Notes to Consolidated Financial Statements
1.
Basis of Presentation and Going Concern
The Company is a Delaware corporation. Through the subsidiary
incorporated in the state of California, SpendSmart Networks, Inc.
(“SpendSmart-CA”), the Company provides proprietary
loyalty systems and a suite of digital engagement and marketing
servers through our
Mobile and Loyalty Marketing programs
and proprietary website building software that help local merchants
build relationships with consumers and drive revenues
. The Company is a publicly traded company trading
on the OTC Bulletin Board under the symbol “SSPC.” The
accompanying audited consolidated financial statements include the
accounts of the Company and SpendSmart-CA as of December 31, 2016
and 2015 and for the years then ended, and have been prepared in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). All
intercompany balances and transactions have been
eliminated.
As of December 31, 2016, the Company’s audited consolidated
financial statements included an opinion containing an explanatory
paragraph as to the uncertainty of the Company’s ability to
continue as a going concern. The Company has continued to incur net
losses through December 31, 2016 and have yet to establish
profitable operations. These factors among others create a
substantial doubt about our ability to continue as a going concern.
The Company’s audited consolidated financial statements as of
and for the periods ended December 31, 2016 do not contain any
adjustments for this uncertainty.
The Company currently plans to raise additional required capital
through the sale of shares of the Company’s preferred or
common stock. All additional amounts raised will be used for our
future investing and operating cash flow needs. However there can
be no assurance that we will be successful in consummating such
financing. This description of our future plans for financing does
not constitute an offer to sell or the solicitation of an offer to
buy our securities.
2. Reclassification
Certain
reclassifications were made to the 2015 financial statement
presentation to conform to the 2016 financial statement
presentation. These reclassifications relate to balances from
discontinued operations.
3.
Summary of Significant Accounting Policies
Loans Receivable and Accounts Receivable
The Company extended credit to its customers in the normal course
of business and performs ongoing credit evaluations of its
customers. Loans and accounts receivable are stated at amounts due
from customers net of an allowance for doubtful accounts. Accounts
that are outstanding longer than the contractual payment terms are
considered past due. The Company determines its allowance for
doubtful accounts by considering a number of factors, including the
length of time loan and accounts receivable are past due and the
customer's current ability to pay its obligation to the Company.
The Company writes off loans and accounts receivable when they
become uncollectible. The Company is no longer entering into notes
with its customers.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with US GAAP requires our management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities,
fair value of financial instruments, at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could materially differ from those estimates.
Significant estimates inherent in the preparation of the
accompanying consolidated financial statements include
recoverability and useful lives of intangible assets, the valuation
allowance related to the Company's deferred tax assets, the
allowance for doubtful accounts related and notes and accounts
receivable and the fair value of stock options and warrants granted
to employees, consultants, directors, investors and placement
agents.
Revenue Recognition
The Company generates revenues primarily in the form of set up
fees, license fees, messaging, equipment and marketing services
fees and value added mobile marketing and mobile commerce
services. License fees are charged monthly for support
services. Set-up fees primarily consist of fees for
website development services (including support and unspecified
upgrades and enhancements when and if they are available), training
and professional services that are not essential to functionality.
The Company offers two licenses consisting of our Engage license
and our Thrive license.
The Company now offers both licenses
in a combined package known as the Customer Loyalty System License
(“CLS”).
We recognize revenues when all of the following conditions are
met:
●
there
is persuasive evidence of an arrangement;
●
the
products or services have been delivered to the customer;
●
the
amount of fees to be paid by the customer is fixed or determinable;
and
●
the
collection of the related fees is probable.
Signed agreements are used as evidence of an arrangement.
Electronic delivery occurs when we provide the customer with access
to the software. We assess whether a fee is fixed or determinable
at the outset of the arrangement, primarily based on the payment
terms associated with the transaction. The Company offered extended
payment terms in 2014 and 2015 with regards to the setup fee with
typical terms of payment due between one and three years from
delivery of license. The Company no longer offers extended payment
terms. We assess collectability of the set-up fee based on a number
of factors such as collection history and creditworthiness of the
customer. If we determine that collectability is not probable,
revenue is deferred until collectability becomes probable,
generally upon receipt of cash.
License arrangements may also include set-up fees such as website
development, delivery of tablets, professional services and
training services, which are typically delivered within 30-60 days
of the contract term. In determining whether set-up fee revenues
should be accounted for separately from license revenues, we
evaluate whether the set-up fees are considered essential to the
functionality of the license using factors such as the nature of
our products; whether they are ready for use by the customer upon
receipt; the nature of our implementation services, which typically
do not involve significant customization to or development of the
underlying software code; the availability of services from other
vendors; whether the timing of payments for license revenues is
coincident with performance of services; and whether milestones or
acceptance criteria exist that affect the realizability of the
license fee. Substantially all of our set-up fee arrangements are
recognized as the services are performed. Payments received in
advance of services performed are deferred and recognized when the
related services are performed.
We do not offer refunds and therefore have not recorded any sales
return allowance for any of the periods presented. Upon a periodic
review of outstanding accounts and notes receivable, amounts that
are deemed to be uncollectible are written off against the
allowance for doubtful accounts.
Deferred revenue consists substantially of amounts invoiced in
advance of revenue recognition for our products and services
described above. We recognize deferred revenue as revenue only when
the revenue recognition criteria are met.
Debt discount and issuance costs
Debt issuance costs, including the value of warrants issued in
connection with debt financing and fees or costs paid to lender,
are presented in the consolidated balance sheets as a direct
deduction from the carrying amount of that debt.
The Company amortizes the discount to interest expense over the
term of the respective debt using the effective interest
method.
Cash and cash equivalents
The Company considers all investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents
primarily represent funds invested in money market funds, bank
certificates of deposit and U.S. government debt securities whose
cost equals fair market value.
From time to time, the Company has maintained bank balances in
excess of insurance limits established by the Federal Deposit
Insurance Corporation. The Company has not experienced any losses
with respect to cash. Management believes the Company is not
exposed to any significant credit risk with respect to its cash and
cash equivalents.
Property and Equipment
Property and equipment (including
kiosks) had been recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related
assets (generally three to five years). Costs incurred for
maintenance and repairs are expensed as incurred and expenditures
for major replacements and improvements are capitalized and
depreciated over their estimated remaining useful lives.
Depreciation expense for the years ended December 31, 2016 and2015
was $0 and $628,999, respectively. The Company accelerated the
depreciation in the amount of approximately $496,000 on the kiosks,
which have seven inch screens, to reduce their net book value to
zero due to technological obsolescence in 2015. In the fourth
quarter 2015, they were replaced by new ten inch screens and some
new seven inch screens which will be able to run offline from wifi,
have faster processors and ultra-sharp screens, and have licensee
reporting tools.
Currently the Company sells the equipment to the
customer. Therefore the cost of equipment is included in operating
expenses and not capitalized as property and
equipment.
Software Capitalization
The Company accounts for computer software used in the business in
accordance with ASC 350 “Intangibles-Goodwill and
Other”. ASC 350 requires computer software costs associated
with internal use software to be charged to operations as incurred
until certain capitalization criteria are met. Costs incurred
during the preliminary project stage and the post-implementation
stages are expensed as incurred. Certain qualifying costs incurred
during the application development stage are capitalized as
property, equipment and software. These costs generally consist of
internal labor during configuration, coding, and testing
activities. Capitalization begins when (i) the preliminary project
stage is complete, (ii) management with the relevant authority
authorizes and commits to the funding of the software project, and
(iii) it is probable both that the project will be completed and
that the software will be used to perform the function intended. We
capitalized $291,957 and $912,212 in software for the years ended
December 31, 2016 and 2015, respectively. Software depreciation
expense for the years ended December 31, 2016 and 2015 was $469,987
and $273,517, respectively.
We recorded impairment expense
of $718,116 related to our SMS software for the year ended December
31, 2016.
Valuation of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets
are less than the assets’ carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets
exceed the estimated fair value of the assets.
We recorded
impairment expense on our intangible assets of $922,688 related to
our SMS technology assets, $38,853 related to trademarks, and
$17,531 related to our TechXpress technology assets for the year
ended December 31, 2016.
