Washington, D.C. 20549
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of large accelerated filer, accelerated
filer, smaller reporting company and emerging
growth company in Rule 12b-2 of the Exchange Act. .
Large accelerated filer [ ] Accelerated
Filer [ ] Non-Accelerated Filer [ ] Smaller
Reporting Company [X] Emerging Growth Company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).[ ] Yes [X] No
The number of shares of issuers common stock, par value $0.0001 per share, outstanding as of June 30, 2017 was approximately 1,584,245,095.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A The Company
SoOum Corp., formerly known as
Swordfish Financial, Inc., (a Texas Corporation), acquired 80% of the outstanding common stock of Nature Vision, Inc. pursuant to a stock acquisition/merger agreement on August 14, 2009. As a result of the merger, Nature Vision changed its name to Swordfish Financial, Inc. (Swordfish).
On September 23, 2014, Swordfish entered into a Securities Purchase Agreement with 100% of the common stock shareholders (the Sellers) of SoOum Corp. Upon the closing of the transaction on November 10, 2014, SoOum Corp. shareholders transferred all of their outstanding shares of common stock to SoOum Holdings, Inc., a wholly owned subsidiary of Swordfish. In consideration, Swordfish issued 9,100,000 shares of its Class B Preferred stock and 1,690,000 shares of its Class C preferred Stock. The Class B Preferred Stock is convertible at the rate of 1 common share to 1. The Class C Preferred Stock is convertible at the rate of 10 common shares to 1. Class B and Class C have voting rights of 1,000 to 1 per share. As a result of the merger Swordfish Financial, Inc. changed its name to SoOum Corp.
Effective with the merger, SoOum Corp. changed its business focus to international commodity trading arbitrage. The Company will use its own proprietary technology to identify and exploit arbitrage opportunities. SoOum also plans to distribute trade intelligence to global subscribers in order to solve supply shortages and bring new business to local manufacturers.
Material Definitive Agreements
Acquisition
On August 25, 2016, SoOum Corp entered into a Securities Purchase Agreement with one hundred percent (100%) of the members (the Sellers) of Western Grade LLC (WG). Upon the closing of the transaction on October 6, 2016, WG members transferred all of their outstanding ownership interests to SoOum Corp. In consideration, SoOum Corp. issued 445,000,000 shares of common stock to the Sellers. The common stock received by the members of Western Grade LLC, represent an ownership interest in SoOum Corp of approximately 42% at such time. WG became a wholly owned subsidiary of SoOum Corp. See Form 8-K filed by SoOum Corp. on October 6, 2016 for more detail.
Initially, for periods after the acquisition of WG (since October 6, 2016), SoOum Corp.s financial results were referred to as Successor and its results of operations combined SoOum Corp. operations and Western Grades operations. For periods prior to the acquisition of WG the financial results were referred to as Predecessor and its operations included only the operations of WG.
Spin-Off
On July 28, 2017, the Company signed a Separation Agreement (the Agreement) with Ms. Joy Gillespie pursuant to which Ms. Gillespie exchanged her 445,000,000 shares of common stock of SoOum Corp. for 100% of the ownership interests of Western Grade, LLC (WG), which were owned by SoOum Corp. In effect, this transaction reverses the prior acquisition of Western Grade by SoOum Corp., which occurred on October 06, 2016. The Separation Agreement entered between the parties contains other terms common to a transaction of this nature. Accordingly,
the Company's financial statements will not include the operations of WG from
effective date of January 1, 2017, and the related transaction was accounted
for as a spin-off of WG as of the effective date. Based on the consideration
received (shares of common stock) and the net assets surrendered, the Company
recorded a loss on spinoff of approximately $2,600,000, which has been included
in loss on discontinued operations in the accompanying statement of operations
for the period ended June 30, 2017.
Due to the Agreement, the Company will no longer report WG as the Company's "Predecessor" and all historical financial information of the Company will be that of SoOum Corporation. WG
was only consolidated with SoOum Corporation's financial statements for the
period from October 6, 2017 (date of acquisition) through December 31,
2016. The
Proforma financial information included below discloses the effects as if the
acquisition of WG was not included in the consolidated balance sheet at December
31, 2016 included herein.
