The number of shares of Common Stock, $0.001
par value, outstanding on June 4, 2018 was 357,591,331 shares.
PART
I
The
Company
Next Group Holdings
.
Next Group Holdings, Inc. (the “Company” or “NXGH”) is a corporation formed under the laws of Florida,
which focuses on the business of using proprietary technology to provide enhanced mobility solutions to unserved, unbanked, and
emerging markets in the banking field.
Operating
Subsidiaries
. The Company’s business operations are conducted primarily through its subsidiaries. The Company’s
subsidiaries are as follows:
|
●
|
Next
CALA, Inc. (94% owned by the Company), a corporation formed under the laws of Florida (“Next CALA”);
|
|
|
|
|
●
|
NxtGn,
Inc. (65% owned by the Company), a corporation formed under the laws of Florida (“NxtGn”);
|
|
|
|
|
●
|
Meimoun
& Mammon, LLC (100% owned by the Company), a limited liability company formed under the laws of Florida (“M&M”);
|
|
|
|
|
●
|
Tel3
(Tel3) (a sub division of M&M).
|
|
|
|
|
●
|
Next
Mobile 360 LLC (100% owned by the Company), a limited liability company formed under the laws of Florida (“Next Mobile”);
and
|
|
|
|
|
●
|
Limecom,
Inc. (100% owned by the Company)
|
|
|
|
|
●
|
SDI
Next. (51% owned by the Company)
|
Properties.
The Company’s headquarters are located in Miami, Florida.
Recent
Developments
The
Company has a Market Partner Agreement with InsightPOS, LLC since September 17, 2016. InsightPOS is a “State of the Art”,
“Super Functional Point Of Sale” system that has it a sleek, modern, efficient design and combination of tools that
we believe makes the retail experience friendlier, quicker and better both for the shopper and for store management. InsightPOS
will allow retailers to sell and manage their store’s inventory, with over 50 million SKUs already in the system and increase
customer loyalty by offering important services and benefits. These additional services include, but are not limited to, long
distance telecom products, cellular account payments (US and International), utility bill payments (electric, water, cable, satellite,
etc.) and others. InsightPOS will provide the ability for each retail store to offer financial services, including gift cards,
reloadable debit cards and potentially money transfer services, which will increase store revenue organically in a manner few
have imagined possible. Insight POS can replace the entire cash register, inventory and management system.
The Company installed about 10 units including
training by InsightPOS. These units were withdrawn due to required programming development and improved network interconnections.
The revenues generated by system utilization should maintain the system at no cost to each retailer. NXGH will market major brand
services along with its own branded services, GPR (General Purpose Reload) and reward cards.
The Company, through its affiliate, Next Communications, Inc., has the right to sell STI Mobile, Next
Cala and any Next products to 8,800 locations that were serviced by a prepaid distribution network. The Company will offer the
InsightPOS system to clients of this distribution network as well via direct sales through its own sales force and affiliates.
When a system is installed, NGH receives 50% of the gross profits received by InsightPOS after retailer commissions are paid.
Acquisition
of Limecom, Inc.
As discussed in an 8-K filed with the SEC on October 26, 2017, on October 24, 2017, the Company received
100% of all outstanding shares of Limecom, Inc., as per the acquisition agreement which was effective as of October 24, 2017. NXGH
through its wholly-owned subsidiary, Next Group Acquisition Inc., purchased all of the issued and outstanding shares of LimeCom,
Inc. (“LimeCom”), a Florida corporation, from Heritage Ventures Limited (“Heritage”). LimeCom is engaged
in the global telecommunications business. The Stock Purchase Agreement (“Agreement”) with Heritage provided for the
payment of 51,804,809 shares of NXGH restricted common stock and the sum of $2,000,000 for the shares of LimeCom. Additionally,
the Company agreed to an initial cash payment equal to the net income of Limecom for the period of January 1, 2017 to October 23,
2017 which totaled approximately $1,000,000. The cash component of the purchase price is payable within eight (8) months from the
closing date. 10,360,962 shares of NXGH stock will be held in escrow for a period of eight (8) months in the event that any unknown
or undisclosed claims are made against LimeCom. The acquisition further provides that LimeCom must achieve $125,000,000 in revenues
in fiscal year 2017 and $2,500,000 in EBITA which was achieved. The Company and Heritage have a mutual right of rescission if the
$2,000,000 is not paid or any unknown or undisclosed material claims are made against Limecom. as set forth in the Agreement.
As
a part of the Agreement, Orlando Taddeo, President and CEO of LimeCom, and principal stockholder of Heritage, has agreed to enter
into an Employment Agreement with LimeCom to be the President and CEO of LimeCom for all LimeCom business operations outside of
the U.S., until such time as he qualifies to work in the U.S. His Employment Agreement further provides that his Agreement will
be the same as that of Arik Maimon, CEO of NXGH. He will also be appointed a Director of NXGH. Mr. Taddeo has been Director and
CEO of LimeCom for the past 5 years, and has been in the global telecommunications business since 1998. He has also recently
held the following positions: Managing Partner Heritage Ventures (Ireland), Founder and Investor in LinkALL since February 2014.
Acquisition
of SDI NEXT Distribution LLC
On December 6, 2017, the Company completed
its formation of SDI NEXT Distribution in which it holds a 51% interest, previously announced August 24, 2017 as a Letter of Intent
with Fisk Holdings, LLC. As Managing Member of the newly formed LLC, the Company will contribute a total of $500,000, to be paid
per an agreed-upon schedule over a twelve-month period beginning December 2017. Fisk Holdings, LLC will contribute 30,000 (thirty
thousand) active Point of Sale locations for distribution of retail telecommunications and prepaid financial products and services
to include, but not be limited to: prepaid general purpose reload cards, prepaid gift cards, prepaid money transfer, prepaid utility
payments, and other prepaid products. The completed acquisition consists of an established distribution business for third-party
gift cards, mobile top up, financial services and content, which presently includes more than 30,000 U.S. retail locations, including
store locations, convenience stores, bodegas, store fronts, etc. The Company’s 51% stake in SDI NEXT also provides distribution
for the Company’s recently announced CUENTAS and MIO virtual mobile banking solutions aimed at unbanked, underbanked and
financially underserved consumers, making them available to customers at the more than 30,000 retail locations SDI presently serves.
Entry
into Material Service Agreements
On
February 15, 2018, the Company entered into Service Agreements with COMTEL DIRECT, LLC D.B.A. MSG TELCO (“MSG”) and
Wiztel USA, Inc (“Wiztel”).
NXGH’s
Agreement with MSG will be compensated in stock for MSG supplying NXGH with up to $50 million gross revenue of wholesale telecommunications
services (the “Services”) with a minimum of 2.5% margin over a 1 year period starting from date of the agreement with
the possibility for an additional $50 million gross revenue of wholesale telecommunications services (the “Additional Services”)
during the same 1 year term (the “Term”). If the parties have not reached $100 million in Gross Revenue upon expiration
of the Term, this Agreement will automatically be extended for an additional 60 days. Any additional term extension must be agreed
by both parties in writing. Either Party may terminate this Agreement with respect to a material breach incapable of cure within
thirty (30) days after written notice, or if the other party (a) becomes insolvent or admits its inability to pay its debts generally
as they become due; (b) becomes subject, voluntarily or involuntarily, to any proceeding under any domestic or foreign bankruptcy
or insolvency law, which is not fully stayed within seven business days or is not dismissed or vacated within 45 days after filing;
(c) is dissolved or liquidated or takes any corporate action for such purpose; (d) makes a general assignment for the benefit
of creditors; or (e) has a receiver, trustee, custodian or similar agent appointed by order of any court of competent jurisdiction
to take charge of or sell any material portion of its property or business. NXGH must continue to file its SEC 10-Q and 10-K reports.
NXGH
will have the right to accept or reject the telecommunications traffic provided by MSG in NXGH’s sole discretion. For the
initial $50 million in Gross Revenue or any part thereof provided through MSG, NXGH will issue one (1) Restricted NXGH Common
Share for each $10 in Gross Revenue on a quarterly basis during the 12 months from the Effective Date. The Parties agree that
after the initial $50 million in Gross Revenue has been achieved, for the remainder of the 1 year period, Contractor will receive
(1) Warrant for each $10 in Additional Gross Revenue, up to 5 million warrants of the Company. Each warrant is exercised to purchase
1 restricted NXGH common share at $0.10 per share exercisable for a period of two (2) years from the date that each warrant is
issued to MSG. NXGH shall reserve a total of 10 million authorized but unissued Shares required to meet the contemplated commitment.
Shares and Warrants will be deemed “restricted securities” as defined under Rule 144(a)(3) of the Securities Act of
1933, as amended. The process to calculate and deliver the shares and warrants is detailed in the agreement.
Under
NXGH’s Agreement with Wiztel, Wiztel will be compensated in stock for supplying NXGH with up to $50 million gross revenue
of wholesale telecommunications services (the “Services”) with a minimum of 2.5% margin over a 1 year period starting
from date on the agreement. Wiztel will charge NXGH a total of $10.00 for the Services in addition to the 5 million shares of
restricted NXGH stock. Upon reaching the milestone of $50 million in gross revenue within 1 year, Wiztel will receive 5 million
restricted shares of NXGH. Wiztel will receive the 5 million shares of NXGH restricted stock 30 days after NXGH certifies that
NXGH has received the $50 million in gross revenue with a minimum of 2.5% profit within the one (1) year period. In the event
that Wiztel does not provide the minimum $50 million in revenue exclusive of taxes, at a 2.5% profit to NXGH, Wiztel understands
that Wiztel will only be entitled to receive a pro rata number of shares as relates to the 5 million shares of restricted NXGH
common stock. That the pro rata number of shares will be determined by NXGH. Either Party may terminate this agreement with 120
days written notice. If this Agreement is terminated by NXGH without cause prior to completion of the Services but where the Services
have been partially performed, Wiztel will be entitled to pro rata payment of the Compensation to the date of termination provided
that there has been no breach of contract on the part of Wiztel.
Entrance
into Non-Binding Letter of Intent
On
February 26, 2018, the Company signed a non-binding letter of intent with Cima Telecom, Inc. (“Cima”) agreeing that
both parties will confirm the basic terms upon which NextGroup shall move forward in the negotiation of definitive agreements
to license the Knetic and Auris technology platforms owned by Cima, in exchange for equity securities in NextGroup.
Cima intends to grant NextGroup a fully
paid, royalty-free, world-wide, perpetual, non-sublicensable license (the “License”) to utilize the Auris and Knetic
platforms and intellectual properties included in such platforms for the Financial Technology (“FINTECH”) worldwide
vertical markets. The License to be granted shall be exclusive for use within the FINTECH space, which for purposes of the License
shall be defined as “connecting banking and prepaid card usage. Cima will agree to not license the Platforms to any other
person or entity for use within the FINTECH space. Rather, NextGroup shall have the right to grant its customers, and its customers’
end-users, access to the services provided by the platforms. NextGroup may transfer the License to any subsidiaries or affiliates
provided that NextGroup shall not have the right to sell, assign, sub-license, or convey the License or Platforms to any third-parties.
As consideration for the License, NextGroup intends to convey to Cima shares of capital stock of NextGroup
comprising an ownership interest of twenty-five percent (25%) of the issued and outstanding equity securities of NextGroup, based
upon NextGroup’s valuation of Fifty Million Dollars ($50,000,000). Prior to closing, the Company will be required to increase
its authorized common stock or effect a reverse stock split to have adequate common shares to issue. Cima and NextGroup anticipate
that the closing of the Transaction (the “Closing”) will take place as soon as reasonably practicable, and will work
towards a Closing to occur within sixty (60) days of the execution and delivery of this Letter by the Parties. Simultaneously with
the Closing, Cima will deliver the source code for the Platform to an escrow agent, to hold in escrow subject to the terms and
conditions of an escrow agreement in a form acceptable to Cima (the “Escrow Agreement”).
NextGroup
and Cima intend to enter into a definitive purchase agreement (“Purchase Agreement”) incorporating the terms and conditions
of this Letter relating to the acquisition of the Shares, and such customary representations, warranties, covenants and conditions,
including indemnification provisions, confidentiality provisions, and other customary provisions for Purchase Agreements of this
type which are reasonably acceptable to the parties.
Cima
and NextGroup intend to execute certain instruments and documents ancillary to the Purchase Agreement (the “Ancillary Documents”),
which set forth and govern the rights, preferences, and restrictions relating to Cima’s ownership interest in, and the operation
of, NextGroup, including, without limitation: (i) standard financial reporting and information rights; (ii) voting rights; and
(iii) the right to request that the shareholders of NextGroup elect one (1) director selected by Cima to NextGroup’s board
of directors (the “Board”), and if the shareholders do not elect such individual to the Board, then the right to require
NextGroup’s management to present a proxy to its shareholders recommending that the director selected by Cima be elected
to the Board. The Ancillary Documents may include, without limitation, an amended and restated certificate of incorporation, amended
and restated by-laws, voting agreement, investors’ rights agreement, and such other documents and instruments reasonable
necessary to effectuate the Transaction.
NextGroup and Cima further intend to execute an exclusive license agreement (“License Agreement”),
memorializing the worldwide License of the Platforms, and an agreement governing the administration of the Platforms (the “Administration
Agreement”). Additionally, NextGroup and Cima intend to execute a software maintenance and support agreement (“Maintenance
Agreement”, collectively, with the Escrow Agreement, License Agreement, and Administration Agreement, the “Platform
Agreements”), commencing as of the Closing of the Transaction and continuing for a period of four (4) years thereafter, pursuant
to which Cima will provide certain maintenance and support services to NextGroup in connection with the Platform, and NextGroup
will pay Cima Three Million Five Hundred Thousand Dollars ($3,500,000), as follows: (a) year-one: Five Hundred Thousand Dollars
($500,000), paid over the second (2nd) six-month period of the year; (b) year-two: Five Hundred Thousand Dollars ($500,000); (c)
year-three: One Million Dollars ($1,000,000); and (d) year-four: One Million Five Hundred Thousand Dollars ($1,500,000.00). The
agreed upon maintenance and support services costs set forth above will not be increased by Cima during the term of the Maintenance
Agreement.
The
execution and delivery of the Purchase Agreement, Ancillary Documents, and Platform Agreements are material conditions of the
Transactions, and shall be delivered at Closing.
The
terms and conditions of the Transactions will be subject to and conditioned upon: (i) Cima’s complete and reasonable investigation
and analysis of NextGroup and its businesses (the “Due Diligence Investigation”); (ii) the Parties negotiating and
signing a definitive Purchase Agreement, Ancillary Documents, and Platform Documents(including any conditions set forth therein);
and (iii) the Parties obtaining all third party consents and approvals, if any, necessary for Cima’s acquisition or receipt
of the Shares (“Third Party Consents”).
Each party hereto will bear its own costs
and expenses in connection with the transactions contemplated in this transaction, including the costs and expenses of accountants,
lawyers and advisors.
NextGroup acknowledges that
following the execution of this letter, Cima anticipates the expenditure of substantial efforts and resources in the conduct of
its Due Diligence Investigation of NextGroup and its businesses, and the preparation and negotiation of the Purchase Agreement
and Ancillary Documents. Accordingly, NextGroup agrees that it and its officers, members, managers, directors, employees, representatives
and agents will not, directly or indirectly, from the date this letter is executed and delivered by both Parties, and for one
hundred eighty (180) days thereafter (such period, the “Exclusivity Period”) (a) license, develop, create, or purchase
a platform for the purpose or purposes that NextGroup intends to use the Platforms; or (b) solicit, initiate, encourage or facilitate
the invitation of inquiries or proposals or offers from any person or entity (other than Cima or any of its Affiliates, or any
of their respective members, managers, directors, officers, shareholders, employees, representatives and agents) concerning the
licensing or development of a platform for the purpose or purposes that NextGroup intends to use the Platforms.
Each
party hereto shall be responsible for all fees, costs and expenses that may become due and owing to any broker or finder retained
by such party, and each such party shall indemnify and hold harmless the other party in connection therewith.
Next
CALA
Our
Next CALA subsidiary promotes and distributes NextCALA-branded Prepaid Visa® General Purpose Reloadable (“GPR”)
prepaid debit cards, bearing the Next CALA Debit™ and Visa® logos. Customers may register for our prepaid debit card
at
http://www.nextcala.com
. Each of our cards is issued by The Bancorp, MetaBank, Metropolitan Bank or Sutton Bank.
According to a Prepaid Card Market report
published in March 2017 by Allied Market Research, the Prepaid Card Market is projected to grow at a CAGR of 22.7% from 2016 to
2022. The market accounted for $896 billion, and is expected to reach $3,653 billion by 2022. The base year considered for the
study is 2015, and the forecast period is 2016-2022. Based on projections indicated by this report and other information, we believe
that prepaid debit cards are one of the fastest growing niches in the financial sector. According to the 2015 FDIC National Survey,
approximately nine million individuals in the U.S., including those in various minority communities, are unable to obtain access
to the banking system due to various reasons, including but not limited to poor credit scores or a lack of exposure to the U.S.
banking system. Prepaid debit cards are a convenient option for such individuals. Prepaid debit cards may also be an intermediate
step toward such individuals ultimately joining the financial system. In addition, prepaid debit cards are a popular option for
gift-giving due to fraud protection in the case of loss or theft. We believe that prepaid debit cards are replacing cash as a preferred
gift for these reasons, in certain regards.
Card
holders can upload funds onto their NextCALA prepaid cards via ACH wire transfer, online, or in person using Vanilla Reload machines,
which are stationed in over 50,000 locations throughout the U.S., including but not limited to Walmart, CVS, Dollar General, Rite
Aid and Walgreens retail stores, and anywhere in the Mio Reload Network, which includes more than 450,000 retail locations throughout
the world. The card can be used like a traditional credit card or debit card and is accepted wherever Visa Debit® cards are
accepted. Money spent using the card is deducted from the total balance of prepaid funds previously uploaded on the card. Unlike
a credit card, prepaid debit card holders do not have the ability to spend more than the balance of prepaid funds previously uploaded
on the card. Prepaid debit cards can be used and spent online and can be used at an ATM machine to retrieve cash.
Contractual
Relationships with InComm, Bancorp, and Visa.
Next CALA Prepaid Card® GPR cards are distributed and serviced by InComm
Financial Services, a wholly-owned subsidiary of InComm Holdings, Inc. (“InComm”). Next CALA has been indemnified
by InComm, which possesses money transmitter licenses in all 50 states. InComm specifically also indemnifies Next CALA with respect
to Anti Money Laundering and Know Your Client US banking regulations, as they capture and verify all of this as part of our agreement.
