200,000
|
Proceeds
from issuance of related party financing
|
-
|
100,000
|
Repayment
of notes
|
(70,262
)
|
(37,627
)
|
Repayment
of notes to related parties
|
(35,000
)
|
-
|
Repayment
of convertible notes
|
(200,000
)
|
-
|
Proceeds
from issuance of convertible debt
|
180,000
|
1,488,500
|
Net cash provided by financing activities
|
1,053,990
|
1,750,873
|
|
|
|
Net decrease in cash and cash equivalents
|
(382,296
)
|
(1,216,309
)
|
|
|
|
Cash and cash equivalents at beginning of the period
|
470,341
|
1,242,155
|
Cash and cash equivalents at end of the period
|
$
88,045
|
$
25,846
|
|
|
|
Non-cash Investing and
Financing Activities:
|
|
|
The
Company had conversion of 47,500 shares of Series C preferred stock
into 190,000 shares of common stock during the nine months ended
September 30, 2015.
|
The
Company issued 1,438,340 warrants in connection with convertible
debt during the nine months ended September 30, 2015.
|
The
Company issued 26,479,217 warrants in connection with the exercise
of tender offer warrants during the nine months ended September 30,
2016.
|
The
Company had a debt discount of $730,520 in connection with
convertible debt during the nine months ended September 30,
2015.
|
The
Company had a debt discount of $50,738 in connection with
convertible debt during the nine months ended September 30,
2016.
|
The
Company issued 17,895,859 shares of Common Stock in connection with
the exercise of tender offer warrants during the nine months ended
September 30, 2016.
|
See accompanying notes to unaudited condensed consolidated
financial statements.
SPENDSMART
NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
SpendSmart Networks, Inc. is a Delaware corporation (“the
Company”). The Company brings value added products
and mobile marketing solutions to consumers, merchants, and other
businesses. The accompanying unaudited condensed
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary SpendSmart Networks, Inc.,
a California corporation (SpendSmart-CA). All material intercompany
balances and transactions have been eliminated. The
accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the financial statements
included in our Annual Report on Form 10-K for the year ended
December 31, 2015. The year-end balance sheet data was
derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in
the United States of America (“GAAP”). All
normal recurring adjustments which are necessary for the fair
presentation of the results for the interim periods are reflected
herein. Operating results for the nine-month period
ended September 30, 2016 are not necessarily indicative of results
to be expected for a full year.
2. Liquidity and Going Concern
As of December 31, 2015, the Company’s audited consolidated
financial statements included an opinion containing an explanatory
paragraph as to the uncertainty of the Company’s ability to
continue as a going concern. The Company has continued to incur net
losses through September 30, 2016 and has yet to establish
profitable operations. These factors among others create a
substantial doubt about the Company’s ability to continue as
a going concern at September 30, 2016. The Company’s
unaudited consolidated financial statements as of and for the
period ended September 30, 2016 do not contain any adjustments for
this uncertainty.
In an effort to reduce overhead, the Company reduced salaries by
10% during the first nine months of 2016 and issued options equal
to the value of the reduction. The Company also currently plans to
attempt to raise additional required capital through the sale of
unregistered shares of the Company’s preferred or common
stock. All additional amounts raised will be used for our future
investing and operating cash flow needs as well as payment of
previous debts. However, there can be no assurance that we will be
successful in consummating such financing. This description of our
recent financing and future plans for financing does not constitute
an offer to sell or the solicitation of an offer to buy our
securities, nor shall such securities be offered or sold in the
United States absent registration or an applicable exemption from
the registration requirements and certificates evidencing such
shares contain a legend stating the same.
3. Reclassification
Certain
reclassifications were made to the 2015 financial statement
presentation to conform to the 2016 financial statement
presentation. These reclassifications relate to immaterial
balances from discontinued operations, which have been included in
respective balances from continuing operations.
4. Summary of Significant Accounting Policies
The condensed consolidated financial statements have been prepared
in accordance with GAAP.
Loans Receivable and Accounts Receivable
The Company extended credit to its licensees in the normal course
of business and performs credit evaluations of its customers. The
Company no longer offers extended payment terms. Loans and accounts
receivable are stated at amounts due from customer’s net of
an allowance for doubtful accounts. Accounts that are outstanding
longer than the contractual payment terms are considered past due.
The Company determines its allowance for doubtful accounts by
considering a number of factors, including the length of time loan
and accounts receivable are past due and the customer's current
ability to pay its obligation to the Company. The Company writes
off loans and accounts receivable when they become
uncollectible.
SPENDSMART
NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, fair value of financial
instruments, at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could materially differ
from those estimates.
Significant estimates inherent in the
preparation of the accompanying consolidated financial statements
include recoverability and useful lives of intangible assets, the
valuation allowance related to the Company's deferred tax assets,
the allowance for doubtful accounts related and notes and accounts
receivable, the fair value of stock options and warrants granted to
employees, consultants, directors, investors and placement agents,
notes, derivative liabilities (conversion option) and assumptions
used to fair value the inducement expense related to the warrant
tender offer.
Revenue Recognition
The Company generates revenues primarily in the form of set up
fees, license fees, messaging, equipment and marketing services
fees and value added mobile marketing and mobile commerce
services. License fees are charged monthly for support
services. Set-up fees primarily consist of fees for
website development services (including support and unspecified
upgrades and enhancements when and if they are available), training
and professional services that are not essential to functionality.
The Company offers two licenses consisting of our Engage license
and our Thrive license.
The Company now offers both licenses
in a combined package known as the Customer Loyalty System License
(“CLS”).
The revenues for
Engage, Thrive, and CLS license set-up fees are recognized over the
training and implementation periods of one month,
respectively.
The Company recognizes revenues when all of the following
conditions are met:
●
|
there is persuasive evidence of an arrangement;
|
●
|
the products or services have been delivered to the
customer;
|
●
|
the amount of fees to be paid by the customer is fixed or
determinable; and
|
●
|
The collection of the related fees is probable.
|
Signed agreements are used as evidence of an arrangement.
Electronic delivery occurs when we provide the customer with access
to the software. The Company assesses whether a fee is fixed or
determinable at the outset of the arrangement, primarily based on
the payment terms associated with the transaction. The Company
offered extended payment terms in 2014 and 2015 with regards to the
setup fee with typical terms of payment due between one and three
years from delivery of license. The Company no longer offers
extended payment terms. The Company assessed collectability of the
set-up fee based on a number of factors such as collection history
and creditworthiness of the licensee. If the Company determines
that collectability is not probable, revenue is deferred until
collectability becomes probable, generally upon receipt of
cash.
