REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
FlitWays Technology Inc.
Los Angeles, California
We have audited the accompanying balance sheet of FlitWays Technology Inc. as of December 31, 2015, and the related statements of operations, stockholders’ deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we do not express an opinion thereon. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FlitWays Technology Inc. as of December 31, 2015, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has recurring losses from operations since inception and has limited working capital. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ SQUAR MILNER LLP
Newport Beach, California
October 14, 2016
F-2
FLITWAYS TECHNOLOGY INC.
Consolidated Balance
Sheet
As of December 31,
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
76,000
|
|
$
|
7,000
|
|
Accounts
receivable, net
|
|
11,000
|
|
|
7,000
|
|
Total current assets
|
|
87,000
|
|
|
14,000
|
|
|
|
|
|
|
|
|
Computers and software, net
|
|
-
|
|
|
2,000
|
|
|
|
|
|
|
|
|
Total Assets
|
$
|
87,000
|
|
$
|
16,000
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
495,000
|
|
$
|
49,000
|
|
Deferred
compensation - Officer
|
|
174,000
|
|
|
144,000
|
|
Line of credit related party
|
|
86,000
|
|
|
-
|
|
Total current liabilities
|
|
755,000
|
|
|
193,000
|
|
Long-term Liabilities
|
|
|
|
|
|
|
Line of
credit - related party
|
|
-
|
|
|
52,000
|
|
Total liabilities
|
|
755,000
|
|
|
245,000
|
|
|
|
|
|
|
|
|
Stockholders' Deficit
|
|
|
|
|
|
|
Common stock
52,429,281 and 20,000,000 shares issued and outstanding
|
|
52,000
|
|
|
20,000
|
|
Additional paid in capital
|
|
2,123,000
|
|
|
5,000
|
|
Accumulated deficit
|
|
(2,843,000
|
)
|
|
(254,000
|
)
|
|
|
|
|
|
|
|
Total Stockholders' Deficit
|
|
(668,000
|
)
|
|
(229,000
|
)
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders' Deficit
|
$
|
87,000
|
|
$
|
16,000
|
|
F-3
The accompanying notes are an integral part of these
financial statements.
FLITWAYS TECHNOLOGY INC.
Consolidated Statements
of Operations
For the Years Ended December 31,
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Sales, net
|
$
|
434,000
|
|
$
|
337,000
|
|
Cost of sales
|
|
(364,000
|
)
|
|
(271,000
|
)
|
Gross
profit
|
|
70,000
|
|
|
66,000
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
Core technology and development
expense
|
|
59,000
|
|
|
24,000
|
|
Officer
compensation
|
|
79,000
|
|
|
72,000
|
|
General and administrative
|
|
2,515,000
|
|
|
86,000
|
|
Total operating expenses
|
|
2,653,000
|
|
|
182,000
|
|
Operating loss
|
|
(2,583,000
|
)
|
|
(116,000
|
)
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
Interest
expense
|
|
(6,000
|
)
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
(2,589,000
|
)
|
|
(120,000
|
)
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(2,589,000
|
)
|
$
|
(120,000
|
)
|
|
|
|
|
|
|
|
Loss per common share - Basic
and Diluted
|
$
|
(0.10
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
Weighted Average Number of
Common Shares Outstanding:
|
|
|
|
|
|
|
Basic and Diluted
|
|
26,756,107
|
|
|
20,000,000
|
|
F-4
The accompanying notes are an integral part of these
financial statements.
FLITWAYS TECHNOLOGY INC.