- 8 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
Less: WG
|
ProForma
|
|
Current Assets
|
|
391,658
|
391,566
|
92
|
|
Total Assets
|
|
3,846,445
|
3,846,353
|
92
|
|
Current Liabilities
|
|
9,867,116
|
1,652,316
|
8,214,800
|
|
Total Liabilities
|
|
9,945,924
|
1,733,124
|
8,214,800
|
|
Total Equity (Deficit)
|
|
(6,099,479)
|
2,113,229
|
(8,214,708)
|
|
The following financial information presents the aggregate carrying amounts of the classes of assets and liabilities of discontinued operations at December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
122,829
|
|
|
|
Accounts Receivable
|
|
|
112,929
|
|
|
|
Prepaid Expenses and Other Current Assets
|
|
|
155,808
|
|
|
|
Total Current Assets of Discontinued Operations
|
|
|
391,566
|
|
|
|
Noncurrent assets of Discontinued Operations
|
|
|
3,454,787
|
|
|
|
TOTAL ASSETS OF DISCONTINUED OPERATIONS
|
|
$
|
3,846,353
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
Accounts Payable and Accrued Expenses
|
|
$
|
480,055
|
|
|
|
Current Portion of Notes Payable
|
|
|
1,033,183
|
|
|
|
Current Portion of Notes Payable to Related Parties
|
|
|
139,078
|
|
|
|
Total Current Liabilities of Discontinued Operations
|
|
|
1,652,316
|
|
|
|
Noncurrent Liabilities of Discontinued Operations
|
|
|
80,808
|
|
|
|
TOTAL LIABILITIES OF DISCONTINUED OPERATIONS
|
|
$
|
1,733,124
|
|
|
|
-
9 -
SOOUM CORP.
New York, New York
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A The Company continued
Principles of Consolidation
The consolidated financial statements include the accounts of SoOum Corp., and its wholly owned subsidiaries; Nature Vision, Inc., and SoOum (collectively the Company). All significant inter-company balances have been eliminated in consolidation.
Basis of Presentation
The condensed consolidated balance sheet as of December 31, 2016, which has been derived from audited consolidated financial statements, and these unaudited condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United Stated (GAAP), and include all assets, liabilities, revenues and expenses of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated. These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2016. Certain information required by U.S. GAAP has been condensed or omitted in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC). The results for the period ended June 30, 2017, are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2017 or for any future period. Certain items have been reclassified to conform to the current year presentation.
NOTE B Summary of Significant Accounting Policies
Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Companys financial condition and results and require managements most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Companys significant and critical accounting policies and practices are disclosed below.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant assumptions by management include among others: allowance for doubtful accounts, fair value of derivative liabilities, and the valuation of equity based instruments. Actual results could differ from those estimates. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
- 10 -
SOOUM CORP.
New York, New York
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
B Summary of Significant Accounting Policies - continued
Fair Value
of Financial Instruments
The estimated
fair values for financial instruments are determined at discrete points in
time based on relevant market information. These estimates involve uncertainties
and cannot be determined with precision. The carrying amounts of accounts
receivable, accounts payable, accrued liabilities, and notes payable approximate
fair value given their short-term nature or effective interest rates.
Earnings per Share
Earnings per share of common stock are computed in accordance with the Financial Accounting Standards Board (FASB) ASC 260, Earnings per Share. Basic earnings per share are computed by dividing income or loss available to common shareholders by the weighted-average number of common shares outstanding for each period. Diluted earnings per share are calculated by adjusting the weighted average number of shares outstanding assuming conversion of all potentially dilutive stock options, warrants and convertible securities, if dilutive. Common stock equivalents that are anti-dilutive are excluded from both diluted weighted average number of common shares outstanding and diluted earnings per share.
Employee Stock Based Compensation
Stock based compensation issued to employees and members of our board of directors is measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. The grant date fair value of a stock based award is recognized as an expense over the requisite service period of the award on a straight-line basis.
For purposes of determining the variables used in the calculation of stock based compensation issued to employees, the Company performs an analysis of current market data and historical data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture rate. With the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables in the Black-Scholes option pricing model. Depending upon the number of stock options granted any fluctuations in these calculations could have a material effect on the results presented in our consolidated statements of operations. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our consolidated financial statements.