In addition, The Bancorp Bank (“Bankcorp”), a member of the FDIC, pursuant to a license from Visa USA, Inc., acts
as program manager and as clearing house and provides banking capacities in transactions involving the cards. Prepaid card deposits
are held by Bankcorp, MetaBank, Metropolitan Bank or Sutton Bank.
InComm
has granted NEXTCALA a complete white label of their back end prepaid, GIFTCARD, GPR, 210,000 US retailers with electronic and
hard plastic stored value open and closed loop licenses, products and our very own brand along with licensing their MIO brand
that is branded at every 210,000 InComm retailer and online footprint. In June 2017, NGH signed a Resale Agreement with InComm
for the purchase and resale of prepaid and stored value products and services. Theterms with InComm, include the following:
|
●
|
InComm
appointed NGH as an authorized reseller of InComm to promote, market and sell the Prepaid Items and Money Transmission Products
and Services;
|
|
|
|
|
●
|
InComm
will allow NGH to establish host-to-host connectivity between NGH’s platform and InComm;
|
|
|
|
|
●
|
InComm
will provide us with an Application Protocol Interface (API) for access to their real-time, Web-based transaction reporting
system with respect to sales of Prepaid Items and Money Transmission Products and Services by Merchants;
|
|
|
|
|
●
|
InComm
offers to NGH a wide variety of Prepaid Wireless “Top-Up” Phone Cards, Third-Party Merchant Gift Cards and Content
Card Products.;
|
|
|
|
|
●
|
NGH
will be eligible to earn a volume-based rebate on sales of certain third-party gift cards;
|
These
are the terms that InComm has agreed, and additional offerings remain subject to further negotiations between us and InComm.
Customer
Service
. Next CALA Prepaid Visa® GPR cards offer free customer service and reloads 24 hours per day.
Load
Limits Per Card.
The maximum load amount per registered Next CALA Prepaid Visa® is $10,000. Customers can load between
$20 and $500 per load into a Next CALA Prepaid Visa® GPR card.
FDIC
Insurance.
Each Next CALA Prepaid Visa® GPR card account is insured by the Federal Deposit Insurance Corporation for a
maximum amount of $50,000. The customer is always in charge of his or her prepaid account, including online access, unique routing
and account numbers.
Retail
and ATM Locations Accepting the Next CALA Card.
Next CALA cards are accepted wherever Visa Debit® cards are accepted,
and can be used for purchases at retail locations, online, and over the phone, as well as for ATM withdrawals and other ATM functions,
remittances, bill payments, mobile-banking, and virtual digital wallet functions.
Reloads
at Retail Locations, and by Direct Deposit or Wire Transfer.
Card holders can upload funds onto their NextCALA prepaid cards
via ACH wire transfer, online, or in person using Vanilla Reload machines, which are stationed in over 50,000 locations throughout
the U.S., including but not limited to Walmart, CVS, Dollar General, Rite Aid and Walgreens retail stores, and anywhere in the
Mio Reload Network, which includes more than 450,000 retail locations throughout the world.
Mobile
Apps.
Next CALA is currently developing its NEXTCALA Mobile applications for both Android and iOS. The NEXTCALA mobile Android
and iOS applications should give users access to mobile banking and banking services 24 hours per day, 365 days per year. Users
should be able to use the application to make mobile-to-mobile payments, to transfer funds to family, friends, and retailers,
and to see all balances and transactions, including retail transactions made online or in physical retail locations with the Next
CALA Prepaid Visa® card associated with the app user’s account. With the NEXTCALA Mobile app, users should not only
have an easier way to bank, they also may earn points that can be redeemed towards long distance calls either via voice or HD
Video among other benefits provided under the NEXTCALA Rewards program.
Next
CALA’s new NEXTCALA Mobile Android and iOS apps should give users an easy way to check balances and account activity, make
phone-to-phone payments, and send money to family, friends, and retailers.
Prepaid
Card Solutions Democratize Banking and Payments
. Prepaid cards democratize electronic payments and remittances for those outside
the traditional banking system. The growing popularity of prepaid card solutions for both banked and unbanked consumers is driven
by the prepaid card’s unique ability to solve almost any payment need.
Rapid
Growth of the Mobile Banking Market
. Based on projections by industry experts, the Company believes that prepaid debit cards
are one of the fastest growing niches in the financial sector. The Prepaid Unbanked and underbanked segments of the USA, specifically
the Latin demographic, is expanding rapidly and will reach approximately $421 billion in the United States and approximately $822
billion worldwide by 2017.
NEXTCALA
Rewards
. Through our Next CALA Rewards program, we are planning to offer benefits including allowing Next CALA subscribers
to earn points for use in remittance transactions, or to be credited into reloadable international and domestic long distance
calling cards for voice or HD video calls. During the second half of 2017, as Next CALA’s sibling company NxtGn, Inc. begins
to roll out new products and services, the Next CALA Rewards program should also offer Next CALA subscribers the ability to use
NxtGn’s proprietary HD Personal Telepresence products to participate in health care consultations, distance learning, and
exclusive live entertainment events. The NEXTCALA Rewards platform is currently being developed and scheduled for release in the
second half of 2018.
Advertising
and Promotion
. Next CALA is planning to increase its market presence and reach by aggressively advertising. CP & B is
a 4% equity owner of NXGH and is scheduled to promote its products and services. In the initial phase of the launch campaign which
will begin upon release of the NEXTCALA Mobile applications, Next CALA will use advertising to increase consumer awareness and
stimulate trial of the NEXTCALA Mobile apps and Next CALA Prepaid Card® GPR cards during the second half of 2018. Throughout
the launch campaign, Next CALA will promote NEXTCALA Mobile apps and Next CALA Prepaid Card® GPR card enrollments by pushing
promotional videos and offers to the Company’s telephony mobility users and to millions of existing customers of marketing
partners who provide products and services to under-banked, non-banked, low-income Americans, immigrants, teens, and other natural
niche markets for the Next CALA’s products and services.
Strategic
Alliances with Marketing Partners
. Next CALA intends to build strategic alliances and joint venture marketing partnerships
with Lifeline service providers (who provide federally-subsidized free cell phones and free telephony services to millions of
under-banked or non-banked low-income Americans) and other companies and affinity groups which provide products and services to
under-banked or non-banked immigrants, teens, and other emerging niche markets for mobile banking and prepaid card solutions.
While
the primary venue for Next CALA’s launch campaign will be web-based media, the campaign will also include push promotions,
web videos, bench, bus, and subway advertising, podcast advertising, and other disruptive measures designed to rapidly increase
consumer awareness and trial of the NEXTCALA Mobile apps and Next CALA Prepaid Card® GPR cards in carefully selected target
markets.
NxtGn
NxtGn.
Our NxtGn subsidiary is a software company which designs, develops, produces, markets, and provides robust, scalable, high
density, high performance HD video platforms, call processing engines, and worldwide telephony networks intended to give clients
proprietary and sustainable competitive advantages in efficiency, stability, security, flexibility, and costs, allowing them to
deliver premium quality voice, video, and data services at above-average profit margins.
Joint
Venture with Telarix
. NxtGn has entered into a joint venture with telephony platform industry leader Telarix, Inc. to develop
and market the AVYDA Powered by Telarix™ HD telepresence platform. The AVYDA Powered by Telarix™ product is marketed
throughout the world by the Telarix sales force.
AVYDA
Powered by Telarix
. Developed in a joint venture with industry-leader Telarix, Inc., NxtGn’s product AVYDA Powered by
Telarix™ HD Video platform allows subscribers to use HD telepresence services that until recently were within reach only
of Fortune 500 companies and very high net worth individuals. The AVYDA Powered by Telarix™ HD telepresence platform allows
users to connect using their mobile phones, tablets, and personal computers, to telepresence rooms, health care and educational
applications, exclusive online entertainment events, online gaming, and other special events. The AVYDA Powered by Telarix™
technology allows HD video conferencing connections point-to-multipoint, with up to 10,000 concurrent calls per session border
control (SBC), and the platform is fully compatible with iOS, Android, and Cisco TelePresence operating systems. The platform
is currently operational but requires additional updates prior to broad launch.
Vitco
Technology
. NxtGn telephony and HD video platforms use technology proprietary technology owned by NxtGN, Telarix, and Vitco
LLC, US IP Series, a limited liability company formed under the laws of Delaware (“Vitco”), which licenses software
solutions to several of the world’s largest and most successful telecommunications carriers. Through December 31, 2015 NxtGn
owned an option to acquire Vitco in consideration for $5,000,000 of the Company’s common stock which expired unexercised.
Vitco is currently the owner of 25% of the issued and outstanding shares of NxtGn. Upon exercise of the option, NxtGn would acquire
all title, rights and interests in certain proprietary and patented technology and intellectual property owned by Vitco, including
Inbound SIP Signaling Server technology, Outbound SIP Signaling Server technology, Packet Cable Accounting Server technology,
RADIUS Accounting Server technology, Real-time Call Information Server technology, Routing Application Server technology, Signaling
Monitoring & Analysis Server technology, and H.323 Signaling Server technology, as well as all of Vitco’s issued and
outstanding shares of NxtGn. Vitco’s technology is currently licensed to NxtGn on a royalty-free basis.
Next
Mobile 360
Next
Mobile 360
. Our Next Mobile subsidiary is a mobile virtual network operator (or “MVNO”) which provides NextMobile360™
branded mobile phones and prepaid voice, text, and data mobile phone services to a customer base currently consisting of approximately
1,000 MVNO Mobile Virtual Network Operators such as Virgin Mobile have been successful at creating a brand, and not own the hardware
or network. Next Mobile operates this business pursuant to contracts with Sprint Corporation which allow Next Mobile to use Sprint’s
network infrastructure to operate a virtual telecommunications network providing voice, text, and data services of essentially
the same quality as those Sprint provides to its own retail subscribers.
As
customers worldwide continue to migrate away from legacy telephone and banking systems to enhanced mobility solutions, the Company’s
technological advantage and the synergies created by its unique combination of reloadable bank card and mobile virtual network
operator rights will make its products increasingly useful to un-banked, under-banked, under-served and other emerging niche markets.
Joint
Venture
. Because MVNO marketing is capital intensive, Next Mobile may sell a 50% interest in its MVNO rights to an operating
partner who will be responsible for funding all future marketing expenses of the MVNO. The Company has been introduced to interested
purchasers by Sprint, and believes it will be able to sell a 50% interest in the MVNO for $1.5 million in cash plus a commitment
to fund all of the joint venture’s future marketing expenses. While this remains a possibility, the Company is not actively
pursuing this sale.
M&M
M&M.
Our M&M subsidiary is a wholesale provider of domestic and international long distance voice, text, and data telephony
services to carriers in the United States and throughout the world. M&M holds International and Domestic Section 214 licenses
issued by the Federal Communications Commission, and operate the NextMobile360™ business through its wholly-owned subsidiary
Next Mobile. While M&M has historically provided wholesale long distance telephony service to a number of leading domestic
and international carriers.
Network
.
The M&M Network is the private international network over which the Company is capable of delivering large volumes of highest-quality
international long distance voice and data telephony services at significant cost savings. The network’s architecture is
scalable and proprietary, and M&M plans to increase capacity as demand increases. The M&M Network consists of four principal
elements:
Points
of Presence.
Points of presence digitize voice signals into data, allowing transmission and retrieval over a broadband data
network. M&M’s points of presence, which are the gateways to the M&M Network, are located within its Global Network
Operations Center in Miami, Florida, and colocations throughout the world.
The
Transmission Medium.
This is the Internet, which is the backbone of the M&M Network.
The
M&M Voice and Data Platform Controller.
This is M&M’s proprietary software and switchless routing platform,
which is the heart of the M&M Network. Developed by M&M and NxtGn in cooperation with Cisco, the system can scale to support
more than 200,000 simultaneous sessions on a single chassis. M&M’s Next Voice and Data Platform Controller is located
within the Company’s Global Network Operations Center in Miami, Florida.
The
M&M Global Network Operations Center.
This is the facility which houses the Company’s primary point of presence
and the M&M Voice Platform Controller, and from which M&M monitors and manages the voice and data traffic transmitted
through the network.
Focus
on High-Margin Destinations in Difficult Operating Environments.
By focusing its route development operations on building
strategic partnerships with providers in difficult telephony operating environments in Latin America, Africa, and other emerging
markets, M&M hopes to increase its market reach and overall revenues. By using NxtGn’s proprietary call processing technology,
M&M can significantly reduce equipment costs and other capital expenditures required to enter difficult operating environments.
The technological advantage which historically made M&M a market leader in long distance traffic terminated in Mexico and
other destinations in Latin America will allow M&M to expand its market reach into Africa and the Middle East and other lucrative
markets. Licensed FCC 214 long distance wholesaler, owner of Tel3 dba Pinless long distance.
Tel3.
During the year ended December 31, 2016, the Company acquired 100% of the outstanding ownership interest in Tel3. Tel3 provides
prepaid calling cards to consumers directly and operates in a complimentary space as M&M. Tel3 was originally acquired by
the Company’s CEO in a private transaction and sold to the Company for $10 cash.
Limecom
Limecom is a
wholly-owned subsidiary of the Company and is a wholesale provider of international long distance Voice over IP (Non-interconnected
VoIP) telephony services to carriers in the United States and throughout the world. Limecom Inc is a Florida corporation acquired
by NGH on October 24, 2017 in exchange for shares and a future cash payment. Limecom had over $128 million in gross sales revenue
during the year ended December 31, 2017 of which approximately $51.6 million was produced after the acquisition.
Next
Communications, Inc. Bankruptcy
The
Company has historically received financing from Next Communications, Inc., an entity controlled by our CEO, and had a related
party payable balance of $2,919,615 and $2,961,271 due to Next Communications, Inc. as of December 31, 2017 and 2016. During the
first calendar quarter of 2017, Next Communications, Inc. filed for bankruptcy protection. As a result, the related party payable
is being handled by a court appointed trustee as an asset of Next Communications, Inc. and the Company may need to begin repaying
the amounts due on a more fixed schedule.
Transaction
Processing Products / Accent InterMedia
During
the year ended December 31, 2016, the Company acquired a controlling interest in Accent InterMedia (AIM) through its acquisition
of Transaction Processing Products. AIM fulfilled gift card orders and processed gift card transactions on behalf of retail businesses.
On March 31, 2017, the Company disposed of its interest in Transaction Processing Products by selling it to its former owner.
Employees
As
of December 31, 2017, we have three (3) officers who have employment agreements. We also have contract labor agreements with seven
other subcontractors on both a part-time and full-time basis. We consider our relations with our subcontractors to be good.
Available
Information
We
are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. All of our reports are able
to be reviewed through the SEC’s Electronic Data Gathering Analysis and Retrieval System (EDGAR) which is publicly available
through the SEC’s website (
http://www.sec.gov
).
We
intend to furnish to our stockholders annual reports containing financial statements audited by our independent certified public
accountants and quarterly reports containing reviewed unaudited interim financial statements quarterly. You may contact the Securities
and Exchange Commission at (800) SEC-0330 or you may read and copy any reports, statements or other information that we file with
the Securities and Exchange Commission at the Securities and Exchange Commission’s public reference room at the following
location:
Public
Reference Room
100
F. Street N.W.
Washington,
D.C. 2054900405
Telephone:
(800) SEC-0330
Owning our common shares involves a high degree of risk. You should
consider carefully the following risk factors and all other information contained in this information statement. If any of the
following risks occur, the business, financial condition, liquidity, results of operations or as well as our ability of to make
distributions to our shareholders, could be materially and adversely affected. In that case, the market price of our common shares
could decline significantly, and you could lose all or a part of the value of your ownership in our common shares. Some statements
in this information statement, including statements in the following risk factors, constitute forward-looking statements. Please
refer to the section in this information statement entitled “Forward-Looking Information.”
Risks Related to Next Group Holdings.
We have a limited operating history
and therefore we cannot ensure, either in the near- or long-term, that we will be able to generate cash flow or profit or execute
our business plan.
The Company is now engaged in new businesses
started in each 2017 and 2016. As a result, we have a limited operating history upon which you may evaluate our business and an
investment in our common stock may entail significantly more risk than the shares of common stock of a company with a substantial
operating history. Our business operations are subject to numerous risks, uncertainties, expenses and difficulties associated with
early stage enterprises. You should consider an investment in our company in light of these risks, uncertainties, expenses and
difficulties. Such risks include: the absence of a lengthy operating history; insufficient capital to fully realize our operating
plan; our ability to anticipate and adapt to a developing market; a competitive environment characterized by well-capitalized competitors;
our ability to identify, attract and retain qualified personnel; our reliance on key management personnel.
Because we are subject to these risks,
evaluating our business may be difficult. We may be unable to successfully overcome these risks, which could harm our business
and prospects. Our business strategy may be unsuccessful and we may be unable to address the risks we face in a cost-effective
manner, if at all. If we are unable to successfully address these risks, there may be an adverse effect on our business, results
of operations, financial condition and cash flows.
The Company has not yet achieved
profitability from its business operations and is reliant on outside financing to fund operations.
As of December 31, 2017, the Company had
a working capital deficit of $7,075,716 and an accumulated deficit of $14,207,568 including losses from operations of $1,562,153
and $7,877,309 during the years ended December 31, 2017 and 2016. The Company will be dependent on obtaining additional financing
through equity or debt offerings which may cause future dilution.
Due to existing contractual obligations
we may not achieve profitability.
Next Group Holdings and/or its subsidiaries
are required to perform certain obligations under material contracts with third parties. The Company is not current on its financial
obligations under these agreements due to historically low profitability and cash flows from operations. Next Mobile is required
to perform certain obligations under material contracts with Sprint Corporation, Auris, and EZ ILD. M&M is required to perform
certain obligations under material contracts with Ariafone Telekom Ltd, Broadvox LLC, IP Network America LLC, Locus Telecommunications
LLC, and SMT Telecom (also known in the telecommunications industry as “RAZA”). Next CALA is required to perform certain
obligations under material contracts with ITC Financial Licenses, Inc., IH Financial Licenses, Inc., and The Bancorp Bank, and
Visa USA, Inc. NxtGn is required to perform certain obligations under material contracts with Telarix, Inc., Vidyo, Inc., and
Vitco. During the year ended December 31, 2017, the Company acquired Limecom, a wholesale provider of telecommunications minutes.
The Company may be dependent on cash flows from Limecom to satisfy obligations for its other subsidiaries.
