We have audited the accompanying consolidated
balance sheets of GTX Corp (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements
of operations and comprehensive loss, stockholders’ deficit, and cash flows for each of the years in the two-year
period ended December 31, 2016. GTX Corp’s management is responsible for these consolidated financial statements. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2016
1.
ORGANIZATION
AND BASIS OF PRESENTATION
During
the periods covered by these financial statements, GTX Corp and subsidiaries (the “Company” or “GTX”)
were engaged in businesses that design, develop and sell various interrelated and complementary products and services in the Personal
Location Services marketplace. GTX owns 100% of the issued and outstanding capital stock of Global Trek Xploration (“GTX
California”) and LOCiMOBILE, Inc. Until February 2015, GTX also owned 100% of Code Amber News Service, Inc. (“CANS”).
GTX
California focuses on hardware, software, connectivity, design and development of Global Positioning System (“GPS”)
and Bluetooth Low Energy (“BLE”) monitoring and tracking solutions by providing real-time tracking of the whereabouts
of people and high valued assets. Utilizing a miniature quad band GPRS transceiver, antenna, circuitry, battery and inductive
charging pad our product(s) can be customized and integrated into numerous products whose location and movement can be monitored
in real time over the Internet through our 24x7 tracking portal or on a web enabled cellular telephone. Our core products and
services are supported by an IP portfolio of patents, patents pending, registered trademarks, copyrights, URLs and a library of
software source code. LOCiMOBILE, Inc., has been at the forefront of Smartphone application (“App”) development since
2008. With a suite of mobile applications that turn the iPhone, iPad, Android and other GPS enabled handsets into a tracking device
which can be tracked from handset to handset or through our tracking portal or on any connected device with internet access. LOCiMOBILE
has launched numerous Apps across multi mobile device operating systems and continues to launch consumer and enterprise apps.
Until its dissolution in February 2015, CANS provided state Amber Alerts throughout the US and Canada via website tickers and
news feeds to merchants, internet service providers, affiliate partners, corporate sponsors and local, state and federal agencies.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States. The accompanying consolidated financial statements reflect the accounts of GTX Corp and its wholly owned
subsidiaries. All significant inter-company balances and transactions have been eliminated.
Going
Concern
The consolidated financial statements have
been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities
in the normal course of business for the foreseeable future. The Company has incurred net losses of $1,220,356 and $1,279,708
for the years ended December 31, 2016 and 2015, respectively, has incurred losses since inception resulting in an accumulated
deficit of $19,739,419 as of December 31, 2016, and has negative working capital of $1,233,909 as of December 31,
2016. A significant part of our negative working capital position at December 31, 2016 consisted of $867,812 of amounts due to
various accredited investors of the Company for convertible promissory notes. The Company anticipates further losses in the development
of its business.
The ability to continue as a going concern
is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet
its obligations and repay its liabilities arising from normal business operations when they come due. The Company’s ability
to raise additional capital through the future issuances of debt or equity is unknown. The ability to obtain additional
financing, the successful development of the Company’s contemplated plan of operations, or its ability to achieve
profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors
raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements
of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
Revenues
consist primarily of the sale of our GPS tracking devices and the related monthly service fees, the sale of our GPS SmartSole
via various pilot programs, the monthly service fee from subscribers of the GPS Shoe, and our mobile tracking applications sold
via the Apple iTunes Store and the Google Marketplace.
The
Company recognizes revenue from product sales when the product is shipped to the customer and title has transferred. The Company
recognizes application revenue when the application is purchased by the customer. The Company assumes no remaining significant
obligations associated with the product sale other than that related to its warranty program discussed below. Revenue related
to monthly service fees both for the GPS SmartSole, GPS Shoes and GPS tracking devices, licensing agreements and annual subscriptions
are recognized over the respective terms of the agreements.
Revenue
from multiple-element arrangements is allocated to the elements based on the relative fair value of each element, which is generally
based on the relative sales price of each element when sold separately. Each element’s allocated revenue is recognized when
the revenue recognition criteria for that element have been met. If the Company cannot objectively determine the fair value of
any undelivered element included in a multiple-element arrangement, the Company defers revenue until all elements are delivered
and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
Allowance
for Doubtful Accounts
We extend credit based on our evaluation of
the customer’s financial condition. We carry our accounts receivable at net realizable value. We monitor our exposure to
losses on receivables and maintain allowances for potential losses or adjustments. We determine these allowances by (1) evaluating
the aging of our receivables; and (2) reviewing high-risk customers financial condition. Past due receivable balances are written
off when our internal collection efforts have been unsuccessful in collecting the amount due. Our allowance for doubtful accounts
was $10,507 as of December 31, 2016 and $0 as of December 31, 2015.
Shipping
and Handling Costs
Shipping
and handling costs are included in cost of goods sold in the accompanying consolidated statements of operations.
Product
Warranty
The
Company’s warranty policy provides repair or replacement of products (excluding GPS Shoe devices) returned for defects within
ninety days of purchase. Warranty liabilities are recorded at the time of sale for the estimated costs that may be incurred under
our standard warranty. As of December 31, 2016, products returned for repair or replacement have been immaterial. Accordingly,
a warranty liability has not been deemed necessary.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair
Value Estimates
Pursuant
to the Accounting Standards Codification (“ASC”) No. 820, “
Disclosures About Fair Value of Financial Instruments
",
the Company records its financial assets and liabilities at fair value. ASC No. 820 provides a framework for measuring fair value,
clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between
market participants at the reporting date. ASC No. 820 establishes a three-tier hierarchy, which prioritizes the inputs used in
the valuation methodologies in measuring fair value:
|
Level 1 -
|
Inputs are unadjusted,
quoted prices in active markets for identical assets or liabilities at the measurement date.
|
|
|
|
|
Level 2 -
|
Inputs (other than
quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation
with market data at the measurement date and for the duration of the asset/liability’s anticipated life.
|
|
|
|
|
Level 3 -
|
Inputs reflect management’s
best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration
is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
|
The
carrying values for cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities
approximate their fair value due to their short maturities.
