The following is a summary of notes payable as of September 30,
2016 and December 31, 2015:
The following is a roll-forward of the Company’s
notes payable and related discounts for the nine months ended September 30, 2016:
NOTE 7 - CONVERTIBLE NOTES PAYABLE, NET
Convertible notes consisted of the following as of September 30,
2016 and December 31, 2015:
|
|
2016
|
|
|
2015
|
|
In January 2017, the
below notes, which were being renegotiated, and related accrued interest were converted into common stock of the Company (see
note 13). All principal and interest are due at
maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2015, the Company issued 10% convertible notes in the aggregate principal amount of $700,000. The notes are secured by the assets of the Company, matured in June 2016, and are convertible into common stock of the Company at a conversion rate of $0.03 per share, subject to adjustment. In connection with the issuance of these notes, the Company also issued warrants for the purchase of 15,400,000 shares of the Company’s common stock at an exercise price of $0.05 per share for a period of five years. The conversion rate on the notes and exercise price of the warrants are subject to adjustment for anti-dilution protection that requires these features to be bifurcated and presented as derivative liabilities at their fair values. See Note 8. The Company also incurred debt issuance costs of $124,000, which are presented as a discount against the note and amortized into interest expense over the term of the note. During the nine months ended September 30, 2016, one note holder elected to convert principal and accrued interest totaling $21,222 into 704,074 shares of common stock.
|
|
$
|
680,000
|
|
|
$
|
700,000
|
|
|
|
|
|
|
|
|
|
|
In July 2015, the Company issued 10% convertible notes with in the aggregate principal amount of $190,000. The notes are secured by the assets of the Company, matured in July 2016, and are convertible into common stock of the Company at a conversion rate of $0.03 per share, subject to adjustment. In connection with the issuance of these notes, the Company also issued warrants for the purchase of 4,180,000 shares of the Company’s common stock at an exercise price of $0.05 per share for a period of five years. The conversion rate on the notes and exercise price of the warrants are subject for adjustment to anti-dilution protection that requires these features to be bifurcated and presented as derivative liabilities at their fair values. See Note 8. The Company also incurred debt issuance costs of $16,200, which are presented as a discount against the note and amortized into interest expense over the term of the note.
|
|
|
166,000
|
|
|
|
166,000
|
|
(Continued on next page)
(Continued)
|
|
2016
|
|
|
2015
|
|
In February 2016, the Company re-issued a 12% convertible note in the amount of $172,095. The note is secured by the assets of the Company, originally maturing in September 2016, and is convertible into common stock of the Company at a rate of $0.10 per share.
|
|
|
172,095
|
|
|
|
172,095
|
|
|
|
|
|
|
|
|
|
|
In April 2016, the Company
issued 12% convertible notes in the amount of $1,550,000. The notes are secured by the assets of the Company, mature in
October 2016, and are convertible into common stock of the Company at a rate of $0.25 per share. In connection
with the issuance of these notes, the Company also issued 1,033,337 shares of common stock and warrants for the purchase
of 6,200,000 shares of the Company’s common stock at an exercise price of $0.25 per share for a
period of five years. The conversion rate on the notes and exercise price of the warrants are subject to
adjustment for anti-dilution protection that requires these features to be bifurcated and presented as derivative
liabilities at their fair values. See Note 8. The portion of the remaining proceeds attributable to the notes and common
stock were allocated to the instruments based on their relative fair values. See Notes 8 and 10. The Company
also incurred debt issuance costs of $226,400, which are presented as a
discount against the note and amortized into interest expense over the term
of the note. In August 2016, the Company entered into an agreement with
the April 2016 Accredited Investors to reduce the exercise price on the embedded
conversion feature and the warrants to $.10 and to increase the number of
warrants to 15,500,000. The August 2016 change in the terms of these convertible notes has been determined to be a loan
extinguishment in accordance with ASC 470, Debt. The reported amounts under a loan extinguishment are not significantly
different than that of the Company’s reported amounts. See notes 8 and
10.