Consolidated Statement of
Stockholders Deficit
For the Years Ended December 31, 2016 and
2015
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2014
|
|
20,000,000
|
|
$
|
20,000
|
|
$
|
5,000
|
|
$
|
(134,000
|
)
|
$
|
(109,000
|
)
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(120,000
|
)
|
|
(120,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2015
|
|
20,000,000
|
|
|
20,000
|
|
|
5,000
|
|
|
(254,000
|
)
|
|
(229,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares for merger transaction
|
|
30,000,000
|
|
|
30,000
|
|
|
(30,000
|
)
|
|
-
|
|
|
-
|
|
Issuance of shares for cash
|
|
1,179,281
|
|
|
1,000
|
|
|
304,000
|
|
|
-
|
|
|
305,000
|
|
Issuance of shares for services rendered
|
|
1,250,000
|
|
|
1,000
|
|
|
1,844,000
|
|
|
-
|
|
|
1,845,000
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,589,000
|
)
|
|
(2,589,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2016
|
|
52,429,281
|
|
$
|
52,000
|
|
$
|
2,123,000
|
|
$
|
(2,843,000
|
)
|
$
|
(668,000
|
)
|
F-5
The accompanying notes are an integral part of these
financial statements.
FLITWAYS TECHNOLOGY INC.
Consolidated Statements
of Cash Flows
For the Years Ended December 31
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash Flows from Operating
Activities
|
|
|
|
|
|
|
Net loss
|
$
|
(2,589,000
|
)
|
$
|
(120,000
|
)
|
Adjustments to reconcile net
loss to net cash used in operating activities:
|
|
|
|
|
|
|
Fair value of shares issued for services
|
|
1,845,000
|
|
|
-
|
|
Depreciation
|
|
2,000
|
|
|
4,000
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
Accounts
receivable
|
|
(4,000
|
)
|
|
(5,000
|
)
|
Accounts payable and accrued
expenses
|
|
446,000
|
|
|
37,000
|
|
Deferred
compensation - officer
|
|
30,000
|
|
|
72,000
|
|
Net cash used in operating activities
|
|
(270,000
|
)
|
|
(12,000
|
)
|
|
|
|
|
|
|
|
Cash Flows from Financing
|
|
|
|
|
|
|
Proceeds from
the sale of stock
|
|
305,000
|
|
|
-
|
|
Advances line of credit -
related party
|
|
34,000
|
|
|
5,000
|
|
Net cash provided by
financing activities
|
|
339,000
|
|
|
5,000
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in
Cash
|
|
69,000
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
Cash Beginning of Year
|
|
7,000
|
|
|
14,000
|
|
|
|
|
|
|
|
|
Cash End of Year
|
$
|
76,000
|
|
$
|
7,000
|
|
|
|
|
|
|
|
|
Supplemental Cash flow
Information
|
|
|
|
|
|
|
Cash paid of income taxes
|
|
-
|
|
|
-
|
|
Cash paid for
interest
|
|
-
|
|
|
-
|
|
F-6
The accompanying notes are an integral part of these
financial statements.
FLITWAYS TECHNOLOGY INC.
Notes to Consolidated
Financial Statements
For the Years Ended December 31, 2015 and 1014
Note 1 - Nature of the Business and Summary of Significant Accounting Policies
Company
Flitways
Technology Inc., formerly known as Cataca Resources, Inc. (the Company), was
incorporated in the State of Nevada as a for-profit company on December 11, 2012
and established a fiscal year end of December 31. The Company was initially
engaged in the acquisition, exploration and development of natural resource
properties. On September 7, 2016, the Company abandoned its mineral claim and
entered into a Share Exchange Agreement (the Share Exchange Agreement) with
Flitways Technology Inc. (Flitways). The Company refocused its efforts and is
now involved in the on demand transportation business providing businesses and
private travelers access to book and schedule ground transportation online or
by mobile device. The Company gives travelers access to customizable travel
rides through a network of ground travel providers. It incorporates ride booking
into the travel industry by making travel ride booking available at various
travel points of sale to allow travelers to book rides that fit their lifestyle
online and on its mobile application. Effective November 9, 2016, the Company
changed its name from Cataca Resources, Inc. to Flitways Technology Inc.