We have well-financed, well-managed
competitors and may not be able to adequately compete in our market.
Most of our competitors are larger and
have greater financial, technical, marketing, and other resources than we do. Some of our competitors have seasoned management
teams with more experience and expertise in our industry than we do. Some competitors may enjoy significant competitive advantages
that result from, among other things, having substantially more available capital, having a lower cost of capital, having greater
economies of scale, and having enhanced operating efficiencies compared to ours.
We may not be able to secure sufficient
capital to effectively execute our business plan.
We may not be able to attract and obtain
sufficient capital from the equity and debt markets, or any other capital markets, to execute our business plan and grow our business.
If we do not have access to sufficient funding in the future, we may not be able to make necessary capital expenditures necessary
to execute our business plan, and in that event our ability to generate revenue may be significantly impaired.
Recent events in the financial markets
have had an adverse impact on the credit markets, and, as a result, credit has become significantly more expensive and difficult
to obtain, if available at all. Some lenders are imposing more stringent credit terms and there has been and may continue to be
a general reduction in the amount of credit available. Many banks are either unable or unwilling to provide new asset-based lending.
Tightening credit markets may have an adverse effect on our ability to obtain financing on favorable terms, thereby increasing
financing costs and/or requiring us to accept financing with increasing restrictions. If adverse conditions in the credit markets,
in particular with respect to our industry, materially deteriorate, our business could be materially and adversely affected. Our
long-term ability to grow through additional investments will be limited if we cannot obtain additional financing. Market conditions
may make it difficult to obtain financing, and we cannot assure you that we will be able to obtain debt or equity financing or
that we will be able to obtain it on favorable terms.
We anticipate being involved in a
variety of litigation.
We have historically been subject to any
litigation and we anticipate being involved in a range of future court proceedings in the ordinary course of business as we continue
to operate our business. We are currently involved in various litigations as discussed in Item 3 – Legal Proceedings. While
we intend to vigorously defend any non-meritorious action or challenge, no assurance can be given that we will not incur significant
expense relating to these matters or that they will not require significant management attention and adversely affect us.
Our business plan involves a number
of assumptions that may prove inaccurate, which may cause us to realize substantially different operating results than we hope
for.
In developing our business plan and business
model, we made a number of assumptions, including assumptions related to annual operating costs, market size and demand, customer
retention rates, customer drop-out rates, default rates, and local, national, and worldwide economic conditions. These assumptions
may prove inaccurate, causing us our performance and operating results to differ significantly from the performance and operating
results we have projected while developing our business plan and business model.
Operating our business on a larger
scale could result in substantial increases in our expenses.
As our business grows in size and complexity,
we can provide no assurance that we can successfully enter new markets or grow our business without incurring significant additional
expenses, that our management platform will ultimately prove to be scalable, and/or that we will be able to achieve economies of
scale or we will be able to operate our business on a larger scale than the scale we have historically operated on.
Debt service obligations could adversely
affect our operating results, and could adversely affect our ability to make or sustain distributions to our stockholders and the
market price of our common stock.
Incurring debt could subject us to many
risks, including the risks that: our cash flows from operations will be insufficient to make required payments of principal and
interest; our debt may increase our vulnerability to adverse economic and industry conditions; we will be subject to restrictive
covenants that require us to satisfy and remain in compliance with certain financial requirements or that impose limitations on
the type or extent of activities we conduct; and we may be required to dedicate a substantial portion of our cash flows from operations
to payments on our debt, thereby reducing cash available for distribution to our stockholders, funds available for operations and
capital expenditures, future business opportunities or other purposes. We are currently in default on two outstanding convertible
notes payable and have insufficient cash to repay loans due on demand by the note holders. Additionally, if we do not have sufficient
funds to repay any debt we incur when it matures, we may need to refinance the debt or raise additional equity. If, at the time
of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancing, increases in interest
expense could adversely affect our cash flows and, consequently, cash available for distribution to our stockholders. To the extent
we are required to raise additional equity to satisfy such debt, existing stockholders would see their interests diluted. If we
are unable to refinance our debt or raise additional equity on acceptable terms, we may be forced to dispose of assets on disadvantageous
terms, potentially resulting in losses or the incurrence of special taxes and fees that apply to dispositions of assets. To the
extent we cannot meet any existing or future debt service obligations, we will risk losing some or all of our assets that may be
pledged to secure our obligations to foreclosure. Any unsecured debt agreements we enter into may contain specific cross-default
provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are
in default under other loans in some circumstances.
Security breaches and other disruptions
could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business
we use sophisticated call processing engines and other sophisticated telecommunications technology platforms, and we acquire and
store sensitive data, including intellectual property, our proprietary business information and personally identifiable information
of our prospective and current tenants, our employees and third-party service providers on our networks and website. The secure
processing and maintenance of this information is critical to our operations and business strategy. Despite our security measures,
our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance
or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly
disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in revenue losses, legal claims
or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our
operations and the services we provide to customers or damage our reputation, which could adversely affect our results of operations
and competitive position.
We are dependent on our executive
officers and dedicated personnel, and the departure of any of our key personnel could materially and adversely affect us.
We rely on a small number of persons to
carry out our business and investment strategies. While we have employment agreements in place with our executive officers, any
member of our senior management may cease to provide services to us at any time. The loss of the services of any of our key management
personnel, or our inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business
and financial results. As we expand, we will continue to need to attract and retain qualified additional senior management but
may not be able to do so on acceptable terms or at all.
We are subject to regulation which
may adversely affect our ability to execute our business plan.
We operate in an ever-evolving and complex
legal and regulatory environment. We, the products and services that we offer and market, and those for which we provide processing
services, are subject to a variety of federal, state and foreign laws and regulations, including, but not limited to: federal communications
laws and regulations; foreign jurisdiction communications laws and regulations; federal anti-money laundering laws and regulations,
including the USA PATRIOT Act (the Patriot Act), the Bank Secrecy Act (the BSA), anti-terrorist financing laws and anti-bribery
and corrupt practice laws and regulations in the U.S., and similar international laws and regulations, including the Proceeds of
Crime (Money Laundering) and Terrorist Financing Act in Canada); state unclaimed property laws and money transmitter or similar
licensing requirements; federal and state consumer protection laws, including the Credit Card Accountability, Responsibility and
Disclosure Act of 2009 (the CARD Act), and the Durbin Amendment to Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (the Dodd-Frank Act), and regulations relating to privacy and data security; and foreign jurisdiction payment services industry
regulations. We believe that we are currently operating in compliance with all applicable laws and regulations, but there is no
certainty that laws and regulations affecting our business will not change. Any such change of laws and regulations applicable
to our business might adversely affect our ability to execute our business plan and achieve profitable operating results.
We are subject to Telecommunications
Industry Regulation.
Our subsidiaries Next Mobile, Limecom and
M&M are subject to regulation by the Federal Communications Commission and other government agencies and task forces. M&M
holds International and Domestic Section 214 Authority issued by the Federal Communications Commission, which may be suspended
or revoked by the Federal Communications Commission if M&M does not strictly comply with all applicable regulations and the
terms and conditions under which the International and Domestic Section 214 Authority was issued. Next Mobile and M&M are also
subject to foreign jurisdiction communications laws and regulations. We believe that we, including our subsidiaries, are currently
operating in compliance with all applicable laws and regulations, but there is no certainty that laws and regulations affecting
our business will not change. Any such change of laws and regulations applicable to our business might adversely affect our ability
to execute our business plan and achieve profitable operating results.
We are subject to Anti-Money Laundering
Regulation.
We are subject to a comprehensive federal
anti-money laundering regulatory regime that is constantly evolving. The anti-money laundering regulations to which we are subject
include the BSA, as amended by the Patriot Act, which criminalizes the financing of terrorism and enhances existing BSA regimes
through: (a) expanding AML program requirements to certain delineated financial institutions; (b) strengthening customer identification
procedures; (c) prohibiting financial institutions from engaging in business with foreign shell banks; (d) requiring financial
institutions to have due diligence procedures and, where appropriate, enhanced due diligence procedures for foreign correspondent
and private banking accounts; and (e) improving information sharing between financial institutions and the U.S. government. Pursuant
to the BSA, we have instituted a Customer Identification Program, (CIP). The CIP is incorporated into our BSA/anti-money laundering
compliance program. We are increasingly facing more stringent anti-money laundering rules and regulations, compliance with which
may increase our costs of operation, decrease our operating revenues and disrupt our business” for additional information.
Our subsidiary, Next CALA, is or may become subject to reporting and recordkeeping requirements related to anti-money laundering
compliance obligations arising under the Patriot Act and its implementing regulations. In addition, provisions of the BSA enacted
by the Prepaid Access Rule issued by the Financial Crimes Enforcement Network (FinCEN), impose certain obligations, such as registration
and collection of consumer information, on “providers” of certain prepaid access programs, including the prepaid products
issued by our Next CALA subsidiary, and our issuing banks for which we serve as program manager. In order to qualify for certain
exclusions under the Prepaid Access Rule, some of our content providers were required to modify operational elements of their products,
such as limiting the amount that can be loaded onto a card in any one day. In addition, pursuant to the Prepaid Access Rule, Next
CALA and some of our retail distribution partners have adopted policies and procedures to prevent the sale of more than $10,000
in prepaid access (including closed loop and open loop products that fall under the monetary thresholds outlined above) to any
one person during any one day.
We are subject to Anti-Terrorism and Anti-Bribery Regulation.
We are also subject to an array of federal
anti-terrorism and anti-bribery legislation. For example, the U.S. Treasury Department’s Office of Foreign Assets Control
(OFAC) administers a series of laws that impose economic and trade sanctions against targeted foreign countries and regimes, terrorists,
international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and
other entities that pose threats to the national security, foreign policy or economy of the United States. As part of its enforcement
efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries,
as well as those such as terrorists and narcotics traffickers designated under programs that are not country-specific and with
whom U.S. persons are generally prohibited from dealing. The Foreign Corrupt Practices Act, or FCPA, prohibits the payment of bribes
to foreign government officials and political figures and includes anti-bribery provisions enforced by the Department of Justice
and accounting provisions enforced by the Securities and Exchange Commission. The statute has a broad reach, covering all U.S.
companies and citizens doing business abroad, among others, and defining a foreign official to include not only those holding public
office but also local citizens affiliated with foreign government-run or government-owned organizations. The statute also requires
maintenance of appropriate books and records and maintenance of adequate internal controls to prevent and detect possible FCPA
violations. Abuse of our prepaid products for purposes of financing sanctioned countries, terrorist funding, bribery or corruption
could cause reputational or other harm that could have a material adverse effect on our business, results of operations and financial
condition” for additional information.
We are subject to Consumer Protection Regulation.
We are subject to various federal, state
and foreign consumer protection laws, including those related to unfair and deceptive trade practices as well as privacy and data
security. Failure to comply with, or further expansion of, consumer protection regulations could have a material adverse effect
on our business, results of operations and financial condition. A data security breach could expose us to liability and protracted
and costly litigation, and could adversely affect our reputation and operating revenues.”
We are subject to Federal Regulation.
At the federal level, Congress and federal
regulatory agencies have enacted and implemented new laws and regulations that affect the prepaid industry, such the CARD Act and
FinCEN’s Prepaid Access Rule. Moreover, there are currently proposals before Congress that could further substantially change
the way banks, including prepaid card issuing banks and other financial services companies, are regulated and are permitted to
offer their products to consumers. Non-bank financial services companies, including money transmitters and prepaid access providers,
are now regulated at the federal level by the Consumer Financial Protection Bureau (the CFPB), which began operations in July 2011,
bringing additional uncertainty to the regulatory system and its impact on our business. We are increasingly facing more stringent
anti-money laundering rules and regulations, compliance with which may increase our costs of operation, decrease our operating
revenues and disrupt our business. Abuse of our prepaid products for purposes of financing sanctioned countries, terrorist funding,
bribery or corruption could cause reputational or other harm that could have a material adverse effect on our business, results
of operations and financial condition. Failure to comply with, or further expansion of, consumer protection regulations could have
a material adverse effect on our business, results of operations and financial condition. Failure by us to comply with federal
banking regulation may subject us to fines and penalties and our relationships with our issuing banks may be harmed.
We are subject to State Unclaimed Property Regulations.
For some of our prepaid products, we or
our issuing banks are required to remit unredeemed funds to certain (but not all) states pursuant to unclaimed property laws. However,
unclaimed property laws are subject to change. Costs of compliance or penalties for failure to comply with or changes in state
unclaimed property laws and regulations and changes in state tax codes could have a material adverse effect on our business, financial
condition and results of operations.
We are subject to Money Transmitter Licenses or Permits
.
Most states regulate the business of sellers
of traveler’s checks, money orders, drafts and other monetary instruments, which we refer to collectively as money transmitters.
While many states expressly exempt banks and their agents from regulation as money transmitters, others purport to regulate the
money transmittal businesses of bank agents or do not extend exemptions to non-branch bank agents. In those states where we are
required to be licensed, we are subject to direct supervision and regulation by the relevant state banking departments or similar
agencies charged with enforcement of the money transmitter statutes and must comply with various restrictions and requirements,
such as those related to the maintenance of certain levels of net worth, surety bonding, selection and oversight of our authorized
delegates, permissible investments in an amount equal to our outstanding payment obligations with respect to some of the products
subject to licensure, recordkeeping and reporting, and disclosures to consumers. We are also subject to periodic examinations by
the relevant licensing authorities, which may include reviews of our compliance practices, policies and procedures, financial position
and related records, various agreements that we have with our issuing banks, retail distribution partners and other third parties,
privacy and data security policies and procedures, and other matters related to our business. As a regulated entity, Next CALA
may incur significant costs associated with regulatory compliance. We anticipate that compliance costs and requirements will increase
in the future for our regulated subsidiaries and that additional subsidiaries will need to become subject to these or new regulations.
If we fail to maintain our existing money transmitter licenses or permits, or fail to obtain new licenses or permits in a timely
manner, our business, results of operations and financial condition could be materially and adversely affected.
We are subject to Privacy Regulation.
In the ordinary course of our business,
we collect and store or may collect and store personally identifiable information about customers, holders of our cards, subscribers,
and users. This information may include names, addresses, email addresses, social security numbers, driver’s license numbers
and account numbers. We also maintain or may maintain a database of cardholder data for our proprietary cards relating to specific
transactions, including account numbers, in order to process transactions and prevent fraud. These activities subject us to certain
privacy and information security laws, regulations and rules in the United States, including, for example, the privacy provisions
of the Gramm-Leach-Bliley Act and its implementing regulations, various other federal and state privacy and information security
statutes and regulations, and the Payment Card Industry Data Security Standard. These federal and state laws, as well as our agreements
with our issuing banks, contain restrictions relating to the collection, processing, storage, disposal, use and disclosure of personal
information, and require that we have in place policies regarding information privacy and security. We have in effect a privacy
policy relating to personal information provided to us in connection with requests for information or services, and we continue
to work with our issuing banks and other third parties to update policies and programs and adapt our business practices in order
to comply with applicable privacy laws and regulations. Certain state laws also require us to notify affected individuals of certain
kinds of security breaches of computer databases that contain their personal information. These laws may also require us to notify
state law enforcement, regulators or consumer reporting agencies in the event of a data breach. Failure to comply with, or further
expansion of, consumer protection regulations could have a material adverse effect on our business, results of operations and financial
condition. A data security breach could expose us to liability and protracted and costly litigation, and could adversely affect
our reputation and operating revenues.
We are subject to Foreign Regulation.
We are subject to regulation by foreign
governments and must maintain permits and licenses in certain foreign jurisdictions in order to conduct our business. Foreign regulations
also present obstacles to, or increased costs associated with, our expansion into international markets. For example, in certain
jurisdictions we face costs associated with repatriating funds to the United States, administrative costs associated with payment
settlement and other compliance costs related to doing business in foreign jurisdictions. We are also subject to foreign privacy
and other regulations. These foreign regulations often differ in kind, scope and complexity from U.S. regulations. We are subject
to added business, political, regulatory, operational, financial and economic risks associated with our international operations.
We operate in a highly and increasingly regulated environment, and failure by us or the businesses that participate in our distribution
network to comply with applicable laws and regulations could have a material adverse effect on our business, results of operations
and financial condition. Changes in laws and regulations to which we are subject, or to which we may become subject in the future,
may materially increase our costs of operation, decrease our operating revenues and disrupt our business.
We are subject to Card Association
and Network Organization Rules.
In addition to the federal, state, local,
and foreign jurisdiction laws and regulations discussed above, we, our Next CALA subsidiary and our issuing banks, are also subject
to card association and debit network rules and standards. The operating rules govern a variety of areas, including how consumers
and merchants may use their cards and data security. Each card association and network organization audits us from time to time
to ensure our compliance with these standards. Noncompliance with these rules or standards due to our acts or omissions or the
acts or omissions of businesses that work with us could result in fines and penalties or the termination of the card association
registrations held by us or any of our issuing banks. Changes in card association rules or standards set by Visa or Vanilla Reload,
or changes in card association and debit network fees or products or interchange rates, could materially and adversely affect our
business, financial condition and results of operations.
All of the risks related particularly to
our subsidiaries Next Mobile, M&M, Next CALA, NxtGn and Limecom stated below are also risks related generally to Next Group
Holdings:
Risks Related to Next Mobile
Next Mobile has well-financed, well-managed
competitors and may not be able to adequately compete in its market.
Next Mobile faces competition from many
strong and well-financed competitors and other competitors, including, without limitation, AT&T, Sprint, Viber, WhatsApp, Skype,
MetroPCS, TracFone, Telcel, StraightTalk, Simple Mobile, Virgin Mobile, Boost, Net 10, IDT, Boost, and others.
Next Mobile is dependent on the performance
of third-party network operators.
MVNO operators, including Next Mobile,
earn revenues by purchasing network capacity from other network operators and reselling it to end users. Next Mobile uses Sprint’s
network to offer its services, and is dependent on the performance of Sprint and its network.
Other Risks Related to Next Mobile.
Please see “Risks Related to Next
Group Holdings” for other risks related to Next Mobile.
Risks Related to M&M
M&M has well-financed, well-managed
competitors and may not be able to adequately compete in its market.
M&M faces competition from many strong
and well-financed competitors and other competitors, engaged in the wholesale transmission and termination of domestic and international
long distance voice, text, and data telephone services, including, without limitation, IDT, Skype, Verizon, WhatsApp, Viber, and
others.
Other Risks Related to M&M.
Please see “Risks Related to Next
Group Holdings” for other risks related to M&M.