Non-Employee Stock Based Compensation
Issuances of the Company's common stock or warrants for acquiring goods or services are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for the fair value of the equity instruments issued to consultants or vendors is determined at the earlier of (i) the date at which a commitment for performance to earn the equity instruments is reached (a "performance commitment" which would include a penalty considered to be of a magnitude that is a sufficiently large disincentive for nonperformance) or (ii) the date at which performance is complete. Although situations may arise in which counter performance may be required over a period of time, the equity award granted to the party performing the service is fully vested and non-forfeitable on the date of the agreement. As a result, in this situation in which vesting periods do not exist as the instruments fully vested on the date of agreement, the Company determines such date to be the measurement date and will record the estimated fair market value of the instruments granted as a prepaid expense and amortize such amount to general and administrative expense in the accompanying statement of operations over the contract period. When it is appropriate for the Company to recognize the cost of a transaction during financial reporting periods prior to the measurement date, for purposes of recognition of costs during those periods, the equity instrument is measured at the then-current fair values at each of those interim financial reporting dates.
- 11 -
SOOUM CORP.
New York, New York
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE B Summary of Significant Accounting Policies continued
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.
The Company reviews the terms of the common stock, warrants and convertible debt it issues to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. The Company uses a lattice model for valuation of the derivative.
When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.
The discount
from the face value of the convertible debt, together with the stated interest
on the instrument, is amortized over the life of the instrument through periodic
charges to interest expense, using the effective interest method.
Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether net cash settlement of the derivative instrument could be required within the 12 months of the balance sheet date.
Debt Modifications and Extinguishments
When the Company modifies or extinguishes debt, it does so in accordance with ASC Topic 470-50-40, which requires modification to debt instruments to be evaluated to assess whether the modifications are considered substantial modifications. A substantial modification of terms shall be accounted for as an extinguishment. Based on the guidance relied upon and the analysis performed, if the Company believes the embedded conversion feature has no fair value on the date of issuance (measurement date) and the embedded conversion feature has no beneficial conversion feature, the embedded conversion feature does not meet the criteria in ASC 470-50-40-10 or 470-20-25 and the issuance of the convertible note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss. If the Company determines the change in terms meet the criteria for substantial modification under ASC 470 it will treat the modification as extinguishment and recognize a loss from debt extinguishment.
- 12 -
SOOUM CORP.
New York, New York
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE C Recently Issued Accounting Standards
In July 2017, the FASB issued ASU No. 2017-11, which eliminates the requirement to classify financial instruments as derivative liabilities simply because they have down round pricing protection. The Company has often issued warrants with down round pricing protection as part of its financing activities. Currently, the Company has convertible notes payable and warrants with down round pricing protection that are classified as derivative liabilities. The Company revalues these warrant tranches each reporting period and records the valuation differences as a component of other income in the statement of operations. The adoption of this ASU will allow the Company to classify its remaining warrant derivatives as equity and future warrants that might be issued by the Company with down round price protection will qualify as equity rather than derivative liability for balance sheet presentation purposes. This ASU is effective for annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is determining the financial impact of this ASU.
Financial Accounting Standards Board, or FASB, Accounting Standards Update, or FASB ASU 2017-04 Simplifying the Test for Goodwill Impairment (Topic 350)
In January 2017, the FASB issued 2017-04. The guidance removes Step Two of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those years, with early adoption permitted. We do not expect this ASU to have a significant impact on our consolidated financial statements and related disclosures.
FASB ASU 2017-01 Clarifying the Definition of a Business (Topic 805)
In January 2017, the FASB issued 2017-1. The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU is not expected to have a significant impact on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-15 Statement of Cash Flows (Topic 230)
In August 2016, the FASB issued 2016-15. Stakeholders indicated that there is a diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU will not have a significant impact on our statement of cash flows.
- 13 -
SOOUM CORP.