License arrangements may also include set-up fees for website
development, delivery of tablets, professional services and
training services, which are typically delivered within 30-60 days
of the contract term. In determining whether set-up fee revenues
should be accounted for separately from license revenues, we
evaluate whether the set-up fees are considered essential to the
functionality of the license using factors such as the nature of
our products; whether they are ready for use by the customer upon
receipt; the nature of our implementation services, which typically
do not involve significant customization to or development of the
underlying software code; the availability of services from other
vendors; whether the timing of payments for license revenues is
coincident with performance of
services; and whether milestones or acceptance criteria exist that
affect the realizability of the license fee. Substantially all of
our set-up fee arrangements are recognized as the services are
performed. Payments received in advance of services performed are
deferred and recognized when the related services are
performed.
We do not offer refunds and therefore have not recorded any sales
return allowance for any of the periods presented. Upon a periodic
review of outstanding accounts and notes receivable, amounts that
are deemed to be uncollectible are written off against the
allowance for doubtful accounts.
Deferred revenue consists substantially of amounts invoiced in
advance of revenue recognition for our products and services
described above. We recognize deferred revenue as revenue only when
the revenue recognition criteria are met.
SPENDSMART NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Cash and cash equivalents
The Company considers all investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents
primarily represent funds invested in money market funds, bank
certificates of deposit and U.S. government debt securities whose
cost equals fair market value.
From time to time, the Company has maintained bank balances in
excess of insurance limits. The Company has not experienced any
losses with respect to cash. Management believes the Company is not
exposed to any significant credit risk with respect to its cash and
cash equivalents.
Property and Equipment
Property and equipment had been recorded at cost and depreciated
using the straight-line method over the estimated useful lives of
the related assets (generally three to five years). Costs incurred
for maintenance and repairs are expensed as incurred and
expenditures for major replacements and improvements are
capitalized and depreciated over their estimated remaining useful
lives. Depreciation expense for the three and nine months ended
September 30, 2016 and 2015 was $0 and $0, and $628,999 and
$535,286, respectively. Property and equipment has been fully
depreciated as of September 30, 2016.
Software Capitalization
The Company accounts for computer software used in the business in
accordance with ASC 350 “Intangibles-Goodwill and
Other”. ASC 350 requires computer software costs associated
with internal use software to be charged to operations as incurred
until certain capitalization criteria are met. Costs incurred
during the preliminary project stage and the post-implementation
stages are expensed as incurred. Certain qualifying costs incurred
during the application development stage are capitalized as
property, equipment and software. These costs generally consist of
internal labor during configuration, coding, and testing
activities. Capitalization begins when (i) the preliminary project
stage is complete, (ii) management with the relevant authority
authorizes and commits to the funding of the software project, and
(iii) it is probable both that the project will be completed and
that the software will be used to perform the function
intended. We capitalized $291,957 and $732,533,
respectively, in software development related to programming and
coding for new product development for the nine months ended
September 30, 2016 and 2015. Software amortization
expense for the three and nine months ended September 30, 2016 and
2015 was $128,765 and $360,262, and $82,456 and $178,003,
respectively.
Valuation of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets
are less than the assets’ carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets
exceed the estimated fair value of the assets. There has not been
any impairment recorded during the period ended September 30,
2016.
Income Tax Expense Estimates and Policies
As part of the income tax provision process of preparing the
Company’s financial statements, the Company is required to
estimate the Company’s provision for income taxes. This
process involves estimating current tax liabilities together with
assessing temporary differences resulting from differing treatments
of items for tax and accounting purposes. These differences result
in deferred tax assets and liabilities. Management then assesses
the likelihood that the Company deferred tax assets will be
recovered from future taxable income and to the extent believed
that recovery is not likely, a valuation allowance is established.
Further, to the extent a valuation allowance is established and
changes occur to this allowance in a financial accounting period,
such changes are recognized in the Company’s tax provision in
the Company’s condensed consolidated statement of operations.
The Company’s use of judgment in making estimates to
determine the Company’s provision for income taxes, deferred
tax assets and liabilities and any valuation allowance is recorded
against our net deferred tax assets.
The Company recognizes the benefit of an uncertain tax position
taken or expected to be taken on the Company’s income tax
returns if it is “more likely than not” that such tax
position will be sustained based on its technical merits. The
Company does not have any unrecognized tax benefits or accrued
penalties and interest. If such matters were to arise, the Company
would recognize interest and penalties related to income tax
matters in income tax expense.
SPENDSMART
NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Stock-Based Compensation
The Company accounts for stock based compensation arrangements
through the measurement and recognition of compensation expense for
all stock based payment awards to employees and directors based on
estimated fair values. The Company uses the Black-Scholes option
valuation model to estimate the fair value of the Company’s
stock options and warrants at the date of grant. The Black-Scholes
option valuation model requires the input of subjective assumptions
to calculate the value of options and warrants. The Company uses
historical company data among other information to estimate the
expected price volatility and the expected forfeiture rate and not
comparable company information.
Net Income (Loss) per Share
The Company calculates basic earnings per share (“EPS”)
by dividing the Company’s net income(loss) and comprehensive
net income (loss) applicable to common shareholders by the weighted
average number of common shares outstanding for the period, without
considering common stock equivalents. Diluted EPS is computed by
dividing net income or net loss and comprehensive net loss
applicable to common shareholders by the weighted average number of
common shares outstanding for the period and the weighted average
number of dilutive common stock equivalents, such as options and
warrants. Options and warrants are only included in the calculation
of diluted EPS when their effect is dilutive.
For the three months ended September 30, 2016 diluted earnings per
common share are computed by the numerator effected by the gain on
the change in fair value of the warrant liability and the
denominator is increased to include the number of additional
potential common shares from the warrants underlying the warrant
liability.
Diluted earnings per common shares were calculated using the
following net income and weighted average shares outstanding for
the three months ended September 30, 2016.
|
Three Months Ended September 30, 2016
|
|
|
Net
income
|
$
176,882
|
Gain
on the change in fair value of the warrant liability
|
(389,658
)
|
Diluted
earnings
|
$
(212,776
)
|
Weighted
average number of common and common equivalent
shares
outstanding:
|
Basic
number of common shares outstanding
|
39,315,995
|
Dilutive
effect of warrants
|
12,138,166
|
Diluted
number of common and common stock equivalent shares
outstanding:
|
51,454,161
|
SPENDSMART
NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
For the nine months ended September 30, 2016 and the three and nine
months ended September 30, 2015, diluted net loss per common share
is equal to the basic net loss per common share since all
potentially dilutive securities are anti-dilutive.