|
|
|
1,550,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Principal Outstanding
|
|
$
|
2,568,095
|
|
|
$
|
1,038,095
|
|
Unamortized Discounts – Deferred Debt Discounts
|
|
|
(139,912
|
)
|
|
|
(583,049
|
)
|
Unamortized Deferred – Debt issuance costs
|
|
|
(88,808
|
)
|
|
|
(71,700
|
)
|
Convertible Notes, Net
|
|
$
|
2,339,375
|
|
|
$
|
383,346
|
|
The following is a roll-forward of the Company’s
convertible notes and related discounts for the nine months ended September 30, 2016:
|
|
Principal
Balance
|
|
|
Debt
Issuance
Costs
|
|
|
Debt
Discounts
|
|
|
Total
|
|
Balance at December 31, 2015
|
|
$
|
1,038,095
|
|
|
$
|
(71,700
|
)
|
|
$
|
(583,049
|
)
|
|
$
|
383,346
|
|
New issuances
|
|
|
1,550,000
|
|
|
|
(226,400
|
)
|
|
|
(636,373
|
)
|
|
|
687,227
|
|
Conversions
|
|
|
(20,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,000
|
)
|
Amortization
|
|
|
-
|
|
|
|
209,292
|
|
|
|
1,079,510
|
|
|
|
1,288,802
|
|
Balance at September 30, 2016
|
|
$
|
2,568,095
|
|
|
$
|
(88,808
|
)
|
|
$
|
(139,912
|
)
|
|
$
|
2,339,375
|
|
NOTE 8 –DERIVATIVE LIABILITY
Due to the potential adjustment in the conversion
price associated with certain of the convertible debentures and the potential adjustment in the exercise price of certain of the
warrants, the Company has determined that certain conversion features and warrants are derivative liabilities.
The fair values of the embedded conversion
features and the warrants are estimated and recorded as derivative liabilities on the date of issuance, offset by a discount on
the related convertible note payable up to the face amount of the note, with any excess fair value recorded as derivative expense
on the date of issuance. The Company’s convertible debt is convertible into common stock at conversion rates that vary based
on the trading prices of the Company’s common stock. Accordingly, the conversion feature is required to be presented at fair
value on the dates of issuance, settlement, and at each reporting date. The Company also has warrants to purchase common stock
outstanding that provide for adjustments to the exercise prices upon the future dilutive issuances. The Company utilizes Monte
Carlo simulations and stochastic forecasting to estimate the fair value of the warrants and conversion options. The ranges of assumptions
utilized in estimating the fair value of the warrants and conversion options during the nine months ended September 30, 2016, are
as follows:
Expected Volatility
|
|
|
70% to 87%
|
|
Expected Term
|
|
|
0.5 to 5.0 Years
|
|
Risk Free Rate
|
|
|
0.20% to 1.14%
|
|
Dividend Rate
|
|
|
0.00%
|
|
Triggering Capital Raise Probabilities
|
|
|
50% - 75%
|
|
A summary of derivative activity for the nine
months ended September 30, 2016 is as follows:
Balance at December 31, 2015
|
|
$
|
25,445,645
|
|
New issuances
|
|
|
648,836
|
|
Conversions feature reclassified to equity upon conversion of related notes payable
|
|
|
(692,850
|
)
|
Change in fair value
|
|
|
(16,082,616
|
)
|
Balance at September 30, 2016
|
|
$
|
9,319,015
|
|
NOTE 9 – RELATED PARTY TRANSACTIONS
Acquisition of FIN:
As discussed in Note 2, the Company
acquired all of the issued and outstanding shares of FIN in February 2016. The Company’s Chief Operating Officer and
then 1.7% shareholder in the Company was also a significant shareholder in FIN at the time of the acquisition.
Convertible Notes Payable
As of September 30, 2016, the Company has
outstanding convertible notes payable to certain members of the Company’s Board of Directors. Total amount due to the
related parties amounted to $150,000 at September 30, 2016. See Note 7.
Other
In connection with the Company’s
ability to secure third-party financing, the Company paid Network 1 Financial Securities, Inc. (“Network 1”), a
registered broker-dealer, a cash fee of $224,000 and issued Network 1 3,430,000 shares of common stock of the Company in
accordance with its agreement during the nine months ended September 30, 2016. A member of the Company’s Board of
Directors previously maintained a partnership with a key principal of Network 1. The agreement calls for Network 1 to receive
a 16% commission, in cash and stock, of the total amount of proceeds from any financing it secures for the Company (8% in
cash and 8% in stock).
NOTE 10
–
STOCKHOLDER’S
DEFICIT
Common Stock
During the nine months ended September 30,
2016, the Company issued 704,074 shares of common stock upon the conversion of principal and interest on convertible debt totaling
$21,222.