New York, New York
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE C Recently Issued Accounting Standards - continued
FASB ASU 2016-12 Revenue from Contracts with Customers (Topic 606)
In May 2016, the FASB issued 2016-12. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-12 provides clarification on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815)
In May 2016, the FASB issued 2016-11, which clarifies guidance on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-10 Revenue from Contracts with Customers (Topic 606)
In April 2016, the FASB issued ASU 2016-10, clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-09 Compensation Stock Compensation (Topic 718)
In March 2016, the FASB issued ASU 2016-09, which includes multiple provisions intended to simplify various aspects of accounting for share-based payments. The new guidance will require entities to recognize all income tax effects of awards in the income statement when the awards vest or are settled. It also will allow entities to make a policy election to account for forfeitures as they occur. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This standard did not have a significant impact on our consolidated financial statements and related disclosures.
- 14 -
SOOUM CORP.
New York, New York
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE C Recently Issued Accounting Standards - continued
FASB ASU 2016-02 Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. This ASU is effective for fiscal years beginning after December 18, 2018, including interim periods within those fiscal years. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.
FASB ASU 2015-17 Income Taxes (Topic 740)
In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred tax assets and liabilities on the balance sheet. Previous GAAP required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.
FASB ASU 2015-16 Business Combinations (Topic 805), or ASU 2015-16
- In September 2015, the FASB issued ASU 2015-16, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This ASU is effective for interim and annual reporting period beginning after December 15, 2016, including interim periods within those fiscal years, with the option to early adopt for financial statements that have not been issued. We will apply this guidance to any business combinations that may occur.
FASB ASU 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory, or ASU 2015-11
- In July 2015, the FASB issued ASU 2015-11, which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using first-in, first-out (FIFO) or average cost. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016, with the option to early adopt as of the beginning of an annual or interim period. The adoption of this ASU did not have a significant impact on our financial position, results of operations and cash flows.
- 15 -
SOOUM CORP.
New York, New York
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note D - Notes Payable
Notes payable consisted of the following:
|
|
|
|
June 30, 2017
|
December 31, 2016
|
Jeff Zernov (Former Chief Executive Officer) (a)
|
|
|
Payable August 17, 2010 at 15% Interest.
|
$ 290,000
|
$ 290,000
|
|
|
|
Castaic (a)
|
|
|
Installment note payable annually at $17,171 including interest at 8.0% from January 2009 through January 2011.
|
30,620
|
30,620
|
|
|
|
Installment note payable monthly at $1,175 including interest at 8.0% from February 2008 through January 2011.
|
20,246
|
20,246
|
|
|
|
Innovative Outdoors (a)
|
|
|
Installment note payable monthly at $4,632 including interest at 7.0% from August 2008 through July 2011.
|
100,555
|
100,555
|
|
|
|
Total Notes Payable
|
$ 441,421
|
$ 441,421
|
(a) The Company no longer has contact with these holders and, accordingly, has not accrued interest on such notes since 2014. Such accrual would have increased accrued expenses by approximately $27,300 and $13,652 at June 30, 2017 and December 31, 2016, respectively and increased interest expense by approximately $27,300 for each of the six months ended June 30, 2017 and 2016.
NOTE E Convertible Debentures
As of June 30, 2017, the Company has outstanding fifteen (15) security purchase agreements with accredited investors for the sale of convertible promissory notes bearing interest at 5% - 12%, per annum. Pursuant to the convertible promissory notes the investor may convert the amount paid towards the Securities Purchase Agreements into common stock of the Company. Conversion prices vary based on the agreements and have various discount rates and terms. The convertible notes payable are convertible into common stock of the Company at the lesser of (a) discounts ranging from 0% - 50% of the lowest daily trading prices ranging from 10 to 30 days before the conversion date, or (b) a conversion price of $.0001.
- 16 -
SOOUM CORP.
New York, New York
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
E Convertible Debentures - continued
During the three months ended March 31, 2017, the Company entered into convertible
debentures aggregating $191,500. Based on the embedded conversion features,
the Company recorded derivative liabilities in the amount of approximately
$500,000, debt discount of approximately $189,000 and interest expense of approximately
$311,000 (due to the excess of the initial derivative valuation over the face
amount of the debenture). In
addition the Company issued shares of common stock as a commitment fee (See
Note I).
In January 2017, the Company entered into convertible debentures for
an aggregate amount of $100,000. In exchange, the Company extinguished $100,000
of notes payable to a different party. In connection with the $100,000
debentures, the Company recognized a loss from extinguishment of debt and additional
derivative liabilities of approximately $390,000 during the three months ended
March 31, 2017.