Risks Related to Next CALA
Next CALA has well-financed, well-managed
competitors and may not be able to adequately compete in its market.
Next CALA faces competition from many strong
and well-financed competitors. The prepaid financial services industry is highly competitive and includes competitors such as American
Express, First Data, Total Systems Services, Green Dot, NetSpend, Money Network, Momentum, Blackhawk, Prepaid MasterCard, MasterCard
RePower, PayPal, Apple Pay, Amex Serve, H&R Block Emerald, J.P. Morgan Chase, and others. Next CALA faces intense competition
from existing players in the prepaid card industry. The Company began operations recently and is much smaller than its competitors.
To compete effectively, Next CALA
needs to continuously improve its offerings.
Next CALA began operations recently and
is substantially smaller than its competitors. As a result, to compete effectively, Next CALA needs to rapidly and continuously
improve its offerings.
Next CALA may be unable to attract
and retain users.
As of the date of this filing, Next CALA
has an operating history of less than two years. If Next CALA cannot increase the number of cardholders using its Next CALA Prepaid
Card® GPR cards, and retain its existing cardholders, this will significantly adversely affect Next CALA’s operating
results, revenues, financial condition, and ability to remain in business.
Next CALA may be adversely affected
by fraudulent activity.
Criminals, including, without limitation,
cyber-organized criminal syndicates, and others, use increasingly sophisticated methods to engage in illegal activities involving
prepaid cards, reload products, and customer information. Next CALA relies on third parties for certain transaction processing
services, which subjects Next CALA and its customers to risks related to the vulnerabilities of these third parties, as well as
Next CALA’s own vulnerabilities to criminals engaged in fraudulent activities. Fraudulent activity could result in the imposition
of regulatory sanctions, including significant monetary fines, which could adversely affect Next CALA’s business, operating
results, and financial condition.
Next CALA may be adversely affected
by changes in laws and regulations.
Next CALA operates in an ever-evolving
and complex legal and regulatory environment. The provision of prepaid card services is highly regulated and the laws and regulations
affecting the industry and the manner in which they are interpreted are subject to change. Changes in laws and regulations could
increase compliance and other costs of business activities, require significant systems redevelopment, or render products or services
less profitable or obsolete, any of which could have an adverse effect on Next CALA’s operating results.
Other Risks Related to Next CALA.
Please see “Risks Related to Next
Group Holdings” for other risks related to Next CALA.
Risks Related to NxtGn
NxtGn has well-financed, well-managed
competitors and may not be able to adequately compete in its market.
NxtGn faces competition from many strong
and well-financed competitors who engineer, market, and provide robust, innovative telecommunications call processing engines and
other telecommunications and telephony platforms. These competitors include Viber, WhatsApp, Telarix, Speedflow, VoiPSwitch, and
others. NxtGn began operations recently and is substantially smaller than many of its competitors.
NxtGn may not be able to operate
effectively if it fails to acquire the Optioned Technology.
NxtGn has the option to acquire from Vitco,
in consideration for the Option Price, all title, rights and interests in Optioned Technology. The Optioned Technology is currently
licensed to NxtGn on a royalty-free basis. If NxtGn fails to acquire the Optioned Technology, NxtGn’s license to use the
Optioned Technology basis might expire and might not be renewed, or might not be renewed on favorable terms. The Optioned Technology
is essential to the operation of certain functions of NxtGn’s AVYDA Powered by Telarix™ products.
Other Risks Related to NxtGn.
Please see “Risks Related to Next
Group Holdings” for other risks related to NxtGn.
Risks Related to Limecom
Limecom has well-financed, well-managed
competitors and may not be able to adequately compete in its market.
Limecom faces competition from many strong
and well-financed competitors and other competitors, engaged in the wholesale transmission and termination of domestic and international
long distance voice, text, and data telephone services, including, without limitation, IDT, Skype, Verizon, WhatsApp, Viber, and
others.
Other Risks Related to Limecom.
Please see “Risks Related to Next
Group Holdings” for other risks related to Limecom.
|
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
We currently lease approximately 2,372
square feet of office space at 19 W. Flagler St., Suite 507, Miami, FL, 33130 as our principal offices. We believe these facilities
are in good condition, but that we may need to expand our leased space as our business efforts increase.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
From
time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time
to time that may harm our business.
On October 14, 2014, one of our operating
subsidiaries, NxtGn, Inc. and Next Communications, Inc., an entity controlled by our CEO, (collectively the “Plaintiffs”)
filed suit in the United States District Court for the Southern district of New York against Viber Media, Inc. (“Viber”). Plaintiffs
filed an Amended Complaint asserting four claims: misappropriation of a business idea, misappropriation of trade secrets, breach
of contract, and unjust enrichment. Viber moved the Court to dismiss the Amended Complaint. On March 30, 2016, U.S.
District Judge Richard Sullivan issued an opinion and order on Viber’s motion to Dismiss. Specifically, Judge Sullivan
ordered that Viber’s motion to dismiss is granted on Plaintiffs’ misappropriation of a business idea claim, but denied
as to their misappropriation of trade secrets, breach of contract, and unjust enrichment claims. NxtGn is currently appealing
that motion.
On February 12, 2018, NgtGn and Next Group
Holdings (NGH) were served with a complaint from Viber for reimbursement of attorneys fees and costs totaling $527,782 arising
from the litigation listed above. NxtGn and NGH are vigorously defending their rights in this case as we believe this demand is
premature as litigation is ongoing.
On
October 20, 2016, the Company received a notice it has been named as a defendant in a suit brought by 100 NWT Fee Owner LLC (NWT)
against Next Communications, Inc., an entity controlled by our CEO. In addition to being named a defendant, it was requested the
Company provide certain documents for the discovery process. Due to the original suit being filed against a related party and
not against the Company or its subsidiaries, we believe it likely the Company and its subsidiaries be dismissed as defendants
and has not accrued a contingent loss as of December 31, 2017 or 2016 as a result. As of Feb. 28, 2018, Next Communications Inc.
has signed a proposed settlement agreement with NWT which is in the process of being reviewed by the bankruptcy judge. This settlement
agreement, if approved, will eliminate completely this lawsuit.
During
the year ended December 31, 2014, a former employee of Pleasant Kids (PLKD), Franjose Yglesias-Bertheau, filed lawsuit against
PLKD claiming unpaid wages of $622,968 and was initially awarded that amount in a judgement. However, the judgement was later
revised and the Company settled for $80,000 in March 2017 which was included in accrued salaries as of December 31, 2016. During
the year ended December 31, 2017, the Company agreed to pay cash of $10,000 and enter into a convertible note for $70,000 in exchange
for the settlement amount. The convertible note was converted to shares of common stock during the year ended December 31, 2017.
On
July 6, 2017, the Company received notice an existing legal claim against Accent InterMedia (“AIM”) had been amended
to include claims against the Company. The claims brought against the Company include failure to comply with certain judgments
for collection of funds by the plaintiff while having a controlling interest in AIM via its ownership of Transaction Processing
Products (“TPP”). The Company believes the amended case is without merit and that, per its agreement to sell its interest
in TPP, any claims brought against AIM or TPP would be the responsibilities of the current interest holders. Due to the original
suit being filed against AIM and amended to include the Company after it disposed of its interest in TPP, which had a controlling
interest in AIM, we believe it likely the Company and its subsidiaries be dismissed as defendants.
On December 20, 2017, a Complaint was filed
by J. P. Carey Enterprises, Inc., alleging a claim for $473,264 related to the FranjoseYglesias-Bertheau filed lawsuit against
PLKD listed above. Even though NGH made the agreed payment of $10,000 and issued 3,600,720 shares as conversion of the $70,000
note as agreed in the settlement agreement, the Plaintiff alleges damages which NGH claims are without merit because they received
full compensation as agreed. NGH is in the process of defending itself against these claims.
The accompanying
notes are an integral part of these consolidated financial statements
The accompanying notes are an integral
part of these consolidated financial statements
The accompanying
notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated
financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION
OF BUSINESS
Next Group Holdings, Inc. (the “Company”)
invests in financial technology and currently derives its revenues from the sales of prepaid and wholesale calling minutes. Additionally,
the Company has an agreement with Incomm, a leading processor of general purpose reloadable (“GPR”) debit cards, to
market and distribute a line of GPR cards targeted towards the Latin American market. The Company intends to launch the cards upon
successful completion of appropriate financing and has yet to generate revenues from this activity.
Next Group Holdings, Inc was incorporated
under the laws of the State of Florida on September 21, 2005 to act as a holding company for its subsidiaries, both current and
future. Its subsidiaries are Meimoun and Mammon, LLC (100% owned), Next Cala, Inc (94% owned), NxtGn, Inc. (65% owned) and Next
Mobile 360, Inc. (100% owned) and Transaction Processing Products (100% owned). Additionally, Next Cala, Inc. has a 60% interest
in NextGlocal, a subsidiary formed in May 2016. During the year ended December 31, 2016, the Company acquired a business segment,
Tel3, from an existing corporation. Tel3 was merged into Meimoun and Mammon, LLC effective January 1, 2017. On October 23, 2017,
the Company acquired 100% of the outstanding interests in Limecom, Inc.
On January 1, 2016, NGH completed an Agreement
and Plan of Merger (the “Merger Agreement”) with Pleasant Kids, Inc. (“Pleasant Kids”) and its wholly owned
subsidiary, NGH Acquisition Corp. (“Acquisition Sub”), pursuant to which NGH merged with Acquisition Sub and Acquisition
Sub was then merged into PLKD effective January 1, 2016. Under the terms of the Merger Agreement, the NGH shareholders received
shares of PLKD common stock such that the NGH shareholders received approximately 80% of the total common shares and 100% of the
preferred shares of PLKD issued and outstanding following the merger. Due to the nominal assets and limited operations of PLKD
prior to the merger, the transaction was accorded reverse recapitalization accounting treatment under the provision of Financial
Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 805 whereby NGH became the accounting acquirer
(legal acquiree) and PLKD was treated as the accounting acquiree (legal acquirer). The historical financial records of the Company
are those of the accounting acquirer (NGH) adjusted to reflect the legal capital of the accounting acquiree (PLKD).
As
the transaction was treated as a recapitalization, no intangibles, including goodwill, were recognized. Concurrent with the effective
date of the reverse recapitalization transaction, the Company adopted the fiscal year end of the accounting acquirer of December 31.
Meimoun and Mammon, LLC (“M&M”)
was formed under the laws of the State of Florida on May 21, 2001 as a real estate investment company. During the year ended December
31, 2010, M&M began winding down real estate operations and engaged in telecommunications services. M&M acquired telecom
registrations, licenses and authorities to provide telecom services to the retail and wholesale markets including sales of prepaid
long distance telecom services and Mobile Virtual Network Operator (MVNO) services. The services are sold under the brand name
Next Mobile 360 and through the subsidiary of the same name.
Next Cala, Inc, (“Cala”) was
formed under the laws of Florida on July 10, 2009 for the purpose of offering prepaid and reloadable debit cards to the retail
market. Cala serves consumers in the underbanked and unbanked populations through Incomm, a leading provider of payment remittance
services worldwide.
NxtGn, Inc. (“NxtGn”) was
formed under the laws of Florida on August 24, 2011 to develop a High Definition telepresence product (AVYDA) which allows
users to connect with celebrities, public figures, healthcare and education applications via a mobile phone, tablet or
personal computer. NxtGn has entered into a joint venture with telephony platform industry leader Telarix, Inc. to
develop and market the AVYDA Powered by Telarix™ HD telepresence platform. The AVYDA Powered by Telarix™ product is
marketed throughout the world by the Telarix sales force.
On May 27, 2016, Next Cala entered into
a Joint Venture Agreement (the “Agreement”) with Glocal Payments Solutions, Inc (“Glocal”) to form a joint
venture, NextGlocal, in which Cala has a 60% controlling interest and Glocal has a 40% interest. The Joint Venture sought to launch
and activate up to 45,000 prepaid debit cards under the Cala brand by December 31, 2016 and 360,000 additional cards during the
2017 calendar year. Neither milestone was achieved. Either party may terminate the agreement at December 31, 2016 if certain objectives
are not met. The joint venture has not had activity since the year ended December 31, 2016 but has not been formally dissolved.
On July 22, 2016, the Company completed
its acquisition of Transaction Processing Products, Inc. (“TPP”) which has a 64% interest in Accent InterMedia, LLC
(“AIM”) and no other assets or liabilities. See Note 16.
On August 10, 2016, M&M, a wholly owned
subsidiary of the Company, closed the acquisition of Tel3 from a related party. Tel3 provides prepaid calling cards to consumers
directly and operates in a complimentary space as M&M. Tel3 was originally acquired by the Company’s CEO in a private
transaction and sold to the Company for $10 cash. See Note 16.
On October 23, 2017, the Company, closed
the acquisition of Limecom, Inc. (“Limecom”), Limecom is a global telecommunication company, providing services to
telecommunication providers from all over the world. Limecom operates a network built on internet protocol (“IP”) switching
equipment. It was organized as a Florida limited liability company (“LLC”) on November 21, 2014 and known as Limecom
LLC. On September 29, 2015, Limecom converted to a Florida C-Corporation.
The Company has a Market Partner Agreement
with InsightPOS, LLC since September 17, 2016. InsightPOS is a “State of the Art”, “Super Functional Point Of
Sale” system that has a combination of tools that we believe makes the retail experience quicker and better both for the
shopper and for store management. The Company previously installed about 10 units including training by InsightPOS. These units
were withdrawn due to required programming development and improved network interconnections.
On December 6, 2017, the Company completed its formation of SDI NEXT Distribution LLC in which it holds
a 51% interest, previously announced August 24, 2017 as a Letter of Intent with Fisk Holdings, LLC. As Managing Member of the newly
formed LLC, the Company will contribute a total of $500,000, to be paid per an agreed-upon schedule over a twelve-month period
beginning December 2017. Fisk Holdings, LLC will contribute 30,000 active Point of Sale locations for distribution of retail telecommunications
and prepaid financial products and services to include, but not be limited to: prepaid general purpose reloadable cards, prepaid
gift cards, prepaid money transfer, prepaid utility payments, and other prepaid products.
The Company, through its affiliate, Next
Communications, Inc., has the right to sell STI Mobile, Next Cala and any Next products to 8,800 locations that were serviced
by a prepaid distribution network. The Company will offer the InsightPOS system to clients of this distribution network as well
via direct sales through its own sales force and affiliates. When a system is installed, NGH receives 50% of the gross profits
received by InsightPOS after retailer commissions are paid.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
This summary of accounting policies for
Next Group Holdings, Inc. is presented to assist in understanding the Company’s financial statements. The Company uses the
accrual basis of accounting and accounting principles generally accepted in the United States of America (“US GAAP”
accounting) and have been consistently applied in the preparation of the consolidated financial statements.
Principals of Consolidation
The consolidated financial statements are
prepared in accordance with US GAAP. The consolidated financial statements of the Company include the Company and its wholly-owned
and majority-owned subsidiaries. All inter-company balances and transactions have been eliminated.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified
for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
Use
of Estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities and certain revenues and expenses and disclosure of contingent
assets and liabilities as of the date of the financial statements. Actual results could differ from those estimates. Estimates
are used when accounting for allowances for bad debts, collectability of loans receivable, potential impairment losses of the capitalized
license fee, impairment of goodwill, impairment of intangible assets, fair value of stock based compensation and fair value calculations
related to embedded derivative features of outstanding convertible notes payable and other financial instruments.
Cash
For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents
to the extent the funds are not being held for investment purposes. The Company held no cash equivalents as of December 31, 2017
or 2016. As of December 31, 2017 and 2016, the Company did not hold cash with any one financial institution in excess of the FDIC
insured limit of $250,000.
Investments
During the year ended December 31, 2017,
the Company acquired 50,000 shares of common stock of Green Spirit Industries, a publicly held company, as a referral fee. The
total value of the common shares was recorded as other income using the price of the common stock as quoted on Nasdaq on the date
received resulting in other income of $550,000. At December 31, 2017, the Company marked the value of the shares to fair value
resulting in an unrealized loss of $300,000 being recorded as other comprehensive loss for the year ended December 31, 2017. The
fair value of the common shares, as quoted by Nasdaq, as of December 31, 2017 was $250,000.
Revenue recognition
The Company follows paragraph 605-10-S99
of the FASB
Accounting Standards Codification
for revenue recognition. The Company will recognize revenue when it is realized
or realizable and earned. The Company considers revenue realized or realizable and earned when all 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. The Company primarily generates
revenues through the brokering of sales of minutes from one telecommunications carrier to another through Limecom and to a lesser
extent the sales of prepaid calling minutes to consumers through its Tel3 division. While the Company collects payment for such
minutes in advance, revenue is recognized upon delivery to and consumption of minutes by the consumer. Minutes are forfeited buy
the consumer after 12 consecutive months of non-use at which point the Company recognizes revenue from the forfeiture of prepaid
minutes. Next Cala generated revenues from commissions earned from Incomm, a leading financial services provider, and NxtGn generated
revenues from the sale of voice over IP platform software during the years ended December 31, 2017 and 2016.
Business Segments
The Company operates in a single business
segment in telecommunications.
Property and Equipment
Property and equipment are stated at cost
less accumulated depreciation and amortization. The Company provides for depreciation and amortization using the straight-line
method over the estimated useful lives of the related assets, which range from three to five years.
Maintenance and
repair costs are expensed as they are incurred while renewals and improvements which extend the useful life of an asset are capitalized.
At the time of retirement or disposal of property and equipment, the cost and related accumulated depreciation and amortization
are removed from the accounts and any resulting gain or loss is reflected in the consolidated results of operations.
Goodwill and Intangible Assets
Goodwill represents
the excess cost over the fair value of the assets of an acquired business. Goodwill and intangible assets acquired in a business
combination accounted for as a purchase and determined to have an indefinite useful life are not amortized but are tested for impairment
at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to
their estimated residual values and reviewed periodically for impairment. The Company evaluates the possible impairment of goodwill
annually as part of its reporting process for the fourth quarter of each fiscal year. The Company determines the fair value of
each subsidiary the goodwill relates to and compares the fair value to the carrying amount of the subsidiary. To the extent the
carrying amount of the subsidiary exceeds the fair value of it, an impairment loss is recorded.