During the nine months ended September
30, 2016, the Company issued 94,068 shares of common stock as consideration for information technology services. The fair value of
the shares, totaling $15,227, was estimated based on the publicly quoted trading price and recorded as expense.
During the nine months ended September 30,
2016, the Company issued 675,000 shares of common stock as consideration for services related to its acquisition of FIN Holdings.
The fair value of the shares, totaling $270,000, was estimated based on the publicly quoted trading price and recorded as expense.
During the nine months ended September 30,
2016, the Company issued 260,537 shares of common stock in partial settlement of a contingent liability of $59,681 related to its
acquisition of MultiPay. See Note 12.
During the nine months ended September
30, 2016, the Company issued 1,430,000 shares of common stock as consideration for debt issuance costs. The fair value of
the shares, totaling $169,125, was estimated based on publicly quoted trading prices and recorded as debt issuance costs to
be amortized into interest expense over the terms of the respective debt agreements.
During the nine months ended September
30, 2016, the Company issued 1,033,337 shares of common stock in connection with the April 2016 convertible notes (See Note
7) of which $54,470 of the proceeds from the issuance of convertible notes was attributed to the common stock based on their
relative fair value to that of the note and recorded as a debt discount to be amortized into interest expense over the terms
of the respective debt agreements.
During the nine months ended September 30,
2016, the Company issued 22,500,000 shares of common stock as consideration for the acquisition of FIN Holdings. See Note 2.
On August 10, 2016 through August
26, 2016, the Company entered into and closed Subscription Agreements with several accredited investors (the "August
2016 Accredited Investors") pursuant to which the August 2016 Accredited Investors purchased an aggregate of
25,000,000 shares of the Company's common stock (the "2016 Subscription Shares") for an aggregate purchase price
of $1,250,000. In order to reduce the dilution to the other shareholders as a result of this private offering,
certain shareholders of the Company including the Chief Executive Officer, directors and others agreed to return to the
Company 10,000,000 shares of common stock in the aggregate for cancellation. As of September 30, 2016, only 3,345,616 had
been returned. The majority of the remaining 6,654,384 were returned and cancelled in the first quarter of 2017. In
connection with this private offering, the Company paid Network 1 Financial Securities, Inc., a registered broker-dealer, a
cash fee of $100,000 and issued 2,000,000 shares of common stock of the Company.
Warrants
During the nine months ended
September 30, 2016, in connection with the issuance of debt and the purchase of inventory, the Company issued warrants to
acquire 15,966,953 shares of common stock over five-year terms. Warrants to acquire 208,332, 258,621 and 1,550,000 shares of
common stock are exercisable for an exercise price of $0.48 per share, $0.58 per share and $0.10 (previously $0.25) per
share, respectively. On August 10, 2016, the Company and the April 2016 Accredited Investors entered into a letter agreement
whereby the conversion price of the secured convertible debentures was reduced to $0.10 in consideration of the modification
of the price protection features. Furthermore, the exercise price of the common stock purchase warrants was reduced
to $0.10 per share and the number of shares issuable upon exercise of the common stock purchase warrants was increased from
6,200,000 to 15,500,000.
The following is a summary of the Company’s
warrant activity for the nine months ended September 30, 2016:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
|
Outstanding at December 31, 2015
|
|
|
35,171,744
|
|
|
$
|
0.10
|
|
|
3.83 Years
|
Granted
|
|
|
15,966,953
|
|
|
$
|
0.11
|
|
|
4.55 Years
|
Outstanding at September 30, 2016
|
|
|
51,138,697
|
|
|
$
|
0.11
|
|
|
4.05 Years
|
Stock Options
During the six months ended June 30,
2016, the Company granted to employees, options to acquire 3,000,000 shares of common stock, of which 1,000,000
are exercisable at an exercise price of $0.45 per share vesting over two years, 1,000,000 are exercisable at an exercise
price of $0.40 per share vesting on the date of grant, 500,000 are exercisable at an exercise price of $0.25 per share with
100,000 exercisable immediately and the balance vesting over two years, and 500,000 are exercisable at an exercise price
of $0.10 per share vesting over two years.
