Notes to the Financial Statements
December 31, 2017
NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
We were organized as a Nevada corporation on August 25, 1999. On August 15, 2014, we entered into an Agreement and Plan of Merger to combine our business and activities with CannaSys, Inc., a privately held Colorado corporation focused on providing services to the cannabis industry (“CannaSys-Colorado”), into a single entity (the “Merger”). CannaSys-Colorado was originally formed on October 4, 2013, as a limited liability company, and converted to a corporation on June 26, 2014. Under the terms of the merger agreement, our wholly owned subsidiary formed to effectuate the Merger was merged with and into CannaSys-Colorado, the surviving entity, which then became our wholly owned subsidiary.
Due to the CannaSys-Colorado shareholders controlling us after the Merger, CannaSys-Colorado was considered the accounting acquirer. The transaction was therefore recognized as a reverse acquisition of us by CannaSys-Colorado.
In connection with the closing of the Merger and after meeting the requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”), on November 12, 2014, we filed amended and restated articles of incorporation with the Nevada Secretary of State that: (i) changed our name to CannaSys, Inc.; (ii) increased our authorized capital stock to 80,000,000 shares, consisting of 75,000,000 shares of common stock and 5,000,000 shares of preferred stock; (iii) authorized 5,000,000 shares of preferred stock; and (iv) made other modernizing, nonmaterial changes to our articles of incorporation. Changing our corporate name to CannaSys, Inc. was a condition to the Merger transaction. The name change better reflects the nature of our principal business operations and it became effective in the OTC market on December 2, 2014, when FINRA announced the name change. We also received a new CUSIP number and our trading symbol was changed to “MJTK.”
On October 17, 2016, we completed a recapitalization of our company, consisting of a 20-to-one reverse split and an increase of authorized capitalization to 2,500,000,000 shares of capital stock, consisting of 2,000,000,000 shares of common stock, par value $0.001, and 5,000,000 shares of preferred stock, par value $0.001. This recapitalization triggered the automatic conversion of 1,515,000 shares of Series A Preferred Stock to 75,750 shares of common stock.
On December 7, 2017, we increased our authorized capital to 12,005,000,000 shares, consisting of 12,000,000,000 shares of common stock and 5,000,000 shares of preferred stock.
Nature of Business
We provide technology services in the ancillary space of the cannabis industry. We do not produce, sell, or handle in any manner cannabis products. As the current cannabis industry grows and gains momentum around the country, technology needs for the industry have been largely underserved. Our focus on this niche element of the industry is to create efficient and profitable tools for both industry owners and consumers.
Since inception, we have developed, refined, and introduced branded products, membership loyalty programs, text-message-based platforms for customer engagement, and laboratory management systems into the cannabis industry. To support marketing and delivery of our principal products and to access other products and services, we are expanding a network of strategic alliances within the industry to build an array of product and service offerings and to increase use of our distribution channels. Most of our active strategic relationships were only recently initiated and are yet to generate revenue.
We seek funding to launch our integrated cannabis-industry product and service suite. Our primary business objectives are to generate stable revenues and cash flows through the development of vertically integrated distribution centers and to collect and monetize cannabis consumer data.
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NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Use of Estimates
The preparation of financial statements in accordance with GAAP permits management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Concentrations of Credit Risk
We maintain our cash in bank deposit accounts, the balances of which at times may exceed federally insured limits. We continually monitor our banking relationships and consequently have not experienced any losses in our accounts. We believe we are not exposed to any significant credit risk on cash.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents for the year ended December 31, 2017 or 2016.
Accounts Receivable
Revenues that have been recognized but not yet received are recorded as accounts receivable. Losses on receivables will be recognized when it is more likely than not that a receivable will not be collected. An allowance for estimated uncollectible amounts will be recognized to reduce the amount of receivables to its net realizable value. The need for an allowance for uncollectible amounts is evaluated quarterly. We have not deemed it necessary to establish an allowance for doubtful accounts as of December 31, 2017 and 2016.
Reclassifications
Certain reclassifications have been made to the prior-year financial information to conform to the presentation used in the financial statements for the year ended December 31, 2017.
Fair Value of Financial Instruments
We follow Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 825-10-50-10,
Financial Instruments—Overall—Disclosure,
for disclosures about fair value of our financial instruments and ASC 820-10-35-37,
Fair Value Measurement—Overall—Subsequent Measure—Fair Value Hierarchy,
to measure the fair value of our financial instruments. ASC 820-10-35-37 establishes a framework for measuring fair value GAAP and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10-35-37 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by ASC 820-10-35-37 are described below:
Level 1:
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|
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
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|
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Level 2:
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|
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
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|
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Level 3:
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Pricing inputs that are generally observable inputs and not corroborated by market data.
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The carrying amount of our financial assets and liabilities, such as cash, prepaid expenses, and accrued expenses, approximate their fair value because of the short maturity of those instruments. Our notes payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to us for similar financial arrangements at December 31, 2017.
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The following table presents assets and liabilities that are measured and recognized at fair value on a recurring basis:
Description
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Level 1
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Level 2
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|
Level 3
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Total Gains and (Losses)
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|
|
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|
|
|
|
|
|
|
December 31, 2017:
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|
|
|
|
|
|
|
|
|
|
|
Available for sale securities
|
$
|
-
|
|
$
|
-
|
|
$
|
57,500
|
|
$
|
-
|
Total
|
$
|
-
|
|
$
|
-
|
|
$
|
57,500
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities
|
$
|
-
|
|
$
|
-
|
|
$
|
32,500
|
|
$
|
-
|
Total
|
$
|
-
|
|
$
|
-
|
|
$
|
32,500
|
|
$
|
-
|
Fixed Assets
Fixed assets are carried at the lower of cost or net realizable value. Normal maintenance and repairs are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets of three years.