Amortization of
intangible assets for each of the next five years and thereafter is expected to be as follows:
|
Year ended December 31,
|
|
|
|
|
2018
|
|
$
|
428,571
|
|
|
2019
|
|
|
428,571
|
|
|
2020
|
|
|
428,571
|
|
|
2021
|
|
|
428,571
|
|
|
2022
|
|
|
428,571
|
|
|
Thereafter
|
|
|
792,902
|
|
|
Total
|
|
$
|
2,935,757
|
|
Amortization expense was $71,429 and
$0 for the years ended December 31, 2017 and 2016, respectively. Amortization expense for each period is included in cost of revenue.
Impairment of Long-Lived Assets
In accordance with ASC Topic 360, formerly
SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets,
the Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully
recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of its
asset based on estimates of its undiscounted future cash flows. If these estimated future cash flows are less than the carrying
value of the asset, an impairment charge is recognized for the difference between the asset’s estimated fair value and its
carrying value. The Company recorded impairment losses of $0 and $3,916,976, of which $1,243,430 is included in losses from discontinued
operations, during the years ended December 31, 2017 and 2016, respectively. Refer to Note 16 for further discussion.
Non-Controlling Interest
The Company reports the non-controlling
interest in its majority owned subsidiaries in the consolidated balance sheets within the stockholders’ deficit section,
separately from the Company’s stockholders’ deficit. Non-controlling interest represents the non-controlling interest
holders’ proportionate share of the equity of the Company’s majority-owned subsidiaries. Non-controlling interest is
adjusted for the non-controlling interest holders’ proportionate share of the earnings or losses and other comprehensive
income (loss) and the non-controlling interest continues to be attributed its share of losses even if that attribution results
in a deficit non-controlling interest balance.
Derivative Liabilities and
Fair Value of Financial Instruments
Fair value accounting requires bifurcation
of embedded derivative instruments such as conversion features in convertible debt or equity instruments and measurement of their
fair value for accounting purposes. In assessing the convertible debt instruments, management determines if the convertible debt
host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement.
If the instrument is not considered conventional convertible debt under ASC 470, the Company will continue its evaluation process
of these instruments as derivative financial instruments under ASC 815.
Once determined, derivative liabilities
are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded
in results of operations as an adjustment to fair value of derivatives.
Fair value of certain of the Company’s
financial instruments including cash, accounts receivable, account payable, accrued expenses, notes payables, and other accrued
liabilities approximate cost because of their short maturities. The Company measures and reports fair value in accordance with
ASC 820, “Fair Value Measurements and Disclosure” defines fair value, establishes a framework for measuring fair value
in accordance with generally accepted accounting principles and expands disclosures about fair value investments.
Fair value, as defined in ASC 820, is
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The fair value of an asset should reflect its highest and best use by market participants, principal
(or most advantageous) markets, and an in-use or an in-exchange valuation premise. The fair value of a liability should reflect
the risk of nonperformance, which includes, among other things, the Company’s credit risk.
Valuation techniques are generally classified into three
categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of the
techniques may require significant judgment and are primarily dependent upon the characteristics of the asset or liability, and
the quality and availability of inputs. Valuation techniques used to measure fair value under ASC 820 must maximize the use of
observable inputs and minimize the use of unobservable inputs. ASC 820 also provides fair value hierarchy for inputs and resulting
measurement as follows:
Level 1: Quoted prices (unadjusted) in
active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2: Quoted prices for similar assets
or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active;
inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or
corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3: Unobservable inputs for the asset
or liability that are supported by little or no market activity, and that are significant to the fair values.
Fair value measurements are required to
be disclosed by the Level within the fair value hierarchy in which the fair value measurements in their entirety fall. Fair value
measurements using significant unobservable inputs (in Level 3 measurements) are subject to expanded disclosure requirements including
a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following:
(i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings, and
a description of where those gains or losses included in earning are reported in the statement of income.
The Company records a debt discount related
to the issuance of convertible debts that have conversion features at adjustable rates. The debt discount for the convertible instruments
is recognized and measured by allocating a portion of the proceeds as an increase in additional paid-in capital and as a reduction
to the carrying amount of the convertible instrument equal to the fair value of the conversion features. The debt discount will
be accreted by recording additional non-cash gains and losses related to the change in fair values of derivative liabilities over
the life of the convertible notes.
Except as discussed in
Note 8 –
Derivative Liabilities
and
Note 12 – Stockholders’ Equity,
the Company did not identify any other assets
or liabilities that are required to be presented on the consolidated balance sheet at fair value in accordance with ASC 825-10
as of December 31, 2017 and 2016.
Income Taxes
Income taxes are accounted for under the
assets and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect
for the year in which those temporary differences are expected to be recovered or settled. Use of net operating loss carry forwards
for income tax purposes may be limited by Internal Revenue Code section 382 if a change of ownership occurs.
Net Loss Per Basic and Diluted Common
Share
Basic loss per share is calculated by dividing
the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period.
Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted
weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the
basic weighted number of shares adjusted for any potentially dilutive debt or equity.
At December 31, 2017, the Company had two outstanding convertible notes payable with conversion rights
that are exercisable. The amount of outstanding principal on these convertible notes total $48,897 plus accrued interest of $35,136
for total convertible debts as of December 31, 2017 of $84,033 representing 7,932,584 new dilutive common shares if converted at
the applicable rates. Additionally, the Company had common stock subscriptions totaling $400,000 representing an additional 11,428,572
common shares and 34,852,226 common shares committed but not yet issued. The effects of these notes, common shares subscribed and
common shares committed have been excluded as the conversion would be anti-dilutive due to the net loss incurred in the year ended
December 31, 2017.
At December 31, 2016, the Company had fifteen
outstanding convertible notes payable with conversion rights that are exercisable. The remaining convertible notes outstanding
at December 31, 2016 were not convertible until six months after issuance, or January 2017. The amount of outstanding principal
on these convertible notes total $1,056,897 plus accrued interest of $202,068 for total convertible debts as of December 31, 2016
of $1,258,965 representing 75,347,762 new dilutive common shares if converted at the applicable rates. The effects of these notes
have been excluded as the conversion would be anti-dilutive due to the net loss incurred in the period presented.
Dividends
The Company has not adopted any policy
regarding payment of dividends. No dividends have been paid during any of the periods shown.
As discussed in the 8K filed on May 18,
2016, the Company declared a special dividend on its outstanding common stock of one share of Class D Redeemable Preferred Stock.
Pursuant to the dividend, the special stock dividend will be distributed to owners of the Company’s common stock as
of the record date in a ratio of one share of Class D Redeemable Preferred Stock common stock for every 1 share of common stock
owned as of the record date. The Company originally had set the record date as June 10, 2016 but was later modified to July
22, 2016. The Class D Preferred Stock must be redeemed within six months within six (6) months (or as soon thereafter as permitted
by law) following final resolution of the Corporation’s affiliates lawsuit against ViberMedia, Inc. (Next Communications,
Inc. and Nxtgn, Inc. v. Viber Media, Inc.) which is, as of the date of this filing, pending in U.S. District Court for the Southern
District of New York or any successor or other lawsuit relating to the subject matter thereof in which the Corporation (or any
successor-in-interest) is named as a plaintiff (the “Lawsuit”). The Designation fixes the redemption price of each
share of class D Preferred stock as the greater of par value or the amount obtained by dividing (a) 9.03 percent of the net proceeds
to the Corporation of the Lawsuit after payment of fees and expenses incurred in connection with such law suit and the resolution
of any creditor claims against Next Communications and all taxes on net income accrued or paid with respect to such amount,
by (b) the total number of shares of Class D Preferred stock issued and outstanding as of the Redemption Date, which amount shall
be rounded to the nearest whole cent.
The Company has accrued common stock dividends
payable of $30,000 of December 31, 2017 and 2016.
Advertising Costs
The Company’s policy regarding
advertising is to expense advertising when incurred. The Company incurred $28,295 and $7,797 of advertising costs during the
years ended December 31, 2017 and 2016, respectively.
Stock-Based Compensation
The Company accounts for equity instruments
issued to parties other than employees for acquiring goods or services under guidance of subtopic 505-50 of the FASB Accounting
Standards Codification (“Sub-topic 505-50”) and subtopic 718-20 for awards classified as equity to employees.
Related Parties
The registrant follows subtopic 850-10
of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20 the Related
parties include (a) affiliates of the registrant; (b) entities for which investments in their equity securities would be required,
absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted
for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and profit-sharing trusts
that are managed by or under the trusteeship of management; (d) principal owners of the registrant; (e) management of the registrant;
(f) other parties with which the registrant may deal if one party controls or can significantly influence the management or operating
policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate
interests; and (g) Other parties that can significantly influence the management or operating policies of the transacting parties
or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that
one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The financial statements shall include
disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar
items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated
or combined financial statements is not required in those statements. The disclosures shall include: (a) the nature of the relationship(s)
involved; (b) description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for
each of the periods for which income statements are presented, and such other information deemed necessary to an understanding
of the effects of the transactions on the financial statements; (c) the dollar amounts of transactions for each of the periods
for which income statements are presented and the effects of any change in the method of establishing the terms from that used
in the preceding period; and (d) amounts due from or to related parties as of the date of each balance sheet presented and, if
not otherwise apparent, the terms and manner of settlement.
Accounts Receivable
Accounts receivable balances are established
for amounts owed to the Company from its customers from the sales of services and products. The Company closely monitors the collectability
of outstanding accounts receivable and provides an allowance for doubtful accounts based on estimated collections of outstanding
amounts. There was an allowance for doubtful accounts of $20,000 and $8,000 as of December 31, 2017 and 2016.
Accounts
Receivable Factoring
Limecom executed a factoring and security
agreement with a financial institution on June 22, 2017, whereby it sells certain of its accounts receivable in exchange for cash.
These factoring transactions qualify for sales treatment in accordance with FASB ASC 860, Transfers and Servicing. Upon purchase
of the accounts receivable, the Company shall be deemed to have sold, transferred, assigned, set over and conveyed to the financial
institution, without recourse except as expressly stated in the agreement, all of the Company’s right, title and interest
in and to the purchased accounts receivable. Purchases have an initial gross liquidation advance rate of 90%, up to a maximum
cumulative outstanding face amount of $4,000,000. The initial discount fee is 2.1%, and an additional 0.85% of certain receivables.
The Company has a credit insurance policy
covering all factored accounts receivable, under which the financial institution is the beneficiary on the policy if default were
to occur.
Loans Receivable
The Company carries loans receivable for
unsecured amounts lent to unrelated and related parties. The balance due to the Company is monitored for collectability. An allowance
for uncollectible loans is established based on the estimated collectability of outstanding loans.
License Fee
On June 30, 2015 the Company entered into
an agreement with a certain vendor whereby it obtained a license to market and distribute certain closed loop general purpose
reloadable debit cards for an initial term of three years. The Company remitted $250,000 as a license fee in connection with the
agreement which it is recognizing over the initial term of the agreement on a straight line basis. The unamortized balance of
the license fee was $34,722 and $118,056 as of December 31, 2017 and 2016, respectively.
Finance Deposit
During December 2015, the Company made
a deposit with a financial advisory firm as part of an agreement executed at that time. The agreement was cancelled soon thereafter
within the cancellation period that would allow for a refund of the deposit made. However, the Company had not yet received the
refund by the due date and the asset was written to $0. The Company carried a current asset of $0 and $25,000 as of December 31,
2017 and 2016 reflecting the amount of deposit anticipated to be received.
Recently Issued Accounting Standards
In March 2016, the FASB issued ASU
2016-09,
“Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting
.
”
The amendments in this update simplify several aspects of the accounting for employee
share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding
requirements, as well as classification in the statement of cash flows. The Company adopted the new guidance on January 1,
2017. The primary impact of adoption was the recognition of excess tax benefits in our provision for income taxes rather than
paid-in capital. A corresponding adjustment was recorded to increase the valuation allowance.
In January 2017, the FASB issued ASU 2017-04,
“
Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment”.
The amendments
in this update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment
test. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 31, 2019.
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing after January 1, 2017. The Company
notes that this guidance applies to its reporting requirements and will implement the new guidance accordingly in performing goodwill
impairment testing; however, the Company does not believe this update will have a material impact on the consolidated financial
statements.
In January 2017, the FASB issued ASU 2017-01,
“
Business Combinations (Topic 805): Clarifying the Definition of a Business,
” which revises the definition of
a business. This update is effective for annual periods beginning after December 15, 2017, including interim periods within those
years. Early adoption is permitted. The Company notes that this guidance will impact its acquisitions beginning January 1, 2018.
In May 2014, the FASB issued ASU 2014-09, “Revenue
from Contracts with Customers (Topic 606),” which amends the guidance in ASC 605, “Revenue Recognition.” 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 to in exchange for those goods
or services. The Company adopted this standard on January 1, 2018 and did not have an impact on the Company’s revenue recognition
practices.
In April 2016, the FASB issued ASU 2016-10,
“Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU
2016-10”). The amendments in this update clarify the following two aspects to Topic 606: identifying performance obligations
and the licensing implementation guidance, while retaining the related principles for those areas. The entity first identifies
the promised goods or services in the contract and reduces the cost and complexity. An entity evaluates whether promised goods
and services are distinct. Topic 606 includes implementation guidance on determining whether an entity’s promise to grant
a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point
in time) or a right to access the entity’s intellectual property (which is satisfied over time). The Company evaluated the
impacts of ASU 2016-10 and determined it did not have an impact on the Company’s revenue recognition practices.
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842),” which supersedes the guidance in ASC 840, “Leases.” The purpose of the
new standard is to improve transparency and comparability related to the accounting and reporting of leasing arrangements. The
guidance will require balance sheet recognition for assets and liabilities associated with rights and obligations created by leases
with terms greater than twelve months. The guidance is effective for fiscal years beginning after December 15, 2018, including
interim periods within those years. Modified retrospective application is required. Early adoption is permitted. The Company does
not expect the standard to have a material impact on its consolidated balance sheets or consolidated statements of operations.
In January 2016, FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The update provides
guidance to improve certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The standard
is effective for fiscal years beginning after December 15, 2018. Early adoption by public companies for fiscal years or interim
periods that have not yet been issued or, by all other entities, that have not yet been made available for issuance of this guidance
are permitted as of the beginning of the fiscal year of adoption, under certain restrictions. The Company is required to apply
the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.
The guidance related to equity securities without readily determinable fair values should be applied prospectively to equity investments
that exist at the date of adoption. The Company anticipates adopting this update in the first quarter of the year ending December
31, 2018 and is currently evaluating the impact on the Company’s financial statements.
On August 26, 2016, the FASB issued Accounting
Standards Update (ASU) 2016-15, Classification of Certain Cash Receipts and Cash Payments, seeking to eliminate diversity in practice
related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments
in ASU 2016-15 address eight specific cash flow issues and apply to all entities, including both business entities and not-for-profit
entities that are required to present a statement of cash flows under FASB Accounting Standards Codification (FASB ASC) 230, Statement
of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The
Company has adopted this standard and did not have an impact on the Company’s presentation of the consolidated statements
of cash flows.
On May 10, 2017, The FASB issued Accounting Standards Update (ASU) 2017-09, Scope of Modification Accounting,
which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes
to the terms of conditions of share-based payment awards to which an entity would be required to apply modification accounting
under ASC 718. For all entities, ASU 2017-09 is effective to annual reporting periods, including interim periods within those
annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period.
The Company does not anticipate this standard to have an impact on its accounting practices.
Other accounting standards that
have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on our financial statements upon adoption.
NOTE 3 – DISCONTINUED OPERATIONS
The Company has classified its former gift card processing business as a discontinued operation. During
the first quarter of 2017, the Company ceased activity in this business segment and disposed of its ownership interest. On April
26, 2017, the Company entered into and completed the sale of the business to an unaffiliated third party.
Revenue Recognition for Discontinued Operations
Our discontinued operations generated revenue
primarily from processing gift cards for local retailers. Commissions were recognized under service agreements with the retailers
and recorded as revenue when processing fees were earned.
The financial position of discontinued
operations was as follows:
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
Cash (restricted and unrestricted)
|
|
$
|
-
|
|
|
$
|
7,163
|
|
|
Accounts receivable
|
|
|
-
|
|
|
|
42,267
|
|
|
Prepaid expenses
|
|
|
-
|
|
|
|
10,891
|
|
|
Notes receivable
|
|
|
-
|
|
|
|
83,353
|
|
|
Equipment, net of accumulated depreciation
|
|
|
-
|
|
|
|
82,210
|
|
|
Net current assets of discontinued operations
|
|
$
|
-
|
|
|
$
|
225,884
|
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
1,996,039
|
|
|
Deferred revenue
|
|
|
-
|
|
|
|
48,585
|
|
|
Loans payable
|
|
|
-
|
|
|
|
392,096
|
|
|
Net current liabilities of discontinued operations
|
|
$
|
-
|
|
|
$
|
2,436,720
|
|
The results of discontinued operations
do not include any allocated or common overhead expenses. The results of operations of discontinued operations were as follows:
|
|
|
For the Year Ended
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
207,053
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Loss on disposal of business
|
|
|
327,800
|
|
|
|
-
|
|
|
Other general and administrative
|
|
|
-
|
|
|
|
592,939
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss
|
|
|
-
|
|
|
|
1,243,430
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
327,800
|
|
|
$
|
1,629,316
|
|
NOTE 4 – LIQUIDITY AND PROFITABILITY
During the year ended December 31, 2017,
the Company’s net loss was $724,642 and cash used in operations was $308,946, which included the reduction of accounts payable
and accrued liabilities in the amount of $7,534,252. As of December 31, 2017, the Company had $92,714 of cash, a working capital
deficit of $7,075,716, which included accounts payable and accrued liabilities of $7,030,050, and the Company’s shareholder
deficit was $4,541,584. During 2017, the Company acquired a cash flow positive subsidiary which had net income before income tax
benefit of $1,400,496 from October 24, 2017 (the date of acquisition) to December 31, 2017.
Due to our operational losses, the Company
has relied to a large extent on funding received from Next Communications, Inc., an organization in which our Chief Executive Officer
and Chairman holds a controlling equity interest and holds an executive position. During the first calendar quarter of 2017, Next
Communications, Inc. filed for bankruptcy protection. As a result, the related party payable is being handled by a court appointed
trustee as an asset of Next Communications, Inc. and the Company may need to begin repaying the amounts due on a more fixed schedule.