Reclassifications
For
comparability, certain prior period amounts have been reclassified, where appropriate, to conform to the financial statement presentation
used in 2016.
Cash
and Cash Equivalents
Cash
equivalents consist of highly liquid investments with insignificant rate risk and with original maturities of three months or
less at the date of purchase.
Inventory
Inventory
generally consists of raw materials and finished goods and is valued at the lower of cost (first-in, first-out) or net realizable
value. The Company evaluates its inventory for excess and obsolescence on a regular basis. In preparing the evaluation the Company
looks at the expected demand for the product, as well as changes in technology, in order to determine whether or not a reserve
is necessary to record the inventory at net realizable value. For the years ending December 31, 2016 and 2015 the Company did
not recognize any charges to expense associated with excess and obsolete inventory cost adjustments.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated
using the straight-line method over the estimated two year useful lives of the assets. When property and equipment are retired
or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain
or loss is included in operations. Expenditures for maintenance and repairs are expensed as incurred.
Website
Development
Under
ASC 350-50 –
Intangibles – Goodwill and Other – Website Development Costs
, costs and expenses incurred
during the planning and operating stages of the Company’s website development are expensed as incurred. The Company accounts
for the development of its website by expensing all costs associated with the planning of the website as incurred and capitalizing
the costs to develop the website. Depreciation is calculated using the straight-line method over the estimated two year useful
lives of the assets.
Software
Development Costs
Software
development costs include payments made to independent software developers under development arrangements primarily for the development
of our smart-phone mobile applications (“Apps”). Software development costs are capitalized once technological feasibility
of a product is established and it is determined that such costs should be recoverable against future revenues. For products where
proven technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product
basis. Amounts related to software development that are not capitalized are charged immediately to product research and development
costs.
Commencing
upon the related product’s release, capitalized software development costs are amortized to cost of sales based upon the
higher of (i) the ratio of current revenue to total projected revenue or (ii) the straight-line method. The recoverability of
capitalized software development costs is evaluated based on the expected performance of the specific products for which the costs
relate. The following criteria are used to evaluate expected product performance: historical performance of comparable products
using comparable technology and orders for the product prior to its release.
Significant
management judgments and estimates are utilized in the assessment of when technological feasibility is established, as well as
in the ongoing assessment of the recoverability of capitalized costs. If revised forecasted or actual product sales are less than
and/or revised forecasted or actual costs are greater than the original forecasted amount utilized in the initial recoverability
analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment
charge.
Intangible
Assets
The Company records identifiable intangible
assets acquired from other enterprises or individuals at cost. Intangible assets consist of a licensing agreement enabling the
Company to sell its GPS-related vehicle tracking software and services.
Marketable
Securities
During the second quarter of fiscal 2016,
we received marketable equity securities, which we have classified as “available for sale” securities. Our
marketable securities are marked to market on a quarterly basis, with unrealized gains and losses being excluded from earnings
and reflected as a component of other comprehensive income.
The
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those
securities.
Following
are the disclosures related to our financial assets pursuant to ASC No. 820:
|
|
December
31, 2016
|
|
|
|
Fair
Value
|
|
|
Input
Level
|
|
Available for sale marketable securities:
|
|
|
|
|
|
|
Common stock
|
|
$
|
31,875
|
|
|
|
Level
1
|
|
The
fair value of our available for sale securities is determined based on quoted market prices for identical securities on a quarterly
basis.
Derivative
Instruments
Our
debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances
may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.
Our
derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative
liability recorded as charges or credits to income, in the period in which the changes occur. For bifurcated conversion options
that are accounted for as derivative instrument liabilities, we determine the fair value of these instruments using the Black-Scholes
option pricing model. This model requires assumptions related to the remaining term of the instrument and risk-free rates of return,
our current Common Stock price and expected dividend yield, and the expected volatility of our Common Stock price over the life
of the option.
Net
Loss Per Common Share
Basic
net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during
the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock
and potentially outstanding shares of common stock during each period. There were no dilutive shares outstanding as of December
31, 2016 and 2015. Common stock equivalents, totaling 117,371,085 and 81,434,946 at December 31, 2016 and 2015, respectively,
were not included in the computation of diluted earnings per share in 2016 and 2015 on the consolidated statements of operations
due to the fact that the Company reported a net loss in 2016 and 2015 and to do so would be anti-dilutive for that period.
Income
Taxes
The
Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized
by applying the statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing
bases of existing assets and liabilities are expected to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Stock-based
Compensation
Stock-based
compensation expense is recorded for stock and stock options awarded in return for services rendered. The expense is measured
at the grant-date fair value of the award and recognized as compensation expense on a straight-line basis, which is generally
commensurate with the vesting period. The Company estimates forfeitures that it expects will occur and records expense based upon
the number of awards expected to vest.
Comprehensive
Loss
FASB ASC 220 establishes rules for reporting
and displaying comprehensive loss and its components. Comprehensive loss is the sum of net loss as reported in the consolidated
statements of operations and comprehensive loss transactions as reported in the consolidated statement of stockholders’ deficit.