The conversion rights embedded in the Notes
are accounted for as derivative financial instruments because of the down round
feature of the conversion price. The embedded conversion feature was valued at the date of issuance and each reporting period using the Black-Scholes-Merton options pricing model with the following assumptions: risk free interest rates ranging from .84% to 1.22%, contractual expected life of six (6) to twelve (12) months, expected volatility of 289% to 549%, calculated using the historical closing price of the companys
common stock, and dividend yield of zero, resulting in fair market value.
The Company had convertible debentures outstanding as follows:
|
|
|
|
|
At June 30, 2017
|
|
Outstanding Balance of Convertible Debenture
|
Unamortized
Discount
|
Net of Principal and Unamortized Discount
|
|
|
|
|
|
Convertible Debentures
|
|
|
|
|
January 10, 2014 - Debenture
|
|
$ 7,150
|
$
|
$ 7,150
|
April 2, 2014 Debenture
|
|
17,815
|
|
17,815
|
June 18, 2014 Settlement Agreement
|
|
58,420
|
|
58,420
|
September 1, 2015 - Debenture
|
|
227,873
|
|
227,873
|
December 3, 2015 - Debenture
|
|
11,667
|
|
11,667
|
August 29, 2016 - Debenture
|
|
20,000
|
|
20,000
|
August 29, 2016 - Debenture
|
|
24,000
|
|
24,000
|
December 8, 2016 - Debenture
|
|
35,500
|
|
35,500
|
January 11, 2017 - Debenture
|
|
30,000
|
(12,354)
|
17,646
|
January 18, 2017 - Debenture
|
|
60,000
|
(24,176)
|
35,824
|
January 18, 2017 - Debenture
|
|
15,000
|
(1,364)
|
13,636
|
January 23, 2017 - Debenture
|
|
37,000
|
|
37,000
|
February 2, 2017
|
|
66,500
|
(12,308)
|
54,192
|
March 9, 2017
|
|
20,000
|
(6,841)
|
13,159
|
May 12, 2017
|
|
2,000
|
|
2,000
|
|
|
|
|
|
Total Convertible Debentures
|
|
$ 632,925
|
$ (57,043)
|
$ 575,882
|
- 17 -
SOOUM CORP.
New York, New York
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE E Convertible Debentures - continued
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At December 31, 2016
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Outstanding Balance of Convertible Debenture
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Unamortized
Discount
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Net of Principal and Unamortized Discount
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Convertible Debentures
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January 10, 2014 - Debenture
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$ 7,150
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$
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$ 7,150
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April 2, 2014 Debenture
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17,815
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17,815
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June 18, 2014 Settlement Agreement
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|
58,420
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58,420
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September 1, 2015 - Debenture
|
|
327,873
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327,873
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December 3, 2015 - Debenture
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|
11,667
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11,667
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August 29, 2016 - Debenture
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20,000
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20,000
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August 29, 2016 - Debenture
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24,000
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24,000
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December 8, 2016 - Debenture
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35,500
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(30,965)
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4,535
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December 13, 2016 - Debenture
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15,000
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15,000
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|
|
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Total Convertible Debentures
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$ 517,425
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$ (30,965)
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$ 486,460
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In connection with the issuance of the note payable on December 8, 2016, the Company recorded a beneficial conversion feature of $35,500 based on the fixed conversion terms of such instrument. During the six months ended June 30, 2017, the Company amortized approximately $30,000 to interest expense. The debt discount was fully amortized at June 30, 2017.
In April, 2017, all convertible notes payable were in default due to the Companys delinquency of its public filings. These notes also contain various default provisions including increases to the interest rate ranging from 0% to 16%, penalties of fixed amounts of $1,200, penalties of $500 per day or increases to the principal balance ranging from 0% to 150%. As of August 18, 2017, the Company has not received any correspondence enforcing default provisions of such notes. Effective with the filing of this Form 10-Q for the period ended June 30, 2017, the Company will be current in its periodic filings.
- 18 -
SOOUM CORP.
New York, New York
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note F Related Party Transactions
Notes payable Related Parties consisted of the following:
The notes to the former member of the Board of Directors are in default and the Company has included approximately $1,347,828 of accrued interest in accrued expenses at June 30, 2017 and December 31, 2016.