Revenue Recognition
We follow ASC 605-10-S99-1,
Revenue Recognition
, for revenue recognition. We will recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the product has been shipped or the services have been rendered to the customer; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured.
During the fiscal year 2016, we generated two types of revenue, including:
(1)
Customized software development, in which we developed software for customers on a bespoke basis.
(2)
Software licensing, in which we licensed our existing portfolio of software products to customers on either a one-time fee or recurring monthly fee basis.
We allocated cost of goods sold for both forms of revenue on a pro-rata basis through either direct outsourcing of development resources or direct costs associated with our employees or contractors.
During the fiscal year 2017, we generated revenue from software sales, primarily through Citizen Toke.
No cost of goods sold were incurred related to the fiscal year 2017 revenues generated.
Earnings (Loss) per Common Share
Net income (loss) per common share is computed pursuant to ASC 260-10-45,
Earnings per Share—Overall—Other Presentation Matters
. Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period. The weighted average number of common shares outstanding and potentially outstanding common shares assumes that we incorporated as of the beginning of the first period presented.
Our diluted loss per share is the same as the basic loss per share for the years ended December 31, 2017 and 2016, as the inclusion of any potential shares would have had an antidilutive effect due to our loss from operations.
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Stock-based Compensation
We account for equity-based transactions with nonemployees under the provisions of ASC 505-50,
Equity-Based Payments to Non-Employees
. ASC 505-50 establishes that equity-based payment transactions with nonemployees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The fair value of common stock issued for payments to nonemployees is measured at the market price on the date of grant. The fair value of equity instruments, other than common stock, is estimated using the Black-Scholes option valuation model. In general, we recognize the fair value of the equity instruments issued as deferred stock compensation and amortize the cost over the term of the contract.
We account for employee stock-based compensation in accordance with the guidance of ASC 718,
Compensation—Stock Compensation,
which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The fair value of the equity instrument is charged directly to compensation expense and credited to additional paid-in capital over the period during which services are rendered.
Valuation of Intangibles and Long-Lived Assets
We test intangibles and long-lived assets for recoverability when changes in circumstances indicate the carrying value may not be recoverable, for example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, and significant negative industry or economic trends. We evaluate recoverability of an asset by comparing its carrying value to the future net undiscounted cash flows that we expect will be generated by the asset. If the comparison indicates that the carrying value of an asset is not recoverable, we recognize an impairment loss for the excess of carrying value over the estimated fair value.
Income Taxes
We follow ASC 740-10-30,
Income Taxes—Overall—Initial Measurement
, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the fiscal year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of income in the period that includes the enactment date.
We adopted ASC 740-10-25,
Income Taxes—Overall—Recognition
, with regards to uncertainty income taxes. ASC 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10-25, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740-10-25 also provides guidance on derecognition, classification, interest, penalties on income taxes, and accounting in interim periods and requires increased disclosures. We had no material adjustments to our liabilities for unrecognized income tax benefits according to the provisions of ASC 740-10-25.
We have evaluated Staff Accounting Bulletin No. 118 regarding the impact of the decreased tax rates of the Tax Cuts & Jobs Act. See Note 15 – Income Taxes below for schedules that describe the new rates adjusted for the period of enactment.
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Recently Issued Accounting Pronouncements
In January 2017, the FASB issued an Accounting Standards Update (“ASU”) 2017-01,
Business Combinations (Topic 805) Clarifying the Definition of a Business
. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for interim and annual periods beginning after December 15, 2017, and should be applied prospectively on or after the effective date. We are in the process of evaluating the impact of this accounting standard update.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
which requires restricted cash to be presented with cash and cash equivalents on the statement of cash flows and disclosure of how the statement of cash flows reconciles to the balance sheet if restricted cash is shown separately from cash and cash equivalents on the balance sheet. ASU 2016-18 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We are in the process of evaluating the impact of this accounting standard update on our financial statements.
In August 2016, the FASB issued ASU 2016-15
, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
. ASU 2016-15 provides guidance for targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. ASU 2016-15 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We are in the process of evaluating the impact of this accounting standard update on our statements of cash flows.
In March 2016, the FASB issued ASU 2016-09,
Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09, which amends several aspects of accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, and classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. We are in the process of evaluating the impact of this accounting standard update on its financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. We are in the process of evaluating the impact of this accounting standard update on our financial statements.
In May 2014, August 2015, April 2016, and May 2016, the FASB issued ASU 2014-09—
Revenue from Contracts with Customers
(Topic 606), ASU 2015-14—
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, ASU 2016-08—
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, ASU 2015-14—
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, ASU 2016-10—
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, and ASU 2016-12 (ASC Topic 606) Revenue from Contracts with 606) Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, and ASU 2016-12—
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,
to guide accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. These updates also require entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. This standard may be applied to the process of assessing the impact, if any, on our financial statements.
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We have implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.
NOTE 3—GOING CONCERN
As reflected in the accompanying financial statements, we had an accumulated deficit of $16,588,998 at December 31, 2017, had a net loss of $6,124,706, and used net cash of $740,741 in operating activities for the year ended December 31, 2017. These factors raise substantial doubt about our ability to continue as a going concern. The financial statements have been prepared assuming that we will continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
While we are attempting to increase operations and revenues, our cash position may not be significant enough to support our daily operations. Management intends to raise additional funds by way of debt and equity financing. Management believes that the actions presently being taken to further implement our business plan and generate increased revenues provide the opportunity for us to continue as a going concern. While we believe in the viability of our strategy to generate increased revenues and in our ability to raise additional funds, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to further implement our business plan and generate increased revenues. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
NOTE 4—PROPERTY AND EQUIPMENT
Furniture, fixtures, and equipment, stated at cost, less accumulated depreciation, consisted of the following at December 31:
|
2017
|
|
2016
|
|
|
|
|
|
|
Furniture, fixtures, and equipment
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$
|
-
|
|
$
|
8,403
|
Less: accumulated depreciation
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|
-
|
|
|
(4,637)
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Loss on disposal
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|
-
|
|
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(3,766)
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Fixed assets, net
|
$
|
-
|
|
$
|
-
|
During the year ended December 31, 2016, we disposed of $8,403 of office furniture we were no longer using, resulting in a loss on disposal of $3,766.