Comprehensive loss transactions that currently apply to the Company result from unrealized losses on available for sale
investments.
Recently
Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue From Contracts With
Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer
of promised goods and services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP
when it becomes effective. The new standard will be effective for the Company on January 1, 2017. Early application is not permitted.
ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. The Company is still evaluating
the potential effects that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
In
August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
The new standard provides guidance around
management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as
a going concern and to provide related footnote disclosure. The new standard is effective for the fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption standard is not expected
to have a material impact on our financial statements.
There
were other updates recently issued, most of which represented technical clarifications and corrections to the accounting literature
or application to specific industries and are not expected to have a material impact on the Company’s financial position,
results of operations or cash flows.
3.
JOINT VENTURE AND INVESTMENT IN EQUITY SECURITIES
On
June 16, 2016, the Company entered into a Definitive Agreement with Inventergy Innovations, LLC (“Inventergy”), a
subsidiary of Inventergy Global, Inc. (NASDAQ: INVT). The Company partnered with Inventergy to monetize three (3) GTX Patents.
Upon signing the Agreement, the Patents were assigned to an Inventergy subsidiary, and Inventergy assigned a 45% interest in the
entity to GTX. Inventergy is also obligated to make a sequence of quarterly payments to GTX in 2017, which payments represent
non-refundable advances against future royalty and other payments. Pursuant to a non-exclusive license back to GTX, GTX will still
retain all use rights of the 3 patents.
In
addition to the Definitive Agreement, the Company entered into a Consulting Agreement with Inventergy for a period of eighteen
months. The Company was issued 42,500 shares of restricted common stock of INVT valued at $62,479 on the date of grant,
of which 1/6
th
of the stock vests at the close of each calendar quarter and Inventergy agreed to make five monthly
payments to GTX totaling $250,000 through December 2016 as compensation. As of December 31, 2016, $250,000 of the cash compensation
and $20,826 of stock had been recognized, which represents the vested portion of the restricted common stock. As
of December 31, 2016, we owned 42,500 shares of restricted common stock of INVT at a closing price of $0.75, for a value of $31,875.
The Company uses the equity method to account
for its 45% investment in the Inventergy subsidiary. Under the equity method, the Company recognizes its share of the earnings
and losses of the subsidiary as they accrue instead of when they are realized. As of December 31, 2016, the Company’s investment
in the subsidiary was $0.
4.
RELATED
PARTY TRANSACTIONS
In
order to preserve cash for other working capital needs, various officers, members of management and Board Members agreed to accrue
portions of their wages since 2011. As of December 31, 2016, and 2015, the Company owed $23,992 and $291,451, respectively, for
such accrued wages.
On September 30, 2016, management elected to
transfer accrued salaries into long-term convertible promissory notes, due on March 31, 2018, totaling $318,671. On December 31,
2016, management elected to transfer additional accrued salaries into long-term convertible promissory notes, due on March 31,
2018, totaling $110,326. The notes will bear a 10% annual interest rate. Management shall have the right, but not the obligation
to convert up to 50% of the amount advanced and accrued interest into shares, warrants or options of common or preferred stock
of the Company at $0.01 per share.
5.
INVENTORY
Inventories
consist of the following:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
31,041
|
|
|
$
|
51,768
|
|
Finished goods
|
|
|
79,907
|
|
|
|
5,875
|
|
Total Inventories
|
|
$
|
110,948
|
|
|
$
|
57,643
|
|
6.
PROPERTY
AND EQUIPMENT
Property
and equipment, net, consists of the following:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Software
|
|
$
|
19,900
|
|
|
$
|
18,744
|
|
Website development
|
|
|
91,622
|
|
|
|
91,622
|
|
Software development
|
|
|
246,122
|
|
|
|
202,834
|
|
Less: accumulated
depreciation
|
|
|
(222,343
|
)
|
|
|
(181,408
|
)
|
|
|
|
|
|
|
|
|
|
Total property
and equipment, net
|
|
$
|
135,301
|
|
|
$
|
131,792
|
|
Depreciation
expense for the years ended December 31, 2016 and 2015 was $40,935 and $3,172, respectively, and is included in general and administrative
expenses.
7.
CONCENTRATIONS
We
currently rely on one manufacturer to supply us with our GPS SmartSole and one manufacturer to supply us with the GPS device included
in the GPS SmartSole. The loss of either of these manufacturers could severely impede our ability to manufacture the GPS SmartSole.
During
the year ended December 31, 2016, the Company’s customer base was comprised of approximately 20 B2B wholesale distributors,
representing 43% of our annual revenues and 21% B2C with hundreds of individual consumers who bought through our online ecommerce
store. The Company had two customers representing approximately 23% and 42%, respectively, of sales and one customer representing
approximately 32% of total accounts receivable for the year ended December 31, 2016. The Company had two customers representing
approximately 17% and 13%, respectively, of sales and one customer representing approximately 10% of total accounts receivable
for the year ended December 31, 2015.
8.