On August 10, 2016, the Company issued to several
of its employees and consultants stock options (the "Plan Options") under its Equity Compensation Plan to acquire an
aggregate of 17,000,000 shares of common stock of the Company exercisable at $0.05 per share. The Plan Options contain vesting
periods over 12 quarters commencing on October 1, 2016 as well as various vesting milestones. The Plan Options are exercisable
for a period of ten years. Further, the Company amended existing stock options to acquire 50,800,000 shares of common stock under
its Equity Compensation Plan to extend the term from five years to 10 years.
On August 10, 2016, the Company entered into
an amended agreement (the "Amendment") with Parity Labs, LLC ("Parity") to amend the compensation section of
an existing Advisory Agreement previously entered into between the Company and Parity on November 16, 2015 for the provision of
strategic advisory services. The Amendment calls for the Company to issue to Parity the option (the "Parity Option")
to acquire 20,000,000 shares of common stock of the Company, exercisable at $0.05 per share for a period of ten years. The Parity
Option vests as to 10,000,000 options immediately and then in 12 equal tranches of 833,333 options per month commencing
on September 1, 2016. Parity options vested in entirety upon Mr. Beck becoming Chief Executive Officer of Ipsidy, Inc. in January
2017. Mr. Beck is the manager of Parity.
The Company determined the grant date fair value of the options
granted during the nine months ended September 30, 2016 using the Black Scholes Method and the following assumptions:
Expected Volatility – 79% to 93%
Expected Term – 2.5 – 5.9 Years
Risk Free Rate – 1.16% - 1.49%
Dividend Rate – 0.00%
Activity related to stock options for the nine
months ended September 30, 2016 is summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Contractual
Term (Yrs.)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of December 31, 2015
|
|
|
47,800,000
|
|
|
$
|
0.32
|
|
|
|
3.99
|
|
|
$
|
924,650
|
|
Granted
|
|
|
40,000,000
|
|
|
$
|
0.09
|
|
|
|
9.89
|
|
|
$
|
3,725,000
|
|
Outstanding as of September 30, 2016
|
|
|
87,800,000
|
|
|
$
|
0.21
|
|
|
|
9.40
|
|
|
$
|
4,649,650
|
|
Exercisable as of September 30, 2016
|
|
|
51,258,333
|
|
|
$
|
0.30
|
|
|
|
9.19
|
|
|
$
|
1,570,658
|
|
The following table summarizes stock option
information as of September 30, 2016:
Exercise Prices
|
|
|
Outstanding
|
|
|
Weighted
Average
Contractual
Life
|
|
Exercisable
|
|
$
|
0.0001
|
|
|
|
3,500,000
|
|
|
9.0 Years
|
|
|
1,750,000
|
|
$
|
0.05
|
|
|
|
37,000,000
|
|
|
9.93 Yeas
|
|
|
10,833,333
|
|
$
|
0.10
|
|
|
|
8,500,000
|
|
|
8.98 Years
|
|
|
4,500,000
|
|
$
|
0.15
|
|
|
|
6,300,000
|
|
|
9.0 Years
|
|
|
2,825,000
|
|
$
|
0.25
|
|
|
|
500,000
|
|
|
9.51 Years
|
|
|
100,000
|
|
$
|
0.40
|
|
|
|
1,000,000
|
|
|
9.42 Years
|
|
|
1,000,000
|
|
$
|
0.45
|
|
|
|
31,000,000
|
|
|
9.01Years
|
|
|
30,250,000
|
|
|
Total
|
|
|
|
87,800,000
|
|
|
9.19 Years
|
|
|
51,258,333
|
|
As highlighted on the previous page,
the term of all options was extended for all previous awards to ten years from the original grant date and therefore
the remaining contractual term in the table above is now 9.19 years. The incremental cost associated with the term extension
was approximately $402,000.
During the nine months ended September 30,
2016, the Company recognized approximately $6,806,000 of stock-based compensation expense. As of September 30, 2016, there was
approximately $3,111,000 of unrecognized compensation costs related to stock options outstanding which will be expensed through
2019.
NOTES 11 –
direct
financing lease
In September 2015, the Company and
an entity in Colombia entered into a rental contract for the rental of 78 kiosks to provide cash collection and fare services
at transportation stations. The lease term began in May 2016 when the kiosks were installed and operational. The term of
the rental contract is ten years at an approximate monthly rate of $11,900. The lessee has the option at the end of the
lease term to purchase each unit for approximately $40. The term of the lease approximates the economic life of the kiosks.