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June 30, 2017
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December 31, 2016
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|
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R Kiphart Former Member of Board of Directors Unsecured (a)
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$ 1,045,000
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$ 1,045,000
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R Kiphart Former Member of Board of Directors Secured (a)
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50,000
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50,000
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Legacy Shareholders (a)
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149,185
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149,185
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Miscellaneous
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5,611
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5,611
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Current Management
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8,391
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8,391
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Total Notes Payable Related Parties
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$ 1,258,187
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$ 1,258,187
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(a)
The
Company no longer has contact with these holders and, accordingly, has not
accrued interest on such notes since December 2015. Such accrual would
have increased accrued expenses by approximately $82,124 and $164,248 at June
30, 2017 and December 31, 2016, respectively and increased interest expense
by approximately $82,124 for each of the six months ended June 30, 2017 and
2016.
The Company has a convertible note payable with a David Westbrook, a related party,
father
to the Companys CEO, in the amount of $2,000. The note is due and payable in November 2017 and accrues interest at 12%. The note is included in convertible notes payable (See Note E).
Note G Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company has negative working capital and has incurred an operating loss during the six months ended June 30, 2017. These factors raise substantial doubt about the Companys ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern. Management intends to raise additional working capital through the issuance of stock and through additional loans from investors.
The ability of the Company
to continue as a going concern is dependent on its ability to raise adequate
capital to fund operating losses until it is able to engage in profitable business
operations. To the extent financing is not available, the Company may not be
able to, or may be delayed in, developing its services and meeting its obligations.
The Company will continue to evaluate its projected expenditures relative to
its available cash and to evaluate additional means of financing in order to
satisfy its working capital and other cash requirements. The accompanying financial
statements do not reflect any adjustments that might result from the outcome
of these uncertainties.
- 19 -
SOOUM CORP.
New York, New York
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE H Accrued Expenses
Accrued Expenses
consisted of the following:
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June 30, 2017
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December 31, 2016
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Consulting Fees
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$ 765,379
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$ 765,379
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Interest
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1,713,626
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1,681,011
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Professional Fees
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641,348
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503,544
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|
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Total Accrued Expenses
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$ 3,120,353
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$ 2,949,934
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NOTE I Stockholders Equity
Increase in Authorized Shares
On February 6, 2017, the shareholders approved an amendment to the Companys articles of Incorporation to increase the number of authorized common stock to 20,000,000,000 shares from 5,000,000,000 shares.
Preferred Stock
In June 2011, the board of directors approved the designation of 25,000,000 shares of preferred stock, par value $0.0001 per share, of the Company as Class A Preferred Stock. The Class A Preferred stock receive no dividends or liquidation preferences. Each share is entitled to the equivalent of 100 votes of common stock. Each share of Class A is convertible at a ratio of 1 share of Class A for .10 share of common.
In September 2014, the board of directors approved the designation of 10,000,000 shares of preferred stock, par value $0.0001 per share, of the Company as Class B Preferred Stock. The Class B Preferred stock receives no dividends or liquidation preferences. Each share is entitled to the equivalent of 1,000 votes of common stock. Each share of Class B is convertible at a ratio of 1 share of Class B for 1 share of common.
In September 2014, the board of directors approved the designation of 10,000,000 shares of preferred stock, par value $0.0001 per share, of the Company as Class C Preferred Stock. The Class C Preferred stock receives no dividends or liquidation preferences. Each share is entitled to the equivalent of 10,000 votes of common stock. Each share of Class C is convertible at a ratio of 1 share of Class C for 10 shares of common.
In January 2016, the board of directors approved the designation of 10,000,000 shares of preferred stock, par value $0.001 per share, of the Company as Class D Preferred Stock. The Class D Preferred stock participate in dividends declared on the Companys common stock on the basis of 1,000 shares of common per share of Class D and have no liquidation preference. Each share is entitled to the equivalent of 1,000 votes of common stock. Each share of Class D is convertible at a ratio of 1 share of Class D for 1,000 shares of common.
·
In January 2016, the Company issued 3,441,000 shares of Class D as compensation for services rendered. The Company recorded approximately $4,000,000 of expense related to such issuance.