Merger Transaction
On October 14, 2016 (“Closing Date”), Flitways completed a reverse recapitalization of Cataca Resources, Inc. (“Cataca”), a Nevada corporation. At the time of the reverse recapitalization, Cataca was considered a shell corporation with no revenues or significant assets. In connection with the merger transaction, Cataca issued 20,000,000 shares of its common stock in exchange for 100%, or 10,000,000 shares, of the issued and outstanding shares of Flitways. This share exchange resulted in the shareholders of Flitways obtaining a majority voting interest in Cataca.
For
financial reporting purposes, Flitways has been treated as the acquirer in the
reverse recapitalization completed on the Closing Date. Accordingly, the assets
and liabilities of Flitways are reported at their historical cost and the assets
and liabilities of Cataca were recorded at their historical cost basis. The
consolidated financial statements reported herein have been retroactively
restated for all periods presented to report the historical financial position,
results of operations and cash flows of Flitways. The 30,000,000 shares of
common stock retained by the Cataca shareholders were reported as issued on the
Closing Date.
Basis of Presentation
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced recurring losses since its inception. The Company incurred a net loss of approximately $2,589,000 for the year ended December 31, 2016, and had an accumulated deficit of approximately $2,843,000 as of December 31, 2016. Since inception, the Company has financed its activities principally through loans from its majority shareholder and equity financing. Management expects to incur additional losses and cash outflows in the foreseeable future in connection with development of its operating activities.
F-7
These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that could result from
the outcome of this uncertainty. The consolidated financial statements do not
include any adjustments that might be necessary should the Company be unable to
continue as a going concern.
The
Company is subject to a number of risks similar to those of other similar stage
companies, including dependence on key individuals, successful development,
marketing and branding of products; uncertainty of technology development and
generation of revenues; dependence on outside sources of financing; risks
associated with research, development; dependence on third-party contractors for
ride services; protection of intellectual property; and competition with larger,
better-capitalized companies. Ultimately, the attainment of profitable
operations is dependent on future events, including obtaining adequate financing
to fulfil its development activities and generating a level of revenues adequate
to support the Companys cost structure. To support the Companys financial
performance, the Companys majority shareholder has executed a line of credit to
provide funding to the Company of not more than $200,000.
There
can be no assurance however that such financing will be available in sufficient
amounts, when and if needed, on acceptable terms or at all. If results of
operations for 2017 do not meet managements expectations, or additional capital
is not available, management believes it has the ability to reduce certain
expenditures. The precise amount and timing of the funding needs cannot be
determined accurately at this time, and will depend on a number of factors,
including the market demand for the Companys services, the quality of
technology development efforts, management of working capital, and continuation
of normal payment terms and conditions for purchase of services. The Company is
uncertain whether its cash balances and cash flow from operations will be
sufficient to fund its operations for the next twelve months. If the Company is
unable to substantially increase revenues, reduce expenditures, or otherwise
generate cash flows for operations, then the Company will need to raise
additional funding to continue as a going concern through its major
shareholder(s), or through other avenues.
Reclassification
Certain
amounts presented in the December 31, 2015 consolidated balance, consolidated
statement of operations and consolidated cash flows have been reclassified to
correspond to the presentation in the 2016 financial statements.
Financial Statement
Presentation
The
preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect reported amounts and related
disclosures.
Use of
Estimates
The
preparation of the accompanying 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 at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-8
Cash and Cash
Equivalents
The
Company considers all unrestricted cash, short-term deposits, and other
investments with original maturities of no more than ninety days when acquired
to be cash and cash equivalents for the purposes of the statement of cash flows.
As of December 31, 2016 and 2015, the Company did not have any cash equivalents.
Concentration of Credit
Risk
Financial
instruments that potentially subject the Company to concentration of credit risk
consist primarily of cash and accounts receivable. The Company maintains cash
balances at financial institutions within the United States, which are insured
by the Federal Deposit Insurance Corporation (FDIC) up to limits of
approximately $250,000. The Company has not experienced any losses with regard
to its bank accounts and believes it is not exposed to any risk of loss on its
cash bank accounts.
Accounts
Receivable
Accounts
receivable are comprised of credit card settlements and receivables from travel
partners and are stated at cost less an allowance for estimated uncollectible
accounts. The allowance is calculated based upon the level of past due accounts
and the relationship with and financial status of the Companys customers.