We conducted
an impairment analysis on our intangible assets and goodwill and
determined that we had an impairment related to our intangible
assets of
$1,189,246 and on our goodwill of $3,202,276 at
December 31, 2015
Income Tax Expense Estimates and Policies
As part of the income tax provision process of preparing the
Company’s financial statements, the Company is required to
estimate the Company’s provision for income taxes. This
process involves estimating our current tax liabilities together
with assessing temporary differences resulting from differing
treatments of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities.
Management then assesses the likelihood that the Company deferred
tax assets will be recovered from future taxable income and to the
extent believed that recovery is not likely, a valuation allowance
is established. Further, to the extent a valuation allowance is
established and changes occur to this allowance in a financial
accounting period, such changes are recognized in the
Company’s tax provision in the Company’s consolidated
statement of operations. The Company’s use of judgment in
making estimates to determine the Company’s provision for
income taxes, deferred tax assets and liabilities and any valuation
allowance is recorded against our net deferred tax
assets.
There are various factors that may cause these tax assumptions to
change in the near term, and the Company may have to record a
future valuation allowance against our deferred tax assets. The
Company recognizes the benefit of an uncertain tax position taken
or expected to be taken on the Company’s income tax returns
if it is “more likely than not” that such tax position
will be sustained based on its technical merits.
Stock Based Compensation
The Company accounts for stock based compensation arrangements
through the measurement and recognition of compensation expense for
all stock based payment awards to employees and directors based on
estimated fair values. The Company uses the Black-Scholes option
valuation model to estimate the fair value of the Company’s
stock options and warrants at the date of grant. The Black-Scholes
option valuation model requires the input of subjective assumptions
to calculate the value of options and warrants. The Company uses
historical company data among other information to estimate the
expected price volatility and the expected forfeiture
rate.
Derivatives – Warrant Liability
The Company accounts for the common stock warrants granted and
still outstanding as of December 31, 2016 in connection with
certain financing transactions (“Transactions”) in
accordance with the guidance contained in ASC 815-40-15-7D,
"Contracts in Entity's Own Equity" whereby under that provision
they do not meet the criteria for equity treatment and must be
recorded as a liability. Accordingly, the Company classifies the
warrant instrument as a liability at its fair value and adjusts the
instrument to fair value at each reporting period. This liability
is subject to re-measurement at each balance sheet date until
exercised, and any change in fair value is recognized in the
Company's statements of operations. The fair value of the warrants
issued by the Company in connection with the transactions has been
estimated using a Monte Carlo simulation.
The Company accounts for certain of its outstanding warrants issued
in fiscal 2010, 2012 and 2013 (“2010 Warrants,”
“2012 Warrants” and “2013 Warrants, respectively)
as derivative liabilities. These warrants were determined to be
ineligible for equity classification due to provisions of the
respective instruments that may result in an adjustment to their
conversion or exercise prices. The Company recognized a gain of $0
and $47,209 in the fair value of derivatives for the years ended
December 31, 2016 and 2015, respectively. These derivative
liabilities which arose from the issuance of these warrants
resulted in an ending balance of derivative liabilities of $0 at
December 31, 2015, and expired in 2016.
The Company accounts for certain of its outstanding warrants issued
in fiscal 2016 (“2016 Warrants”) as derivative
liabilities. The 2016 Warrants were determined to be ineligible for
equity classification due to provisions of the respective
instruments that may result in an adjustment to their conversion or
exercise prices. The Company recognized a gain of $2,732,444 in the
fair value of these derivatives for the year ended December 31,
2016. These derivative liabilities which arose from the issuance of
the 2016 Warrants resulted in an ending balance of derivative
liabilities of $1,366,898 as of December 31,
2016.
Derivatives - Bifurcated Conversion Option in Convertible
Notes
The Company issued Convertible Notes with features that are either
(i) not afforded equity classification, (ii) embody risks not
clearly and closely related to host contracts, or (iii) may be
net-cash settled by the counterparty. As required by ASC
815,
Accounting for Derivative
Financial Instruments and Hedging Activities
, in certain instances, these instruments are
required to be carried as derivative liabilities, at fair value, in
our financial statements.
The Convertible Notes issued during the years ended December 31,
2016 and 2015 are subject to anti-dilution adjustments that allow
for the reduction in the Conversion Price, as defined in the
agreement, in the event the Company subsequently issues equity
securities including Common Stock or any security convertible or
exchangeable for shares of Common Stock for a price less than the
current conversion price. The Company bifurcated and accounted for
the conversion option in accordance with ASC 815 as a derivative
liability, since this conversion feature is not considered to
be indexed to the Company’s own stock.
The Company’s derivative liability has been measured at fair
value at December 31, 2016 using a Monte-Carlo Simulation. Inputs
into the model require estimates, including such items as estimated
volatility of the Company’s stock, estimated probabilities of
additional financing, risk-free interest rate, and the estimated
life of the financial instruments being fair valued. In addition,
since the conversion price contains an anti-dilution adjustment,
the probability that the Conversion Price of the Notes would
decrease as the share price decreased was also incorporated into
the valuation calculation.
The Company recognized a gain of $242,231 and a gain of $410,602 in
the fair value of conversion option derivatives for the year ended
December 31, 2016 and 2015, respectively. These derivative
liabilities resulted in an ending balance of conversion option
derivative liabilities of $88,242 and $179 as of December 31, 2016
and December 31, 2015, respectively.
Subsequent changes to the fair value of the derivative liabilities
will continue to require adjustments to their carrying value that
will be recorded as other income (in the event that their value
decreases) or as other expense (in the event that their value
increases). In general (all other factors being equal), the Company
will record income when the market value of the Company’s
common stock decreases and will record expense when the value of
the Company’s stock increases. The fair value of these
liabilities is estimated using Monte Carlo pricing models that are
based on the individual characteristics of the Company’s
warrants, preferred and common stock, as well as assumptions for
volatility, remaining expected life, risk-free interest rate and,
in some cases, credit spread.
Net Loss per Share
The Company calculates basic earnings per share (“EPS”)
by dividing the Company’s net loss applicable to common
shareholders by the weighted average number of common shares
outstanding for the period, without considering common stock
equivalents. Diluted EPS is computed by dividing net income or net
loss applicable to common shareholders by the weighted average
number of common shares outstanding for the period and the weighted
average number of dilutive common stock equivalents, such as
options and warrants. Options and warrants are only included in the
calculation of diluted EPS when their effect is
dilutive.
Fair value of assets and liabilities
Fair value is defined as the price that would be received from
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
When determining the fair value for applicable assets and
liabilities, we consider the principal or most advantageous market
in which we would transact and we consider assumptions market
participants would use when pricing the asset or liability, such as
inherent risk, transfer restrictions, and risk of nonperformance.
This guidance also establishes a fair value hierarchy to prioritize
inputs used in measuring fair value as follows:
|
●
|
Level
1: Observable inputs such as quoted prices in active
markets;
|
|
●
|
Level
2: Inputs, other than quoted prices in active markets, that are
observable either directly or indirectly; and
|
|
●
|
Level
3: Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own
assumptions.
|
The Company’s financial instruments are cash and cash
equivalents, accounts payable, and derivative liabilities. The
recorded values of cash equivalents and accounts payable
approximate their fair values based on their short-term nature. The
fair value of derivative liabilities is estimated using option
pricing models that are based on the individual characteristics of
our warrants, preferred and common stock, the derivative liability
on the valuation date as well as assumptions for volatility,
remaining expected life, risk-free interest rate and, in some
cases, credit spread. The derivative liabilities are the only Level
3 fair value measures.