·
In October 2016, the holders of the Class D converted all outstanding shares into 436,200,000 shares of the Companys common stock, foregoing any additional shares owed under the stated conversion terms.
Common Stock
On October 13, 2015, the Company resolved to adopt the Employees, Directors and Consultants Stock Plan for the Year 2015. The purpose of this Plan is to enable the Company, to promote the interests of the Company and its stockholders by attracting and retaining employees, directors and consultants capable of furthering the future success of the Company and by aligning their economic interests more closely with those of the Companys stockholders, by paying their fees or salaries in the form of shares of the Companys common stock. 500,000,000 shares of common stock are registered to this plan at an offering price of $0.0001. The Plan expired on January 1, 2017.
During the six months ended June 30, 2017, the Company issued 832,986,300 shares of common stock for the conversion of debt and accrued interest of approximately $83,300.
During the six months ended June 30, 2017, the Company issued 92,000,000 shares of common stock for services rendered. The estimated fair value of such shares was approximately $111,000, which was expensed upon issuance.
During the six months ended June 30, 2017, the Company issued 41,562,500 shares of common stock for the payment of a loan commitment fee for a convertible debenture received February 2, 2017. The estimated fair value of the loan commitment fee was approximately $62,350 and was expensed upon issuance. (See Note E).
- 20 -
SOOUM CORP.
New York, New York
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE J Commitments and Contingencies
Various creditors
have brought legal proceedings for collections of their claims against the
Company. Judgments payable at June 30, 2017 and December 31, 2016 are
$1,147,203.
NOTE K Fair Value
The Company has categorized its assets and liabilities recorded at fair value based upon the fair value hierarchy specified by GAAP. All assets and liabilities are recorded at historical cost which approximates fair value, and therefore, no items were valued according to these inputs.
The levels of fair value hierarchy are as follows:
·
Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;
·
Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals; and
·
Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company categorizes such financial asset or liability based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. All assets and liabilities are at cost which approximates fair value and there are not items that were required to be valued on a non-recurring basis.
The following liabilities were valued at fair value as of June 30, 2017 and December 31, 2016. No other items were valued at fair value on a recurring or non-recurring basis as of June 30, 2017 and December 31, 2016.
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June 30, 2017
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Fair Value Measurements Using
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Carrying
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Value
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Level 1
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Level 2
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Level 3
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Total
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Derivative Liabilities
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$
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$
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$
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$ 1,242,080
|
$ 1,242,080
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|
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Total
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$
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$
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$ 1,242,080
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$ 1,242,080
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|
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December 31, 2016
|
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Fair Value Measurements Using
|
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Carrying
|
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|
|
|
Value
|
Level 1
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Level 2
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Level 3
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Total
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Derivative Liabilities
|
$
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$
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$
|
$ 641,271
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$ 641,271
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|
|
|
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|
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Total
|
|
$
|
$
|
$ 641,271
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$ 641,271
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- 21 -
SOOUM CORP.
New York, New York
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE K Fair Value continued
The following table presents the approximate changes in fair value of the Companys embedded conversion features (See Note E) measured at fair value on a recurring basis for the six months ended June 30, 2017.
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Balance January 1, 2017
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$ 641,271
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Issuance of Embedded Conversion Feature
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890,774
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Change in Fair Value
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199,760
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Reclassification to Additional Paid in Capital
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(489,725)
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|
Balance June 30, 2017
|
$ 1,242,080
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- 22 -
Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
Three Months Ended June 30, 2017 Compared With Three Months Ended June 30, 2016
Net revenues for the three months ended June 30, 2017 and 2016 was $-0- and $427, respectively. Cost of goods sold were $-0- and $312 for the three months ended June 30, 2017 and 2016, respectively. Net loss for the three months ended June 30 2017 was ($25,398) compared to net loss of ($80,140) for the three months ended June 30, 2016.
Total general and administrative expenses were $114,341 for the three months ended June 30, 2017 compared to $58,231 for the three months ended June 30, 2016.
Other income and (expenses) were $88,943 for the three months ended June 30, 2017 compared to ($22,024) for the three months ended June 30, 2016. Other income and (expenses) for the three months ended June 30, 2017 consisted of change in fair value of derivatives of $203,620 and interest expense of ($114,677) compared to change in fair value of derivatives of ($19,806) and interest expense of ($2,218) for the three months ended June 30, 2016.