DEBT
The
following table summarizes the components of our short-term borrowings:
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Q4 2014 Convertible Notes
|
|
$
|
126,000
|
|
|
$
|
126,000
|
|
Q1 2015 Convertible Notes
|
|
|
60,000
|
|
|
|
150,000
|
|
Q2 2015 Convertible Notes
|
|
|
200,000
|
|
|
|
200,000
|
|
Q3 2015 Convertible Notes
|
|
|
45,000
|
|
|
|
84,000
|
|
Q4 2015 Convertible Notes
|
|
|
-
|
|
|
|
196,250
|
|
Q1 2016 Convertible Notes
|
|
|
60,000
|
|
|
|
-
|
|
Q2 2016 Convertible Notes
|
|
|
225,431
|
|
|
|
-
|
|
Q3 2016 Convertible Notes
|
|
|
507,671
|
|
|
|
-
|
|
Q4 2016 Convertible
Notes
|
|
|
162,826
|
|
|
|
-
|
|
Total short-term convertible notes
|
|
|
1,386,928
|
|
|
|
756,250
|
|
Less:
Debt discount
|
|
|
(90,119
|
)
|
|
|
-
|
|
Convertible notes,
net of debt discount
|
|
$
|
1,296,809
|
|
|
$
|
756,250
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
867,812
|
|
|
$
|
556,250
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
$
|
428,997
|
|
|
$
|
200,000
|
|
|
|
|
|
|
|
|
|
|
Short-term derivative
liabilities
|
|
$
|
78,112
|
|
|
$
|
-
|
|
Short-term
convertible notes
Convertible
Notes
During
the fourth quarter of 2014, we entered into note and share purchase agreements with independent accredited investors. The Q4 2014
Convertible Notes carried an original issue discount of 17%, matured on December 31, 2015 and are convertible into common
stock of the Company at $0.015 per share, subject to adjustment and mandatory conversion. As of December 31, 2016 and 2015,
$126,000 total principal balance was outstanding. In addition to the 2014 Convertible Notes, a total of 1,050,000 additional
shares of the Company’s common stock will be issued to the investors if the 2014 Convertible Notes are not repaid or converted
prior to June 30, 2015. As of December 31, 2016, the noteholders have not requested their additional shares
.
During
the first quarter of 2015, we entered into note and share purchase agreements with an independent accredited investor. As a result,
we issued a convertible note with a total principal balance of $60,000 (the “Q1 2015 Convertible Notes”) and issued
500,000 shares of common stock (“Q1 2015 Stock”) in exchange for cash proceeds of $50,000. The Q1 2015 Convertible
Notes carried an original issue discount of 17%, matured on December 31, 2015 and are convertible into common stock of
the Company at $0.015 per share, subject to adjustment and mandatory conversion. In addition to the Q1 2015 Convertible Notes
and the Q1 2015 Stock, a total of 500,000 additional shares of the Company’s common stock will be issued to the investors
if the Q1 2015 Convertible Notes are not repaid or converted prior to June 30, 2015. As of December 31, 2016, the noteholder has
not requested their additional shares.
On
April 14, 2015, we entered into a Note Purchase Agreement with an unaffiliated third party (the “Investor”) relating
to the sale of unsecured convertible promissory notes. The promissory notes are divided into units (“Units”), each
in the principal amount of $25,000. The promissory notes bear interest at a rate of 14% per annum, payable quarterly and a maturity
date of April 14, 2017. The unsecured convertible promissory notes are convertible into common stock of the Company at a price
of $0.015 per share at any time by the holder, subject to certain conditions and restrictions set forth in the notes. On April
14, 2015 and again on May 5, 2015, the Investor purchased a $25,000 Unit (for a total of $50,000) and on May 17, 2015, June 7,
2015 and June 29, 2015, the Investor purchased 3 $50,000 Units (for a total of $150,000) totaling $200,000 as of December 31,
2016 and 2015
On
August 26, 2015, we entered into Note and Share Purchase Agreement with an independent accredited investor. As a result, we issued
a convertible note with a total principal balance of $15,000 (the “Q3 2015 Convertible Notes”). The Convertible Note
carries an original issue discount of 17%, matured on March 31, 2016 and is convertible into common stock of the Company at $0.015
per share, subject to adjustment and mandatory conversion.
On
September 9, 2015 we entered into Note and Share Purchase Agreement with an independent accredited investor. As a result, we issued
convertible notes with a total principal balance of $30,000 (the “Q3 2015 Convertible Notes”). The Convertible Note
carries an original issue discount of 17%, matured on March 31, 2016 and is convertible into common stock of the Company
at $0.015 per share, subject to adjustment and mandatory conversion.
On
January 15, 2016, we received an additional installment of $15,000 from an accredited investor relating to the 7.5% Convertible
Debenture entered into on October 9, 2015. On April 15, 2016, this note was sold to a private investor pursuant to the Exchange
Agreement.
On
January 27, 2016, pursuant to a Note Purchase Agreement with an unaffiliated third party (the “Investor”) relating
to the sale of an unsecured convertible promissory note and warrant. The third party purchased an additional unit for $25,000
and a principal balance of $30,000. The convertible promissory note is divided into units (“Units”), each in the principal
amount of $30,000, with equal installments of $1,000 due sequentially every week until $30,000 has been repaid and warrants to
purchase 1,250,000 shares of common stock at an exercise price of $0.015 per share. The convertible promissory notes were due
on November 25, 2016, subject to certain conditions and restrictions set forth in the notes. The convertible promissory note has
a relative fair value of $23,899 and the warrants has a relative fair value of $6,101 at the date of issuance determined using
the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free
interest rate of 0.88% (ii) estimated volatility of 171% (iii) dividend yield of 0.00% and (iv) expected life of the warrants
of 25 months. The convertible note is convertible into shares of common stock based on the volume weighted average of the closing
price per share for the 20 consecutive trading days prior to the conversion date if there is any outstanding principal balance
due after the expiration due date. As of December 31, 2016, $5,000 cash installment payments have been made toward lowering the
outstanding principal balance. On June 14, 2016, we consolidated all of these Investor’s notes into a single note
valued at $120,000. The note was due December 16, 2016 and carries an OID of 20%.