The kiosks were installed and operational in the second quarter of 2016; which is when the lease commenced.
The Company has recorded the transaction at
its net investment in the lease and will receive monthly payments of $11,856, or $142,272 annually, to reduce the receivable and
record income associated with the related amount due. The transaction resulted in incremental revenue for the nine months ended
September 30, 2016 of $33,050.
The equipment under capital lease is valued at approximately $748,000.
The aggregate minimum future lease payments to be received is approximately $1,422,000. Unearned income recorded in connection
with this lease is approximately $474,000 and will be recorded over the term of the lease using the effective interest method.
Future minimum lease payments to be received under this lease are as follows;
Year Ending December 31,
|
|
|
|
2016
|
|
$
|
30,537
|
|
2017
|
|
|
122,145
|
|
2018
|
|
|
122,145
|
|
2019
|
|
|
122,145
|
|
2020
|
|
|
122,145
|
|
2021
|
|
|
122,145
|
|
Thereafter
|
|
|
529,323
|
|
|
|
|
1,170,585
|
|
Less Deferred income
|
|
|
(440,486
|
)
|
Net investment lease
|
|
$
|
730,099
|
|
NOTE 12
–
COMMITMENTS AND CONTINGENCIES
Contingent Purchase Consideration
The Company has recorded a contingent liability
of approximately $370,000 related to the acquisition of Multipay because of the contingency of the shares to be issued and debt
to be released upon the payment of certain liabilities by the Multipay Shareholders. During the nine months ended September 30,
2016, the Company issued 260,537 shares of common stock in settlement of $59,681 of the contingent liability. The remaining balance
as of September 30, 2016 was $310,445.
Legal Matters
From time to time, claims are made against
the Company in the ordinary course of business, which could result in litigation. Claims and associated litigation are subject
to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting
the Company from selling one or more products or engaging in other activities. The occurrence of an unfavorable outcome in any
specific period could have a material adverse effect on the Company’s results of operations for that period or future periods.
The Company is not presently a party to any pending or threatened legal proceedings.
NOTE 13 – SUBSEQUENT EVENTS
From December 1, 2016 through December
27, 2016, the Company entered into and closed Securities Purchase Agreements with several accredited investors (the
"December 2016 Accredited Investors") pursuant to which the December 2016 Accredited Investors invested an
aggregate of $1,275,000 (the "Offering") into the Company in consideration of Promissory Notes (the
"Notes") and an aggregate of 1,912,500 shares of common stock. The Notes are payable one year from the date of
issuance and bear interest of 10% per annum for the initial six months of the term of the Notes and 15% per annum for the
remaining six months of the term of the Notes. The Notes could be prepaid in whole or in part by the Company at any time
without penalty; provided, that any partial payment of principal must be accompanied by payment of accrued interest to the
date of prepayment. Any payment made to the December 2016 Accredited Investors which is not a full payment of all principal
and interest on all of the Notes will be made pro rata to the December 2016 Accredited Investors based on the respective
principal amounts of the Notes. The Notes were converted into shares of common stock on January 31, 2017 as more
fully described below.
On December 30, 2016, ID Global LATAM
S.A.S. (“IDG LATAM”), a wholly owned subsidiary of the Company, entered into a Contract for the Provision of Cash
Collection Services (the "Contract") with Recaudo Bogota S.A.S. ("RB"), a Colombian company, pursuant to
which the Company agreed to supply, maintain and provide platform services for 740 unattended payment collection and fare
ticketing kiosks, in consideration of approximately $30 million dollars (excluding VAT) payable over the ten year period of
the Contract. Pursuant to the contract IDG LATAM is required to obtain a performance bond from a financial institution in the
amount of $6 million dollars. In addition, IDG LATAM will need to obtain financing for the cost of the equipment to be
supplied but has not as of the date hereof entered into a definitive agreement for such financing nor has the required
performance bond been obtained. The parties are currently re-negotiating the terms of the Contract including a potential
phased delivery and a reduction in the number of kiosks. If the negotiation is formalized in a definitive agreement, this
would potentially result in a reduction in the consideration paid over the ten year period of the Contract and reduce the
required performance bond.