A
summary of quantitative information with respect to valuation
methodology and significant unobservable inputs used for the
Company’s warrant derivative liabilities that are categorized
within Level 3 of the fair value hierarchy as of December 31, 2016
and 2015 is as follows:
Date
of Valuation
|
|
|
Stock
Price
|
0.02
|
0.15
|
Volatility
(Annual)
|
140
%
|
66
%
|
Number
of assumed financings
|
1
|
1
|
Total
shares outstanding
|
41,975,571
|
20,458,761
|
Strike
Price
|
0.01
|
0.75
|
Risk-free
Rate
|
1.34
%
|
0.96
%
|
Maturity
Date
|
|
|
Expected
Life
|
N/A
|
N/A
|
A summary of quantitative information with respect to valuation
methodology and significant unobservable inputs used for the
Company’s conversion option derivative that are categorized
within Level 3 of the fair value hierarchy as of December 31, 2016
is as follows:
Date
of Valuation
|
|
|
Stock
Price
|
0.02
|
0.15
|
Volatility
(Annual)
|
140
%
|
66
%
|
Strike
Price
|
N/A
|
0.75
|
Risk-free
Rate
|
1.40
%
|
1.40
%
|
Maturity
Date
|
|
|
At December 31, 2016 and 2015, the estimated fair values of the
liabilities measured on a recurring basis are as
follows:
|
|
Fair
Value Measurements at
|
|
Carrying
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
Earn-out
liability
|
$
-
|
$
-
|
$
-
|
$
-
|
Warrant
derivative liability
|
1,366,898
|
-
|
-
|
1,366,898
|
Conversion
option derivative liability
|
88,242
|
-
|
-
|
88,242
|
Total
|
$
1,455,140
|
$
-
|
$
-
|
$
1,455,140
|
|
|
|
|
|
|
|
Fair
Value Measurements at
|
|
Carrying
|
|
|
|
|
|
|
Financial
Assets
|
|
|
|
|
Earn-out
liability
|
$
-
|
$
-
|
$
-
|
$
-
|
Conversion
option derivative liability
|
179
|
-
|
-
|
179
|
Total
|
$
179
|
$
-
|
$
-
|
$
179
|
The
following tables present the activity for Level 3 liabilities for
the years ended December 31, 2016 and 2015:
|
Fair
Value Measurement Using
|
|
Significant
Unobservable Inputs
|
|
|
|
Warrant
Derivative Liability
|
Conversion
Option Derivative Liability
|
Beginning
balance at December 31, 2015
|
$
-
|
$
179
|
Additions
during the year
|
4,099,344
|
330,933
|
Total
(gains) or losses included in net loss
|
(2,732,446
)
|
(242,870
)
|
Transfers
in and/or out of Level 3
|
-
|
-
|
Ending
balance at December 31, 2016
|
$
1,366,898
|
$
88,242
|
|
Fair
Value Measurement Using
|
|
Significant
Unobservable Inputs
|
|
|
|
Warrant
Derivative Liability
|
Conversion
Option Derivative Liability
|
Beginning
balance at December 31, 2014
|
$
47,209
|
$
-
|
Additions
during the year
|
-
|
410,781
|
Total
(gains) or losses included in net loss
|
(47,209
)
|
(410,602
)
|
Transfers
in and/or out of Level 3
|
-
|
-
|
Ending
balance at December 31, 2015
|
$
-
|
$
179
|
Changes
in fair value of our Level 3 earn-out liability for the years ended
December 31, 2016 and 2015 were as follows:
Fair Value Measurements Using Level 3
Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Derivative Liability
|
|
|
Balance
- December 31, 2015
|
$
-
|
179
|
-
|
$
179
|
Additions
during the period
|
4,099,344
|
330,933
|
-
|
4,430,277
|
Total
(gains) or losses include in net loss
|
(2,732,446
)
|
(242,870
)
|
-
|
(2,975,316
)
|
Balance
- December 31, 2016
|
$
1,366,898
|
88,242
|
-
|
$
1,455,140
|
Advertising
The Company expenses advertising costs as incurred. The Company has
no existing arrangements under which we provide or receive
advertising services from others for any consideration other than
cash. Advertising expenses totaled $208,530 and $320,044 for the
years ended December 31, 2016 and 2015, respectively.
Litigation
From time to time, the Company may become involved in litigation
and other legal actions. The Company estimates the range of
liability related to any pending litigation where the amount and
range of loss can be estimated. The Company records its best
estimate of a loss when the loss is considered probable. Where a
liability is probable and there is a range of estimated loss with
no best estimate in the range, the Company records a charge equal
to at least the minimum estimated liability for a loss contingency
when both of the following conditions are met: (i) information
available prior to issuance of the financial statements indicates
that it is probable that an asset had been impaired or a liability
had been incurred at the date of the financial statements and (ii)
the range of loss can be reasonably estimated.
On July 8, 2015, Intellectual Capital Management, LLC dba SMS
Masterminds and SpendSmart Networks, Inc. were named in a potential
class-action lawsuit entitled Peter Marchelos, et al v.
Intellectual Capital Management, et al, filed in the United States
District Court Eastern District of New York relating to alleged
violations of the Telephone Consumer Protection Act of 1991. This
litigation involves the same licensee and merchant as a previous
lawsuit and the same attorneys represent the plaintiffs in this
action. The claim of one of the two plaintiffs was resolved for
$1,701. The Company believes the Plaintiff’s allegations have
no merit. There are no other legal claims currently pending
or threatened against us that in the opinion of our management
would be likely to have a material adverse effect on our financial
position, results of operations or cash flows.
Earn Out
The Company agreed to pay the sellers an earn-out payment relating
to fifteen percent of the earnings generated by SMS Masterminds
after the acquisition and an additional earn-out payment tied to
the EBITDA of the Company after the acquisition of SMS Masterminds,
of up to $2,000,000 in aggregate. The Company paid $0
during the years ended December 31, 2016 and 2015 related to this
earn-out agreement.
The
change in fair value of Earn-out liability expenses totaled $0 for
the year ended December 31, 2016 and $594,216 for the year ended
December 31, 2015. We recorded the change in earn-out liability due
to our updated operating assumptions in the underlying valuation
related to the SMS acquisition.
The
Company agreed to pay the sellers a guaranteed payment of $400,000
of which $390,000 had been paid as of December 31, 2015 and $10,000
was paid in January, 2016. As of December 31, 2016, the remaining
balance was $0.
Goodwill
The Company accounted for goodwill under ASC 350 “Intangibles
– Goodwill and Other” (“ASC 350”). ASC 350
requires an evaluation of impairment by assessing qualitative
factors, and if necessary, applying a fair-value based test. The
goodwill impairment test requires qualitative analysis to determine
whether is it more likely than not that the fair value of a
reporting unit is less than the carrying amount, including
goodwill. An indication of impairment through analysis of these
qualitative factors initiates a two-step process, which requires
management to make judgments in determining what assumptions to use
in the calculation. The first step of the process consists of
estimating the fair value of the Company’s reporting units
based on discounted cash flow models using revenue and profit
forecasts and comparing the estimated fair values with the carrying
values of the Company’s reporting units which include the
goodwill. If the estimated fair values are less than the carrying
values, a second step is performed to compute the amount of the
impairment by determining an “implied fair value” of
goodwill. The determination of the Company’s “implied
fair value” requires the Company to allocate the estimated
fair value to the assets and liabilities of the reporting unit. Any
unallocated fair value represents the “implied fair
value” of goodwill, which is compared to the corresponding
carrying value. The Company tested goodwill impairment
at December 31, 2015 and concluded that goodwill was fully
impaired. Goodwill was written down in the amount of $3,202,276 in
2015.
Intangible assets
Intangible assets consist of intellectual property/technology,
customer lists, and trade-name/marks acquired in business
combinations under the purchase method of accounting are recorded
at fair value net of accumulated amortization since the acquisition
date. Amortization is calculated using the straight line method
over the estimated useful lives at the following annual
rates:
|
|
IP/technology
|
10
|
Trade-name/marks
|
10
|
|
|
|
Intangible assets beginning balance
|
1,570,575
|
3,097,700
|
Amortization
|
(192,503
)
|
(337,879
)
|
Impairment
|
(979,072
)
|
(1,189,246
)
|
Intangible assets ending balance
|
399,000
|
1,570,575
|
The Company reviews its finite-lived intangible assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of finite-lived intangible asset may not
be recoverable. Recoverability of a finite-lived intangible asset
is measured by a comparison of its carrying amount to the
undiscounted future cash flows expected to be generated by the
asset. If the asset is considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset, which is
determined based on discounted cash flows.
The
Company evaluates the recoverability of identifiable intangible
assets whenever events or changes in circumstances indicate that an
intangible asset’s carrying amount may not be recoverable.