On
February 5, 2016, an accredited investor with a convertible note of $30,000, converted their outstanding principal balance into
2,250,000 shares of common stock at a conversion price of $0.015 per share.
On February 8, 2016, we entered into a Note
and Share Purchase Agreement with an unaffiliated third party (the “Investor”) relating to the sale of an unsecured
convertible promissory note. The convertible promissory note is divided into units (“Units”), each in the principal
amount of $30,000. The notes were due on December 31, 2016, subject to certain conditions and restrictions set forth in the notes.
The convertible notes are convertible into shares of common stock at $0.01 per share. In addition to the Note and Share Purchase
Agreement, a total of 500,000 additional shares of the Company’s common stock will be issued to the Investor if the convertible
promissory note is not repaid or converted prior to June 30, 2017. On February 8, 2016 the Investor purchased two $25,000
units (for a total of $50,000).
During
the year ended December 31, 2016, we made cash payments totaling $23,000 to accredited investors to reduce the outstanding balances
on their loans.
On
March 16, 2016, we entered into a Loan Agreement with an independent accredited investor relating to the sale of a convertible
promissory note and warrant. As a result, we issued convertible notes with a total principal balance of $55,000 and warrants to
purchase 2,500,000 shares of common stock at an exercise price of $0.0125 per share. The convertible promissory note has a relative
fair value of $33,379 and the warrants have a relative fair value of $21,621 at the date of issuance determined using the
Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest
rate of 1.05% (ii) estimated volatility of 221% (iii) dividend yield of 0.00% and (iv) expected life of the warrants of 3 years.
The Convertible Note carries an original issue discount of 10%, mature on March 16, 2017 with a 12% interest rate and are convertible
into common stock of the Company at 60% of the lowest closing price over a five day period immediately prior to but not including
the Conversion Date. However, the conversion price shall not be lower than $0.005 per share. During the year ended December 31,
2016, the accredited investor converted their outstanding principal balance and accrued interest totaling $57,440 into 11,487,997
shares of common stock at a conversion price of $0.005 per share.
On
March 16, 2016, we entered into a Loan Agreement with an independent accredited investor relating to the sale of a convertible
promissory note and warrant. As a result, we issued convertible notes with a total principal balance of $25,000 and warrants to
purchase 500,000 shares of common stock at an exercise price of $0.0125 per share. The convertible promissory note has a relative
fair value of $19,455 and the warrants has a relative fair value of $5,545 at the date of issuance determined using the Black-Scholes
option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 1.05%
(ii) estimated volatility of 221% (iii) dividend yield of 0.00% and (iv) expected life of the warrants of 3 years. The Convertible
Note carries an original issue discount of 10%, mature on March 16, 2017 with a 12% interest rate and are convertible into common
stock of the Company at 60% of the lowest closing price over a five day period immediately prior to but not including the Conversion
Date. However, the conversion price shall not be lower than $0.005 per share. During the year ended December 31, 2016, the accredited
investor converted their outstanding principal balance and accrued interest totaling $26,574 into 5,314,842 shares of common stock
at a conversion price of $0.005 per share.
On
April 15, 2016, the Company entered into an Exchange Agreement and a Lock-Up Agreement with a private investor (the “Investor”).
Pursuant to the Exchange Agreement, the Company agreed to issue the Investor two promissory notes in the amount of $234,619 and
$29,327 (the “Notes”), respectively, in exchange for a 7.5% Convertible Debenture purchased by the Investor from a
third party (the “Original Note”). The Company has also granted the Investor a right of first refusal on all future
Company financings over the next twelve months. Via the Exchange Agreement, the Company was able to extend the maturity dates
of the Notes to May 10, 2016 and October 15, 2016, respectively. Pursuant to the Lock-Up Agreement, the Investor has agreed not
to sell any shares acquired from conversion of the Note until May 10, 2016. The convertible notes are convertible into shares
of common stock at 49% of the lowest traded price in the prior thirty trading days. As a result of the Exchange Agreement, we
recognized a loss on extinguishment of debt of $29,327. During the year ended December 31, 2016, the Investor converted their
outstanding principal balance of $183,515 into 54,668,934 shares of common stock.
On
April 18, 2016, the Company entered into a Loan Agreement with a private investor in connection with a bridge financing transaction,
consisting of an Unsecured Convertible Promissory Note in principal amount of $25,000 and three-year warrants to purchase 500,000
shares of the Company’s common stock with an exercise price of $0.0125 per share. The convertible promissory note has a
relative fair value of $20,872 and the warrants has a relative fair value of $4,128 at the date of issuance determined using the
Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest
rate of 0.90% (ii) estimated volatility of 215% (iii) dividend yield of 0.00% and (iv) expected life of the warrants of 3 years.
The Convertible Note carries an original issue discount of 10%, matures on April 14, 2017 with a 12% interest rate and
is convertible into common stock of the Company at 60% of the lowest closing price over a five day period immediately prior
to but not including the Conversion Date. However, the conversion price shall not be lower than $0.005 per share.