Six Months Ended June 30, 2017 Compared With Six Months Ended June 30, 2016
Net revenues for the six months ended June 30, 2017 and 2016 was $19,354 and $3,087, respectively. Cost of goods sold were $14,315 and $437 for the six months ended June 30, 2017 and 2016, respectively. Net loss for the six months ended June 30 2017 was ($4,237,303) compared to net loss of ($4,159,537) for the six months ended June 30, 2016.
Total general and administrative expenses were $516,776 for the six months ended June 30, 2017 compared to $4,113,737 for the six months ended June 30, 2016.
Other income and (expenses) were ($1,100,369) for the six
months ended June 30, 2017 compared to ($48,450) for the six months ended June
30, 2016. Other income and (expenses) for the six months ended June 30, 2017
consisted of change in fair value of derivatives of ($199,760), loss on extinguishment
of debt of ($390,254) and interest expense of ($510,355) compared to change
in fair value of derivatives of $6,922, and interest expense of ($55,372) for the six months ended June 30, 2016.
Loss on discontinued operations was $2,625,197 for the six months ended June 30, 2017 compared to $-0- for the six months ended June 30, 2016, which accounted for the spin-off of Western Grade.
Spin-Off
On July 28, 2017, the Company signed a Separation Agreement (the Agreement) with Ms. Joy Gillespie pursuant to which Ms. Gillespie exchanged her 445,000,000 shares of common stock of SoOum Corp. for 100% of the ownership interests of Western Grade, LLC (WG), which were owned by SoOum Corp. In effect, this transaction reverses the prior acquisition of Western Grade by SoOum Corp., which occurred on October 06, 2016. The Separation Agreement entered between the parties contains other terms common to a transaction of this nature. Accordingly, the Company's financial statements will not include the operations of WG from effective date of January 1, 2017, and the related transaction was accounted for as a spin-off of WG as of the effective date. Based on the consideration received (shares of common stock) and the net assets surrendered, the Company recorded a loss on spinoff of approximately $2,600,000, which has been included in loss on discontinued operations in the accompanying statement of operations for the period ended June 30, 2017.
Due to the Agreement, the Company will no longer report WG as the Company's "Predecessor" and all historical financial information of the Company will be that of SoOum Corporation. WG was only consolidated with SoOum Corporation's financial statements for the period from October 6, 2017 (date of acquisition) through December 31, 2016. The Proforma financial information included below discloses the effects as if the acquisition of WG was not included in the consolidated balance sheet at December 31, 2016 included herein.
Liquidity and Capital Resources
Our operations used approximately $196,000 in cash for the six months ended June 30, 2017. Cash provided during the six months ended June 30, 2017, came principally from cash proceeds from convertible notes payable of $193,500.
Our operations used approximately $4,000 in cash for the six months ended June 30, 2016. Cash provided during the three months ended June 30, 2016 came principally from cash proceeds from notes payable affiliates of approximately $3,800.
-23-
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. We incurred net loss of $4,237,303 and $4,159,537 respectively, for the six months ended June 30, 2017 and 2016 and had an accumulated deficit of $23,937,173 as of June 30, 2017. We have managed our liquidity during the first quarter of 2017 through the issuance of convertible notes payable. These factors raise substantial doubt about the Companys ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
There were no changes to the Companys critical accounting policies for the six months ended June 30, 2017. Refer to the filed 10-K for a more detailed summary of the Companys critical accounting policies.
Going Concern
The condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company has negative working capital and has incurred an operating loss during the six months ended June 30, 2017. These factors raise substantial doubt about the Companys ability to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern. Management intends to raise additional working capital through the issuance of stock and through additional loans from investors.
The ability of the Company to continue as a going concern is dependent on its ability to raise adequate capital to fund operating losses until it is able to engage in profitable business operations. To the extent financing is not available, the Company may not be able to, or may be delayed in, developing its services and meeting its obligations. The Company will continue to evaluate its projected expenditures relative to its available cash and to evaluate additional means of financing in order to satisfy its working capital and other cash requirements. The accompanying financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.