Such circumstances could include, but are not limited to (1) a
significant decrease in the market value of an asset, (2) a
significant adverse change in the extent or manner in which an
asset is used, or (3) an accumulation of costs significantly in
excess of the amount originally expected for the acquisition of an
asset. The Company measures the carrying amount of the asset
against the estimated undiscounted future cash flows associated
with it. Should the sum of the expected future net cash flows be
less than the carrying value of the asset being evaluated, an
impairment loss would be recognized. The impairment loss would be
calculated as the amount by which the carrying value of the asset
exceeds its fair value. The fair value is measured based on quoted
market prices, if available. If quoted market prices are not
available, the estimate of fair value is based on various valuation
techniques, including the discounted value of estimated future cash
flows. The evaluation of asset impairment requires the Company to
make assumptions about future cash flows over the life of the asset
being evaluated. These assumptions require significant judgment and
actual results may differ from assumed and estimated amounts.
During the year ended December 31, 2016, the Company recorded an
impairment loss of $979,072 related to an intangible
asset.
Recently
Issued Accounting Pronouncements
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers, as amended, (Topic 606), with an
effective date for annual reporting periods beginning after
December 15, 2017, including interim periods within that reporting
period. Earlier application is permitted only as of annual
reporting periods beginning after December 15, 2016. The Company is
evaluating the impact, if any, the pronouncement will have on both
historical and future financial positions and results of
operations, with an expected completion date of June 30,
2017.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial
Statements—Going Concern
(“ASU
2014-15)
,
which states
management should evaluate whether there are conditions or events,
considered in the aggregate, that raise a substantial doubt about
the entity’s ability to continue as a going concern within
one year after the date that the financial statements are issued.
Management’s evaluation should be based on relevant
conditions and events that are known and likely to occur at the
date that the financial statements are issued. ASU 2014-15 as
required was adopted in the fourth quarter 2016
.
In February 2016, the FASB issued ASU 2016-02, Leases which amended
guidance for lease arrangements in order to increase transparency
and comparability by providing additional information to users of
financial statements regarding an entity's leasing activities. The
revised guidance seeks to achieve this objective by requiring
reporting entities to recognize lease assets and lease liabilities
on the balance sheet for substantially all lease arrangements. The
guidance, which is required to be adopted in the first quarter of
2019, will be applied on a modified retrospective basis beginning
with the earliest period presented. Early adoption is permitted. We
are currently evaluating the impact of adopting this guidance on
our consolidated financial statements.
In March 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2016-09 - Compensation - Stock Compensation,
which simplifies the accounting for the tax effects related to
stock based compensation, including adjustments to how excess tax
benefits and a company’s payments for tax withholdings should
be classified, amongst other items. ASU 2016-09 is effective
for financial statements issued for fiscal years beginning after
December 15, 2016, and interim periods within those fiscal
years. Early adoption is permitted. We do not expect this to have a
material impact on our consolidated financial
statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments
– Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments" (ASU 2016-13), that requires entities to use
a new impairment model based on expected losses. Under this new
model an entity would recognize an impairment allowance equal to
its current estimate of credit losses on financial assets measured
at amortized cost. ASU 2016-13 is effective for us beginning
January 1, 2020 with early adoption permitted January 1, 2019.
Credit losses under the new model will consider relevant
information about past events, current conditions and reasonable
and supportable forecasts, resulting in recognition of lifetime
expected credit losses. We are currently evaluating the impact of
adopting this guidance on our consolidated financial
statements.
Segments
The
Company operates in one reportable segment. Accordingly, no segment
disclosures have been presented herein.
4. Accounts Receivable, Short-Term and Long-Term Notes
Receivable
Management
reviews accounts receivable, short-term and long-term notes
receivable on a monthly basis to determine if any receivables are
potentially uncollectible. An allowance for doubtful accounts is
determined based on a combination of historical experience, length
of time outstanding, customer credit worthiness, and current
economic trends. As of December 31, 2016, the Company had recorded
an allowance for doubtful accounts of $1,796,000. We recorded a bad
debt expense of $552,725 during the year ended December 31, 2016
and wrote off uncollectable accounts during the year ended December
31, 2016 in the amount of $147,408, all of which were fully
reserved. As of December 31, 2015, the Company had recorded an
allowance for doubtful accounts of
$1,389,883.
Notes
receivable aged over 60 days past due are considered delinquent and
notes receivable aged over 90 days past due with known collection
issues are placed on non-accrual status. Interest revenue is not
recognized on notes receivable while on non-accrual status. Cash
payments received on non-accrual receivables are applied towards
the principal. When notes receivable on non-accrual status are
again less than 60 days past due, recognition of interest revenue
for notes receivable is resumed. We charge interest rates on our
notes receivable averaging 13% which approximates a fair value. We
recorded approximately $38,782 in interest income for the year
ended December 31, 2016.
Based
upon the Company's methodology, the notes receivable balances with
reserves and the reserves associated with those balances are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
Notes Receivable
|
908,590
|
661,371
|
632,422
|
461,702
|
276,168
|
199,669
|
Accounts
Receivable
|
437,589
|
-
|
295,759
|
-
|
141,830
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
Notes Receivable
|
793,988
|
414,665
|
767,138
|
399,401
|
26,850
|
15,264
|
Accounts
Receivable
|
921,829
|
-
|
529,461
|
-
|
292,368
|
-
|
The
roll forward of the allowance for doubtful accounts related to
notes receivable and accounts receivable is as
follows:
|
|
|
|
|
|
Receivable Reserve
|
Balance
at December 31, 2014
|
286,571
|
349,954
|
188,527
|
Incremental
Provision
|
796,063
|
551,256
|
441,627
|
Recoveries
|
-
|
-
|
-
|
Charge
offs
|
(450,212
)
|
(439,508
)
|
(334,395
)
|
Balance
at December 31, 2015
|
632,422
|
461,702
|
295,759
|
|
|
|
|
|
|
Receivable Reserve
|
Balance
at December 31, 2015
|
$
632,422
|
$
461,702
|
$
295,759
|
Incremental
Provision
|
177,316
|
401
|
415,197
|
Recoveries
|
-
|
-
|
-
|
Charge
offs
|
(42,600
)
|
(62,702
)
|
(81,495
)
|
Balance
at December 31, 2016
|
$
767,138
|
$
399,401
|
$
629,461
|
5. Short Term Note Receivable
The
Company issued a Secured Convertible Promissory Note (the
“Note”) in the principal amount of $410,000 to a third
party in September 2014. The Note bears interest at the rate of
5.25% per annum and matured in four months. For the years ended
December 31, 2016 and December 31, 2015, the Company has recorded
$0 and $27,380 of interest income from this Note. $130,000 of the
principal amount was paid in 2015. The remaining balance of
$322,430 was written off during the year ended December 31, 2015,
which was made up of $280,000 in principal and $42,430 in
interest.
6. Convertible Promissory Notes
On November 30, 2016, the Company issued a Convertible Promissory
Note to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount
of $100,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing. We recorded $2,250 in interest expense for the year
ended December 31, 2016.
On
November 7, 2016, the Company issued a Convertible Promissory Note
to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of
$100,000. Mr. Blech, a member of the board of directors, is the
trustee. The Convertible Promissory Note bears an interest at the
rate of 9%, has a six month maturity date, and a voluntary
conversion into an upcoming financing in the event the Company
closes the financing and receives gross proceeds totaling at least
$200,000. The conversion rate will be at the same terms of the
financing. We recorded $2,817 in interest expense for the year
ended December 31, 2016.
On July
19, 2016, the Company issued the following Convertible Promissory
Notes: Joe Proto ($40,000), John Eyler ($40,000), Francis J. Liddy
($20,000), Isaac Blech ($40,000), and Transpac Investments Ltd.
($40,000). All of the individuals listed are members of the board
of directors. The Convertible Promissory Notes bear interest at the
rate of 9%, have a six month maturity date, and a mandatory
conversion into an upcoming financing in the event the Company
closes the financing and receives gross proceeds totaling at least
$200,000. The conversion rate will be at the same terms of the
financing. We recorded $7,283 in interest expense for the year
ended December 31, 2016.
During the year ended December 31, 2015, the Company closed on a
private offering and issued and six 9% Convertible Promissory Notes
with principal amounts of $300,000, $262,500, $275,000, $75,000,
50,000, and $150,0000 (the “Notes”) and warrants to
purchase 400,002, 350,002, 366,667, 66,667, 100,001, and 200,001
shares of the Company’s common stock (the
“Warrant”), respectively. The Company also agreed to
provide piggy-back registration rights to the holders of the Units.