Depreciation Expense
Depreciation expense for the years ended December 31, 2017 and 2016, was $0 and $1,412, respectively.
Software, stated at cost, less accumulated amortization, consisted of the following at December 31:
|
2017
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2016
|
|
|
|
|
|
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Software
|
$
|
221,000
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$
|
221,000
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Less: accumulated amortization
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|
(150,764)
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|
|
(40,264)
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Loss on disposal
|
|
70,236
|
|
|
-
|
Intangible assets, net
|
$
|
-
|
|
$
|
180,736
|
During the year ended December 31, 2017, management determined that the software it was amortizing had become impaired resulting in a loss on disposal of $70,236.
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Amortization Expense
Amortization expense for the software for the years ended December 31, 2017 and 2016, was $110,500 and $40,264, respectively.
NOTE 5
—
AVAILABLE FOR SALE SECURITIES
On December 10, 2015, we acquired a 1.083% interest in Duby, LLC for $32,500. Duby is a social media application focused on cannabis consumers. As part of the acquisition, Duby plans to assist in the promotion of our products and services on its platform. We purchased the interest in Duby as part of ongoing negotiations for the joint marketing and promotion of our respective products. The purchase is being accounted for according to ASC 320,
Debt and Equity Securities
, as available-for-sale securities and has been recorded at cost. As Duby is not a public company with active trading by which the investment could be valued at December 31, 2017, we performed an impairment analysis and determined that as of December 31, 2017, there had been no impairment to the value of the purchased interest in Duby based on subsequent financings undertaken by Duby with third parties that substantiated the reported valuation.
On February 12, 2017, we acquired 2,500,000 shares of stock in Alliance Financial Network, Inc. (“AFN”) for $25,000. The shares were purchased pursuant to a non-binding letter of intent in which we were to acquire 100% of the assets of AFN. That letter of intent was terminated on May 9, 2017. As AFN is not a public company with active trading by which the investment could be valued at December 31, 2017, we performed an impairment analysis and determined that as of December 31, 2017, there had been no impairment to the value of the purchased interest in AFN.
NOTE 6—INVESTMENT IN MHB
On November 10, 2015, we entered into an agreement to exchange 500,000 shares of our common stock for 10 million shares of MHB, Inc., doing business as Mile High Brands (“MHB”).
The shares were valued at $5.80 per share, the closing stock price on the date of grant, for a total of $2,900,000.
Through this transaction, we acquired 49% of the issued and outstanding common shares of MHB. MHB is a lifestyle branding agency focused on the regulated cannabis industry. Its clients include celebrities and product companies that wish to access the rapidly growing cannabis marketplace. The purchase is being accounted for according to ASC 320,
Debt and Equity Securities
, under the equity method of accounting.
A
t December 31, 2015, we performed an impairment analysis of our investment in MHB. We used a perpetuity-based valuation model to determine a discounted cash flow and terminal value for MHB’s business. Based on this analysis, it was determined that the value of the investment was impaired and that the current fair value was $1,049,475. We recorded an impairment loss on investment of $1,846,515 as of December 31, 2015.
A
t December 31, 2016, we performed another impairment analysis using the same methodology. Based on this analysis, we determined that the value of the investment was once again impaired and that the current fair value was $0. We recorded an impairment loss on investment of $1,049,475 as of December 31, 2016.
On December 22, 2016, we entered into an amendment to share exchange agreement, under which: (a) MHB cancelled 9,985,000 MHB shares issued to us under the exchange agreement; (b) we cancelled 485,000 of our post-split shares issued to MHB under the exchange agreement; (c) the Gross Revenue Assignment between the parties was terminated and section 2.04 of the exchange agreement was deleted in its entirety; and (d) the parties confirmed that the $7,500 payment from MHB to us was for fees as originally contemplated under the exchange agreement. As amended, each party now owns 15,000 shares of the other party’s common stock.
NOTE 7—ASSET PURCHASE
On August 10, 2016, we entered into an Asset Purchase Agreement and a General Assignment and Bill of Sale, with Beta Killers LLC, a Colorado limited liability company, whereby we acquired all of the assets comprising the current version of the Citizen Toke application, including all Intellectual Property (as defined in the agreement), code, and other intangibles and related documentation associated with Citizen Toke. The purchase price was 1,000,000 shares of common stock. The shares were valued at $0.22 per share, the closing price on the date of purchase, for a total purchase price of $221,000. The software is being amortized over its estimated useful life of three years.
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On September 20, 2017, we issued 2,000,000 shares of Series B Preferred Stock to Beta Killers LLC, as consideration for and in exchange of its agreement to waive our prior defaults, release us from our obligations under the asset purchase agreement and related agreements, and enter into an additional statement of work under our master services agreement.
NOTE 8—COMMITMENTS AND CONTINGENCIES
Operating Lease
We currently sublease office space in Denver, Colorado. We signed a month-to-month lease starting January 1, 2016. Current lease payments are based on number of desks being occupied not to exceed $1,500 per month. The sublease required a deposit of $1,500, which was paid on January 25, 2016.
NOTE 9—RELATED-PARTY TRANSACTIONS
Refer to Note 13 for warrants issued.