Account balances are written off against the allowance when it is determined
that it is probable that the receivable will not be recovered. As of December
31, 2016 and 2015, no allowance for bad debt was considered necessary.
Property and
Equipment
Property
and equipment are carried at cost less accumulated depreciation and
amortization, and includes expenditures that substantially increase the useful
lives of existing property and equipment. Maintenance, repairs, and minor
renovations are expensed as incurred. Upon sale or retirement of property and
equipment, the cost and related accumulated depreciation are eliminated from the
respective accounts and the resulting gain or loss is included in the results of
operations. The Company provides for depreciation of property and equipment
using the straight-line method over the estimated useful lives or the term of
the lease, as appropriate. Software and Computer Equipment are depreciated over
a period of three years.
Commitments and
Contingencies
In
the normal course of business, the Company is subject to loss contingencies,
such as legal proceedings and claims arising out of its business, that cover a
wide range of matters, including, among others, government investigations,
environment liability and tax matters. An accrual for a loss contingency is
recognized when it is probable that an asset had been impaired or a liability
had been incurred and the amount of loss can be reasonably estimated.
Fair Value
Measurements
The
accounting standards regarding fair value of financial instruments and related
fair value measurements define fair value, establish a three-level valuation
hierarchy for disclosures of fair value measurement and enhance disclosure
requirements for fair value measures.
ASC
Topic 820 establishes a valuation hierarchy for disclosure of the inputs to
valuation used to measure fair value. This hierarchy prioritizes the inputs into
three broad levels as follows:
Level
1 - inputs are quoted prices (unadjusted) in active markets for identical assets
or liabilities.
F-9
Level
2 - inputs are quoted prices for similar assets and liabilities in active
markets or inputs that are observable for the asset or liability, either
directly or indirectly through market corroboration, for substantially the full
term of the financial instrument.
Level
3 - inputs are unobservable inputs based on our own assumptions used to measure
assets and liabilities at fair value.
On
a Recurring
Basis
A
financial asset or liabilitys classification within the hierarchy is determined
based on the lowest level of input that is significant to the fair value
measurement. The Companys assessment of the significance of a particular input
to the fair value measurement in its entirety requires management to make
judgments and consider factors specific to the asset or liability.
As
of December 31, 2016 and 2015, the Company had no financial assets and
liabilities carried at fair value.
Due
to their short-term nature, the carrying values of cash and equivalents,
accounts receivable, accounts payable, and accrued expenses, approximate fair
value. Based on borrowing rates currently available to the Company for loans
with similar terms, the carrying value of the notes payable approximates fair
value.
Accounting for Stock-Based
Compensation
Share-based
compensation cost is measured at grant date, based on the fair value of the
award, and is recognized as expense over the employees service period. The
Company recognizes compensation expense on a straight-line basis over the
requisite service period of the award.
Equity
instruments issued to nonemployees are recorded at their fair value on the
measurement date and are subject to periodic adjustment as the underlying equity
instruments vest.
We
determined that the Black-Scholes Option Pricing Model is the most appropriate
method for determining the estimated fair value for stock options or warrants.
The Black-Scholes Model requires the use of highly subjective and complex
assumptions that determine the fair value of share-based awards, including the
equity instruments expected term and the price volatility of the underlying
stock.
Segment
Information
Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. The Companys chief operating decision
maker is its senior management team. The Company has one operating segment that
is dedicated to the on demand transportation business providing businesses and
private travelers access to book and schedule ground transportation online or
by mobile device.
Revenue
Recognition
Revenues
are generally recognized when an agreement exists and price is determinable, the
service has been rendered, net of discounts, returns and allowance and
collectability is reasonably assured. These conditions are typically met when
the trip has been completed. The Company utilizes third parties as
transportation providers for customers. The Company, acting as principal as the
Company is the primary obligor in the arrangement with its customers, has latitude in
establishing pricing, the Company customizes the services required to the
particular customer needs, has discretion in selection of transportation
providers, and assumes all credit risk in its transactions.