Potential
common stock equivalents outstanding as of September 30, 2016 and
2015 consist of convertible notes, common stock options, investor
warrants, and compensation warrants:
|
|
|
|
|
Convertible
notes
|
8,719,640
|
1,512,500
|
Common
stock options
|
19,726,842
|
8,666,833
|
Investor
warrants
|
37,995,156
|
23,861,368
|
Compensation
warrants
|
1,981,667
|
1,895,000
|
Excluded
potentially dilutive securities
|
68,423,305
|
35,935,701
|
Derivatives - Warrant Liability
The Company accounts for the common stock warrants granted and
still outstanding as of September 30, 2016 in connection with
certain financing transactions (“Transactions”) in
accordance with the guidance contained in ASC 815-40-15-7D,
"Contracts in Entity's Own Equity" whereby under that provision
they do not meet the criteria for equity treatment and must be
recorded as a liability. Accordingly, the Company classifies the
warrant instrument as a liability at its fair value and adjusts the
instrument to fair value at each reporting period. This liability
is subject to re-measurement at each balance sheet date until
exercised, and any change in fair value is recognized in the
Company's statements of operations. The fair value of the warrants
issued by the Company in connection with the Transactions has been
estimated using a Monte Carlo simulation.
The Company accounted for certain of its outstanding warrants
issued in fiscal 2010, 2012 and 2013 (“2010 Warrants,”
“2012 Warrants” and “2013 Warrants, respectively)
as derivative liabilities. The 2010 Warrants were determined to be
ineligible for equity classification due to provisions of the
respective instruments that may result in an adjustment to their
conversion or exercise prices. The Company recognized gains of $0
and $47,209 in the fair value of derivatives for the nine months
ended September 30, 2016 and 2015, respectively. The Company
recognized a gain of $0 and $19,221 in the fair value of
derivatives for the three months ended September 30, 2016 and 2015,
respectively. These derivative liabilities which arose from the
issuance of the 2010 Warrants resulted in an ending balance of
derivative liabilities of $0 as of September 30, 2016 and December
31, 2015, respectively. These warrants expired in November
2015.
SPENDSMART NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The Company accounts for certain of its outstanding warrants issued
in fiscal 2016 (“2016 Warrants”) as derivative
liabilities. The 2016 Warrants were determined to be ineligible for
equity classification due to provisions of the respective
instruments that may result in an adjustment to their conversion or
exercise prices. The Company recognized gains of $1,756,087 and $0
in the fair value of derivatives for the nine months ended
September 30, 2016 and 2015, respectively. The Company recognized
gains of $781,085 and $0 in the fair value of derivatives for the
three months ended September 30, 2016 and 2015, respectively. These
derivative liabilities which arose from the issuance of the 2016
Warrants resulted in an ending balance of derivative liabilities of
$2,343,255 and $0 as of September 30, 2016 and December 31, 2015,
respectively.
Debt discount and issuance costs
Debt issuance costs, including the value of warrants issued in
connection with debt financing and fees or costs paid to lender,
are presented in the consolidated balance sheets as a direct
deduction from the carrying amount of that debt.
The Company amortizes the discount to interest expense over the
term of the respective debt using the effective interest
method.
Derivatives – Bifurcated Conversion Option in Convertible
Notes
The
Company does not use derivative financial instruments to hedge
exposures to cash-flow, market or foreign-currency risks. However,
the Company has issued Convertible Notes with features that are
either (i) not afforded equity classification, (ii) embody risks
not clearly and closely related to host contracts, or (iii) may be
net-cash settled by the counterparty. As required by ASC 815,
Accounting for Derivative
Financial Instruments and Hedging Activities
, in certain
instances, these instruments are required to be carried as
derivative liabilities, at fair value, in our financial
statements.
The
Convertible Notes issued during the year ended December 31, 2015
are subject to anti-dilution adjustments that allow for the
reduction in the Conversion Price, as defined in the agreement, in
the event the Company subsequently issues equity securities
including Common Stock or any security convertible or exchangeable
for shares of Common Stock for a price less than the current
conversion price. The Company bifurcated and accounted for the
conversion option in accordance with ASC 815 as a derivative
liability, since this conversion feature is not considered to be
indexed to the Company’s own stock.
The
Company’s derivative liability has been measured at fair
value at September 30, 2016 using a Monte-Carlo Simulation. Inputs
into the model require estimates, including such items as estimated
volatility of the Company’s stock, estimated probabilities of
additional financing, risk-free interest rate, and the estimated
life of the financial instruments being fair valued. In addition,
since the conversion price contains an anti-dilution adjustment,
the probability that the Conversion Price of the Notes would
decrease as the share price decreased was also incorporated into
the valuation calculation.
The
Company modified two existing Notes during the first quarter 2016
and three existing Notes during the second quarter, 2016. According
to FASB ASC 470-50, the modification is accounted for as a debt
extinguishment, whereby the new debt instrument is initially
recorded at fair value, and that amount is used to determine the
debt extinguishment gain or loss to be recognized and the effective
rate of the new instrument. We recognized a loss on the
extinguishment of debt of $415,689, of which $106,766 was related
to the r
epricing of warrants for the
nine months ended September 30, 2016.
The
Company recognized a gain of $239,582 and $186,026 in the fair
value of derivatives for the nine months ended September 30, 2016
and 2015, respectively. These derivative liabilities which arose
from the issuance of the convertible notes resulted in an ending
balance of derivative liabilities of $2,711 and $179 as of
September 30, 2016 and December 31, 2015, respectively. Subsequent
changes to the fair value of the derivative liabilities will
continue to require adjustments to their carrying value that will
be recorded as other income (in the event that their value
decreases) or as other expense (in the event that their value
increases). The fair value of these liabilities is estimated using
Monte Carlo pricing models that are based on the individual
characteristics of the Company’s warrants, preferred and
common stock, as well as assumptions for volatility, remaining
expected life, risk-free interest rate and, in some cases, credit
spread.
SPENDSMART NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Fair value of assets and liabilities
Fair value is defined as the price that would be received from
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
When determining the fair value for applicable assets and
liabilities, we consider the principal or most advantageous market
in which we would transact and we consider assumptions market
participants would use when pricing the asset or liability, such as
inherent risk, transfer restrictions, and risk of nonperformance.
This guidance also establishes a fair value hierarchy to prioritize
inputs used in measuring fair value as follows:
●
Level 1: Observable inputs such as quoted prices in active
markets;
●
Level 2: Inputs, other than quoted prices in active markets, that
are observable either directly or indirectly; and
●
Level 3: Unobservable inputs in which there is little or no market
data, which require the reporting entity to develop its own
assumptions.