The Notes have a term of twelve (12) months, pay interest
semi-annually at 9% per annum and can be voluntarily converted by
the holder into shares of common stock at an exercise price of
$0.75 per share, subject to adjustments for stock dividends,
splits, combinations and similar events as described in the Notes.
In addition, if the Company issues or sells common stock at a price
below the conversion price then in effect, the conversion price of
the Notes shall be adjusted downward to such price but in no event
shall the conversion price be reduced to a price less than $0.50
per share. The Warrants have an exercise price of $0.75 per share
and have a term of four years. The holders of the Warrants may
exercise the Warrants on a cashless basis for as long as the shares
of common stock underlying the Warrants are not registered on an
effective registration statement. The relative fair value
ascribed to the 1,483,340 warrants issued was approximately
$337,118 and was recorded to additional paid-in capital. The
embedded conversion feature was bifurcated and accounted for as a
derivative liability at approximately $393,000 on the day of
issuance. The remaining proceeds were allocated based on
the relative fair value of the debt and the warrant, and
accordingly, approximately $730,520 of debt discount was recorded
and was amortized over the initial term of the debt using the
effective interest method. These notes were modified in second
quarter 2016 and again in fourth quarter 2016. See below for
further discussion.
During the second quarter 2016, the Company amended four of the
outstanding 9% Convertible Promissory Notes with principal amounts
of $275,000, $75,000, 50,000, and $150,000 as follows: the maturity
dates were extended to November 5, 2016, September 2, 2016,
November 22, 2016, and September 26, 2016, respectively; the
conversion price was lowered to $0.15 per share, the provision
limiting the conversion price adjustment to that of the Series C
Preferred Stock was removed, and an option to be repaid prior to
the maturity date in the event the Company raises capital in excess
of three million dollars was added. The Company also amended the
warrant issued in conjunction with the Convertible Promissory Note
reducing the exercise price to $0.15 and issued new warrants to
purchase 666,669 shares of the Company's common stock with a $0.15
exercise price and a three year expiration.
According to
FASB ASC 470-50, the modification is accounted for as a debt
extinguishment, whereby the new debt instrument is initially
recorded at fair value, and that amount is used to determine the
debt extinguishment gain or loss to be recognized and the effective
rate of the new instrument. We recognized a loss on the
extinguishment of debt of $415,689 for the year ended December 31,
2016.
During
the fourth quarter 2016, the Company amended six of the outstanding
9% Convertible Promissory Notes with principal amounts of $300,000,
$262,500, $275,000, $75,000, $50,000, and $150,000 as follows: the
maturity dates were extended to May 5, 2017; the interest rate for
the extension period was increased to 15%; the conversion price was
changed to the per share price at the time of the next financing of
$2,000,000 or greater. According to FASB ASC 470-50, the
modification is accounted for as a debt extinguishment, whereby the
new debt instrument is initially recorded at fair value, and that
amount is used to determine the debt extinguishment gain or loss to
be recognized and the effective rate of the new instrument. We
recognized a loss on the extinguishment of debt of $58,032 for the
year ended December 31, 2016.
On July 15, 2015, the Company issued a Convertible Promissory
Note in the principal amount of $400,000 inclusive of interest. The
Note is for a term of six months. The Note bears interest at twelve
percent per annum. The Note is secured by the assets of the
Company. The Note may be converted into shares of the
Company’s common stock at $0.75 per share. The Company also
issued the holder warrants to purchase 500,000 shares of the
Company’s common stock. The proceeds were allocated based on
the relative fair value of the debt and the warrant. The warrants
have an exercise price of $0.75 per share and have a term of two
years. The relative fair value ascribed to the 500,000 warrants
issued was approximately $49,000 and was recorded to additional
paid-in capital. This amount will be amortized over the term of the
debt using the effective interest rate method. As part of the
closing of the Tender Offer, $200,000 of these notes converted into
1,333,334 shares of common stock and the investor received common
stock and 1,333,333 warrants with a three year term at an exercise
price of $0.15. The remaining $200,000 of notes was paid in
February 2016.
During the year ended December 31, 2015, the Company issued
Convertible Promissory Notes to investors in the principal amount
of $150,000, $150,000, $287,333, and $48,000. The Notes feature a
mandatory conversion feature obligating the holder to participate
and apply the principal and interest into a “Qualified
Financing” meaning a financing taking place prior to January
31, 2016, wherein the Company receives gross proceeds totaling at
least $1,000,000. In the event the entire principal plus accrued
interest under this Note is not eligible for conversion into a
Qualified Financing, then any remaining balance of this Note shall
be converted into restricted common stock at the price of the
Qualified Financing and Holder shall receive three (3) times any
warrant coverage provided for in the Qualified Financing. The Notes
bear interest at nine percent per annum and has a maturity date of
six months. The embedded conversion feature of the note was
bifurcated and accounted for as a derivative liability at
approximately $17,379 on the day of issuance. As part of the
closing of the Tender Offer, these notes converted into 4,291,679
shares of common stock and the investors received 12,875,037
warrants with a three year term at an exercise price of
$0.15.
7. Notes Payable
On
August 26, 2015, the Company entered into a Business Promissory
Note and Security Agreement with Bank of Lake Mills for the
principal sum of $200,000 and a daily interest rate of 0.22%. The
Note is for a term of six months with a weekly repayment schedule
ending February 22, 2016. The Note included standard
representations and warranties. The Note was secured by certain
assets of the Company as well as a personal guarantee by Alex
Minicucci, our then CEO. The total repayment amount including
interest and principal is $244,637 and was to be paid pro-rata
weekly ending February 22, 2016. For the year ended December 31,
2015, we recorded interest expense related to the note of $39,585.
For the year ended December 31, 2015, we have paid approximately
$129,738 in principal repayments related to the Note. For the year
ended December 31, 2016, we paid approximately $70,262 in principal
repayments related to the Note. As of February 25, 2016, the note
has been fully repaid.
8. Due to Related Party
On August 14, 2015 and September 28, 2015, the Company entered into
Loan Agreements with Alex Minicucci for the principal sum of
$65,000 and $35,000, respectively. The Loans were to be paid off by
December 31, 2016 and include an interest rate of 7%. For the years
ended December 31, 2016 and 2015, we recorded interest expense
related to the loans of $4,756 and $3,034. The $35,000 loan has
been repaid during 2016 and the Company extended the terms related
to the $65,000 loan to May 10, 2017.
9. Common Stock and Warrants
Common stock
During the year ended December 31, 2016, the company issued
17,895,859 shares of common stock upon warrant exercises related to
the tender offer. The Company issued 1,563,677 shares of common
stock related to services rendered and recognized expense of
$103,910 and issued 511,266 shares of common stock related to
interest due and recognized expense of $21,500. 257,668 shares of
Series C Stock converted to 1,546,008 shares of common shares
during the year ended December 31, 2016.
During
the year ended December 31, 2015, the company issued 1,047,522
shares of common stock and the Company recognized expense of
$496,288 for services rendered and interest.
Tender Offer and Debt Conversion
Between December 11, 2015 and February 3, 2016, the Company entered
into agreements with investors, pursuant to which on February 3,
2016, warrant holders exercised 12,270,846 Warrants to purchase an
aggregate of 12,270,846 shares of our common stock for gross
proceeds of $1.84 million. The Company issued new warrants to
purchase an aggregate of 26,479,217 shares of common stock at an
exercise price of $0.15 per share, in consideration for the
immediate exercise of the warrants. In August, 2016, the exercise
price on 13,209,609 of these warrants was reduced to $0.01, as the
Company had not met its six-month targets related to these
warrants. In January, 2017, the exercise price on 13,209,608 of
these warrants was reduced to $.01, as the Company had not met its
twelve-month target related to these warrants. The following
paragraph discusses the accounting treatment related to this
reduction.
The Warrants have a cash settlement feature; as a result, they were
classified as a derivative liability and recorded at fair value.