F-10
Cost of
Sales
Cost
of sales includes cost of the various transportation providers and merchant fees
related to each transaction.
Income
Taxes
The
provision for income taxes is determined using the asset and liability approach
of accounting for income taxes. Under this approach, deferred taxes represent
the future tax consequences expected to occur when the reported amounts of
assets and liabilities are recovered or paid. The provision for income taxes
represents income taxes paid or payable for the current year plus the change in
deferred taxes during the year. Deferred taxes result from differences between
the financial and tax basis of the Companys assets and liabilities and are
adjusted for changes in tax rates and tax laws when changes are enacted. A
valuation allowance is recorded to reduce deferred tax assets when it is more
likely than not that a tax benefit will not be realized.
We
must assess the likelihood that the Companys deferred tax assets will be
recovered from future taxable income, and to the extent the Company believes
that recovery is not likely, we establish a valuation allowance. Management
judgment is required in determining our provision for income taxes, deferred tax
assets and liabilities, and any valuation allowance recorded against the net
deferred tax assets. We recorded a full valuation allowance as of December 31,
2016 and 2015. Based on the available evidence, the Company believes it is more
likely than not that it will not be able to utilize its deferred tax assets in
the future. We intend to maintain valuation allowances until sufficient evidence
exists to support the reversal of such valuation allowances. We make estimates
and judgments about its future taxable income that are based on assumptions that
are consistent with our plans. Should the actual amounts differ from our
estimates, the carrying value of our deferred tax assets could be materially
impacted.
We
recognize in the financial statements the impact of a tax position, if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position. The Companys policy is to recognize interest
and penalties accrued on any unrecognized tax benefits as a component of
operating expense. We do not believe there are any tax positions for which it is
reasonably possible that the total amounts of unrecognized tax benefits will
significantly increase or decrease within twelve months of the reporting date.
There were no penalties or interest liabilities accrued as of fiscal year end
December 31, 2016 or 2015, nor were any penalties or interest costs included in
expense for the years ended December 31, 2016 and 2015.
The
years under which we conducted our evaluation coincided with the tax years
currently still subject to examination by major federal and state tax
jurisdictions, those being 2014 through 2016 for federal purposes and 2014
through 2016 for state purposes.
Advertising
Costs
The
Company expenses advertising costs when incurred. Advertising costs incurred
amounted to $9,000 and $11,000 for the years ended December 31, 2016 and 2015,
respectively.
Comprehensive Income
(Loss)
Comprehensive
income (loss) represents the change in shareholders equity (deficit) of an
enterprise, other than those resulting from shareholder transactions.
Accordingly, comprehensive income (loss) may include certain changes in shareholders equity (deficit) that
are excluded from net income (loss). For the years ended December 31, 2016 and
2015, the Companys comprehensive loss is the same as its net loss.
F-11
Basic and Diluted Net Loss per Common
Share
Basic
net loss per common share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. Diluted
net loss per common share is determined using the weighted-average number of
common shares outstanding during the period, adjusted for the dilutive effect of
common stock equivalents. In periods when losses are reported, the
weighted-average number of common shares outstanding excludes common stock
equivalents, because their inclusion would be anti-dilutive.
Significant Recent Accounting Pronouncements
In
January 2017, the FASB issued Accounting Standards Update No. 2017-01,
Clarifying the Definition of a Business
(ASU 2017-01). The standard
clarifies the definition of a business by adding guidance to assist entities in
evaluating whether transactions should be accounted for as acquisitions of
assets or businesses. ASU 2017-01 is effective for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. Under ASU
2017-01, to be considered a business, the assets in the transaction need to
include an input and a substantive process that together significantly
contribute to the ability to create outputs. Prior to the adoption of the new
guidance, an acquisition or disposition would be considered a business if there
were inputs, as well as processes that when applied to those inputs had the
ability to create outputs. Early adoption is permitted for certain transactions.