On January 31, 2017, the Company
converted the outstanding debt and accrued interest amount of approximately $6.3 million into approximately 84.8 million
shares of common stock, $.0001 par value per share (“Common Stock’), at a conversion price of $0.10 per share
unless the debt conversion price was initially priced at less than the $0.10 per share. Additionally, the
exercise price of approximately 11.7 million warrants to acquire shares of Common Stock were reduced to $.10 per share
and certain price protection and anti-dilution provisions were removed. See Notes 6 and 7 related to the
Company’s convertible debt and outstanding notes payable.
On January 31, 2017, the Company entered
into and closed a Securities Purchase Agreement with an accredited investor pursuant to which the Company borrowed $3,000,000 into
the Company in consideration of a Senior Unsecured Note and an aggregate of 4,500,000 shares of Common Stock. The Senior
Unsecured Note matures in January 2019 and bears interest at a rate of 10%. In connection with this private offering, the Company
paid Network 1 Financial Securities, Inc., a registered broker-dealer, a cash fee of $120,000 and issued 1,020,000 shares of common
stock of the Company.
On January 31, 2017, the Company engaged Philip
D. Beck as Chief Executive Officer, President and Chairman of the Board of Directors and Stuart P. Stoller as Chief Financial Officer.
In addition, Andras Vago, David Jones and Charles Albanese resigned as directors of the Company and Mr. Albanese also resigned
as Chief Financial Officer. Thomas Szoke reigned as Chief Executive Officer and was engaged as Chief Technology Officer. Douglas
Solomon resigned as Chief Operating Officer and was engaged as
Executive Director, Government
Relations and Enterprise Security.
In
connection with the engagement of Philip D. Beck and Stuart P. Stoller,
the Company granted Mr. Beck and Mr. Stoller,
stock options to acquire 15 million shares and 5 million shares of common stock of the Company, respectively, at an exercise
price of $0.10 per share for a period of ten years. Further, upon the Company being legally entitled to do so, the Company
has agreed to enter into Restricted Stock Purchase Agreements with Mr. Beck and Mr. Stoller to sell 15 million shares and 5
million shares, respectively, of common stock at a per share price of $0.0001, which shares of common stock vest upon
achieving a performance threshold.
Effective February 1, 2017, the Company amended
its certificate of incorporation to change its legal name to “Ipsidy Inc.” from ID Global Solutions Corporation. The
name change was effected pursuant to Section 242 of the Delaware Corporation Law (the “DGCL”). Under the DGCL, the
amendment to the Company’s certificate of incorporation to effect the name change did not require stockholder approval. The
name change does not affect the rights of the Company’s security holders. There were no other changes to the Company’s
incorporation in connection with the name change.
On March 22, 2017, Ipsidy Inc. (the “Company”)
entered into Subscription Agreements with several accredited investors (the "March 2017 Accredited Investors") pursuant
to which the March 2017 Accredited Investors agreed to purchase an aggregate of 20,000,000 shares of the Company’s common
stock for an aggregate purchase price of $4,000,000. The Company has received proceeds of $3,170,000 as of March 22, 2017. An individual
March 2017 Accredited Investor has agreed to fund $830,000 by April 30, 2017. In connection with this private offering, the Company
paid Network 1 Financial Securities, Inc. (“Network”), a registered broker-dealer, a cash fee of $240,000 and agreed
to issue Network 1,000,000 shares of common stock of the Company upon increasing its authorized shares of common stock.
NOTE 14 – RESTATEMENT FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2015
During the preparation of its consolidated
financial statements for the year ended December 31, 2015, the Company determined that for the three and nine-months ended September
30, 2015 it had previously (1) used incorrect valuations for the fair value of intangible assets acquired; (2) capitalized internal
use software, which should have been expensed in accordance with US GAAP; (3) used incorrect valuations for derivative liabilities;
(4) used incorrect valuations for stock options issued for compensation; (5) recorded certain costs related to the issuance of
its convertible and other notes payable incorrectly as general and administrative expenses; and (6) classified certain expenses
and named certain accounts incorrectly. The Company has adjusted those intangible assets, derivative liabilities and compensation
related to stock options using correct valuations. In addition and in accordance with US GAAP, the Company has now capitalized
the costs related to the issuance of its convertible and other notes payable as debt issuance costs as a reduction of the debt
principal and expensed the previously capitalized internal use software costs. The following summarizes the adjustments made to
the Company’s previously reported amounts for the three and nine months ended September 30, 2015.