The Company’s financial instruments are cash and cash
equivalents, accounts receivable, notes receivable, notes payable,
accounts payable and derivative liabilities. The recorded values of
cash equivalents, accounts receivable, notes receivable and
accounts payable approximate their fair values based on their
short-term nature. The fair value of derivative liabilities is
estimated using option pricing models that are based on the
individual characteristics of our warrants, preferred and common
stock, the derivative liability on the valuation date as well as
assumptions for volatility, remaining expected life, risk-free
interest rate and, in some cases, credit spread. The derivative
liabilities and earn-out liabilities are the only Level 3 fair
value measures.
A summary of quantitative information with respect to valuation
methodology and significant unobservable inputs used for the
Company’s warrant liabilities that are categorized within
Level 3 of the fair value hierarchy as of September 30, 2016 and
December 31, 2015 is as follows:
A summary of quantitative information with respect to valuation
methodology and significant unobservable inputs used for the
Company’s conversion options that are categorized within
Level 3 of the fair value hierarchy as of September 30, 2016 is as
follows:
Date
of Valuation
|
|
Stock
Price
|
$
0.06
|
Volatility
(Annual)
|
112.2
%
|
Strike
Price
|
$
0.15
- $0.75
|
Risk-free
Rate
|
0.86 - 0.85
%
|
Maturity
Date
|
10/2/16
- 6/26/19
|
At September 30, 2016 and December 31, 2015, the estimated Level 3
fair values of the liabilities measured on a recurring basis are as
follows:
|
|
Fair Value
Measurements at September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability-warrants liability
|
$
2,343,255
|
-
|
-
|
$
2,343,255
|
Derivative
liability – convertible options
|
$
2,711
|
-
|
-
|
$
2,711
|
Total
securities
|
$
2,345,966
|
$
-
|
$
-
|
$
2,345,966
|
|
|
|
|
|
|
|
Fair Value
Measurements at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Earn-out
liability
|
$
-
|
$
-
|
$
-
|
$
-
|
Derivative
liability – convertible options
|
$
179
|
$
-
|
$
-
|
$
179
|
Total
securities
|
$
179
|
$
-
|
$
-
|
$
179
|
SPENDSMART
NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The following tables present the activity for Level 3 liabilities
for the nine months ended September 30, 2016:
Fair Value Measurements Using Level 3 Inputs
|
Warrant
Derivative
Liability
|
|
|
|
Balance
- December 31, 2015
|
$
-
|
179
|
-
|
$
179
|
Additions
during the period
|
4,099,342
|
242,114
|
-
|
4,341,456
|
Total
Unrealized (gains) or losses include in net loss
|
(1,756,087
)
|
(239,582
)
|
-
|
(1,995,669
)
|
Settlements
during the period
|
-
|
-
|
-
|
-
|
Transfers
in and/or out of Level 3
|
-
|
-
|
-
|
-
|
Balance
- September 30, 2016
|
$
2,343,255
|
2,711
|
-
|
$
2,345,966
|
Advertising
The Company expenses advertising costs as incurred. The Company has
no existing arrangements under which the Company provides or
receives advertising services from others for any consideration
other than cash. Advertising expenses (primarily in the form of
Internet direct marketing) totaled $49,537 and $102,949 for the
three months ended September 30, 2016 and 2015, respectively.
Advertising expenses (primarily in the form of Internet direct
marketing) totaled $125,607 and $255,517 for the nine months ended
September 30, 2016 and 2015, respectively.
Litigation
From time to time, the Company may become involved in litigation
and other legal actions. The Company estimates the range of
liability related to any pending litigation where the amount and
range of loss can be estimated. The Company records its best
estimate of a loss when the loss is considered probable. Where a
liability is probable and there is a range of estimated losses with
no best estimate in the range, the Company records a charge equal
to at least the minimum estimated liability for a loss contingency
when both of the following conditions are met: (i) information
available prior to issuance of the financial statements indicates
that it is probable that an asset had been impaired or a liability
had been incurred at the date of the financial statements and (ii)
the range of loss can be reasonably estimated.
Intangible assets
Intangible assets consist of intellectual property/technology,
customer lists, and trade-name/marks acquired in business
combinations under the purchase method of accounting are recorded
at fair value net of accumulated amortization since the acquisition
date. Amortization is calculated using the straight line method
over the estimated useful lives at the following annual
rates:
|
|
IP/technology
|
10
|
Trade-name/marks
|
10
|
The Company reviews its finite-lived intangible assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of finite-lived intangible asset may not
be recoverable. Recoverability of a finite-lived intangible asset
is measured by a comparison of its carrying amount to the
undiscounted future cash flows expected to be generated by the
asset. If the asset is considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset, which is
determined based on discounted cash flows. Amortization of
intangible assets was $144,855 and $253,219 for the nine months
ended September 30, 2016 and 2015, respectively, and $48,285 and
$84,660 for the three months ended September 30, 2016 and 2015,
respectively.
According to the Financial Accounting Standards Board Accounting
Standards Codification (“ASC”) 360 (“ASC
360”), a long-lived asset (group) that is held and used
should be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount (book value) of the
long-lived asset (group) might not be recoverable (i.e. information
indicates that an impairment might exist). As a result, companies
are not required to perform an impairment analysis (i.e. test the
asset (group) for recoverability and potentially measure an
impairment loss) if indicators of impairment are not present.
Instead, entities would assess the need the need for an impairment
write-down only if an indicator of impairment is present. Companies
are responsible for routinely assessing whether impairment
indicators are present.
SPENDSMART
NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases which amended
guidance for lease arrangements in order to increase transparency
and comparability by providing additional information to users of
financial statements regarding an entity's leasing activities. The
revised guidance seeks to achieve this objective by requiring
reporting entities to recognize lease assets and lease liabilities
on the balance sheet for substantially all lease arrangements. The
guidance, which is required to be adopted in the first quarter of
2019, will be applied on a modified retrospective basis beginning
with the earliest period presented. Early adoption is permitted. We
are currently evaluating the impact of adopting this guidance on
our consolidated financial statements.
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers as amended (Topic 606), with an effective
date for annual reporting periods beginning after December 15,
2017, including interim periods within that reporting period, for
public business entities. Earlier application is permitted only as
of annual reporting periods beginning after December 15, 2016,
including interim reporting periods within that reporting period.
The Company is evaluating the impact, if any, the pronouncement
will have on our financial statements.
In
August 2014, the FASB issued ASU
No. 2014-15,
Presentation
of Financial Statements—Going Concern
(“ASU
2014-15”)
,
which
states management should evaluate whether there are conditions or
events, considered in the aggregate, that raise a substantial doubt
about the entity’s ability to continue as a going concern
within one year after the date that the financial statements are
issued. Management’s evaluation should be based on
relevant conditions and events that are known and likely to occur
at the date that the financial statements are issued. ASU
2014-15 will be effective for the annual period ending after
December 15, 2016, and for annual periods and interim periods
thereafter, however, early application is
permitted. Management does not expect the adoption of ASU
2014-15 to have a material impact on the Company’s
consolidated financial statements, although there may be additional
disclosures upon adoption.