On
May 6, 2016, the Company entered into a Note Purchase Agreement with an unaffiliated third party (the “Investor”)
relating to the sale of an unsecured convertible promissory note and warrant. The third party purchased an additional unit
for $25,000 and a principal balance of $30,000. The convertible promissory note is divided into units (“Units”), each
in the principal amount of $25,000, with equal installments of $1,000 due sequentially every week until $30,000 has been repaid
and warrants to purchase 1,250,000 shares of common stock at an exercise price of $0.015 per share. The convertible promissory
notes were due on December 2, 2016, subject to certain conditions and restrictions set forth in the notes. The convertible
promissory note has a relative fair value of $22,672 and the warrants has a relative fair value of $7,328 at the date of issuance
determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows:
(i) risk-free interest rate of 0.75% (ii) estimated volatility of 168% (iii) dividend yield of 0.00% and (iv) expected life of
the warrants of 31 months. The convertible note is convertible into shares of common stock based on the volume weighted average
of the closing price per share for the 20 consecutive trading days prior to the conversion date if there is any outstanding principal
balance due after the expiration due date. On June 14, 2016, we consolidated all of these Investor’s notes into a single
note valued at $120,000. The note was due December 16, 2016 and carries an OID of 20%.
On
May 10, 2016, we issued a total of 8,201,811 shares of common stock to two investors upon the conversion of $50,000 in debt from
Convertible Notes that was issued in Q1 of 2015 and Q2 of 2016.
On
June 7, 2016, we issued a total of 6,500,000 shares of common stock to an investor upon the conversion of $23,888 in debt from
a Convertible Note that was issued in Q2 of 2016.
On
June 14, 2016, we received $45,000 from a noteholder who consolidated the remaining balance of $55,000 in notes into a $120,000
convertible note with an OID of 20%. The convertible note matured on December 16, 2016, without interest, and is convertible
into common stock of the Company at the lowest traded price in the 5 days prior to the conversion. The noteholder received 2,000,000
shares of common stock for the origination of this loan. These shares were issued on August 5, 2016.
On
June 28, 2016, a noteholder assigned his remaining balance of $60,000 to another investor who consolidated it with that investor’s
$40,000 convertible note. The new convertible note matured on December 31, 2016, without interest, and is convertible into common
stock of the Company at the lower of 49% of the lowest traded price in the prior 30 days or $0.005 per share. During the year
ended December 31, 2016, the investor converted their outstanding principal balance of $100,000 into 32,460,108 shares of common
stock.
On
July 8, 2016, we raised $150,000 related to a Warrant and Note Purchase Agreement with unaffiliated third parties (the “Investors”)
relating to the sale of unsecured convertible promissory notes and warrants (see Item 10.1 and 10.2). The promissory notes
are divided into units (“Units”), each in the principal amount of $31,500. The Convertible Note carries an original
issue discount of 26%, mature on December 31, 2017 and are convertible into common stock of the Company at $0.015 per share, subject
to adjustment and mandatory conversion. On July 8, 2016, the Investors had purchased the minimum raise required of six $25,000
Units (for a total of $150,000). Each Unit comes with two 3-year warrants, one to purchase 1,050,000 shares of common stock
at $0.015 per share and the other to purchase 525,000 shares of common stock at $0.03 per share for a total of 9,450,000
warrants. The convertible promissory notes have a relative fair value of $98,886 and the warrants have a relative fair value of
$51,114 at the date of issuance determined using the Black-Scholes option-pricing model. The assumptions used to calculate the
fair market value are as follows: (i) risk-free interest rate of 0.71% (ii) estimated volatility of 200% (iii) dividend yield
of 0.00% and (iv) expected life of the warrants of 36 months.
On
November 21, 2016, the Company entered into a Securities Purchase Agreement with two (2) accredited investors (“Purchasers”).
The Purchasers will purchase, severally and not jointly, an aggregate of up to $150,000 in Notes Payable corresponding to an aggregate
of up to $77,500 in Principal Amount of Notes. The purchase will occur in up to three tranches of (each a “Tranche,”
and collectively the “Tranches”), with the first Tranche of $27,500 being funded to the Company upon execution of
this Agreement (the “First Closing”). The second Tranche will be for $25,000 and will be funded to the Company days
30 calendar days after the First Closing. The third Tranche will be for $25,000 and will be funded to the Company 60 calendar
days after the First Closing. The Purchasers may convert their notes into common shares in the Company at a price equal to the
lower of 51% of the lowest trading price in the prior 20 days, or at $0.005 per share. The notes do not bear interest. The Company
may prepay the note at any time with a premium of 10% of the amount to be paid off, in the first 90 days, and 20% any time thereafter.
The note matures May 14, 2017. The note was issued pursuant to Section 4(a)(2) of the Securities Act of 1933.
During
the year ended December 31, 2016, management has elected to transfer accrued salaries into long-term convertible promissory notes,
due on March 31, 2018, totaling $428,997. The notes will bear a 10% annual interest rate. Management shall have the right, but
not the obligation to convert up to 50% of the amount advanced and accrued interest into shares, warrants or options of common
or preferred stock of the Company at $0.01 per share.
Derivative
liabilities
The
conversion features embedded in the convertible notes were evaluated to determine if such conversion feature should be bifurcated
from its host instrument and accounted for as a freestanding derivative. In the convertible notes with variable conversion terms,
the conversion feature was accounted for as a derivative liability. The derivatives associated with the term convertible notes
were recognized as a discount to the debt instrument and the discount is amortized over the expected life of the notes with any
excess of the derivative value over the note payable value recognized as additional interest expense at the issuance date. Amortization
of the debt discount totaled $781,629 and $0 during the years ended December 31, 2016 and 2015, respectively.