Fair value of the Warrants, in the total amount of $3,918,924 was
calculated using the Monte-Carlo model, using the following
assumptions: 68.7% expected volatility, a risk-free interest rate
of 0.91%, estimated life of 3 years and no dividend yield. The fair
value of the common stock was $0.148. The transaction was accounted
for as an inducement. ASC 470-20-40 addresses the accounting for
altered conversion privileges, including the issuance of warrants
or other securities (not provided for in the original conversion
terms) to induce conversion. As a result of this transaction, the
Company recognized an inducement expense of $3,560,958 equal to the
fair value of all securities and other consideration transferred in
the transaction in excess of the fair value of securities issuable
pursuant to the original conversion terms, as of the date of the
conversion.
In connection with the tender offer, investors converted $843,751
in Convertible Notes at a conversion price of $0.15 per share into
5,625,013 shares of our common stock during 2016.
10. Convertible Preferred Stock
|
Series A Preferred Stock
At December 31, 2016 and 2015 we had 0 shares of Series A
Cumulative Convertible Preferred Stock (the “Series A
Stock”) outstanding.
Series B Preferred Stock
At December 31, 2016 and 2015 we had 0 shares of Series B
convertible preferred stock (“Series B Stock”)
outstanding.
Series C Convertible Preferred Stock
At December 31, 2016 and 2015, we had 3,443,061 and 3,700,729
shares, respectively, of Series C convertible preferred stock
(“Series C Stock”) outstanding that were issued to
investors for $3.00 per share. We issued 4,299,081 shares of Series
C Stock and had conversions of 56,500 shares for the year ended
December 31, 2015. For the year ended December 31, 2016, we had
conversions of 257,668 shares.
Number of Shares:
The number of
shares of Series C Preferred Stock designated as Series C Preferred
Stock is 4,299,081 (which shall not be subject to increase without
the written consent of all of the holders of the Series C Preferred
Stock or as otherwise set forth in the Certificate of
Designation.
Stated Value:
The initial
Stated Value of each share of Series C Preferred Stock is $3.00 (as
adjusted pursuant to the Certificate of
Designation).
Voluntary Conversion:
The
Series C Preferred Stock shall be convertible at the option of the
holder, into common stock at the applicable conversion price of
$0.75 per share, subject to adjustments for stock dividends,
splits, combinations and similar events as described in the form of
Certificate of Designations. In addition, the Company has the right
to require the holders to convert to common stock under certain
enumerated circumstances.
Mandatory Conversion
: At the
Company’s sole option, each outstanding share of Series C
Preferred Stock may be converted into shares of Common Stock at the
applicable conversion price immediately prior to the close of
business on the date that the volume weighted average price of the
Common Stock, based on the closing price on the or any other market
or exchange where the same is traded, shall exceed $4.00 per share
for any 30 consecutive trading days anytime from the Original Issue
Date with an average daily trading volume of 100,000 shares (such
numbers shall be proportionally adjusted for dividends, stock
splits, Common Stock combinations and recapitalizations involving
the Common Stock).
Voting Rights:
Except as
described in the Certificate of Designations, holders of the Series
C Preferred Stock will vote together with holders of the Company
common stock on all matters, on an as-converted to common stock
basis, and not as a separate class or series (subject to limited
exceptions).
Liquidation Preferences:
In the
event of any liquidation or winding up of the Company prior to and
in preference to any Junior Securities (including common stock),
the holders of the Series C Preferred Stock will be entitled to
receive in preference to the holders of the Company common stock a
per share amount equal to the Stated Value (as adjusted pursuant to
the Certificate of Designations).
11
. Net Loss per Share
Applicable to Common Stockholders
Options,
warrants, and convertible debt outstanding were all considered
anti-dilutive for the year ended December 31, 2016 and 2015 due to
net losses.
The
following securities were not included in the diluted net loss per
share calculation because their effect was anti-dilutive as of the
periods presented:
|
|
|
|
|
|
|
Common
stock options
|
26,865,017
|
10,337,113
|
Investor
warrants
|
37,836,680
|
23,752,410
|
Compensation
warrants
|
1,981,667
|
2,645,000
|
Excluded
potentially dilutive securities
|
66,683,364
|
36,734,523
|
Stock options
In March 2016, our Company granted options to purchase up to
3,517,067 shares of our common stock to members of our Board of
Directors. The options vest immediately; have an exercise price of
$0.12 per share; and expire five years after the date of
grant. The fair value at grant date of these options was
$246,141 and the entire amount was expensed in 2016.
In March 2016, our Company granted options to purchase up to
1,459,326 shares of our common stock to four employees. The options
vest over four years; have an exercise price of $0.12 per share;
and expire five years after the date of grant. The fair
value at grant date of these options was $112,147 and $48,145 was
expensed in 2016.
In March 2016, our Company granted options to purchase up to
1,859,623 shares of our common stock to thirty-three employees. The
options vest immediately; have an exercise price of $0.11 per
share; and expire five years after the date of
grant. The fair value at grant date of these options was
$142,006 and the entire amount was expensed in 2016.
In May 2016, our Company granted options to purchase up to 264,000
shares of our common stock to Frank Liddy. The options vest
immediately; have an exercise price of $0.08 per share; and expire
five years after the date of grant. The fair value at
grant date of these options was $20,256 and the entire amount was
expensed in 2016.
In May 2016, our Company granted options to purchase up to 450,000
shares of our common stock to two employees. The options vest over
two years; have an exercise price of $0.06 per share; and expire
five years after the date of grant. The fair value at
grant date of these options was $17,979 and $8,088 was expensed in
2016.
In June 2016, our Company granted options to purchase up to
2,104,751 shares of our common stock to thirty-two employees. The
options vest immediately; have an exercise price of $0.09 per
share; and expire five years after the date of
grant. The fair value at grant date of these options was
$151,431 and the entire amount was expensed in 2016.
Effective July 22, 2016, the Company cancelled the following stock
and stock options granted to its board of directors on March 21,
2016: (a) Joseph Proto, 350,000 restricted shares of common stock;
(b) John Eyler, options to purchase 464,331 shares of common stock;
(c) Pat Kolenik 350,000 restricted shares of common stock; (d)
Chris Leong, options to purchase 464,331 shares of common stock,
and (e) Isaac Blech, options to purchase 663,330 shares of common
stock.
In September 2016, our Company granted options to purchase up to
2,674,940 shares of our common stock to twenty-five employees. The
options vest immediately; have an exercise price of $0.06 per
share; and expire five years after the date of
grant. The fair value at grant date of these options was
$139,316 and the entire amount was expensed in 2016.
In December 2016, our Company granted options to purchase up to
7,371,357 shares of our common stock to twenty-two employees. The
options vest immediately; have an exercise price of $0.02 per
share; and expire five years after the date of
grant. The fair value at grant date of these options was
$131,947 and the entire amount was expensed in 2016.
In 2016, we expensed $222,357, related to the issuance of options
from 2014 and 2015, that continued to vest in 2016.
For the year ended December 31, 2015, we issued 3,666,476 options,
as follows. During first quarter, 2015, our Company
granted options to purchase up to 165,000 shares of our common
stock to five employees. The options vest over four years; have
exercise prices of $.90 to $.95 per share; and expire five years
after the date of grant. The fair value at grant date of
these options was $101,759. The amount expensed in 2015 was $21,564
and the amount expensed in 2016 was 16,142.
On March 5, 2015, our Company granted options to purchase up to
360,000 shares of our common stock to members of our Board of
Directors. The options vest immediately; have an exercise price of
$0.92 per share; and expire five years after the date of
grant. Each of the following Board members received
45,000 options each related to this issuance: Joe Proto,
Isaac Blech, Alex Minicucci, Cary Sucoff, Patrick Kolenik, Chris
Leong, Jerold Rubinstein, and Mike McCoy. The fair value
at grant date of these options was $208,974 and the entire amount
was expensed in 2015.
In May 2015, our Company granted options to purchase up to 75,000
shares of our common stock to Bruce Neuschwander. The options vest
over four years; have an exercise price of $0.65; and expire five
years after the date of grant. The fair value at grant
date of this option was $31,622. The amount expensed in 2015 was
$10,794 and the amount expensed in 2016 was $3,763.
On October 1, 2015, our Company granted options to purchase up to
1,358,696 shares of our common stock to Jerold
Rubinstein. The options vest immediately; have an
exercise price of $.46 per share; and expire five years after the
date of grant. The fair value at grant date of these
options was $410,559 and the entire amount was expensed in
2015.
In November 2015, the Company repriced the 1,358,696 previously
issued options to Jerold Rubinstein. The replacement stock options
have an exercise price equal to $0.17 and a term of 4.8 years.