Adoption of ASU 2017-01 may have a material impact on the Companys consolidated
financial statements if it enters into future business combinations.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-04,
Simplifying the Test for Goodwill Impairment
(ASU 2017-04). ASU 2017-04
simplifies the accounting for goodwill impairment by removing Step 2 of the
goodwill impairment test, which requires a hypothetical purchase price
allocation. ASU 2017-04 is effective for annual or interim goodwill impairment
tests in fiscal years beginning after December 15, 2019, and should be applied
on a prospective basis. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. The
Company is currently evaluating the effect that adopting this new accounting
guidance will have on its consolidated results of operations, cash flows and
financial position.
In
August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash Payments (a consensus of
the Emerging Issues Task Force).
This ASU requires changes in the
presentation of certain items in the statement of cash flows including but not
limited to debt prepayment or debt extinguishment costs; contingent
consideration payments made after a business combination; proceeds from the
settlement of insurance claims; proceeds from the settlement of corporate-owned
life insurance policies and distributions received from equity method investees.
This guidance will be effective for annual periods and interim periods within
those annual periods beginning after December 15, 2017, will require adoption on
a retrospective basis and will be effective for the Company on January 1, 2018.
The Company is currently evaluating the effect that adopting this new accounting
guidance will have on its consolidated results of operations, cash flows and
financial position.
In
June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments
. The
amendments within this ASU replace the incurred loss impairment methodology in
current GAAP with a methodology that reflects expected credit losses and
requires consideration of a broader range of reasonable and supportable
information to inform credit loss estimates. ASU 2016-13 is effective for fiscal
years beginning after December 15, 2019, including interim periods within those
fiscal years. Entities may early adopt the amendments within this ASU but not
prior to the fiscal years beginning after December 15, 2018,
including the interim periods within those fiscal years. An entity will apply
the amendments in this Update through a cumulative-effect adjustment to retained
earnings as of the beginning of the first reporting period in which the guidance
is effective (that is, a modified-retrospective approach). However, a
prospective transition approach is required for debt securities for which an
other-than-temporary impairment had been recognized before the effective date.
The Company is currently evaluating the effect that adopting this new accounting
guidance will have on its consolidated results of operations, cash flows and
financial position.
F-12
In
March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting
. This
ASU is designed to address simplification of several aspects of the accounting
for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on
the statement of cash flows. ASU 2016-09 is effective for annual periods
beginning after December 15, 2016, and interim periods within those annual
periods. Early adoption of this ASU is permitted and would be applied on a
retrospective basis back to the beginning of fiscal year that included any such
interim period in which early adoption was elected. The Company is currently
evaluating the effect that adopting this new accounting guidance will have on
its consolidated results of operations, cash flows and financial position.
In
February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842) which
requires companies leasing assets to recognize on their balance sheet a
liability to make lease payments (the lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease term on
contracts longer than one year. The lessee is permitted to make an accounting
policy election to not recognize lease assets and lease liabilities for
short-term leases. How leases are recorded on the balance sheet represents a
significant change from previous GAAP guidance in Topic 840. ASU 2016-02
maintains a distinction between finance leases and operating leases similar to
the distinction under previous lease guidance for capital leases and operating
leases. The Company is currently evaluating the effect that adopting this new
accounting guidance will have on its consolidated results of operations, cash
flows and financial position. ASU 2016-02 is effective for fiscal periods
beginning after December 15, 2018, and early adoption is permitted. The Company
is currently evaluating the effect that adopting this new accounting guidance
will have on its consolidated results of operations, cash flows and financial
position.
In
January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities
. The amendments in this Update address certain aspects of
recognition, measurement, presentation, and disclosure of financial instruments.
ASU 2016-01 is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The Company is currently
evaluating the effect that adopting this new accounting guidance will have on
its consolidated results of operations, cash flows and financial position.