On
March 30, 2016, the FASB issued ASU
2016-09,
Compensation—Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment
Accounting
(“ASU 2016-09”)
.
ASU 2016-09 simplifies several
aspects of the accounting for employee share-based payment
transactions including the accounting for income taxes,
forfeitures, and statutory tax withholding requirements, as well as
classification in the statement of cash flows. ASU 2016-09 will
take effect for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2017, with early
application permitted. Management does not expect the adoption of
ASU 2016-09 to have a material impact on the Company’s
consolidated financial statements, although there may be additional
disclosures upon adoption.
Segments
The Company operates in one reportable segment. Accordingly, no
segment disclosures have been presented herein.
5. Accounts Receivable, Short-Term and Long-Term Notes
Receivable
Management reviews accounts receivable, short-term and long-term
notes receivable on a monthly basis to determine if any receivables
are potentially uncollectible. An allowance for doubtful accounts
is determined based on a combination of historical experience,
length of time outstanding, customer credit worthiness, and current
economic trends. We recorded a bad debt expense of $163,323 during
the nine months ended September 30, 2016 and wrote off
uncollectable accounts during the nine months ended September 30,
2016 in the amount of $119,006. As of September 30, 2016, the
Company had recorded an allowance for doubtful accounts of
$1,435,000.
Notes receivable aged over 30 days past due are considered
delinquent and notes receivable aged over 60 days past due with
known collection issues are placed on non-accrual status. Interest
revenue is not recognized on notes receivable while on non-accrual
status. Cash payments received on non-accrual receivables are
applied towards the principal. When notes receivable on non-accrual
status are again less than 60 days past due, recognition of
interest revenue for notes receivable is resumed. The
Company charges interest rates on notes receivable averaging
14%. The Company recorded $33,461 in interest income for
the nine months ended September 30, 2016.
SPENDSMART
NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The allowance for doubtful accounts on long-term receivables is the
Company's best estimate of the amount of probable credit losses
related to the Company's existing note receivables. The
allowance for doubtful accounts is the Company's best estimate of
probable credit losses related to trade receivables and notes
receivable based upon the aging of the receivables, historical
collection data, internal assessments of credit quality and the
economic conditions in the business subprime industry, as well as
in the economy as a whole. The Company charges off uncollectable
amounts against the reserve in the period in which it determines
they are uncollectable. Unearned income on notes receivable is
amortized using the effective interest method. The
Company determines the allowance for doubtful accounts related to
notes receivable based upon a reserve for known collection issues,
as well as a reserve based upon aging, both of which are based upon
history of such losses and current economic conditions. Based upon
the Company's methodology, the notes receivable balances with
reserves and the reserves associated with those balances are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
Notes Receivable
|
787,417
|
467,696
|
682,000
|
348,000
|
105,417
|
119,696
|
Accounts
Receivable
|
1,037,176
|
-
|
405,000
|
-
|
632,176
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
Notes Receivable
|
908,590
|
661,371
|
632,422
|
461,702
|
276,168
|
199,669
|
Accounts
Receivable
|
437,589
|
-
|
295,759
|
-
|
141,830
|
-
|
The roll forward of the allowance for doubtful accounts related to
notes receivable and accounts receivable is as
follows:
|
|
|
|
|
|
|
Balance
at December 31, 2015
|
$
632,422
|
$
461,702
|
$
295,759
|
Incremental
Provision
|
92,178
|
(90,389
)
|
161,534
|
Recoveries
|
-
|
-
|
800
|
Charge
offs
|
(42,600
)
|
(23,313
)
|
(53,093
)
|
Balance
at September 30, 2016
|
$
682,000
|
$
348,000
|
$
405,000
|
The allowance for doubtful accounts as a percentage of total
receivables was approximately 63% as of September 30, 2016 and
approximately 69% as of December 31, 2015.
The Company received a Secured Convertible Promissory Note (the
“Note”) for a principal amount of $410,000 from a third
party in September 2014. The Note bears interest at the rate of
5.25% per annum and matured in four months. For the nine months
ended September 30, 2015, the Company had recorded $12,846 of
interest income from this Note. $121,000 of the
principal amount was paid during the nine months ended 2015. The
remaining Note balance of $322,513 was written off as of the year
ended December 31, 2015.
6. Common Stock and Warrants
Common stock
During the nine months ended September 30, 2016, the company issued
17,895,859 shares of common stock related to the tender offer. The
Company issued 700,000 shares of common stock related to services
rendered and recognized expense of $78,000 and issued 161,266
shares of common stock related to interest due and recognized
expense of $13,500. 10,000 shares of Series C Stock converted to
60,000 shares of common shares during the nine months ended
September 30, 2016.
During the nine months ended September 30, 2015, the company
didn’t issue any common stock for services. 41,500 shares of
Series C Stock converted to 166,000 common shares during the nine
months ended September 30, 2015.
SPENDSMART
NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Tender Offer and Debt Conversion
Between December 11, 2015 and February 3, 2016, the Company entered
into agreements with investors, pursuant to which on February 3,
2016, warrant holders exercised 12,270,846 Warrants to purchase an
aggregate of 12,270,846 shares of our common stock for gross
proceeds of $1.84 million. The Company issued new warrants to
purchase an aggregate of 26,479,217 shares of common stock at an
exercise price of $0.15 per share, in consideration for the
immediate exercise of the warrants. In August, 2016, the exercise
price on 13,209,609 of these warrants was reduced to $0.01, as the
Company had not met its six month targets related to these
warrants. The following paragraph discusses the accounting
treatment related to this reduction.
The Warrants have a cash settlement feature; as a result, they were
classified as a derivative liability and recorded at fair value.
Fair value of the Warrants, in the total amount of $3,918,924 was
calculated using the Monte-Carlo model, using the following
assumptions: 68.7% expected volatility, a risk-free interest rate
of 0.91%, estimated life of 3 years and no dividend yield. The fair
value of the common stock was $0.148. The transaction was accounted
for as an inducement. ASC 470-20-40 addresses the accounting
for altered conversion privileges, including the issuance of
warrants or other securities (not provided for in the original
conversion terms) to induce conversion. As a result of this
transaction, the Company recognized an inducement expense of
$3,560,958 equal to the fair value of all securities and other
consideration transferred in the transaction in excess of the fair
value of securities issuable pursuant to the original conversion
terms, as of the date of the conversion.
In connection with the tender offer, investors converted $843,751
in Convertible Notes at a conversion price of $0.15 per share into
5,625,013 shares of our common stock during the first quarter,
2016.