Our liquidity needs for the next 12 months
and beyond are principally for the funding of our operations and the purchase of property and equipment. Based on the foregoing,
management believes the Company will generate sufficient funds from operations and certain available debt financings available
to finance its operations over the next twelve months. The Company is actively engaging in various strategies to ensure the continuance
of operations for the foreseeable future. Specifically;
|
●
|
During the year ended December 31, 2017, the Company acquired a cash flow positive business in Limecom.
|
|
|
|
|
●
|
The Company plans to seek a new accounts receivable factoring agreement to both raise its credit limit and lower its borrowing costs.
|
|
|
|
|
●
|
The Company has negotiated to extend the maturation dates of certain related party payables totaling approximately $2.0 million.
|
|
|
|
|
●
|
Next Communications, a significant related party to which the Company owes approximately $2.9 million and is currently in bankruptcy, is actively negotiating with the court appointee trustee to extend the maturation date of the related party payable.
|
|
|
|
|
●
|
Certain officers of the Company have entered into a commitment letter whereby they have agreed to enter
into a credit line agreement. The credit line agreement will allow the Company to borrow up to $250,000 at an annual interest rate
of 18% and be in place for a minimum of 13 months.
|
|
|
|
|
●
|
The Company will seek additional capital through a debt offering.
|
Based on the foregoing, management believes
the Company will generate sufficient funds from operations and certain available debt financings available to finance its operations
over the next twelve months.
NOTE 5 – LOANS RECEIVABLE
The Company acquired a total of $83,353
of loans receivable through its acquisition of TPP as discussed in
Note 1 – Organization and Description of Business
.
The Company exited this business in the first quarter of 2017 and the loan is included in assets from discontinued operations as
of December 31, 2016.
NOTE 6 – EQUIPMENT
The Company acquired $4,572 of equipment
net of accumulated depreciation of $1,430 through the reverse recapitalization discussed in
Note 1 – Organization and
Description of Business.
The Company disposed of this property in April 2016 and recorded a loss on disposal of $2,926 during
the year ended December 31, 2016.
Additionally, the Company acquired a total
of $123,013 of equipment at fair value through its acquisition of TPP as discussed in
Note 1 – Organization and Description
of Business.
The Company exited this business in March 2017 and the equipment is included in assets from discontinued operations
as of December 31, 2016.
Depreciation expense was $68 and $41,021, of which $0 and $40,804 is included in
loss from discontinued operations, during the years ended December 31, 2017 and 2016.
The Company had $5,676 and $0 of property
or equipment, all of which is office furniture, and accumulated depreciation of $68 and $0, respectively, as of and December 31,
2017 and 2016.
NOTE 7 – NOTES PAYABLE AND CONVERTIBLE
NOTES PAYABLE
Notes Payable
During the year ended December 31, 2017,
the Company entered into two separate loans to be paid by collection of its future accounts receivable and secured by substantially
all assets of the Company including accounts receivable, cash, equipment, intangible assets, inventory and other receivables. The
first loan resulted in cash proceeds $125,000 to the Company for future payments totaling $168,750 from future receivables and
requires daily repayments of $1,339. The second resulted in cash proceeds of $50,000 for future payments totaling $68,000 from
future receivables and requires daily cash repayments of $540. There was $46,048 due for the agreements as of December 31, 2017
included in current notes payable.
On May 1, 2017, the Company received a
loan from an unrelated party for $25,000. The loan is due on demand and as such is included in current notes payable. The note
does not accrue interest and had a principal balance due of $25,000 as of December 31, 2017.
Convertible Notes Payable
The Company has entered into a series of
convertible notes payable to fund operations. While with differing noteholders, the terms of the outstanding convertible notes
are substantially similar and accrue interest at 8% annually with a default interest rate of 24% and allow for the conversion of
outstanding principal and interest to common stock at a price equal to a 45% to 50% from the lowest trading price in the preceding
20 days.
In February 2017, the Company agreed with
certain noteholders to extend a redemption freeze agreement whereby the convertible note holders agreed to not convert outstanding
principal and accrued interest into common stock for a period of 60 days. Upon the expiration of these agreements, a 90 day extension
was executed whereby the noteholders agreed to not convert additional amounts through the first week of July 2017. Under the terms
of the extension, each noteholder was granted the right to convert a limited amount of outstanding principal to common stock at
a rate equal to the stated rate in the convertible note payable but not less than $0.02 per share and extended the due dates of
the notes to July 2017. The convertible notes outstanding contain cross default features and the Company defaulted on all notes
in November 2016. During the year ended December 31, 2017, the Company accrued a total of $210,403 of penalties on convertible
notes payable which was recorded as a loss on the extinguishment of debt.
The Company settled the majority of its
convertible notes payable in December 2017 for a combination of cash and shares of common stock.
The following table summarizes all convertible
notes payable activity for the year ended December 31, 2017:
|
Holder
|
|
Issue Date
|
|
Due Date
|
|
Original Principal
|
|
|
Balance, December 31,
2016
|
|
|
Advances
|
|
|
Penalties Accrued
|
|
|
Repayments
|
|
|
Conversions to Common Stock
|
|
|
Balance, December 31,
2017
|
|
|
Noteholder 1
|
|
11/25/2015
|
|
11/24/2016
|
|
$
|
82,500
|
|
|
$
|
82,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(46,529
|
)
|
|
$
|
(35,971
|
)
|
|
$
|
-
|
|
|
Noteholder 1
|
|
12/21/2015
|
|
12/21/2016
|
|
|
27,000
|
|
|
|
27,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(27,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Noteholder 1
|
|
1/15/2016
|
|
1/15/2017
|
|
|
131,250
|
|
|
|
131,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(131,250
|
)
|
|
|
-
|
|
|
Noteholder 1
|
|
3/8/2016
|
|
3/8/2017
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Noteholder 1
|
|
4/11/2016
|
|
4/11/2017
|
|
|
82,500
|
|
|
|
82,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(82,500
|
)
|
|
|
-
|
|
|
Noteholder 1
|
|
4/11/2016
|
|
4/11/2017
|
|
|
82,500
|
|
|
|
82,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(82,500
|
)
|
|
|
-
|
|
|
Noteholder 1
|
|
4/11/2016
|
|
4/11/2017
|
|
|
82,500
|
|
|
|
82,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(82,500
|
)
|
|
|
-
|
|
|
Noteholder 1
|
|
5/16/2016
|
|
5/16/2017
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
(110,000
|
)
|
|
|
-
|
|
|
Noteholder 1
|
|
7/22/2016
|
|
7/22/2017
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
(55,000
|
)
|
|
|
-
|
|
|
Noteholder 1
|
|
8/2/2016
|
|
8/2/2017
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
106,471
|
|
|
|
-
|
|
|
|
(156,471
|
)
|
|
|
-
|
|
|
Noteholder 2
|
|
11/20/2015
|
|
11/20/2016
|
|
|
37,000
|
|
|
|
37,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(37,000
|
)
|
|
|
-
|
|
|
Noteholder 3
|
|
3/8/2016
|
|
3/8/2017
|
|
|
50,000
|
|
|
|
14,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Noteholder 3
|
|
5/16/2016
|
|
5/16/2017
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,500
|
)
|
|
|
(77,500
|
)
|
|
|
-
|
|
|
Noteholder 3
|
|
7/22/2016
|
|
7/22/2017
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
33,500
|
|
|
|
(23,500
|
)
|
|
|
(60,000
|
)
|
|
|
-
|
|
|
Noteholder 3
|
|
3/8/2016
|
|
3/8/2017
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,000
|
)
|
|
|
-
|
|
|
Noteholder 4
|
|
1/19/2016
|
|
1/15/2017
|
|
|
131,250
|
|
|
|
131,250
|
|
|
|
-
|
|
|
|
55,432
|
|
|
|
(60,000
|
)
|
|
|
(126,682
|
)
|
|
|
-
|
|
|
Noteholder 4
|
|
3/9/2016
|
|
3/8/2017
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
Noteholder 5
|
|
11/9/2015
|
|
11/9/2016
|
|
|
100,000
|
|
|
|
61,397
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,500
|
)
|
|
|
48,897
|
|
|
Noteholder 6
|
|
11/2/2016
|
|
11/2/2017
|
|
|
52,500
|
|
|
|
52,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(52,500
|
)
|
|
|
-
|
|
|
Noteholder 7
|
|
1/2/2017
|
|
8/2/2017
|
|
|
70,000
|
|
|
|
-
|
|
|
|
70,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(70,000
|
)
|
|
|
-
|
|
|
Totals
|
|
|
|
|
|
$
|
1,404,000
|
|
|
$
|
1,259,397
|
|
|
$
|
70,000
|
|
|
|
210,403
|
|
|
$
|
(243,529
|
)
|
|
$
|
(1,247,374
|
)
|
|
$
|
48,897
|
|
The following table summarizes all convertible
notes payable activity for the year ended December 31, 2016:
|
Holder
|
|
Issue Date
|
|
Due Date
|
|
Original Principal
|
|
|
Balance, December 31, 2015
|
|
|
Advances
|
|
|
Conversions to Common Stock
|
|
|
Balance, December 31, 2016
|
|
|
Noteholder 1
|
|
8/12/2015
|
|
8/12/2016
|
|
$
|
82,500
|
|
|
$
|
82,500
|
|
|
$
|
-
|
|
|
$
|
(82,500
|
)
|
|
$
|
-
|
|
|
Noteholder 1
|
|
9/21/2015
|
|
9/21/2016
|
|
|
72,450
|
|
|
|
72,450
|
|
|
|
14,490
|
|
|
|
(86,940
|
)
|
|
|
-
|
|
|
Noteholder 1
|
|
10/15/2015
|
|
10/15/2016
|
|
|
82,500
|
|
|
|
82,500
|
|
|
|
-
|
|
|
|
(82,500
|
)
|
|
|
-
|
|
|
Noteholder 1
|
|
11/25/2015
|
|
11/24/2016
|
|
|
82,500
|
|
|
|
82,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82,500
|
|
|
Noteholder 1
|
|
12/21/2015
|
|
12/21/2016
|
|
|
27,000
|
|
|
|
27,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,000
|
|
|
Noteholder 1
|
|
1/15/2016
|
|
1/15/2017
|
|
|
131,250
|
|
|
|
-
|
|
|
|
131,250
|
|
|
|
-
|
|
|
|
131,250
|
|
|
Noteholder 1
|
|
3/8/2016
|
|
3/8/2017
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
Noteholder 1
|
|
4/11/2016
|
|
4/11/2017
|
|
|
82,500
|
|
|
|
-
|
|
|
|
82,500
|
|
|
|
-
|
|
|
|
82,500
|
|
|
Noteholder 1
|
|
4/11/2016
|
|
4/11/2017
|
|
|
82,500
|
|
|
|
-
|
|
|
|
82,500
|
|
|
|
-
|
|
|
|
82,500
|
|
|
Noteholder 1
|
|
4/11/2016
|
|
4/11/2017
|
|
|
82,500
|
|
|
|
-
|
|
|
|
82,500
|
|
|
|
-
|
|
|
|
82,500
|
|
|
Noteholder 1
|
|
5/16/2016
|
|
5/16/2017
|
|
|
100,000
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
100,000
|
|
|
Noteholder 1
|
|
7/22/2016
|
|
7/22/2017
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
Noteholder 1
|
|
8/2/2016
|
|
8/2/2017
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
Noteholder 2
|
|
7/27/2015
|
|
7/27/2016
|
|
|
37,000
|
|
|
|
37,000
|
|
|
|
-
|
|
|
|
(37,000
|
)
|
|
|
-
|
|
|
Noteholder 2
|
|
11/20/2015
|
|
11/20/2016
|
|
|
37,000
|
|
|
|
37,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,000
|
|
|
Noteholder 3
|
|
11/9/2015
|
|
11/9/2016
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
(75,000
|
)
|
|
|
-
|
|
|
Noteholder 3
|
|
3/8/2016
|
|
3/8/2017
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
(36,000
|
)
|
|
|
14,000
|
|
|
Noteholder 3
|
|
5/16/2016
|
|
5/16/2017
|
|
|
100,000
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
100,000
|
|
|
Noteholder 3
|
|
7/22/2016
|
|
7/22/2017
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
Noteholder 3
|
|
3/8/2016
|
|
3/8/2017
|
|
|
25,000
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
25,000
|
|
|
Noteholder 4
|
|
1/19/2016
|
|
1/15/2017
|
|
|
131,250
|
|
|
|
-
|
|
|
|
131,250
|
|
|
|
-
|
|
|
|
131,250
|
|
|
Noteholder 4
|
|
3/9/2016
|
|
3/8/2017
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
Noteholder 5
|
|
11/9/2015
|
|
11/9/2016
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
(38,603
|
)
|
|
|
61,397
|
|
|
Noteholder 6
|
|
11/2/2016
|
|
11/2/2017
|
|
|
52,500
|
|
|
|
-
|
|
|
|
52,500
|
|
|
|
-
|
|
|
|
52,500
|
|
|
Noteholder 7
|
|
11/9/2015
|
|
11/9/2016
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
(25,000
|
)
|
|
|
-
|
|
|
Totals
|
|
|
|
|
|
$
|
1,708,450
|
|
|
$
|
620,950
|
|
|
$
|
1,101,990
|
|
|
$
|
(463,543
|
)
|
|
$
|
1,259,397
|
|
Accrued Interest
There was $35,136 and $207,951 of accrued
interest due on all convertible notes as of December 31, 2017 and 2016, respectively.
NOTE 8 – DERIVATIVE LIABILITIES
The Company analyzed the conversion
features of the convertible notes payable as discussed in
Note 7 – Notes Payable and Convertible Notes Payable
for
derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion
features should be classified as a derivative liability because the exercise prices of these convertible notes are subject to
a variable conversion rate with a floor of $0.02 per share. The Company has determined that the conversion feature is not
considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance
with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.
The embedded derivative for the note is
carried on the Company’s balance sheet at fair value. The derivative liability is marked-to-market each measurement
period and any unrealized change in fair value is recorded as a component of the income statement and the associated fair value
carrying amount on the balance sheet is adjusted by the change. The Company fair values the embedded derivative using the
Black-Scholes option pricing model. The aggregate fair value of the derivative at the reverse capitalization date as discussed
in
Note 1- Organization and Description of Business
of the convertible notes payable was $1,236,007 which was recorded as
a derivative liability on the balance sheet.
As of December 31, 2017 and 2016, the
Company had a derivative liability of $574,130 and $1,210,281, respectively and recorded a loss from derivative liability fair
value adjustment of $831,341 and a gain of $1,217,271 during the years ended December 31, 2017 and 2016. Additionally, the Company
recorded excess value of derivative liabilities upon initial measurement of $144,143 and $333,482 as interest expense during the
years ended December 31, 2017 and 2016. The derivative liability activity comes from convertible notes payable as discussed
in
Note 7 – Notes Payable and Convertible Notes Payable
. In addition to derivative liabilities associated with convertible
notes payable, the Company recorded a derivative liability due to a ratchet strike price feature associated with the options issued
in the acquisition of TPP. The options are exercisable at $0.18 per share unless the Company’s common stock is quoted at
a price greater than $0.50 per share at which point the options are exercisable at $0.05 per share.
A summary of outstanding derivative liabilities
as of December 31, 2017 is as follows:
|
Holder
|
|
Derivative Balance
|
|
|
Noteholder 5
|
|
$
|
212,381
|
|
|
Option Holder
|
|
|
361,749
|
|
|
Total
|
|
$
|
574,130
|
|
A summary of outstanding derivative liabilities
as of December 31, 2016 is as follows:
|
Holder
|
|
Derivative Balance
|
|
|
Noteholder 1
|
|
|
65,805
|
|
|
Noteholder 1
|
|
|
21,481
|
|
|
Noteholder 1
|
|
|
104,689
|
|
|
Noteholder 1
|
|
|
39,882
|
|
|
Noteholder 1
|
|
|
48,388
|
|
|
Noteholder 1
|
|
|
48,388
|
|
|
Noteholder 1
|
|
|
48,388
|
|
|
Noteholder 1
|
|
|
68,211
|
|
|
Noteholder 2
|
|
|
29,437
|
|
|
Noteholder 3
|
|
|
12,205
|
|
|
Noteholder 3
|
|
|
68,211
|
|
|
Noteholder 3
|
|
|
19,941
|
|
|
Noteholder 4
|
|
|
104,689
|
|
|
Noteholder 4
|
|
|
39,882
|
|
|
Noteholder 5
|
|
|
290,434
|
|
|
Option Holder
|
|
|
200,250
|
|
|
Total
|
|
$
|
1,210,281
|
|
The value of the embedded derivative liabilities
for the convertible notes payable and outstanding option awards was determined using the Black-Scholes option pricing model based
on the following assumptions:
|
|
|
Year ended December 31,
2017
|
|
|
Expected volatility
|
|
|
178% - 334
|
%
|
|
Expected term
|
|
|
.01 - 2.25 years
|
|
|
Risk free rate
|
|
|
0.97% - 1.89
|
%
|
|
Forfeiture rate
|
|
|
0
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
|
Year ended December 31,
2016
|
|
|
Expected volatility
|
|
|
155% - 871
|
%
|
|
Expected term
|
|
|
.19 - 2.54 years
|
|
|
Risk free rate
|
|
|
0.51% - 1.47
|
%
|
|
Forfeiture rate
|
|
|
0
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
A summary of the changes in derivative
liabilities balance for the year ended December 31, 2017 is as follows:
|
Fair Value of Embedded Derivative Liabilities:
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
1,210,281
|
|
|
Initial measurement of derivative liabilities on new convertible notes payable
|
|
|
328,932
|
|
|
Change in fair value
|
|
|
831,341
|
|
|
Reclassification due to conversion
|
|
|
(1,796,424
|
)
|
|
Balance, December 31, 2017
|
|
$
|
574,130
|
|
A summary of the changes in derivative
liabilities balance for the year ended December 31, 2016 is as follows:
|
Fair Value of Embedded Derivative Liabilities:
|
|
|
|
|
Balance, December 31, 2015
|
|
$
|
-
|
|
|
Acquired in reverse recapitalization
|
|
|
1,236,007
|
|
|
Initial measurement of derivative liabilities on new convertible notes payable and options issued
|
|
|
1,919,043
|
|
|
Change in fair value
|
|
|
(1,217,271
|
)
|
|
Reclassification due to conversion
|
|
|
(727,498
|
)
|
|
Balance, December 31, 2016
|
|
$
|
1,210,281
|
|
NOTE 9 – STOCK OPTIONS
The following table summarizes all stock
option activity for the year ended December 31, 2017:
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
Per Share
|
|
|
Outstanding, December 31, 2016
|
|
|
17,500,000
|
|
|
$
|
0.180
|
|
|
Granted
|
|
|
21,613,142
|
|
|
|
0.108
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(7,500,000
|
)
|
|
|
(0.180
|
)
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding, December 31, 2017
|
|
|
31,613,142
|
|
|
$
|
0.131
|
|
The following table discloses information
regarding outstanding and exercisable options at December 31, 2017:
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Exercise
Prices
|
|
|
Number of
Option Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Life
(Years)
|
|
|
Number of
Option Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
$
|
0.18
|
|
|
|
17,500,000
|
|
|
$
|
0.18
|
|
|
|
2.83
|
|
|
|
10,833,334
|
|
|
$
|
0.18
|
|
|
|
0.07
|
|
|
|
14,113,142
|
|
|
|
.07
|
|
|
|
2.49
|
|
|
|
14,113,142
|
|
|
|
0.07
|
|
|
|
|
|
|
|
31,613,142
|
|
|
$
|
0.131
|
|
|
|
2.66
|
|
|
|
24,946,476
|
|
|
$
|
0.118
|
|
The following table summarizes all stock
option activity for the year ended December 31, 2016:
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
Per Share
|
|
|
Outstanding, December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
18,500,000
|
|
|
|
0.224
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(1,000,000
|
)
|
|
|
1.00
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding, December 31, 2016
|
|
|
17,500,000
|
|
|
$
|
0.180
|
|
The following table discloses information
regarding outstanding and exercisable options at December 31, 2016:
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Exercise
Prices
|
|
|
Number of
Option Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Life
(Years)
|
|
|
Number of
Option Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
$
|
0.18
|
|
|
|
17,500,000
|
|
|
$
|
0.18
|
|
|
|
3.48
|
|
|
|
10,833,334
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
17,500,000
|
|
|
$
|
0.18
|
|
|
|
3.48
|
|
|
|
10,833,334
|
|
|
$
|
0.18
|
|
On May 31, 2016, the Company issued 10,000,000
options to a board member pursuant to its agreement with the member. One third of the 10,000,000 options issued vested immediately
upon execution of the related agreement, resulting in an immediate stock based expense of $558,323 being recognized. The remaining
shares of the issuance vest based on performance milestones which the Company believes is 80% likely of occurring resulting in
stock based expense of $558,328 during the year ended December 31, 2016, at which point there was a 50% probability of attainment,
and $334,997 during the year ended December 31, 2017 at which point the probability of attainment was updated to 80%. The remaining
fair value of the unvested shares of $223,331 will be recognized according to the estimated probability of the performance obligations
being achieved.