Condensed Consolidated Statements of Operations:
|
|
Three Months Ended September 30, 2015
|
|
|
|
As Reported
|
|
|
Reclassifications
|
|
|
As Reclassified
|
|
|
Adjustments
|
|
|
As Restated
|
|
Revenue
|
|
$
|
75,312
|
|
|
$
|
-
|
|
|
$
|
75,312
|
|
|
$
|
-
|
|
|
$
|
75,312
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,135
|
|
|
|
-
|
|
|
|
10,135
|
|
|
|
32,549
|
(1)
|
|
|
42,684
|
|
Research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
840,199
|
|
|
|
4,849,740
|
|
|
|
5,689,939
|
|
|
|
(1,957,052
|
)(4)(5)
|
|
|
3,732,887
|
|
Total operating expenses
|
|
|
850,334
|
|
|
|
4,849,740
|
|
|
|
5,700,074
|
|
|
|
(1,924,503
|
)
|
|
|
3,775,571
|
|
Loss from operations
|
|
|
(775,022
|
)
|
|
|
(4,849,740
|
)
|
|
|
(5,624,762
|
)
|
|
|
1,924,503
|
|
|
|
(3,700,259
|
)
|
Derivative expense
|
|
|
(20,478,790
|
)
|
|
|
-
|
|
|
|
(20,478,790
|
)
|
|
|
(3,767,837
|
)(3)
|
|
|
(24,246,627
|
)
|
Stock compensation expense
|
|
|
(4,849,740
|
)
|
|
|
4,849,740
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Financing Costs of debentures
|
|
|
(1,357,917
|
)
|
|
|
-
|
|
|
|
(1,357,917
|
)
|
|
|
1,357,917
|
|
|
|
-
|
|
Amortizaton of debt discounts
|
|
|
(358,705
|
)
|
|
|
358,705
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest expense
|
|
|
(98,166
|
)
|
|
|
(358,705
|
)
|
|
|
(456,871
|
)
|
|
|
(11,919
|
)(3)
|
|
|
(468,790
|
)
|
Other income
|
|
|
9,315
|
|
|
|
-
|
|
|
|
9,315
|
|
|
|
-
|
|
|
|
9,315
|
|
Net loss
|
|
$
|
(27,909,025
|
)
|
|
$
|
-
|
|
|
$
|
(27,909,025
|
)
|
|
$
|
(497,336
|
)
|
|
$
|
(28,406,361
|
)
|
Net loss per share: Basic and Diluted
|
|
$
|
(0.16
|
)
|
|
$
|
-
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.17
|
)
|
|
|
Nine Months Ended September 30, 2015
|
|
|
|
As Reported
|
|
|
Reclassifications
|
|
|
As Reclassified
|
|
|
Adjustments
|
|
|
As Reclassified
|
|
Revenue
|
|
$
|
86,358
|
|
|
$
|
-
|
|
|
$
|
86,358
|
|
|
$
|
-
|
|
|
$
|
86,358
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
34,312
|
|
|
|
-
|
|
|
|
34,312
|
|
|
|
65,098
|
(1)
|
|
|
99,410
|
|
Research and development
|
|
|
24,853
|
|
|
|
-
|
|
|
|
24,853
|
|
|
|
200,000
|
(2)
|
|
|
224,853
|
|
General and administrative
|
|
|
1,817,906
|
|
|
|
4,849,740
|
|
|
|
6,667,646
|
|
|
|
(2,003,395
|
)(4)(5)
|
|
|
4,664,251
|
|
Total operating expenses
|
|
|
1,877,071
|
|
|
|
4,849,740
|
|
|
|
6,726,811
|
|
|
|
(1,738,297
|
)
|
|
|
4,988,514
|
|
Loss from operations
|
|
|
(1,790,713
|
)
|
|
|
(4,849,740
|
)
|
|
|
(6,640,453
|
)
|
|
|
1,738,297
|
|
|
|
(4,902,156
|
)
|
Derivative expense
|
|
|
(20,979,041
|
)
|
|
|
-
|
|
|
|
(20,979,041
|
)
|
|
|
(6,132,939
|
)(3)
|
|
|
(27,111,980
|
)
|
Stock compensation expense
|
|
|
(4,849,740
|
)
|
|
|
4,849,740
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Financing Costs
|
|
|
(4,538,040
|
)
|
|
|
-
|
|
|
|
(4,538,040
|
)
|
|
|
4,538,040
|
|
|
|
-
|
|
Amortizaton of debt discounts
|
|
|
(421,524
|
)
|
|
|
421,524
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest expense
|
|
|
(112,304
|
)
|
|
|
(421,524
|
)
|
|
|
(533,828
|
)
|
|
|
28,667
|
(3)
|
|
|
(505,161
|
)
|
Other income
|
|
|
9,315
|
|
|
|
-
|
|
|
|
9,315
|
|
|
|
-
|
|
|
|
9,315
|
|
Net loss
|
|
$
|
(32,682,047
|
)
|
|
$
|
-
|
|
|
$
|
(32,682,047
|
)
|
|
$
|
172,065
|
|
|
$
|
(32,509,982
|
)
|
Net loss per share: Basic and Diluted
|
|
$
|
(0.20
|
)
|
|
$
|
-
|
|
|
$
|
(0.20
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.20
|
)
|
(1) Fair Value of Intangible Assets In
Connection with Business Acquisition.