The
derivative liability was calculated using the Black Scholes method over the expected terms of the convertible debentures, with
a risk free rate of 2% and volatility of 107% as of December 31, 2016. Included in Derivative Income in the accompanying consolidated
statements of operations is income arising from the change in fair value of the derivatives of $703,518 and $13,490 during the
years ended December 31, 2016 and 2015, respectively.
9.
INCOME
TAXES
The
provision for refundable Federal income tax consists of the following as of December 31:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Federal
income tax benefit calculated at statutory rate of 35%
|
|
$
|
425,000
|
|
|
$
|
448,000
|
|
Less:
Stock based compensation expense
|
|
|
(116,000
|
)
|
|
|
(171,000
|
)
|
Change
in valuation allowance
|
|
|
(309,000
|
)
|
|
|
(277,000
|
)
|
Net
income tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
The
cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows
at December 31:
|
|
2016
|
|
|
2015
|
|
Deferred tax asset attributable to:
|
|
|
|
|
|
|
|
|
Net operating losses carried
forward
|
|
$
|
4,562,000
|
|
|
$
|
4,270,000
|
|
Less: Valuation
allowance
|
|
|
(4,562,000
|
)
|
|
|
(4,270,000
|
)
|
Net deferred
tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company established a full valuation allowance. The Company continually reviews the adequacy of the valuation allowance and recognizes
a benefit from income taxes only when reassessment indicates that it is more likely than not that the benefits will be realized.
At December 31, 2016, the Company had an unused
net operating loss carryover approximating $13,417,000 that is available to offset future taxable income, which expires
beginning in 2028.
10.
EQUITY
Common
Stock
The
Company issued the following shares of common stock for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
|
|
Value
of Shares
|
|
|
#
of shares
|
|
|
Value
of Shares
|
|
|
#
of shares
|
|
Shares
issued for services rendered
|
|
$
|
296,550
|
|
|
|
34,050,000
|
|
|
$
|
517,203
|
|
|
|
42,600,000
|
|
Shares issued for accrued
salaries and expenses
|
|
|
104,294
|
|
|
|
10,421,592
|
|
|
|
233,000
|
|
|
|
12,562,500
|
|
Shares issued for conversion
of debt
|
|
|
422,879
|
|
|
|
108,464,758
|
|
|
|
420,232
|
|
|
|
35,523,226
|
|
Shares
issued for financing
|
|
|
16,000
|
|
|
|
2,000,000
|
|
|
|
-
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
restricted shares issued
|
|
$
|
839,723
|
|
|
|
154,936,350
|
|
|
$
|
1,170,435
|
|
|
|
90,810,726
|
|
Shares
issued for services rendered were to various members of management, employees and consultants and are generally expensed as Stock-Based
Compensation in the accompanying consolidated statement of operations. Also included are shares of common stock issued to our
2016 investors in conjunction with their note and share purchase agreements. Shares issued for accrued salaries and expenses were
granted to members of management, Board Members, consultants and employees as payment for portions of amounts owed to them for
services rendered in previous periods. Shares issued for conversion of debt relate to conversions of both short and long term
debt as discussed in Note 8. Shares issued for financing in 2015 relate to shares granted to investors for their participation
in the 2015 financings.
Common
Stock Warrants
Since
inception, the Company has issued numerous warrants to purchase shares of the Company’s common stock to shareholders, consultants
and employees as compensation for services rendered.
On
January 27, 2016, 1,250,000 warrants were issued to an accredited investor as part of their Note and Share Purchase Agreement.
The warrants expire on February 26, 2018 at an exercise price of $0.015 per share. The fair value of the warrants was $6,101
on the date of grant.
On
March 16, 2016, 3,000,000 warrants were issued to two accredited investors as part of their Loan Agreements. The warrants expire
on March 16, 2019 at an exercise price of $0.0125 per share. The fair value of the warrants was $27,166 on the date of grant.
On
April 18, 2016, 500,000 warrants were issued to an accredited investor as part of the Note and Share Purchase Agreement. The warrant
expires on April 18, 2019 at an exercise price of $0.0125 per share. The fair value of the warrants was $4,128 on the date
of grant.
On May 6,
2016, 1,250,000 warrants were issued to an accredited investor as part of the Note and Share Purchase Agreement. The warrant expires
on December 16, 2018 at an exercise price of $0.015 per share. The fair value of the warrants was $7,328 on the date of grant.
On
May 16, 2016, 3,300,000 warrants were issued to consultant as part of their Advisory Services Agreement. The warrants expire on
May 16, 2019 at an exercise price of $0.015 per share. The fair value of the warrants was $18,835 on the date of grant.
On
July 1, 2016, 4,200,000 series “A” warrants and 2,100,000 series “B” warrants were issued to an accredited
investor as part of the Note and Warrant Purchase Agreement. The series A and B warrants expires on July 1, 2019 at an exercise
price of $0.015 per share for the series A and $0.030 per share for the series B warrants. The fair value of the warrants was
$34,076 on the date of grant.
On
July 8, 2016, 2,100,000 series “A” warrants and 1,050,000 series “B” warrants were issued to two accredited
investors as part of the Note and Warrant Purchase Agreement. The series A and B warrants expires on July 8, 2019 at an exercise
price of $0.015 per share for the series A and $0.030 per share for the series B warrants. The fair value of the warrants was
$17,038 on the date of grant.