On July 14, 2016, the Company issued 7,500,000
options as part of its acquisition of TPP. The options were exercisable for a period of three years and carried an exercise price
of $0.18 per share. The options carried a ratchet pricing feature whereby they become exercisable at $0.001 per share if the Company’s
common stock trades at a price greater than $0.50 per share. The options carried a value of $898,490 which was recorded as a derivative
liability as discussed in
Note 8 – Derivative Liabilities
. On March 31, 2017, the Company, as part of its sale
of TPP, cancelled these options and reissued 7,500,000 options that are exercisable for a period of three years and carry an exercise
price of $0.18 per share. The options carry a ratchet pricing feature whereby they become exercisable at $0.05 per share if the
Company’s common stock trades at a price greater than $0.50 per share.
On
June 26, 2017, the Company issued a total of 14,113,142 options to certain officers pursuant to employment agreements executed
on that date. The options vested immediately and can be exercised for a period of three years at a price of $0.07. The options
were valued using a Black-Scholes model with the following inputs: an exercise price of $0.07, a stock price at the date of valuation
of $.055, a risk free rate of 1.36%, lives of 3 years and annual volatility of 885%. Annual volatility is derived by computing
daily volatility and multiplying it by the square root of the number of trading days in a typical calendar year The Company recorded
an expense of $776,203 related to these options during the year ended December 31, 2017. There is no unrecognized expense associated
with these options
.
The Company issued 1,000,000 stock options
exercisable at $1.00 pursuant to its agreement with Glocal. This agreement was amended on August 9, 2016 in which the option owners
forfeited these options. The fair value of the 1,000,000 stock options granted with an exercise price of $1.00 was amortized through
the forfeiture resulting in stock based compensation expense of $14,166.
Total stock based compensation
expense related to option grants was $1,111,200 and $1,130,818 during the years ended December 31, 2017 and 2016,
respectively, leaving an unrecognized expense of $223,331 as of December 31, 2017. In determining the compensation cost of
the stock options granted, the fair value of each option grant has been estimated on the date of grant using the
Black-Scholes option pricing model. The assumptions used in these calculations are summarized as follows:
|
|
|
December 31,
2017
|
|
|
Expected term of options granted
|
|
|
3 years
|
|
|
Expected volatility range
|
|
|
885
|
%
|
|
Risk-free interest rate
|
|
|
1.36
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
|
December 31,
2016
|
|
|
Expected term of options granted
|
|
|
0 - 5 years
|
|
|
Expected volatility range
|
|
|
778 - 850
|
%
|
|
Range of risk-free interest rates
|
|
|
0.82 - 1.41
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
As
discussed in
Note 12 – Stockholders’ Equity,
the Company has committed to issue more shares of common stock
than it has authorized. The Company does not have available shares in its treasury to issue should option holders choose to exercise.
As a result, the values of certain stock options are included in stock based liabilities on the balance sheet and subject to remeasurement
at each reporting period.
NOTE 10 – RELATED PARTY TRANSACTIONS
The Company has had extensive dealings
with related parties including those in which our Chief Executive Officer holds a significant ownership interest as well as an
executive position during the years ended December 31, 2017 and 2016. Due to our operational losses, the Company has relied to
a large extent on funding received from Next Communications, Inc., an organization in which our Chief Executive Officer and Chairman
holds a controlling equity interest and holds an executive position. During the first calendar quarter of 2017, Next Communications,
Inc. filed for bankruptcy protection. As a result, the related party payable is being handled by a court appointed trustee as
an asset of Next Communications, Inc. and the Company may need to begin repaying the amounts due on a more fixed schedule.
With the exception of the Company’s purchase of a 9% interest in Next Cala, Inc. from a related
party and the related party payable to Orlando Taddeo for the acquisition of Limecom as described below, amounts scheduled below
as “due to related parties” and “due from related parties” have not had their terms, including amounts,
collection or repayment terms or similar provisions memorialized in formalized written agreements.
Related party balances at December 31, 2017 and 2016 consisted
of the following:
Related party receivable
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
(a) Glocal Card Services
|
|
$
|
36,000
|
|
|
$
|
36,000
|
|
|
Total Due from related parties
|
|
$
|
36,000
|
|
|
$
|
36,000
|
|
Related party payables, net of discounts
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
(b) Due to Next Communications, Inc. (current)
|
|
$
|
2,919,615
|
|
|
$
|
2,961,271
|
|
|
(c) Due to Asiya Communications SAPI de C.V. (current)
|
|
|
5,998
|
|
|
|
95,120
|
|
|
(d) Michael DePrado (current)
|
|
|
99,604
|
|
|
|
99,604
|
|
|
(e) Orlando Taddeo, net of discount of $72,069 (long term, due on July 21, 2019)
|
|
|
2,535,601
|
|
|
|
-
|
|
|
(f) Next Cala 360 (current)
|
|
|
7,350
|
|
|
|
-
|
|
|
Total Due from related parties
|
|
$
|
5,568,168
|
|
|
$
|
3,155,995
|
|
|
(a)
|
Glocal Card Services is our partner in the Glocal Joint Venture
|
|
(b)
|
Next Communication, Inc. is a corporation in which our Chief Executive Officer holds a controlling interest and serves as the Chief Executive Officer
|
|
(c)
|
Asiya Communications SAPI de C.V.is a telecommunications company organized under the laws of Mexico, in which our Chief Executive Officer holds a substantial interest and is involved in active management.
|
|
(d)
|
Michael DePrado is our Chief Operating Officer
|
|
(e)
|
Amount due to
Orlando Taddeo from the acquisition of Limecom
|
|
(f)
|
Next Cala 360, is a Florida corporation established and managed by our Chief Executive Officer.
|
During the years ended December 31, 2017
and 2016, the Company recorded interest expense of $239,033 and $240,492, respectively, using an interest rate equal to that on
the outstanding convertible notes payable as discussed in
Note 7 – Notes Payable and Convertible Notes Payable
as
imputed interest on the related party payable due to Next Communications. The interest was immediately forgiven by the related
party and recorded to additional paid in capital.
Notes Payable, Related Party
During the year ended December 31, 2014, the Company entered into two notes with its President to purchase
his interest in Next Cala, Inc. and separately his voting control in Next Cala. Inc. During the year ended December 31, 2017,
the outstanding principal and accrued interest totaling $294,923 was agreed to be converted to 8,900,000 shares of common stock.
There was $0 and $280,000 of total principal and $0 and $13,321 of interest due at December 31, 2017 and 2016, respectively.
Accounts Receivable, Related Party
The Company had outstanding accounts receivable
of $8,545 from a related party as of December 31, 2017 which was due from Next Communications. The accounts receivable arose from
the sale of wholesale telecommunications minutes to this entity.
Accounts Payable, Related Party
The Company had outstanding accounts payable
of $499,668 to a related party as of December 31, 2017 which was due to Next Communications.
Revenues (Related Party)
The Company generated revenues of $1,019,258 and $17,016 from related parties during the years ended December
31, 2017 and 2016, respectively, as itemized below:
|
|
|
For the Year Ended
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Next Communications
|
|
$
|
343,241
|
|
|
$
|
-
|
|
|
Asiya Communications SAPI de C.V.
|
|
|
672,224
|
|
|
|
142
|
|
|
Next Cala 360
|
|
|
3,793
|
|
|
|
16,874
|
|
|
Total
|
|
$
|
1,019,258
|
|
|
$
|
17,016
|
|
NOTE 11 – ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
Accounts payable and accrued liabilities
consisted of the following as of December 31, 2017 and 2016:
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
Trade payables
|
|
$
|
5,067,841
|
|
|
$
|
851,339
|
|
|
Settlements payable
|
|
|
892,431
|
|
|
|
-
|
|
|
Accrued expenses
|
|
|
699,786
|
|
|
|
133,892
|
|
|
Accrued interest
|
|
|
40,955
|
|
|
|
209,771
|
|
|
Accrued salaries and wages
|
|
|
329,037
|
|
|
|
135,787
|
|
|
Total
|
|
$
|
7,030,050
|
|
|
$
|
1,330,789
|
|
During the year ended December 31, 2014,
a former employee of Pleasant Kids (PLKD), Franjose Yglesias-Bertheau, filed a lawsuit against PLKD claiming unpaid wages of $622,968
and was initially awarded that amount in a judgement. However, the judgement was later revised and the Company settled for $80,000
in March 2017 which is included in accrued salaries as of December 31, 2016. During the year ended December 31, 2017, the Company
agreed to enter into a convertible note payable for $70,000 and pay $10,000 cash in exchange for the settled amount. The convertible
note payable was converted to shares of common stock under the contractual terms during the year ended December 31, 2017.
NOTE 12 – STOCKHOLDERS’
EQUITY
Preferred Stock
At the time of incorporation, the Company
was authorized to issue 60,000,000 shares of preferred stock with a par value of $0.001 of which 50,000,000 was undesignated and 10,000,000 as Series B. With the completion of the recapitalization as discussed in Note 2, the outstanding Series A preferred
shares were cancelled leaving a balance outstanding of Preferred Series A of -0-.
The Company has 10,000,000 shares of Preferred
Stock designated as Series B issued and outstanding. The Series B Preferred Stock is not convertible into Common Stock at any time
and is not entitled to dividends of any kind or liquidation, dissolution rights of any kind. The holders of Series B Preferred
Stock shall be entitled to 1,000 votes for each share of Series B Stock that is held when voting together with holders of the Common
Stock.
The Company has 36,000,000 shares of
Preferred Stock designated as Series D. The Series D Preferred Stock is reserved for the settlement of dividends payable
which were $30,000 as of December 31, 2017 and 2016. The Class D Preferred Stock must be redeemed within six (6) months (or
as soon thereafter as permitted by law) following final resolution of the Corporation’s affiliates lawsuit against
ViberMedia , Inc. (Next Communications, Inc. and Nxtgn, Inc. v. Viber Media, Inc.) which is, as of the date of this filing,
pending in U.S. District Court for the Southern District of New York or any successor or other lawsuit relating to the
subject matter thereof in which the Corporation (or any successor-in-interest) is named as a plaintiff (the
“Lawsuit”). There were no Series D Preferred shares issued or outstanding as of December 31, 2017 or 2016.
Common Stock
Effective November 20, 2015 the Company
amended its Articles of Incorporation to decrease the common shares authorized from 9,500,000,000 to 360,000,000 with a par value
of $0.001.
As discussed in
Note 1 – Organization
and Description of Business
, on January 1, 2016 the Company complated an agreement under which the Company was merged into
Pleasant Kids. Due to the nominal assets and limited operations of Pleasant Kids prior to the merger, the transaction was recorded
as a reverse recapitalization under the provision of Financial Accounting Standards Board Accounting Standards Codification (“FASB
ASC”) 805 whereby the Company became the accounting acquirer (legal acquiree) and Pleasant Kids was treated as the accounting
acquiree (legal acquirer). Through the recapitalization, the Company assumed total net liabilities of $1,032,616.
Common Stock Activity During the
Year Ended December 31, 2016
During the year ended December 31, 2016,
the Company issued 7,705,966 shares of common stock and committed to issue an additional 800,400 shares of common stock for the
conversion of $463,543 of principal of convertible notes payable and 1,041,277 shares for the conversion of $39,689 of accrued
interest. The conversions of principal and accrued interest on convertible notes payable to common stock were done so at the contractual
terms of each respective agreement. Additionally, the Company issued 450,000 common shares valued at $13,260 as repayment of a
non-convertible loan and rescinded 4,000,000 common shares previously issued in connection with the reverse recapitalization discussed
in
Note 1 – Organization and Description of Business.
Common stock issued for services were valued using the close
price of the Company’s common stock on the date of issuance as quoted on the OTCBB. The details of certain issuances of common
stock are as follows:
Common Shares Issued for Services
The Company issued 8,774,959 common shares
for services totaling $2,092,828 pursuant to an agreement whereby a third party would provide certain services on behalf of the
Company for a period of six months effective April 7, 2016. The Company valued the common shares using the close price of the stock
as listed on the OTCBB on April 7, 2016. The Company recognized the value of the shares over the term of the agreement resulting
in $2,092,828 of expense during the year ended December 31, 2016.
Additionally, the Company issued a total
of 500,000 shares for services in connection with its amendment to its Joint Venture agreement with Glocal Payment Solutions dated
August 9, 2016. The shares were valued using the close price on the date of issuance as quoted by Nasdaq of $0.0745 resulting in
total expense of $37,250.
Common Shares Issued for Acquisitions
On July 22, 2016, the Company completed
its acquisition of TPP as discussed in
Note 1 – Organization and Description of Business.
Pursuant to this agreement,
the Company issued 10,000,000 shares of common stock valued at $1,270,000.
Common Shares Rescinded
On April 22, 2016, the Company entered
into a settlement agreement with the former officers of Pleasant Kids, Inc. to settle certain claims the Company brought against
former management. Under the terms of the agreement, former management agreed to return a total of 4,000,000 common shares to the
Company and the Company agreed to lift a stop transfer order that was placed on other shares. There was no gain or loss recorded
on the rescission.
Common Shares Committed to be Issued
for Other Expenses
The 200,535 common shares issued for other
expenses were pursuant to an agreement executed on February 11, 2016 whereby the Company agreed to issue $45,000 of common shares
plus a cash payment of $5,000 in exchange for the option to purchase a controlling interest in an Israeli business. The Company
determined the number of shares to be issued pursuant to the agreement using the close price of our common stock as quoted by the
OTCBB on February 11, 2016 of $0.2244 per share. The Company did not execute its option to purchase a controlling interest in the
business and the fair value of the shares totaling $45,000 was expensed.
Common Shares Committed to be Issued
for Prepayment of Services
The Company issued 1,428,571 common shares
as a prepayment for services pursuant to an agreement with a third party whereby the third party would provide certain marketing
and consulting services for a period of six months effective October 1, 2016. The shares were valued using the close price on the
date of issuance as quoted by Nasdaq of $0.035 resulting in a total value of $50,000. The amount will be recognized as services
are performed over the term of the agreement resulting in expense of $25,000 being recorded during the year ended December 31,
2016 with a prepaid balance of $25,000 as of December 31, 2016.
|
Summary of common stock activity for the year ended December 31, 2016
|
|
Outstanding shares
|
|
|
Balance, December 31, 2015
|
|
|
177,539,180
|
|
|
Recapitalization
|
|
|
44,784,795
|
|
|
Share rescission
|
|
|
(4,000,000
|
)
|
|
Shares issued for services
|
|
|
9,274,959
|
|
|
Shares issued as repayment of loan (a)
|
|
|
450,000
|
|
|
Shares issued for acquisition
|
|
|
10,000,000
|
|
|
Shares issued for conversion of convertible notes payable and accrued interest (b)
|
|
|
8,747,243
|
|
|
Balance, December 31, 2016
|
|
|
246,796,177
|
|
|
(a)
|
Shares issued as repayment of outstanding loan principal of $13,260. The lender did not have conversion rights to convert the principal to common stock. However, the lender agreed to accept shares in lieu of cash repayment.
|
|
(b)
|
Shares issued in connection with outstanding convertible notes payable and convertible accrued interest on convertible notes payable in accordance with contractual terms of noteholders as discussed in
Note 7 – Notes Payable and Convertible Notes Payable.
|
Common Stock Activity During the
Year Ended December 31, 2017
During the year ended December 31, 2017,
the Company issued 44,303,668 shares of common stock for the conversion of $1,075,301 of principal of convertible notes payable
and 6,468,667 shares for the conversion of $193,960 of accrued interest. The conversion of principal and accrued interest on convertible
notes payable to common stock were done so at the contractual terms of each respective agreement. The details of certain issuances
of common stock are as follows:
Common Shares Issued for Services
On various dates during the year ended
December 31, 2017, the Company issued a total of 3,250,000 common shares for services totaling $286,674 pursuant to various agreements
with third parties. The Company valued the common shares using the close price of the stock as listed on the OTCBB on the dates
of issuance.
Common Shares Issued for Acquisitions
On October 23, 2017, the Company completed
its acquisition of Limecom as discussed in
Note 1 – Organization and Description of Business.