During the three months ended June 30, 2015, the Company accounted for the acquisition
of Multipay as a business combination using the acquisition method of accounting utilizing an incorrect valuation. The adjustment
to reflect the correct valuation, including the purchase price allocation of assets acquired, resulted in an increase of $138,336
to Goodwill, $168,438 to Intangible Assets (net of additional amortization) and $370,125 to Contingent Purchase Consideration as
of September 30, 2015. In addition, certain previously reported contingent assets and liabilities of $87,941 were eliminated. The
increase to Intangible Assets required an increase in previously reported amortization expense by $32,549 and $65,098 for the three
and nine months ended September 30, 2015, respectively.
(2) Intangible Assets—Capitalized
Software.
The Company determined that previously capitalized software should have been expensed in accordance with US GAAP.
Accordingly, a reduction of $200,000 to Intangible Assets and an increase to Research and Development Expenses is made as of and
for the six months ended September 30, 2015.
(3) Derivative Liability.
The
fair value of the derivative liabilities related to convertible and other notes payable have now been estimated based on the Monte
Carlo Simulation Model because it considers the effect of the down round feature (probability of a triggering capital raise) along
with the other assumptions associated with the Black-Scholes option pricing model. The previously used methodology by the Company
incorrectly did not take into consideration the probability of a financing at a price that would trigger the instruments down round
provision. The adjusted fair value of the Company’s derivatives associated with its Convertible Notes and other Notes Payable
resulted in an increase of $1,545,232 to the Derivative Liability as of September 30, 2015. For the three and nine months ended
September 30, 2015, the Company’s derivative expense is increased by $3,767,837 and $6,132,939, respectively. In addition,
the finalized fair value analysis of the Company’s embedded derivatives associated with its Convertible and other Notes Payable
required a reduction to the previously recorded Debt Discount which resulted in an increase (decrease) of interest expense of $11,919
and $(28,667) for the three and nine months ended September 30, 2015, respectively. The adjusted fair value analysis for the derivatives
required a decrease to Convertible Notes Payable of $271,655 and an increase to Notes Payable of $159,357 as of September 30, 2015.
(4) Stock-Based Compensation.
The
adjusted fair value of the Company’s stock-based compensation resulted in an increase to general and administrative expenses
of $1,730,352 and $1,716,695 for the three and nine months ended September 30, 2015, respectively.
(5) Debt Issuance Costs.
The
capitalization of debt issuance costs resulted in a reduction to convertible notes payable of and a corresponding decrease general
and administrative of $226,700 and $286,700 for the three and nine months ended September 30, 2015, respectively. The net decrease
to General and Administrative expenses, after considering the decrease of $1,730,352 and $1,716,695 related to stock-based compensation
in (4) above and the capitalization of debt issuance costs of $226,700 and $286,700 is $1,957,052 and $2,003,395 for the three
and nine months ended September 30, 2015, respectively.
(6) Reclassifications.
During
the preparation of its consolidated financial statements for the year ended December 31, 2015, the Company changed or renamed the
classification/description of certain accounts and related amounts. Accordingly, certain of the previously stated classifications/descriptions
and related amounts required adjustment. As of September 30, 2015, and for the three and nine months then ended, the reclassifications
and description changes relate to general and administrative and interest expense associated with the recording of the Debt Discount
amortization and stock-based compensation expense and to reclassification from convertible notes payable to notes payable for those
notes for which only the accrued interest is convertible.