In
July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of
Inventory
. ASU 2015-11 simplifies the subsequent measurement of inventory by
replacing todays lower of cost or market test with a lower of cost and net
realizable value test. The guidance applies only to inventories for which cost
is determined by methods other than last-in first-out (LIFO) and the retail
inventory method (RIM). Entities that use LIFO or RIM will continue to use
existing impairment models (e.g., entities using LIFO would apply the lower of
cost or market test). The guidance is effective for public business entities for
fiscal years beginning after December 15, 2016, and interim periods within those
fiscal years. Early adoption is permitted as of the beginning of an interim or
annual reporting period. The Company is currently evaluating the effect that
adopting this new accounting guidance will have on its consolidated results of
operations, cash flows and financial position.
F-13
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with
Customers
, issued as a new Topic, ASC Topic 606. The new revenue recognition
standard supersedes all existing revenue recognition guidance. Under this ASU,
an entity should recognize revenue when it transfers promised goods or services
to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. ASU 2015-14,
issued in August 2015, deferred the effective date of ASU 2014-09 to the first
quarter of 2018, with early adoption permitted in the first quarter of 2017. The
Company is currently evaluating the effect that adopting this new accounting
guidance will have on its consolidated results of operations, cash flows and
financial position.
In
March, April, May, and December 2016, the FASB issued the following updates,
respectively, to provide supplemental adoption guidance and clarification to ASU
2014-09. These standards must be adopted concurrently upon the adoption of ASU
2014-09. We are currently evaluating the potential effects of adopting the
provisions of these updates.
|
ASU No. 2016-08, Revenue from Contracts with Customers:
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
|
|
|
|
ASU No. 2016-10, Revenue from Contracts with Customers:
Identifying Performance Obligations and Licensing;
|
|
|
|
ASU No. 2016-12, Revenue from Contracts with Customers:
Narrow-Scope Improvements and Practical Expedients; and
|
|
|
|
ASU No. 2016-19, Technical Corrections and Improvements
|
Note 2 Computers and Software
Computers
and software consisted of the following as of December 31,:
|
|
2016
|
|
|
2015
|
|
Software
|
$
|
10,000
|
|
$
|
10,000
|
|
Equipment
|
|
1,000
|
|
|
1,000
|
|
|
|
11,000
|
|
|
11,000
|
|
Accumulated depreciation
|
|
(11,000
|
)
|
|
(9,000
|
)
|
Property and equipment, net
|
$
|
-
|
|
$
|
2,000
|
|
Depreciation expense for the years ended, December 31, 2016 and
2015 was $2,000 and $4,000.
Note 3 -
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following as of December 31,
|
|
2016
|
|
|
2015
|
|
Accounts payable
|
$
|
96,000
|
|
$
|
43,000
|
|
Accrued expense
|
|
27,000
|
|
|
-
|
|
Interest payable - related party
|
|
12,000
|
|
|
6,000
|
|
Accrued compensation
|
|
360,000
|
|
|
-
|
|
Total accounts payable and accrued liabilities
|
$
|
495,000
|
|
$
|
49,000
|
|
Note 4 – Line of credit – Related Party
On
December 31, 2013, the Company entered into an unsecured line of credit
agreement with a credit limit of up to $200,000 with an officer and a
stockholder, bearing interest at a fixed rate of 7.5% per annum. Net advances
and any accrued and unpaid interest are due no later than December 2017. The
outstanding balance on the line of credit at December 31, 2016 and 2015 was
$86,000 and $52,000, respectively, and accrued and unpaid interest was $12,000
and $7,000 as of December 31, 2016 and 2015, respectively.
F-14
Note 5 – Stockholders Equity
The
Company is authorized to issue 75 million shares of common stock, $0.001 par
value per share. Common stock holders are entitled to one vote per share. The
Company has no other class of shares authorized.
The
capital structure has been adjusted retrospectively to account for the
recapitalization resulting from the merger transaction.
In
2016, the Company entered into agreements for consulting services from September
2016 through February 2017, under which the Company was to issue 6,000,000
shares of common stock. The Company recognized $360,000 of expense related to
these services in 2016. The 6,000,000 shares were subsequently issued in
February 2017.