The cancellation and reissuance of these stock options was treated
as a modification under ASC 718 and, accordingly, total stock-based
compensation expense related to these awards increased $35,713,
which was recognized in 2015.
In December, 2015, our Company granted options to purchase up to
278,500 shares of our common stock to four employees. The options
vest immediately; have an exercise price of $.14 per share; and
expire five years after the date of grant. The fair
value at grant date of these options was $26,792 and the entire
amount was expensed in 2015.
In December, 2015, our Company granted options to purchase up to
70,584 shares of our common stock to five employees. The options
vest immediately; have an exercise price of $.75 per share; and
expire five years after the date of grant. The fair
value at grant date of these options was $3,876 and the entire
amount was expensed in 2015.
Stock option activity during the following periods was as
follows:
|
|
|
|
|
|
|
Beginning
balance outstanding
|
10,337,113
|
8,807,667
|
Options
issued during the year
|
19,701,064
|
2,307,780
|
Options
forfeited during the year
|
(1,011,800
)
|
-
|
Options
cancelled during the year
|
(1,591,992
)
|
-
|
Options
expired during the year
|
(569,368
)
|
(778,334
)
|
Ending
balance outstanding
|
26,865,017
|
10,337,113
|
Warrants
The Company issued warrants to purchase shares of the
Company’s common stock to investors in connection with the
issuances of restricted shares of common stock during the years
ended December 31, 2016 and 2015 (the value of which was offset
against the proceeds of the issuance of common stock and not
charged to operations). Outstanding warrants from all sources have
terms ranging from two to five and a half years.
For the year ended December 31, 2016, we did not issue any warrants
to advisors, consultants and in connection with the purchase of
intellectual property. Warrants to purchase up to
2,204,100 shares of common stock have expired. Warrants
to purchase up to 1,981,667 shares of common stock remain
outstanding at December 31, 2016, of which 1,981,667 have
vested.
For the year ended December 31, 2016, we issued 27,895,890 warrants
to investors, of which 26,479,217 related to the Tender Offer above
and 1,416,673 related to the Convertible Notes amendments above.
1,540,767 warrants expired and 12,270,853 warrants were exercised
for the year ended December 31, 2016.
In
recompense for services performed on our behalf, we issued warrants
to purchase up to 750,000 shares of our common stock during the
year ended December 31, 2015, to Siskey Capital at an exercise
price of $.75. 187,500 of those warrants vested immediately. On
December 1, 2015, these warrants were repriced to an exercise price
of $.17 and exercised on December 2, 2015, resulting in gross
proceeds to the company of $127,500.
Through December 31, 2015, we have also issued warrants to purchase
up to 22,835,951 shares of our common stock to investors (and as
compensation to third parties in connection with investments)
related to the sale of our common stock, 26,397,410 of which remain
outstanding net of exercises, cancellations and expirations (all of
which are fully vested).
On October 1, 2015, we issued 750,000 warrants to Siskey Capital
for consulting services as noted above. 187,500 of those warrants
vested immediately. Those 187,500 warrants were repriced on
December 1, 2015 and the remaining 562,500 warrants were vested on
December 1, 2015, with the full 750,000 warrants exercised on
December 2, 2015. Warrants to purchase up to 118,858
shares of common stock have expired. Warrants to
purchase up to 2,645,000 shares of common stock remain outstanding
at December 31, 2015, of which 2,645,000 have vested.
For the year ended December 31, 2015, we issued 1,983,340 warrants
to new investors and 150,994 warrants had expired.
Warrant activity (including warrants issued to investors and for
consulting and advisory services) for the years ended December 31,
2016 and 2015 was as follows:
|
For the
twelve months ended
|
|
|
|
|
|
Beginning
balance outstanding
|
26,397,410
|
23,933,922
|
Warrants
issued during the year
|
|
|
For
consulting and advisory services
|
-
|
1,500,000
|
In
connection with sales of common, preferred stock, and
notes
|
27,895,890
|
1,983,340
|
Warrants
expired or cancelled during the year
|
(2,204,100
)
|
(269,852
)
|
Warrants
exercised
|
(12,270,853
)
|
(750,000
)
|
Ending
balance outstanding
|
39,818,347
|
26,397,410
|
The numbers and exercise prices of all options and warrants
outstanding at December 31, 2016 was as follows:
|
Weighted
Average Exercise Price
|
Expiration
Fiscal Period
|
34,749
|
7.99
|
1st Qtr,
2017
|
1,349,183
|
6.90
|
2nd Qtr,
2017
|
536,500
|
1.14
|
3rd Qtr,
2017
|
1,162,088
|
6.45
|
4th Qtr,
2017
|
10,000
|
6.60
|
1st Qtr,
2018
|
750,000
|
0.25
|
4th Qtr,
2018
|
37,504,567
|
0.37
|
1st Qtr,
2019
|
1,850,007
|
0.44
|
2nd Qtr,
2019
|
1,309,002
|
0.92
|
3rd Qtr,
2019
|
2,603,000
|
1.15
|
4th Qtr,
2019
|
480,000
|
0.92
|
1st Qtr,
2020
|
1,704,446
|
0.19
|
4th Qtr,
2020
|
4,785,376
|
0.12
|
1st Qtr,
2021
|
2,469,995
|
0.09
|
2nd Qtr,
2021
|
2,629,760
|
0.06
|
3rd Qtr,
2021
|
7,371,357
|
0.02
|
4th Qtr,
2021
|
133,334
|
7.05
|
4th Qtr,
2022
|
66,683,364
|
0.59
|
|
Stock based compensation
Results of operations for the years ended December 31, 2016 and
2015 include stock based compensation costs totaling $1,084,323 and
$1,807,337, respectively.
For purposes of accounting for stock based compensation, the fair
value of each option and warrant award is estimated on the date of
grant using the Black-Scholes-Merton option pricing formula.
Compensation expense is recognized upon actual vesting of the
options. The following weighted average assumptions were utilized
for the calculations during the year ended December 31, 2016 and
2015:
|
|
|
|
|
|
|
Expected
life (in years)
|
|
|
Weighted
average volatility
|
167.74
%
|
98.05
%
|
Forfeiture
rate
|
21.92
%
|
10.27
%
|
Risk-free
interest rate
|
1.05
%
|
0.95
%
|
Expected
dividend rate
|
0.00
%
|
0.00
%
|
The weighted average expected option and warrant term for employee
stock options granted reflects the application of the simplified
method set out in SEC Staff Accounting Bulletin No. 107,
Share-Based
Payment
(SAB 107). The
simplified method defines the life as the average of the
contractual term of the options and the weighted average vesting
period for all options. The Company utilized this approach as its
historical share option exercise experience does not provide a
reasonable basis upon which to estimate an expected term. Expected
volatilities are based on the historical volatility of the
Company’s stock. The Company estimated the forfeiture rate
based on our expectation for future forfeitures and (for the
purpose of computing stock based compensation given the contractual
vesting of the Company’s options and warrants outstanding)
the Company assumes that all options and warrants will vest. The
risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield in effect at or near the
time of grant. The Company has never declared or paid dividends and
have no plans to do so in the foreseeable
future.