On July 1, 2017, we entered into an executive employment agreement with Patrick G. Burke to serve as our chief executive officer, chief financial officer, and corporate secretary for a term of one year, with automatic renewals, unless terminated. Mr. Burke’s compensation in this position consisted of an annual base salary of $84,000. In connection therewith, Mr. Burke was awarded 2,250,000 shares of our common stock, to vest in equal quarterly increments over a one-year period. Mr. Burke was also appointed to our board of directors, to serve until his successor was elected and qualified. During 2017, Mr. Burke was awarded a compensation bonus in the gross amount of $5,000. We also incurred an additional $11,705 in health care expenses on Mr. Burke’s behalf, per the terms of his employment agreement. Additionally, we had an unpaid balance of $28,000 due to Mr. Burke, resulting from a combination of his employment agreement and prior consulting agreement, which was converted to a promissory note.
Effective July 1, 2017, Michael Tew resigned as our chief executive officer, chief financial officer, and corporate secretary, his employment agreement was terminated, and he entered into a consulting agreement and a separation and mutual release agreement with us. Mr. Tew continued to serve as a director. In connection therewith, we issued to Mr. Tew a promissory note in the amount of $44,380 for his past-due compensation and severance. The note was paid in full on September 11, 2017. During the fiscal year 2017, we paid the following to Mr. Tew: $84,000 salary, $28,000 severance, $20,000 consulting fees, $22,174 compensation expense, $10,000 advertising expense, $3,600 medical, plus $10,000 to Kimberley Tew, his wife, for a total of $177,774. This total, along with unpaid salary of $50,930 for the prior year, were fully paid during year 2017.
On September 9, 2017, we issued a promissory note to Patrick G. Burke, for $28,000 for unpaid compensation. The note was unsecured, bore interest at 1% per annum, and was due December 31, 2017. As of December 31, 2017, $28,000 and $87 of principal and interest, respectively, were due on this note. This note was amended subsequent to December 31, 2107, and the maturity date was extended to September 30, 2018.
On September 11, 2017, our board appointed Ben Tyson, founder of Beta Killers LLC, as one of our directors, to serve until his successor is elected and qualified.
On September 11, 2017, we issued a promissory note to Daniel J. Rogers, our director, for $6,225 for unpaid compensation and expenses. The note was unsecured, bore interest at 1% per annum, and was due December 31, 2017. This note is currently in default. As of December 31, 2017, $4,225 and $13 of principal and interest, respectively, are due on this note.
On September 11, 2017, we issued a promissory note to Brandon C. Jennewine, our chairman, for $82,001 for unpaid compensation and expenses. The note is unsecured, bears interest at 1% per annum, and was due December 31, 2017. This note is currently in default. As of December 31, 2017, $82,001 and $249 of principal and interest, respectively, are due on this note.
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On September 20, 2017, we issued 2,000,000 shares of Series B Preferred Stock to Beta Killers LLC, as consideration for and in exchange of its agreement to waive our prior defaults, release us from our obligations under the asset purchase agreement and related agreements, and enter into an additional statement of work under our master services agreement. Our director Ben Tyson is also managing member and chief executive officer of Beta Killers LLC. During the fiscal year 2017, we incurred a total of $50,000 of consulting expenses to Beta Killers, LLC under Work Statement No. 2.
On September 20, 2017, we issued 500,000 shares of Series A Preferred Stock to each of our directors in consideration of their future service on our board.
On December 29, 2017, we entered into an executive employment agreement with Michael A. Tew to reengage his services as chief executive officer and chief financial officer for a term of one year, with automatic renewal for successive one-year terms at each anniversary date, unless terminated. Mr. Tew’s annual base salary is $120,000. Mr. Tew continues to serve on our board of directors.
On December 29, 2017, Patrick G. Burke resigned as our chief executive officer and chief financial officer, but continued to serve as our president, treasurer, secretary, and a director. For that reason, we entered into an amended and restated executive employment agreement with Patrick G. Burke to serve as our chief operations officer for an annual base salary of $84,000. We also entered into a grant of restricted stock for 8,000,000 shares of common stock, to vest over nine months.
NOTE 10–NOTE PAYABLE
On April 27, 2016, we issued a promissory note for $27,000 to an investor in conjunction with assignment of his note dated June 26, 2015, to another investor. The note included a $25,000 cash payment and a $2,000 original issue discount. The note was unsecured, accrued interest at 1% per annum, and was due and payable on October 26, 2016. In connection with the execution of the promissory note, we also issued a warrant to purchase 5,000 shares of common stock (Note 13). On January 5, 2017, this note was assigned to and purchased by Microcap Equity Group LLC, which converted the debt in full in January.
NOTE 11—NOTES PAYABLE IN DEFAULT
On May 5, 2016, we issued to Blackbridge Capital, LLC, a convertible promissory note in the principal amount of $50,000 (the “Amended Note”). The Amended Note amends and restates an unsecured promissory note of $50,000, dated June 26, 2015, in favor of Jeff Holmes (the “Original Note”), which Mr. Holmes assigned to Blackbridge as part of the transaction under an Assignment and Assumption Agreement. As consideration for Mr. Holmes’ assignment of the Original Note to Blackbridge, Blackbridge paid $48,000 to Mr. Holmes, retaining $2,000 for its legal fees. The Amended Note accrues interest at the rate of 1% per annum, is convertible into shares of common stock at a conversion price of 50% of the lowest trading price in the 20 trading days before the conversion date, and matured on October 27, 2016. During the year ended December 31, 2016, $45,500 of principal was converted to shares of common stock. As of December 31, 2017, there is $4,500 and $98 of principal and accrued interest due on this note, respectively. This note is currently in default.
NOTE 12—CONVERTIBLE NOTES PAYABLE
On March 2, 2017, we entered into Amendment No. 2 to the Equity Purchase Agreement with Kodiak Capital Group, LLC, to amend the Equity Purchase Agreement dated December 15, 2015, and Amendment No. 1 to Transaction Documents dated August 18, 2016, to increase the maximum commitment amount from $1,000,000 to $3,000,000, extend the commitment period to December 31, 2018, and redefine the market price and valuation period, as those terms are defined in the Equity Purchase Agreement and amendments.