Share-based payments to nonemployees for services provided to the Company totaled $1,490,000 and $0 for the years ended December 31, 2016 and 2015, respectively. Share based payments to employees totaled $355,000 and $0 for the years ended December 31, 2016 and 2015, respectively.
Note 6 - Commitments and Contingencies
Operating Lease
The
Company rents office space from an unrelated party on a month-to-month basis.
For the years ended December 31, 2016 and 2015, rent expense amounted to $19,000
and $12,000, respectively
Litigation
During
the ordinary course of business, the Company is subject to various claims and
litigation. Management believes that the outcome of such claims or litigation
will not have a material adverse effect on the Companys financial position,
results of operations or cash flow.
Note 7 - Income Tax
The Company had no deferred tax provision for the years ended December 31, 2016 and 2015 due to a full valuation allowance on its net deferred tax assets. At December 31, 2016 and 2015, the Company had cumulative federal and state net operating loss carry forwards of approximately $2,500,000 and $120,000, respectively, which begin to expire in 2034.
The Company recognizes deferred tax assets to the extent that it believes these
assets are more likely than not to be realized. In making such a determination,
the Company considers all available positive and negative evidence, including
future reversals of existing taxable temporary differences, projected future
taxable income and tax planning.
Components
of net deferred taxes, including a full valuation allowance, consisted of the
follows at December 31,:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforward
|
$
|
1,028,000
|
|
$
|
47,000
|
|
Stock based compensation
|
|
154,000
|
|
|
-
|
|
State tax - deferred
|
|
(81,000
|
)
|
|
-
|
|
Total
deferred tax assets
|
|
1,101,000
|
|
|
47,000
|
|
Less: Valuation allowance
|
|
(1,101,000
|
)
|
|
(47,000
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets
|
$
|
-
|
|
$
|
-
|
|
F-15
The
Company reorganized from a sole proprietorship to a corporation in October 2014.
Accordingly, net operating losses that were incurred prior to the reorganization
were not carried over to the corporation. The valuation allowance for deferred
tax assets as of December 31, 2016 and 2015 was $1,101,000 and $47,000, respectively. The
net operating losses will begin to expire in 2034. Management believes it is
more likely than not that the deferred tax assets as of December 31, 2016 will
not be realized based on the managements assessment that the deductions
ultimately recognized for tax purposes will be fully utilized. Therefore, full
valuation allowances were set up for these deferred tax assets as of December
31, 2016 and 2015.
For the years ended December 31, 2016 and 2015,
the Companys effective tax rate differs from the federal statutory rate due to
state income taxes, nondeductible expenses, and the full valuation allowance.
Note 8 - Subsequent Events
In accordance with ASC 855, “Subsequent Events”, the Company has evaluated all subsequent events through April 15, 2017, the date the financial statements were available to be issued. The following events occurred after December 31, 2016
Issued 6,000,000 shares of the Company’s common stock to settle deferred compensation expense of approximately $360,000 outstanding as of December 31, 2016.
In March 2017, the Company entered issued two convertible promissory notes both in the amount of $110,000 for an aggregate principal amount of $220,000 (the “Notes”). The Notes accrue interest at 10% per annum with the principal and accrued interest due and payable in October 2017. The principal amount and all accrued interest are convertible into shares of the Company’s common stock at a rate $0.10 per share, subject to adjustments for events of default. Each holder was issued a warrant to purchase 187,500, for a total of 375,000, of the Company’s common stock with a strike price of $0.12 per share, subject to adjustments. Events of default include non-compliance with the Exchange Act. Should the Company be found in default, the conversion rate would be adjusted to 24%, and the conversion rate would be adjusted to the lower of $0.10 or 65% of the average of the 2 lowest sale prices and trading prices as defined in the agreements during the 25 consecutive trading days immediately preceding the conversion date or the closing bid price, whichever is lower, or $0.00001 if the company loses the bid. There is also an adjustment if the stock becomes chilled, or in the case of dilutive issuances.
F-16