A
summary of the Company’s warrant activity and related information is provided below:
|
|
Exercise
Price $
|
|
|
Number
of Warrants
|
|
Outstanding and exercisable
at December 31, 2014
|
|
|
0.08
– 0.40
|
|
|
|
2,000,000
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
Warrants granted
|
|
|
0.015
- 0.02
|
|
|
|
11,150,000
|
|
Warrants expired
|
|
|
0.02
|
|
|
|
(2,000,000
|
)
|
Outstanding and exercisable at December
31, 2015
|
|
|
0.15
- 0.02
|
|
|
|
11,150,000
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
Warrants granted
|
|
|
0.0125
- 0.03
|
|
|
|
18,750,000
|
|
Warrants expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and
exercisable at December 31, 2016
|
|
|
0.0125
- 0.03
|
|
|
|
29,900,000
|
|
Stock
Warrants as of December 31, 2016
|
|
Exercise
|
|
|
Warrants
|
|
|
Remaining
|
|
|
Warrants
|
|
Price
|
|
|
Outstanding
|
|
|
Life
(Years)
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.02
|
|
|
|
9,900,000
|
|
|
|
1.07
|
|
|
|
9,900,000
|
|
$
|
0.015
|
|
|
|
13,350,000
|
|
|
|
2.10
|
|
|
|
13,350,000
|
|
$
|
0.0125
|
|
|
|
3,500,000
|
|
|
|
2.25
|
|
|
|
3,500,000
|
|
$
|
0.03
|
|
|
|
3,150,000
|
|
|
|
2.52
|
|
|
|
3,150,000
|
|
Common
Stock Options
Under
the Company’s 2008 Plan, we are authorized to grant stock options intended to qualify as Incentive Stock Options, “ISO”,
under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified options, restricted and unrestricted stock awards
and stock appreciation rights to purchase up to 7,000,000 shares of common stock to our employees, officers, directors and consultants,
with the exception that ISOs may only be granted to employees of the Company and its subsidiaries, as defined in the 2008 Plan.
The
Company recognizes option expense ratably over the vesting periods. As of December 31, 2012, all options granted were fully vested.
Accordingly, no option expense has been recognized during the years ended December 31, 2016 and 2015.
No
options were granted during 2016 and 2015.
The Plan provides for the issuance of a maximum
of 7,000,000 shares of which, after adjusting for estimated pre-vesting forfeitures and expired options, approximately 2,235,000
were available for issuance as of December 31, 2016.
As
of December 31, 2016, after adjusting for estimated pre-vested forfeitures, there was $0 of unrecognized compensation cost related
to unvested stock options. The Company intends to issue new shares to satisfy share option exercises.
Stock
option activity under the Plan for the period from December 31, 2014 to December 31, 2016 is summarized as follows:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (in years)
|
|
|
Grant
Date Fair Value
|
|
Outstanding at December 31, 2014
|
|
|
775,133
|
|
|
$
|
0.14
|
|
|
|
1.09
|
|
|
$
|
46,901
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options cancelled/forfeited/expired
|
|
|
(322,640
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(31,959
|
)
|
Outstanding at December 31, 2015
|
|
|
452,493
|
|
|
|
0.08
|
|
|
|
0.09
|
|
|
|
14,942
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options cancelled/forfeited/
expired
|
|
|
452,493
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,942
|
)
|
Outstanding at December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
11.
COMMITMENTS & CONTINGENCIES
Bonuses
The
Company has an
employment agreement with its CEO which,
among other provisions, provide for the payment of a bonus, as determined by the Board of Directors, in amounts ranging from 15%
to 50% of the executive’s yearly compensation, to be paid in cash or stock at the Company’s sole discretion, if the
Company has an increase in year over year revenues and the Executive performs his duties (i) within the time frame budgeted for
such duties and (ii) at or below the cost budgeted for such duties.
Contingencies
From
time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise
in the normal course of our business. The ultimate amount of liability, if any, for any claims of any type (either alone or in
the aggregate) may materially and adversely affect our financial condition, results of operations and liquidity. In addition,
the ultimate outcome of any litigation is uncertain. Any outcome, whether favorable or unfavorable, may materially and adversely
affect us due to legal costs and expenses, diversion of management attention and other factors. We expense legal costs in the
period incurred. We cannot assure you that additional contingencies of a legal nature or contingencies having legal aspects will
not be asserted against us in the future, and these matters could relate to prior, current or future transactions or events.
12.
SUBSEQUENT
EVENTS
On January 4, 2017, we issued a total of 10,000,000
shares of common stock to an investor for converting $24,500 in debt from a Convertible Note that was issued in the second
quarter of 2016.
On January 13, 2017, we issued a total of
11,970,339 shares of common stock to an investor for converting $29,327 in debt from a Convertible Note that was issued in the
second quarter of 2016.
On
January 20, 2017, we issued 500,000 shares of common stock (valued at $2,000) to a consultant and 1,000,000 shares of common stock
(valued at $4,000) to 4 members of the board of directors for their services.
On
January 31, pursuant to our Share Purchase Agreement dated November 21, 2016, we entered into and received our 2
nd
Tranche of $97,500 from the Note Holders.
On February 17, 2017, we issued 16,339,869
shares of common stock to an investor for converting $25,000 in debt from a Convertible Note that was issued in the fourth quarter
of 2016.
On February 22, 2017, we issued 16,442,455
shares of common stock to an investor for converting $24,170 in debt from a Convertible Note that was issued in the second
quarter of 2016.
On
March 2, 2017, we issued 3,750,000 shares of common stock (valued at $26,250) to two consultants for their services.
On March 3, 2017, we issued 5,820,000 shares
of common stock to an investor for converting $25,000 in debt from a Convertible Note that was issued in the second quarter
of 2016.