F-
15
On July 31, 2017, we issued a promissory note to Kruse Landa Maycock & Ricks, LLC (“KLMR”), for $125,000 and on August 1, 2017, we issued a promissory note to KLMR for $113,440, both for unpaid accounts payable. The notes are unsecured, due within one year, and accrue interest at a rate of 3% per annum. On December 20, 2017, KLMR transferred its rights in the note for $125,000 to BNA Investment Capital, LLC (“BNA”). BNA immediately made an initial purchase of $65,000 and $753 of principal and interest. The payment for the remaining balance of the note was due by January 31, 2018.
The following is a summary of outstanding convertible promissory notes as of December 31, 2016:
|
|
|
Stated
|
Principal Balance
|
Note Holder
|
Issue Date
|
Maturity Date
|
Interest Rate
|
Outstanding
|
|
|
|
|
|
|
EMA Financial, LLC
|
10/14/2015
|
10/14/2016
|
12%
|
$ -
|
(1)
|
Tangiers Investment Group, LLC
|
11/18/2015
|
11/19/2016
|
10%
|
2,216
|
(2)
|
Kodiak Capital Group, LLC
|
11/30/2015
|
12/01/2016
|
12%
|
44,687
|
(3)
|
Auctus Fund, LLC
|
12/03/2015
|
09/03/2016
|
10%
|
-
|
(4)
|
Kodiak Capital Group, LLC
|
12/15/2015
|
07/15/2016
|
0%
|
50,000
|
|
Adar Bays, LLC
|
12/16/2015
|
12/16/2016
|
8%
|
-
|
(5)
|
Colonial Stock Transfer
|
01/14/2016
|
01/14/2017
|
10%
|
7,507
|
(6)
|
Blackbridge Capital, LLC
|
04/27/2016
|
10/27/2016
|
1%
|
4,500
|
(7)
|
EMA Financial, LLC
|
05/05/2016
|
05/05/2017
|
12%
|
32,883
|
(8)
|
Black Forest Capital, LLC
|
05/31/2016
|
05/31/2017
|
8%
|
-
|
(9)
|
Black Forest Capital, LLC
|
05/31/2016
|
05/31/2017
|
2%
|
-
|
(10)
|
Adar Bays, LLC
|
07/12/2016
|
04/12/2017
|
8%
|
-
|
(11)
|
Auctus Fund, LLC
|
07/20/2016
|
04/20/2017
|
10%
|
45,750
|
|
Microcap Equity Group LLC
|
10/13/2016
|
10/13/2017
|
12%
|
-
|
(12)
|
Microcap Equity Group LLC
|
10/21/2016
|
10/21/2017
|
12%
|
7,400
|
|
Black Forest Capital, LLC
|
10/24/2016
|
04/24/2017
|
8%
|
78,600
|
(13)
|
Black Forest Capital, LLC
|
11/04/2016
|
11/04/2017
|
8%
|
27,500
|
|
Auctus Fund, LLC
|
12/07/2016
|
09/07/2017
|
12%
|
40,750
|
|
Adar Bays, LLC
|
12/12/2016
|
12/12/2017
|
8%
|
14,855
|
(14)
|
Black Forest Capital, LLC
|
12/14/2016
|
12/14/2017
|
8%
|
27,500
|
|
Adar Bays, LLC
|
12/20/2016
|
12/12/2017
|
8%
|
57,500
|
|
|
|
|
|
$441,648
|
|
Less debt discount:
|
|
|
|
(87,908)
|
|
Convertible notes payable, net of discount:
|
|
|
|
$353,740
|
|
_______________
(1) Converted $33,300 of principal to common stock.
(2) Converted $57,784 of principal to common stock.
(3) Converted $5,313 of principal to common stock.
(4) Converted $49,250 of principal to common stock.
(5) Converted $35,000 of principal to common stock.
(6) Converted $2,400 of principal to common stock.
(7) Converted $45,500 of principal to common stock.
(8) Converted $20,617 of principal to common stock.
(9) Converted $30,000 of principal to common stock.
(10) Converted $50,000 of principal to common stock.
(11) Converted $35,000 of principal to common stock
(12) Converted $50,000 of principal to common stock
(13) Converted $48,900 of principal to common stock
(14) Converted $60,156 of principal to common stock
Accrued interest on the above notes was $23,700 as of December 31, 2016.
F-
16
The following is a summary of outstanding convertible promissory notes as of December 31, 2017:
|
|
|
Stated
|
Principal Balance
|
Note Holder
|
Issue Date
|
Maturity Date
|
Interest Rate
|
Outstanding
|
|
|
|
|
|
|
Blackbridge Capital, LLC
|
04/27/2016
|
10/27/2016
|
1%
|
$ 4,500
|
(1)
|
Adar Bays LLC
|
12/20/2016
|
12/12/2017
|
8%
|
-
|
(2)
|
Black Forest Capital, LLC
|
01/23/2017
|
01/23/2018
|
8%
|
-
|
(3)
|
Black Forest Capital, LLC
|
02/15/2017
|
02/15/2018
|
8%
|
91,132
|
(4)
|
Black Forest Capital, LLC
|
03/10/2017
|
03/10/2018
|
8%
|
41,485
|
(5)
|
Black Forest Capital, LLC
|
04/28/2017
|
04/28/2018
|
8%
|
-
|
(6)
|
Adar Bays LLC
|
05/15/2017
|
12/12/2017
|
8%
|
-
|
(7)
|
Kodiak Capital Group, LLC
|
07/03/2017
|
07/03/2018
|
8%
|
5,000
|
|
Adar Bays LLC
|
07/19/2017
|
02/15/2017
|
8%
|
-
|
(8)
|
BNA Investment Capital, LLC
|
08/18/2017
|
08/18/2018
|
8%
|
55,000
|
|
Black Forest Capital, LLC
|
09/11/2017
|
09/11/2018
|
8%
|
-
|
(9)
|
BNA Investment Capital, LLC
|
09/18/2017
|
09/18/2017
|
8%
|
55,000
|
|
BNA Investment Capital, LLC
|
10/18/2017
|
10/18/2017
|
8%
|
55,000
|
|
BNA Investment Capital, LLC
|
11/20/2017
|
11/20/2017
|
8%
|
55,000
|
|
BNA Investment Capital, LLC
|
12/20/2017
|
12/20/2017
|
8%
|
55,000
|
|
BNA Investment Capital, LLC
|
12/20/2017
|
12/20/2017
|
8%
|
65,753
|
|
|
|
|
|
$482,870
|
|
Less debt discount:
|
|
|
|
(330)
|
|
Convertible notes payable, net of discount:
|
|
|
|
$482,540
|
|
_______________
(1) Converted $45,500 of principal to common stock.