7. Convertible Promissory Notes
On July
19, 2016, the Company issued the following Convertible Promissory
Notes: Joe Proto ($40,000), John Eyler ($40,000), Francis J. Liddy
($20,000), Isaac Blech ($40,000), and Transpac Investments Ltd.
($40,000). All of the individuals listed are members of the board
of directors. The Convertible Promissory Notes bear interest at the
rate of 9%, have a six month maturity date, and a mandatory
conversion into an upcoming financing in the event the Company
closes the financing and receives gross proceeds totaling at least
$200,000. The conversion rate will be at the same terms of the
financing. We recorded $1,598 in interest expense for the three and
nine months ended September 30, 2016.
On March 30 and 31, 2015, the Company closed on a private
offering and issued and sold 11.25 units (the “Units”)
to investors with each such Unit consisting of a 9% Convertible
Promissory Note with the principal face value of $50,000 (the
“Notes”) and a warrant to purchase 66,667 shares of the
Company’s common stock (the “Warrant”). The
Company also agreed to provide piggy-back registration rights to
the holders of the Units. The Notes have a term of twelve (12)
months, pay interest semi-annually at 9% per annum and can be
voluntarily converted by the holder into shares of common stock at
an exercise price of $0.75 per share, subject to adjustments for
stock dividends, splits, combinations and similar events as
described in the Notes. In addition, if the Company issues or sells
common stock at a price below the conversion price then in effect,
the conversion price of the Notes shall be adjusted downward to
such price but in no event shall the conversion price be reduced to
a price less than $0.50 per share. The Warrants have an exercise
price of $1.00 per share and have a term of four years. The holders
of the Warrants may exercise the Warrants on a cashless basis for
as long as the shares of common stock underlying the Warrants are
not registered on an effective registration statement. The
Company raised gross proceeds of $562,500 and issued warrants to
acquire 750,004 shares of common stock. The relative fair value
ascribed to the 750,004 warrants issued was $171,875 and was
recorded to additional paid-in capital.
The embedded conversion feature was bifurcated and accounted for as
a derivative liability at $164,300 on the day of issuance. The
remaining proceeds were allocated based on the relative fair value
of the debt and the warrant, and accordingly, $336,175 of debt
discount was recorded at issuance and was amortized over the term
of the debt using the effective interest method. The amount of debt
discount amortized for the nine months ended September 30, 2016 was
$119,479.
On March 29, 2016, the Company amended the March 30, 2015 9%
Convertible Promissory Note with a principal amount of $300,000 as
follows: the maturity date was extended to September 29, 2016, the
conversion price was lowered to $0.15 per share, the provision
limiting the conversion price adjustment to that of the Series C
Preferred Stock was removed, and an option to be repaid prior to
the maturity date in the event the Company raises capital in excess
of three million dollars was added. The Company also amended the
warrant issued in conjunction with the Convertible Promissory Note
reducing the exercise price to $0.15 and issued a new warrant to
purchase 400,002 shares of the Company's common stock with a $0.15
exercise price and a three year expiration.
According to
FASB ASC 470-50, the modification is accounted for as a debt
extinguishment, whereby the new debt instrument is initially
recorded at fair value, and that amount is used to determine the
debt extinguishment gain or loss to be recognized and the effective
rate of the new instrument. We recognized a loss on the
extinguishment of debt of $147,566 for the nine months ended
September 30, 2016.
SPENDSMART
NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
On March 30, 2016, the Company amended the March 30, 2015 9%
Convertible Promissory Note with a principal amount of $262,500 as
follows: the maturity date was extended to September 30, 2016, the
conversion price was lowered to $0.15 per share, the provision
limiting the conversion price adjustment to that of the Series C
Preferred Stock was removed, and an option to be repaid prior to
the maturity date in the event the Company raises capital in excess
of three million dollars was added. The Company also amended the
warrant issued in conjunction with the Convertible Promissory Note
reducing the exercise price to $0.15 and issued a new warrant to
purchase 350,002 shares of the Company's common stock with a $0.15
exercise price and a three year expiration.
According to
FASB ASC 470-50, the modification is accounted for as a debt
extinguishment, whereby the new debt instrument is initially
recorded at fair value, and that amount is used to determine the
debt extinguishment gain or loss to be recognized and the effective
rate of the new instrument. We recognized a loss on the
extinguishment of debt of $141,052 for the nine months ended
September 30, 2016.
During the second quarter 2015, the Company closed on private
offerings and issued and sold 11.00 units (the “Units”)
to investors with each such Unit consisting of a 9% Convertible
Promissory Note with the principal face value of $50,000 (the
“Notes”) and a warrant to purchase 66,667 shares of the
Company’s common stock (the “Warrant”). The
Company also agreed to provide piggy-back registration rights to
the holders of the Units. The Notes have a term of twelve (12)
months, pay interest semi-annually at 9% per annum and can be
voluntarily converted by the holder into shares of common stock at
an exercise price of $0.75 per share, subject to adjustments for
stock dividends, splits, combinations and similar events as
described in the Notes. In addition, if the Company issues or sells
common stock at a price below the conversion price then in effect,
the conversion price of the Notes shall be adjusted downward to
such price but in no event shall the conversion price be reduced to
a price less than $0.50 per share. The Warrants have an exercise
price of $1.00 per share and have a term of four years. The holders
of the Warrants may exercise the Warrants on a cashless basis for
as long as the shares of common stock underlying the Warrants are
not registered on an effective registration statement. The Company
raised gross proceeds of $550,000 and issued warrants to acquire
733,336 shares of common stock. The relative fair value ascribed to
the 750,004 warrants issued was $171,875 and was recorded to
additional paid-in capital.
The embedded conversion feature was bifurcated and accounted for as
a derivative liability at $228,700 on the day of issuance. The
remaining proceeds were allocated based on the relative fair value
of the debt and the warrant, and accordingly, $394,345 of debt
discount was recorded at issuance and is being amortized over the
term of the debt using the effective interest method. The amount of
debt discount amortized for the nine months ended September 30,
2016 was $164,290.
During the second quarter 2016, the Company amended three of the
outstanding 9% Convertible Promissory Notes with principal amounts
of $275,000, $75,000 and $150,000 as follows: the maturity dates
were extended to November 5, 2016, September 2, 2016, and September
26, 2016, respectively; the conversion price was lowered to $0.15
per share, the provision limiting the conversion price adjustment
to that of the Series C Preferred Stock was removed, and an option
to be repaid prior to the maturity date in the event the Company
raises capital in excess of three million dollars was added. The
Company also amended the warrant issued in conjunction with the
Convertible Promissory Note reducing the exercise price to $0.15
and issued new warrants to purchase 666,669 shares of the Company's
common stock with a $0.15 exercise price and a three year
expiration.