As of December 31, 2016, $696,544 of total unrecognized
compensation cost related to unvested stock based compensation
arrangements is expected to be recognized over a weighted-average
period of 16.3 months. The following table summarizes option
activity in connection with stock options and warrants (which
resulted in stock based compensation charges) as of and for the
years ended December 31, 2016 and 2015:
|
|
|
Weighted
|
|
|
|
|
Average
Remaining
|
|
|
|
|
Contractual
|
|
|
|
|
Term
|
|
Outstanding
at December 31, 2015
|
12,982,113
|
$
1.97
|
|
|
Granted
|
19,701,064
|
0.07
|
|
|
Cancelled
|
(2,883,792
)
|
(0.29
)
|
|
|
Forfeited
|
(952,701
)
|
(6.70
)
|
|
|
Exercised
|
-
|
-
|
|
|
Outstanding
at December 31, 2016
|
28,849,184
|
$
0.68
|
45.8
months
|
$
-
|
|
|
|
|
|
Exercisable
|
26,735,358
|
$
0.71
|
45.7
months
|
$
-
|
|
|
|
Weighted
|
|
|
|
|
Average
Remaining
|
|
|
|
|
Contractual
|
|
|
|
|
Term
|
|
Outstanding
at December 31, 2014
|
10,821,525
|
$
2.44
|
|
|
Granted
|
3,807,780
|
0.31
|
|
|
Cancelled
|
(775,834
)
|
(0.92
)
|
|
|
Expired
|
(118,858
)
|
(7.24
)
|
|
|
Exercised
|
(750,000
)
|
(0.17
)
|
|
|
Outstanding
at December 31, 2015
|
12,982,113
|
$
1.98
|
39.9
months
|
$
-
|
|
|
|
|
|
Exercisable
|
11,711,738
|
$
2.06
|
39.6
months
|
$
-
|
Additional disclosure concerning options and warrants is as
follows:
|
|
|
|
|
|
|
|
Weighted
average grant date fair value of options and warrants
granted
|
$
0.05
|
$
0.18
|
Aggregate
intrinsic value of options and warrants exercised
|
-
|
-
|
Weighted
average fair value of options and warrants vested
|
0.43
|
0.66
|
The range of exercise prices for options and warrants granted and
outstanding (which resulted in stock based compensation charges)
was as follows at December 31, 2016 and 2015:
|
Number
of Options and Warrants
|
|
|
|
|
|
|
$
.01 - .74 $
|
19,643,684
|
2,462,196
|
$
.75 - 1.20 $
|
7,529,000
|
7,878,584
|
$
1.21 - 3.00 $
|
114,000
|
218,000
|
$
3.01 - 4.50 $
|
-
|
-
|
$
4.51 - 12.00 $
|
1,560,000
|
2,423,333
|
|
28,846,684
|
12,982,113
|
A summary of the activity of our non-vested options and warrants
for the following periods:
|
|
|
|
|
|
|
Non-vested
outstanding, beginning
|
1,270,375
|
3,285,639
|
Granted
|
19,701,064
|
3,807,780
|
Vested
|
(17,238,203
)
|
(5,279,016
)
|
Forfeited
|
(825,915
)
|
|
Cancelled
|
(795,995
)
|
(544,028
)
|
Non-vested
outstanding, ending
|
2,111,326
|
1,270,375
|
Common Shares Reserved for Future Issuance
The following table summarizes shares of our common stock reserved
for future issuance at December 31, 2016:
|
|
|
|
|
|
Stock
options outstanding
|
26,865,017
|
10,337,113
|
Stock
options available for future grant
|
9,437,000
|
9,437,000
|
Warrants
|
39,818,347
|
26,397,410
|
Total
common shares reserved for future issuance
|
76,120,364
|
46,171,523
|
13.
Income taxes
Deferred tax assets
at December 31, 2016 and 2015 consisted of the
following:
|
|
|
|
|
|
Deferred
tax asset
|
|
|
Net
operating loss carryovers
|
29,294,157
|
26,991,694
|
Accrued
Payroll
|
26,400
|
32,400
|
Sharebased
Compensation
|
2,734,156
|
2,292,027
|
Charitable
Contribution
|
4,700
|
4,700
|
Amortization
|
1,954,508
|
1,584,975
|
Depreciation
|
768,381
|
258,828
|
Allowance
for Doubtful Account
|
687,104
|
555,953
|
Total
deferred tax assets
|
36,209,406
|
31,720,577
|
Valuation
allowance
|
(36,209,406
)
|
(31,720,577
)
|
Deferred tax asset,
net of allowance
|
—
|
—
|
As of
December 31, 2016 and 2015, the Company had federal and state net
operating loss carryovers of approximately $75.3 million and $73.5
million, which will begin to expire in 2029. The net operating loss
carryover may be subject to limitation under Internal Revenue Code
section 382, should there be a greater than 50% ownership change as
determined under the regulations.
In
assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the period in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable
income and taxing strategies in making this assessment. The Company
has determined that, based on objective evidence currently
available, it is more likely than not that the deferred tax assets
will not be realized in future periods. Accordingly, the Company
has provided a valuation allowance for the full amount of the
deferred tax assets at December 31, 2016 and 2015.
The
valuation allowance increased by $4,488,829 and $4,700,682 in 2016
and 2015, respectively, due to the increase in deferred tax assets,
primarily due to net operating loss carryforwards.
A reconciliation of the expected tax benefit computed at the U.S.
federal and state statutory income tax rates to our tax benefit is
as follows:
|
|
|
|
|
|
|
Statutory
federal income tax rate
|
-34.0
%
|
-34.0
%
|
State
taxes, net of federal tax benefit
|
-5.0
%
|
-5.0
%
|
Valuation
Allowance
|
39.0
%
|
39.0
%
|
Income
tax provision (benefit)
|
0.0
%
|
0.0
%
|
We file income tax returns in the U.S. and in the state of
California with varying statutes of limitations. Our policy is to
recognize interest expense and penalties related to income tax
matters as a component of our provision for income taxes. There
were no accrued interest and penalties associated with uncertain
tax positions as of December 31, 2016. The majority of our
operations are in California and the Company believes it has no tax
positions which could more-likely-than not be challenged by tax
authorities. We have no unrecognized tax benefits and thus no
interest or penalties included in the financial
statements.
14.
Commitments
We currently lease space in two locations in San Luis Obispo,
California.
The building that we lease at 805 Aerovista
Parkway is owned by Alexander P Minicucci Trust, which is a related
party transaction due to the trust being controlled by the
Company's former chief strategy officer. Rent expense was $188,746
and $169,511 for the years ended December 31, 2016 and 2015,
respectively. Future rental commitments under contract total
$193,073 as of December 31, 2016.
15.
Employee benefit plan
We have an employee savings plan (the “Plan”) pursuant
to Section 401(k) of the Internal Revenue Code (the
“Code”), covering all of our employees. Participants in
the Plan may contribute a percentage of compensation, but not in
excess of the maximum allowed under the Code. Our Company may make
contributions at the discretion of its Board of Directors. During
the years ended December 31, 2016 and 2015, we made contributions
to the Plan totaling $0 and $83,359, respectively.
16.
Subsequent events
On January 9, 2017, the Company issued a Convertible Promissory
Note to Isaac Blech, a member of the Company’s board of
directors, in the sum of $22,000. The Convertible Promissory Notes
bear interest at the rate of 9%, has a six month maturity date, and
a voluntary conversion into an upcoming financing in the event the
Company closes a financing and receives gross proceeds totaling at
least $200,000. The conversion rate will be at the same terms of
the financing.
On January 23, 2017, the Company issued a Convertible Promissory
Note to Isaac Blech, a member of the Company’s board of
directors, in the sum of $100,000. The Convertible Promissory Notes
bear interest at the rate of 9%, has a six month maturity date, and
a voluntary conversion into an upcoming financing in the event the
Company closes a financing and receives gross proceeds totaling at
least $200,000. The conversion rate will be at the same terms of
the financing.
On February 2, 2017, the Company issued a Convertible Promissory
Note to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount
of $62,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing.
On February 27, 2017, the Company issued a Convertible Promissory
Note to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount
of $45,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing.
On March 24, 2017, the Company issued a Convertible Promissory Note
to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of
$90,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing.
On April 18, 2017, the Company issued a Convertible Promissory Note
to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of
$45,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing.
The
company was served with a lawsuit in February 2017 alleging breach
of contract by Bryan Sarlitt. The action relates to the acquisition
of TechXpress in 2014 and additional compensation that Mr. Sarlitt
is claiming. The Company believes the Plaintiff's allegations
have no merit. There are no other legal claims currently
pending or threatened against us that in the opinion of our
management would be likely to have a material adverse effect on out
financial position, results of operations or cash
flows.
On May
3, 2017, the Company amended one May 5, 2015 9% Convertible
Promissory Note with a principal amount of $275,000 as follows: the
maturity date was extended to July 7, 2017 and in the event the
borrower completes an asset sale or capital raise of more than
$275,000, then the Notes shall automatically immediately become due
and payable.
On May
15, 2017, the Company amended one May 5, 2015 9% Convertible
Promissory Note with a principal amount of $262,500 as follows: the
maturity date was extended to July 7, 2017 and in the event the
borrower completes an asset sale or capital raise of more than
$275,000, then the Notes shall automatically immediately become due
and payable.