(2) Converted $57,500 of principal to common stock.
(3) Converted $27,500 of principal to common stock.
(4) Converted $30,000 of principal to common stock.
(5) Converted $13,515 of principal to common stock.
(6) Converted $28,875 of principal to common stock.
(7) Converted $58,500 of principal to common stock.
(8) Converted $55,725 of principal to common stock.
(9) Converted $92,540 of principal to common stock.
Accrued interest on the above notes was $10,334 as December 31, 2017.
Debt discount expense including original issue discounts for the years ended December 31, 2017 and 2016, was $915,478 and $612,679, respectively. Carrying value of all convertible notes, net of debt discounts, as of December 31, 2017 and 2016, was $482,540 and $353,740, respectively.
Based on the fair value of the embedded conversion options on the day of issuance, a loss of $2,939,837 and $1,214,985 for the years ended December 31, 2017 and 2016, respectively, was recorded in the statement of operations.
NOTE 13—STOCK WARRANTS
The warrants issued by us are classified as equity. The fair value of the warrants calculated at the time of grant was recorded as an increase to additional paid-in-capital.
On December 24, 2015, we issued a warrant to purchase 150,000 shares of common stock to our chief executive officer. As of December 31, 2015, the warrant had vested for 87,500 shares, with an aggregate fair value of $612,500. As of December 31, 2016, the warrant vested for another 50,000 shares, with an aggregate fair value of $350,000. The remaining warrants for 12,500 shares vested in the three months ended March 31, 2017, with an aggregate fair value of $87,500. The aggregate fair value is based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $1.00, stock price of $7.00, 1.33% risk free rate, 842% volatility, and expected life of the warrant of three years.
F-
17
On December 24, 2015, we issued a warrant to purchase 25,000 shares of common stock to one of our directors. The aggregate fair value of the warrant totaled $175,000 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $1.00, stock price of $7.00, 1.33% risk free rate, 842% volatility, and expected life of the warrant of three years.
On December 24, 2015, we issued a warrant to purchase 12,500 shares of common stock to one of our directors. The aggregate fair value of the warrant totaled $87,500 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $1.00, stock price of $7.00, 1.33% risk free rate, 842% volatility, and expected life of the warrant of three years.
On December 24, 2015, we issued a warrant to purchase 7,500 shares of common stock to a former director. As of December 31, 2015, the warrant had vested for 1,875 shares. The aggregate fair value of the vested warrant totaled $13,125 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $1.00, stock price of $7.00, 1.33% risk free rate, 842% volatility, and expected life of the warrant of three years. On March 22, 2016, we accepted the director’s resignation resulting in the cancellation of the warrant for the remaining 5,625 shares.
On January 21, 2016, we issued a warrant to purchase 15,625 shares of common stock to an investor. The aggregate fair value of the warrant totaled $71,875 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $8.00, stock price of $4.60, 2.02% risk free rate, 600% volatility, and expected life of the warrant of 10 years.
On January 24, 2016, pursuant to the terms of a consulting agreement, we issued a warrant to purchase 5,000 shares of common stock to an investor, with an exercise price of $4.60 per share, that expired January 23, 2017. The aggregate fair value of the warrant totaled $28,967 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $4.60, stock price of $5.80, 0.47% risk free rate, 638% volatility, and expected life of the warrant of one year.
On April 28, 2016, pursuant to the terms of a promissory note with an investor, we issued a warrant to purchase 5,000 shares of common stock. The aggregate fair value of the warrant totaled $27,000 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $1.00, stock price of $5.40, 0.91% risk free rate, 1,177% volatility, and expected life of the warrant of 2.68 years.
A summary of the outstanding warrants as of December 31, 2017 and 2016, is as follows:
|
Shares Available to
Purchase with
Warrants
|
|
Weighted
Average
Price
|
|
Weighted
Average
Fair Value
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
215,000
|
|
$ 1.60
|
|
$ 6.80
|
|
|
|
|
|
|
Issued
|
-
|
|
-
|
|
-
|
Exercised
|
-
|
|
-
|
|
-
|
Cancelled
|
-
|
|
-
|
|
-
|
Expired
|
5,000
|
|
-
|
|
-
|
Outstanding, December 31, 2017
|
210,000
|
|
$ 1.60
|
|
$ 6.80
|
|
|
|
|
|
|
Exercisable, December 31, 2017
|
210,000
|
|
$ 1.60
|
|
$ 6.80
|
Range of
Exercise Prices
|
|
Number Outstanding
12/31/2017
|
|
Weighted
Average Remaining
Contractual Life
|
|
Weighted Average
Exercise Price
|
$1.00 - $8.00
|
|
210,000
|
|
1.5 years
|
|
$1.60
|
F-
18
NOTE 14—STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred Stock
On July 29, 2016, we filed an Amendment to the Articles of Incorporation Designating Rights, Privileges, and Preferences of Series A Preferred Stock with the Nevada Secretary of State to designate 1,515,000 shares of Series A Preferred Stock. On September 18, 2017, we filed a Certificate of Amendment to Certificate of Designation after Issuance of Class or Series for our Series A Preferred Stock to increase the number of shares of Series A Preferred Stock to 2,500,000 and revise the rights, privileges, and preferences of the Series A Preferred Stock. Shares of Series A Preferred Stock may be converted at the holder’s election into shares of common stock, at the conversion rate of four shares of fully paid and nonassessable common stock for one share of Series A Preferred Stock. Each share is entitled to 100 votes, voting with the common stock as a single class.