According to FASB ASC 470-50, the modification
is accounted for as a debt extinguishment, whereby the new debt
instrument is initially recorded at fair value, and that amount is
used to determine the debt extinguishment gain or loss to be
recognized and the effective rate of the new instrument. We
recognized a loss on the extinguishment of debt of $127,071 for the
second quarter 2016.
On July 15, 2015, the Company issued a Convertible Promissory Note
in the principal amount of $400,000 inclusive of interest. The Note
was for a term of six months. The Note bears interest at twelve
percent per annum. The Note is secured by the assets of the
Company. The Note may be converted into shares of the
Company’s common stock at $0.75 per share. The Company also
issued the holder warrants to purchase 500,000 shares of the
Company’s common stock. The proceeds were allocated based on
the relative fair value of the debt and the warrant. The warrants
have an exercise price of $0.75 per share and have a term of two
years. The relative fair value ascribed to the 500,000 warrants
issued was approximately $49,000 and was recorded to additional
paid-in capital. This amount which was recorded as a debt discount
was amortized over the term of the debt using the effective
interest method. As part of the closing of the Tender Offer,
$200,000 of these notes converted into 1,333,334 shares of common
stock and the investor received common stock and 1,333,333 warrants
with a three year term at an exercise price of $0.15. The remaining
$200,000 of notes was paid in February 2016.
On October 5, 2015, the Company issued a Convertible Promissory
Note to an investor in the principal amount of $150,000. The Note
features a mandatory conversion feature obligating the holder to
participate and apply the principal and interest into a
“Qualified Financing” meaning a financing taking place
prior to January 31, 2016, wherein the Company receives gross
proceeds totaling at least $1,000,000. In the event the entire
principal plus accrued interest under this Note is not eligible for
conversion into a Qualified Financing, then any remaining balance
of this Note shall be converted into restricted common stock at the
price of the Qualified Financing and Holder shall receive three (3)
times any warrant coverage provided for in the Qualified Financing.
The Note bears interest at nine percent per annum and has a
maturity date of six months. The embedded conversion feature of the
note was bifurcated and accounted for as a derivative liability at
approximately $17,127 on the day of issuance. As part of the
closing of the Tender Offer, these notes converted into 1,029,918
shares of common stock and the investor received 3,089,754 warrants
with a three year term at an exercise price of $0.15.
SPENDSMART
NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
On November 12, 2015, the Company issued a Convertible Promissory
Note to an investor in the principal amount of $150,000. The Note
features a mandatory conversion feature obligating the holder to
participate and apply the principal and interest into a
“Qualified Financing” meaning a financing taking place
prior to January 31, 2016, wherein the Company receives gross
proceeds totaling at least $1,000,000. In the event the entire
principal plus accrued interest under this Note is not eligible for
conversion into a Qualified Financing, then any remaining balance
of this Note shall be converted into restricted common stock at the
price of the Qualified Financing and Holder shall receive three (3)
times any warrant coverage provided for in the Qualified Financing.
The Note bears interest at nine percent per annum and has a
maturity date of six months. The embedded conversion feature of the
note was bifurcated and accounted for as a derivative liability at
approximately $50 on the day of issuance. As part of the closing of
the Tender Offer, these notes converted into 1,000,987 shares of
common stock and the investor received 3,002,961 warrants with a
three year term at an exercise price of $0.15.
On November 13, 2015, the Company issued Convertible Promissory
Notes to five investors in the principal amount of $287,333. The
Notes feature a mandatory conversion feature obligating the holder
to participate and apply the principal and interest into a
“Qualified Financing” meaning a financing taking place
prior to January 31, 2016, wherein the Company receives gross
proceeds totaling at least $1,000,000. In the event the entire
principal plus accrued interest under this Note is not eligible for
conversion into a Qualified Financing, then any remaining balance
of this Note shall be converted into restricted common stock at the
price of the Qualified Financing and Holder shall receive three (3)
times any warrant coverage provided for in the Qualified Financing.
The Notes bears interest at nine percent per annum and has a
maturity date of six months. The embedded conversion feature of the
notes was bifurcated and accounted for as a derivative liability at
approximately $172 on the day of issuance. As part of the closing
of the Tender Offer, these notes converted into 1,937,105 shares of
common stock and the investors received 5,811,315 warrants with a
three year term at an exercise price of $0.15.
On November 16, 2015, the Company issued a Convertible Promissory
Note to an investor in the principal amount of $48,000. The Note
features a mandatory conversion feature obligating the holder to
participate and apply the principal and interest into a
“Qualified Financing” meaning a financing taking place
prior to January 31, 2016, wherein the Company receives gross
proceeds totaling at least $1,000,000. In the event the entire
principal plus accrued interest under this Note is not eligible for
conversion into a Qualified Financing, then any remaining balance
of this Note shall be converted into restricted common stock at the
price of the Qualified Financing and Holder shall receive three (3)
times any warrant coverage provided for in the Qualified Financing.
The Note bears interest at nine percent per annum and has a
maturity date of six months. The embedded conversion feature of the
note was bifurcated and accounted for as a derivative liability at
approximately $30 on the day of issuance. As part of the closing of
the Tender Offer, these notes converted into 323,669 shares of
common stock and the investor received 971,007 warrants with a
three year exercise term at an exercise price of
$0.15.
8. Convertible Preferred Stock
Series A Preferred Stock
At September 30, 2016 and December 31, 2015, the Company had 0
shares of Series A Cumulative Convertible Preferred Stock (the
“Series A Stock”) outstanding.
Series B Preferred Stock
At September 30, 2016 and December 31, 2015, the Company had 0
shares of Series B convertible preferred stock (“Series B
Stock”) outstanding.
Series C Convertible Preferred Stock
At September 30, 2016 and December 31, 2015, the Company had
3,690,729 and 3,700,729 shares, respectively, of Series C
convertible preferred stock (“Series C Stock”)
outstanding that were issued to investors for $3.00 per
share. 10,000 shares of Series C Stock converted to
60,000 shares common stock during the nine months ended September
30, 2016.
SPENDSMART
NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
9. Net Income (Loss) per Share Applicable to Common
Stockholders
Options, warrants, and convertible debt outstanding were all
considered anti-dilutive for the nine months ended September 30,
2016 and 2015 due to net losses.