On September 18, 2017, we filed a Certificate of Designation to designate 2,000,000 shares of Series B Preferred Stock and provide for the rights, privileges, and preferences of the Series B Preferred Stock. Shares of Series B Preferred Stock may be converted at the holder’s election into shares of common stock, at the conversion rate of one share of fully paid and nonassessable common stock for one share of Series B Preferred Stock. Each share is entitled to 1,000 votes, voting with the common stock as a single class.
Both the Series A Preferred Stock and Series B Preferred Stock rank equal to our common stock respecting the payment of dividends and distribution of assets upon liquidation, dissolution, or winding up.
On September 20, 2017, we issued 500,000 shares of Series A Preferred Stock to each of our directors, for a total of 2,500,000 shares of Series A Preferred, in consideration of their future service on our board. The shares were valued using $0.0012, the closing stock price on the date of grant, based on the conversion rights of one preferred share for four common shares, for total noncash expense of $12,000.
On September 20, 2017, we issued 2,000,000 shares of Series B Preferred Stock to Beta Killers LLC, as consideration for and in exchange of its agreement to waive our prior defaults, forgiveness of $42,000 of accounts payable, release us from our obligations under the asset purchase agreement and related agreements, and enter into an additional statement of work.
Due to the voting rights of the issued preferred stock, the company experienced an increase in control for its current controlling shareholders. We calculated the incremental fair value of the additional percentage of control obtained in excess of that already held by the parties who received the preferred stock for a noncash expense of $1,155,793.
Common Stock
On December 7, 2017, we filed an Amendment to the Articles of Incorporation increasing our authorized common stock to 12,000,000,000 (12bil) shares.
On February 2, 2017, we sold 36,000,000 shares of common stock to Kodiak Capital Group LLC for total cash proceeds of $148,680.
On June 15, 2017, we sold 21,000,000 shares of common stock to Kodiak Capital Group LLC for total cash proceeds of $22,000.
During the year ended December 31, 2017, we issued 1,787,500 shares of common stock for services to Patrick Burke, our former chief executive officer. The shares were valued at the closing stock price on the date of grant, for a total noncash expense of $3,606.
F-
19
The following table reflects the amounts of principal, interest, and fees converted, and the corresponding number of shares issued, in connection with outstanding convertible promissory notes during the year ended December 31, 2017:
Date
|
|
Note Holder
|
|
Shares Issued
|
|
Amount
|
|
|
|
|
|
|
|
01/03/2017
|
|
EMA Financial LLC
|
|
17,400,000
|
|
$ 17,400.00
|
01/04/2017
|
|
EMA Financial LLC
|
|
19,200,000
|
|
19,200.00
|
01/05/2017
|
|
Adar Bays LLC
|
|
18,637,742
|
|
14,444.25
|
01/05/2017
|
|
Black Forest Capital LLC
|
|
10,000,000
|
|
7,750.00
|
01/06/2017
|
|
EMA Financial LLC
|
|
21,704,000
|
|
21,704.00
|
01/11/2017
|
|
Black Forest Capital LLC
|
|
15,000,000
|
|
11,625.00
|
01/13/2017
|
|
Black Forest Capital LLC
|
|
20,000,000
|
|
15,500.00
|
01/13/2017
|
|
EMA Financial LLC
|
|
24,556,110
|
|
24,556.11
|
01/13/2017
|
|
Microcap Equity Group LLC
|
|
22,851,306
|
|
17,138.48
|
01/17/2017
|
|
Black Forest Capital LLC
|
|
22,000,000
|
|
17,050.00
|
01/17/2017
|
|
Microcap Equity Group LLC
|
|
13,148,693
|
|
9861.52
|
01/17/2017
|
|
Tangiers Investment Group LLC
|
|
21,569,061
|
|
15,044.42
|
01/18/2017
|
|
Black Forest Capital LLC
|
|
22,500,000
|
|
17,437.50
|
01/18/2017
|
|
Kodiak Capital Group LLC
|
|
52,000,000
|
|
20,800.00
|
01/19/2017
|
|
Black Forest Capital LLC
|
|
11,939,846
|
|
9,253.38
|
01/19/2017
|
|
Kodiak Capital Group LLC
|
|
65,000,000
|
|
26,000.00
|
01/20/2017
|
|
Auctus Fund LLC
|
|
32,760,000
|
|
20,311.20
|
01/20/2017
|
|
Colonial Stock Transfer
|
|
13,289,051
|
|
8,970.11
|
01/24/2017
|
|
Kodiak Capital Group LLC
|
|
77,000,000
|
|
30,800.00
|
01/30/2017
|
|
Auctus Fund LLC
|
|
42,700,000
|
|
17,080.00
|
02/13/2017
|
|
Kodiak Capital Group LLC
|
|
24,716,275
|
|
9,886.51
|
02/13/2017
|
|
Kodiak Capital Group LLC
|
|
48,000,000
|
|
19,200.00
|
02/15/2017
|
|
Auctus Fund LLC
|
|
45,207,264
|
|
30,741.00
|
04/25/2017
|
|
Microcap Equity Group LLC
|
|
5,410,489
|
|
7,845.21
|
05/04/2017
|
|
Black Forest Capital LLC
|
|
10,344,828
|
|
15,000.00
|
05/10/2017
|
|
Black Forest Capital LLC
|
|
16,666,667
|
|
12,500.00
|
06/14/2017
|
|
Black Forest Capital LLC
|
|
20,833,334
|
|
12,500.00
|
06/20/2017
|
|
Black Forest Capital LLC
|
|
25,000,000
|
|
15,000.00