The following securities were not included in the diluted net
income (loss) per share calculation because their effect was
anti-dilutive as of the periods presented:
|
For the nine months ended
September 30,
|
|
|
|
Convertible
notes
|
8,719,640
|
1,512,500
|
Common
stock options
|
19,726,842
|
8,666,833
|
Investor
warrants
|
37,995,156
|
23,861,368
|
Compensation
warrants
|
1,981,667
|
1,895,000
|
Excluded
potentially dilutive securities
|
68,423,305
|
35,935,701
|
10. Stockholders’ Equity
Stock Options and Warrants
Warrant activity (including warrants issued to investors and for
consulting and advisory services) for the nine months ended
September 30, 2016 and 2015 was as follows:
|
For the nine months ended
|
|
|
|
|
|
Beginning
balance outstanding
|
26,397,410
|
23,933,922
|
|
|
|
Expired
during the year
|
(2,045,624
)
|
(160,894
)
|
Exercised during
the year
|
(12,270,853
)
|
-
|
Issued in
connection with issuance of convertible notes
|
1,416,673
|
1,983,340
|
Issued
in connection with tender offer exercise
|
26,479,217
|
-
|
Ending
balance outstanding
|
39,976,823
|
25,756,368
|
SPENDSMART
NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Effective July 22, 2016, the Company cancelled the following stock
and stock options granted to its board of directors on March 21,
2016: (a) Joseph Proto, 350,000 restricted shares of common stock;
(b) John Eyler, options to purchase 464,331 shares of common stock;
(c) Pat Kolenik 350,000 restricted shares of common stock; (d)
Chris Leong, options to purchase 464,331 shares of common stock,
and (e) Isaac Blech, options to purchase 663,330 shares of common
stock.
The numbers and exercise prices of all options and warrants
outstanding at September 30, 2016 are as follows:
|
Weighted Average Exercise Price
|
Expiration
Fiscal Period
|
158,476
|
8.37
|
4th
Qtr, 2016
|
34,749
|
7.99
|
1st
Qtr, 2017
|
1,349,183
|
6.90
|
2nd
Qtr, 2017
|
536,500
|
1.14
|
3rd
Qtr, 2017
|
1,162,088
|
6.45
|
4th
Qtr, 2017
|
10,000
|
6.60
|
1st
Qtr, 2018
|
750,000
|
0.25
|
4th
Qtr, 2018
|
37,548,317
|
0.37
|
1st
Qtr, 2019
|
1,850,007
|
0.44
|
2nd
Qtr, 2019
|
1,324,002
|
0.93
|
3rd
Qtr, 2019
|
2,603,000
|
1.15
|
4th
Qtr, 2019
|
486,250
|
0.92
|
1st
Qtr, 2020
|
1,704,446
|
0.19
|
4th
Qtr, 2020
|
4,785,376
|
0.12
|
1st
Qtr, 2021
|
2,592,997
|
0.09
|
2nd
Qtr, 2021
|
2,674,940
|
0.06
|
3rd
Qtr, 2021
|
133,334
|
7.05
|
|
59,703,665
|
|
|
Stock-based Compensation
Results of operations for the three months ended September 30, 2016
and 2015 include stock based compensation costs totaling $192,842
and $199,207, respectively, all of which was charged to personnel
related expenses.
Results of operations for the nine months ended September 30, 2016
and 2015 include stock based compensation costs totaling $884,449
and $1,053,508, respectively, all of which was charged to personnel
related expenses.
For purposes of accounting for stock based compensation, the fair
value of each option and warrant award is estimated on the date of
grant using the Black-Scholes-Merton option pricing formula.
Compensation expense is recognized over the service period. The
following weighted average assumptions were utilized for the
calculations during the nine months ended September 30, 2016 and
2015:
|
For the nine months ended
|
|
|
|
|
|
Expected
life (in years)
|
|
|
Weighted
average volatility
|
146.05
%
|
108.92
%
|
Forfeiture
rate
|
19.51
%
|
14.21
%
|
Risk-free
interest rate
|
.88
%
|
.97
%
|
Expected
dividend rate
|
0.00
%
|
0.00
%
|
SPENDSMART
NETWORKS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The weighted average expected option and warrant term for employee
stock options granted reflects the application of the simplified
method set out in SEC Staff Accounting Bulletin No. 107,
Share-Based
Payment
(SAB 107). The
simplified method defines the life as the average of the
contractual term of the options and the weighted average vesting
period for all options. The Company utilized this approach as its
historical share option exercise experience does not provide a
reasonable basis upon which to estimate an expected term. Expected
volatilities are based on the historical volatility of the
Company’s stock. The Company estimated the forfeiture rate
based on our expectation for future forfeitures and (for the
purpose of computing stock based compensation given the contractual
vesting of the Company’s options and warrants outstanding)
the Company assumes that all options and warrants will vest. The
risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield in effect at or near the
time of grant. The Company has never declared or paid dividends and
has no plans to do so in the foreseeable
future.
As of September 30, 2016, $497,800 of total unrecognized
compensation cost related to unvested stock based compensation
arrangements is expected to be recognized over a weighted-average
period of 16.7 months.
On August 26, 2015, the Company entered into a Business Promissory
Note and Security Agreement with Bank of Lake Mills for the
principal sum of $200,000 and a daily interest rate of .22%. The
total repayment amount including interest and principal was
$244,637 to be paid pro-rata weekly ending February 22, 2016. For
the three and nine months ended September 30, 2016, we recorded
interest expense related to the note of $0 and $4,947,
respectively. As of February 25, 2016, the note has been fully
repaid.
12. Due to Related Party
On August 14, 2015 and September 28, 2015, the Company entered into
Loan Agreements with Alex Minicucci for the principal sum of
$65,000 and $35,000, respectively. The Loans include an interest
rate of 7%. The $35,000 Loan was repaid in February 2016. For the
three and nine months ended September 30, 2016, we recorded
interest expense related to the loans of $1,138 and $3,413,
respectively.
13. Subsequent Events
On
November 10, 2016, the Company amended one of the outstanding 9%
Convertible Promissory Notes with a principal amount of $150,000 as
follows: the maturity date was extended to May 5, 2017; the
interest rate for the extension period was increased to 15%; the
conversion price was changed to the per share price at the time of
the next financing of $2,000,000 or greater.
On November 8, 2016, the Company amended one of the outstanding 9%
Convertible Promissory Notes with a principal amount of $275,000 as
follows: the maturity date was extended to May 5, 2017; the
interest rate for the extension period was increased to 15%; the
conversion price was changed to the per share price at the time of
the next financing of $2,000,000 or greater. 50,000 shares of
common stock were issued to the borrower.
On
November 7, 2016, the Company issued a Convertible Promissory Note
to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of
$100,000. Mr. Blech, a member of the board of directors, is the
trustee. The Convertible Promissory Note bears an interest at the
rate of 9%, has a six month maturity date, and a voluntary
conversion into an upcoming financing in the event the Company
closes the financing and receives gross proceeds totaling at least
$200,000. The conversion rate will be at the same terms of the
financing. The note is subordinate to the notes issued in
2015.