|
06/12/2017
|
|
Microcap Equity Group LLC
|
|
20,992,286
|
|
12,595.72
|
06/19/2017
|
|
Adar Bays LLC
|
|
8,333,333
|
|
5,000.00
|
06/21/2017
|
|
Adar Bays LLC
|
|
58,000,000
|
|
34,800.00
|
07/11/2017
|
|
Adar Bays LLC
|
|
30,965,477
|
|
20,127.56
|
07/17/2017
|
|
Adar Bays LLC
|
|
63,076,923
|
|
41,000.00
|
07/24/2017
|
|
Black Forest Capital LLC
|
|
44,690,831
|
|
29,049.04
|
08/03/2017
|
|
Adar Bays LLC
|
|
26,606,154
|
|
17,294.00
|
08/18/2017
|
|
Black Forest Capital LLC
|
|
42,857,143
|
|
30,000.00
|
08/21/2017
|
|
Adar Bays LLC
|
|
22,142,857
|
|
15,500.00
|
08/28/2017
|
|
Adar Bays LLC
|
|
27,272,727
|
|
15,000.00
|
08/28/2017
|
|
Black Forest Capital LLC
|
|
52,500,000
|
|
28,875.00
|
09/11/2017
|
|
Adar Bays LLC
|
|
25,454,545
|
|
14,000.00
|
09/11/2017
|
|
Black Forest Capital LLC
|
|
36,363,637
|
|
20,000.00
|
09/14/2017
|
|
Adar Bays LLC
|
|
26,503,740
|
|
13,251.87
|
09/19/2017
|
|
Black Forest Capital LLC
|
|
50,000,000
|
|
25,000.00
|
09/29/2017
|
|
Black Forest Capital LLC
|
|
70,000,000
|
|
24,500.00
|
10/11/2017
|
|
Black Forest Capital LLC
|
|
67,851,689
|
|
23,748.07
|
10/30/2017
|
|
Black Forest Capital LLC
|
|
54,061,823
|
|
13,515.46
|
|
|
|
|
1,467,107,831
|
|
|
F-
20
NOTE 15—INCOME TAX
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss, and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The U.S. federal income tax rate of 21% is being used in 2017 due to the new tax law recently enacted.
Net deferred tax assets consist of the following components as of December 31:
|
|
2017
|
|
2016
|
Deferred Tax Assets:
|
|
|
|
|
Net operating loss carryover
|
|
$
|
751,300
|
|
$
|
893,600
|
Related party accruals
|
|
|
24,000
|
|
|
-
|
Payroll accrual
|
|
|
700
|
|
|
41,400
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(776,000)
|
|
|
(935,000)
|
Net deferred tax assets
|
|
$
|
-
|
|
$
|
-
|
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the period ended December 31, due to the following:
|
|
2017
|
|
2016
|
Book loss
|
|
$
|
(1,286,200)
|
|
$
|
(1,890,600)
|
Meals and entertainment
|
|
|
200
|
|
|
300
|
Other nondeductible expenses
|
|
|
846,000
|
|
|
1,543,700
|
Payroll accrual
|
|
|
(21,600)
|
|
|
35,500
|
Related-party accruals
|
|
|
24,000
|
|
|
-
|
Valuation allowance
|
|
|
437,600
|
|
|
311,100
|
|
|
$
|
-
|
|
$
|
-
|
At December 31, 2017, we had net operating loss carryforwards of approximately $3,817,000 that may be offset against future taxable income through the year 2037. No tax benefit has been reported in the December 31, 2017, financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
NOTE 16—SUBSEQUENT EVENTS
In accordance with ASC 855-10,
Subsequent Events
¸ we have analyzed our operations subsequent to December 31, 2017, through the date the financial statements were available to be issued, and have determined that we do not have any material subsequent events to disclose in these financial statements other than the following.
Subsequent to December 31, 2017, we converted $198,313 of our convertible debt into 657,916,920 shares of common stock.
On January 30, 2018, we received proceeds of $47,250, net of transaction costs and attorney fees, from an 8% Secured Convertible Promissory Note and Securities Purchase Agreement dated January 23, 2018, with BNA Investment Capital, LLC, a Wyoming limited liability company. The Securities Purchase Agreement provides for 12 secured convertible promissory notes in the aggregate principal amount up to $666,666.60, in tranches of $55,555.55 each. Each note accrues interest at the rate of 8% per annum, contains a 10% original issue discount, and matures 12 months from the effective date of its payment. The outstanding amounts funded under the promissory notes are convertible into shares of our common stock in accordance with their terms.
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On February 23, 2018, Patrick G. Burke resigned as our chief operations officer, president, treasurer, secretary, and director. Accordingly, we entered into a termination, settlement, and mutual release agreement, a cancellation of grant of restricted stock, an amendment to promissory note, and a promissory note to provide the terms of Mr. Burke’s termination and resignation and payment of our obligation for severance pursuant to his employment agreement. Pursuant to the terms of Mr. Burke’s termination agreement, the promissory note dated September 9, 2017, was amended to extend the due date to September 30, 2018, and increase the principal to $30,000, his restricted stock grant of 8,000,000 shares was cancelled and replaced with a promissory note for $21,000, and he will be compensated $7,000 per month for January, February and March of 2018.
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