Pursuant to this agreement,
the Company issued 38,000,000 shares of common stock valued at $950,001.
Common Shares Issued for Cash
During the year ended December 31, 2017,
the Company accepted common stock subscription agreements from investors for common stock at $0.0256 per share. Pursuant to these
agreements, the Company issued a total of 2,500,000 shares of common stock resulting in cash proceeds to the Company of $64,000.
Issuance of Common Stock Previously
Committed to be Issued
During the year ended December 31, 2017,
the Company issued a total of 800,400 shares of common stock that were committed to be issued during the year ended December 31,
2016. Additionally, the Company reclassified the value of an additional 1,629,106 shares of common stock committed to be issued
during the year ended December 31, 2016 to a liability as of December 31, 2017.
|
Summary of common stock activity for the year ended December 31, 2017
|
|
Outstanding shares
|
|
|
Balance, December 31, 2016
|
|
|
246,796,177
|
|
|
Shares issued for services
|
|
|
3,250,000
|
|
|
Shares issued committed to be issued during prior year
|
|
|
800,400
|
|
|
Shares issued for acquisition
|
|
|
38,000,000
|
|
|
Shares issued for cash
|
|
|
2,500,000
|
|
|
Shares issued for conversion of convertible notes payable and accrued interest (a)
|
|
|
50,772,335
|
|
|
Balance, December 31, 2017
|
|
|
342,118,912
|
|
|
(a)
|
Shares issued in connection with outstanding convertible notes payable and convertible accrued interest
on convertible notes payable in accordance with contractual terms of noteholders as discussed in
Note 7 – Notes Payable
and Convertible Notes Payable
.
|
The Company has 342,118,912 common shares
issued and outstanding and 46,280,798 common shares committed to be issued, of which 11,428,572 were subscribed for cash, as of
December 31, 2017. The Company authorized common shares of 360,000,000 resulting in a commitment of common shares in excess of
authorized totaling 28,399,710.
Due to the shortfall in authorized common
shares, the Company carries the fair value of the common shares committed not yet issued as a stock based liability. The value
of the unissued shares are subject to fair value measurement at each reporting period. As of December 31, 2017, stock based liabilities
consisted of:
|
|
|
Number of Common Shares and Common Share Equivalents
|
|
|
Fair Value
|
|
|
Common stock to be issued (1)
|
|
|
34,852,226
|
|
|
$
|
2,021,429
|
|
|
Options to purchase common stock (2)
|
|
|
24,113,142
|
|
|
|
941,843
|
|
|
Totals
|
|
|
58,965,368
|
|
|
$
|
2,963,272
|
|
|
|
(1)
|
Includes 13,804,809 common shares committed to be issued in connection with our acquisition of Limecom as discussed in
Note 1 Organization and Description of Business.
|
|
|
(2)
|
Excludes 7,500,000 options with ratchet pricing features included in derivative liabilities
|
As of December 31, 2017, the Company did not have adequate authorized common shares to fulfill its obligations
under certain agreements. Specifically, the Company has committed to issue common shares in excess of authorized totaling 28,399,170;
has 31,613,142 options to purchase common stock issued of which 24,946,476 are exercisable and has outstanding convertible notes
payable and accrued interest the holders of which have the right to convert into 7,932,584 shares of common stock as of December
31, 2017. Total common stock and common stock equivalents in excess of the Company’s authorized common shares are summarized
as follows:
|
Committed shares beyond authorized
|
|
|
28,399,170
|
|
|
Stock options granted
|
|
|
31,613,142
|
|
|
Convertible notes payable and accrued interest
|
|
|
7,932,584
|
|
|
Total
|
|
|
67,944,896
|
|
The Company is actively working to remedy
the common shares committed to be issued beyond its total authorized and is currently assessing increasing the authorized
common shares or effective a reverse stock split.
NOTE 13 – CUSTOMER CONCENTRATION
The Company generated approximately 65%
of its revenues for the year ended December 31, 2017 from four separate customers. The Company did not have any one customer account
for more than 10% of its revenues during the year ended December 31, 2016.
As of December 31, 2017, three separate
customers accounted for approximately 78% of the Company’s total accounts receivable. No single customer accounted for more
than 10% of the outstanding accounts receivable as of December 31, 2016.
NOTE 14 – COMMITMENTS AND
CONTINGENCIES
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential
material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature
of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
On April 7, 2016, the Company executed
an agreement with a service provider to provide certain services for the Company. In addition to cash and stock compensation,
the agreement requires 1% of the outstanding common share equivalent to be issued to the third party when the market capitalization
of the Company reaches $500,000,000 and an additional 1% when it reaches $750,000,000. The Company recorded an expense associated
with the non-variable portion of the agreement. However, the probability of the Company’s market capitalization reaching
these thresholds is uncertain at present and the Company has not accrued a contingent loss as of December 31, 2017 or 2016 as
a result.
On October 14, 2014, one of our operating
subsidiaries, NxtGn Inc., and Next Communications, Inc., an entity controlled by our CEO, (collectively the “Plaintiffs”)
filed suit in the United States District Court for the Southern district of New York against Viber Media, Inc. (“Viber”).
Plaintiffs filed an Amended Complaint asserting four claims: misappropriation of a business idea, misappropriation of trade
secrets, breach of contract, and unjust enrichment. Viber moved the Court to dismiss the Amended Complaint. On March
30, 2016, U.S. District Judge Richard Sullivan issued an opinion and order on Viber’s motion to dismiss. Specifically,
Judge Sullivan ordered that Viber’s motion to dismiss is granted on Plaintiffs’ misappropriation of a business idea
claim, but denied as to their misappropriation of trade secrets, breach of contract, and unjust enrichment claims. The Company
has not accrued any gains associated with this case as it would be a contingent gain and recorded when received.
On February 12, 2018, the Company was
served with a complaint from Viber for reimbursement of attorneys fees and costs totaling $527,782 arising from the litigation
listed above. The Company is vigorously defending their rights in this case as we believe this demand is premature as litigation
is ongoing. The Company has not accrued an estimated loss related to this complaint as of December 31, 2017 given the pre-mature
nature of the motion.
On October 20, 2016, the Company
received a notice it has been named as a defendant in a suit brought against Next Communications, an entity controlled by our
CEO. In addition to being named a defendant, it was requested the Company provide certain documents for the discovery
process. Due to the original suit being filed against a related party and not against the Company or its subsidiaries, we
believe it likely the Company and its subsidiaries will be dismissed as defendants and has not accrued a contingent loss as
of December 31, 2017 or 2016 as a result.
During the year ended December 31, 2014,
a former employee of Pleasant Kids (PLKD), Franjose Yglesias-Bertheau, filed lawsuit against PLKD claiming unpaid wages of $622,968
and was initially awarded that amount in a judgement. However, the judgement was later revised and the Company settled for $80,000
in March 2017 which is included in accrued salaries as of December 31, 2016. During the year ended December 31, 2017, the Company
agreed to enter into a convertible note payable for $70,000 and pay $10,000 cash in exchange for the settled amount. The convertible
note payable was converted to shares of common stock under the contractual terms during the year ended December 31, 2017.
On July 6, 2017, the Company received notice
an existing legal claim against Accent InterMedia (“AIM”) had been amended to include claims against the Company. The
claims brought against the Company include failure to comply with certain judgments for collection of funds by the plaintiff while
having a controlling interest in AIM via its ownership of Transaction Processing Products (“TPP”). The Company believes
the amended case is without merit and that, per its agreement to sell its interest in TPP, any claims brought against AIM or TPP
would be the responsibilities of the current interest holders. Due to the original suit being filed against AIM and amended to
include the Company after it disposed of its interest in TPP, which had a controlling interest in AIM, we believe it likely the
Company and its subsidiaries will be dismissed as defendants.
On December 20, 2017, a Complaint was
filed by J. P. Carey Enterprises, Inc., alleging a claim for $473,264 related to the FranjoseYglesias-Bertheau filed lawsuit against
PLKD listed above. Even though NGH made the agreed payment of $10,000.00 on and issued 3,600,720 shares as conversion of the $70,000
note as agreed in the settlement agreement, the Plaintiff alleges damages which NGH claims are without merit because they received
full compensation as agreed. NGH is in the process of defending itself against these claims.
During 2016, the Limecom had disputed
accounts payable with three (3) carriers, which the Company entered into separate settlement agreements, totaling approximately
$1,147,000. Under the terms of these settlement agreements, the Company was provided with extended payment terms on the outstanding
balances. These settlement agreements are non-interest bearing and include certain default provisions as disclosed in the related
agreements. The Company assumed a total of $676,563 of this liability on October 23, 2017 as part of its acquisition of Limecom
and made repayments totaling $10,000 during the period of acquisition to December 31, 2017. The remaining outstanding principal
balance of these settlement agreements amounted to approximately $666,563 as of December 31, 2017, of which $546,563 is current
and included in accrued liabilities and $120,000 is long term and represented by other long term liabilities.
On October 23, 2017, the Company assumed a
settlement liability Limecom had entered into with American Express as part of its acquisition as discussed in
Note 1 –
Organization and Description of Business.
As of the date of acquisition, there was a total outstanding balance of $995,158.
The Company made repayments totaling $102,727 from the period of October 23, 2017 to December 31, 2017 leaving a remaining balance
due of $892,431 as of December 31, 2017. The balance due is included in accrued liabilities as of December 31, 2017.
The Company maintains office space on a month to month basis and has no long term leases in effect.
NOTE 15 – INCOME TAXES
On December 22, 2017, the U.S. enacted
new tax reform legislation which reduced the corporate tax rate to 21% effective for tax year beginning January 1, 2018. Under
ASC 740, the effects of new tax legislation are recognized in the period which includes the enactment date. As a result, the deferred
tax assets and liabilities existing on the enactment date must be revalued to reflect the rate at which these deferred balances
will reverse. The corresponding adjustment would generally affect the Income Tax Expense (Benefit) shown on the financial statements.
However, since the company has a full valuation allowance applied against all of its deferred tax asset, there is no impact to
the Income Tax Expense for the year ending December 31, 2017.
IRC Section 382 potentially limits the
utilization of NOLs and tax credits when there is a greater than 50% change of ownership. The Company has not performed an analysis
under IRC 382 related to changes in ownership, which could place certain limits on the company’s ability to fully utilize
its NOLs and tax credits. The Company’s has added a note to its financial statements to disclose that there may be some limitations
and that an analysis has not been performed. In the interim, the Company has placed a full valuation allowance on its NOLs and
other deferred tax items.
We recognized income tax benefits of $1,087,096
and $0 during the years ended December 31, 2017 and 2016. The income tax benefit recognized during the year ended December 31,
2017 is the result of releasing a portion of the Company’s valuation allowance against its deferred tax asset equal to the
amount of net deferred tax liability assumed with our acquisition of Limecom as discussed in
Note 16 – Acquisitions.
When it is more likely than not that a tax asset will not be realized through future income the Company must allow for this future
tax benefit. We provided a full valuation allowance on the net deferred tax asset, consisting of net operating loss carry forwards,
because management has determined that it is more likely than not that we will not earn income sufficient to realize the deferred
tax assets during the carry forward period. Effective December 22, 2017 a new tax bill was signed into law that reduced the federal
income tax rate for corporations from 35% to 21%. The new bill reduced the blended tax rate for the Company from 38.58% to 23.58%.
The change in blended tax rate reduced the 2017 net operating loss carry forward deferred tax assets by approximately $0.4 million.
The SEC has issued guidance in Staff Accounting
Bulletin No. 118 that allows for a measurement period of up to one year after the enactment date of the 2017 Tax Reform to finalize
the recording of the related tax impacts. The Company currently anticipates finalizing and recording any resulting adjustments
by the end of fiscal year 2018.
The Company has not taken a tax position that, if challenged, would have a material effect on the
financial statements for the years ended December 2017 or 2016 applicable under FASB ASC 740. We did not recognize any adjustment
to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance of accumulated
deficit on the balance sheet. All tax returns for the Company remain open.
The provision for income taxes differs
from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The sources
and tax effects of the differences for the periods presented are as follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Income tax provision at the federal statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
|
Effect of permanent differences between book and tax net losses
|
|
|
(50.50
|
)%
|
|
|
(30.26
|
)%
|
|
Change in valuation allowance
|
|
|
96.70
|
%
|
|
|
(7.31
|
)%
|
|
Change in federal income tax rate
|
|
|
(21.30
|
)%
|
|
|
-
|
%
|
|
Other
|
|
|
2.90
|
%
|
|
|
-
|
%
|
|
State taxes, net of federal benefit
|
|
|
(1.80
|
)%
|
|
|
3.57
|
%
|
|
Effect on operating losses
|
|
|
60.00
|
%
|
|
|
0.00
|
%
|
Net deferred tax assets and liabilities
consist of the following:
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
969,140
|
|
|
$
|
629,633
|
|
|
Depreciation and gains on fixed asset disposals
|
|
|
437
|
|
|
|
-
|
|
|
Non-deductible changes in compensation costs
|
|
|
72,952
|
|
|
|
-
|
|
|
Stock option expense
|
|
|
568,352
|
|
|
|
-
|
|
|
Gain on fair value measurement of outstanding equity awards
|
|
|
(125,914
|
)
|
|
|
-
|
|
|
Amortization of intangible assets
|
|
|
(742,393
|
)
|
|
|
-
|
|
|
Valuation allowance
|
|
|
(742,574
|
)
|
|
|
(629,633
|
)
|
|
Net deferred tax asset
|
|
|
-
|
|
|
|
-
|
|
The net federal operating loss carry forward
will begin expire in 2036. This carry forward may be limited upon the consummation of a business combination under IRC Section
382.
NOTE 16 – ACQUISITIONS
Limecom (2017)
As discussed in
Note 1 – Organization
and Description of Business
Company completed its acquisition of Limecom on October 23, 2017 for total payables net of discounts
of $2,631,578 and 51,804,809 shares of common stock valued at $1,295,120 for total consideration of $3,926,698. Limecom operates
in the wholesale telecommunications space. As part of the acquisition, the Company assumed net liabilities of $407,016 at fair
value and identifiable intangible assets totaling $3,000,000, resulting in goodwill of $1,333,713. Net liabilities assumed consisted
of the following:
|
Cash
|
|
$
|
139,421
|
|
|
Accounts receivable
|
|
|
13,488,194
|
|
|
Accounts receivable, related party
|
|
|
370,028
|
|
|
Other receivable
|
|
|
207,642
|
|
|
Prepaid expenses and other current assets
|
|
|
927,398
|
|
|
Website
|
|
|
7,187
|
|
|
Related party receivable
|
|
|
120,000
|
|
|
Accounts payable and accrued liabilities
|
|
|
(13,713,901
|
)
|
|
Accounts payable, related party
|
|
|
(685,892
|
)
|
|
Deferred tax liability
|
|
|
(1,087,096
|
)
|
|
Other long term liabilities
|
|
|
(179,996
|
)
|
|
Net liabilities assumed
|
|
|
(407,015
|
)
|
|
|
|
|
|
|
|
Fair value of shares issued and committed to be issued
|
|
|
1,295,120
|
|
|
Initial cash payable
|
|
|
920,670
|
|
|
Note payable, net of discount of $96,092
|
|
|
1,710,908
|
|
|
Total consideration
|
|
|
3,926,698
|
|
|
Identifiable intangible assets
|
|
|
(3,000,000
|
)
|
|
Goodwill recorded
|
|
$
|
1,333,713
|
|
Identifiable Intangible Assets
The Company acquired intangible assets
that consisted of client relationships which had an estimated fair value of $3,000,000. The intangible asset was measured at fair
value using an income approach that discounts expected future cash flows to present value. The Company will amortize the intangible
assets on a straight line basis over their expected useful life of 84 months. Identifiable intangible assets were recorded as follows:
|
Asset
|
|
Amount
|
|
|
Life (months)
|
|
|
Client relationships
|
|
$
|
3,000,000
|
|
|
|
84
|
|
|
Total
|
|
$
|
3,000,000
|
|
|
|
84
|
|
Pro Forma Information (Unaudited)
The unaudited pro forma information for
the years ended December 31, 2017 and 2016 presented below include the effects of the Limecom acquisition had it been consummated
on January 1, 2016 with adjustments to give effect to pro forma events that are directly attributable to the acquisitions. These
adjustments are based upon information and assumptions available to us at the time of filing this Annual Report on Form 10-K. Accordingly,
the unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of what the
actual results of the combined company would have been if the acquisition had occurred at the beginning of the period presented,
nor is it indicative of the future results of operations.
|
|
|
For the Year Ended
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Revenue
|
|
$
|
130,987,515
|
|
|
$
|
125,984,453
|
|
|
Cost of revenue
|
|
|
125,392,733
|
|
|
|
123,837,526
|
|
|
Gross margin
|
|
|
5,594,782
|
|
|
|
2,146,927
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
6,224,733
|
|
|
|
10,189,571
|
|
|
Loss from operations
|
|
|
(629,951
|
)
|
|
|
(8,042,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(211,942
|
)
|
|
|
(484,951
|
)
|
|
Net loss before income tax benefit
|
|
$
|
(841,893
|
)
|
|
$
|
(8,527,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.04
|
)
|
Tel3 (2016)
As discussed in
Note 1 – Organization
and Description of Business
Company completed its acquisition of Tel3 on August 9, 2016 from a related party for cash considerations
of $10. Tel3 was formally a business segment of an existing wholesale calling minutes company and not a legal separate business
entity. Initially, Tel3 was acquired by the Company’s CEO from the seller in a private transaction. Our CEO subsequently
sold its interest in the business to the Company for minimal cash considerations. Tel 3 was merged into M&M, a subsidiary of
the Company, effective January 1, 2017. As part of the acquisition, the Company assumed net liabilities of $780,137 whose book
values equaled fair values at the time of acquisition. The Company did not record goodwill for the amount of consideration in excess
of the fair values of net liabilities assumed due to the acquisition being from a related party. The excess instead was recorded
as a reduction to additional paid-in capital. Net liabilities assumed consisted of the following:
|
Cash
|
|
$
|
45,235
|
|
|
Prepaid expenses
|
|
|
6,728
|
|
|
Accounts payable
|
|
|
(76,294
|
)
|
|
Customer deposits
|
|
|
(755,806
|
)
|
|
Net liabilities assumed
|
|
|
(780,137
|
)
|
|
|
|
|
|
|
|
Cash paid
|
|
|
10
|
|
|
Total consideration
|
|
|
10
|
|
|
Excess recorded as a reduction of additional paid-in capital
|
|
$
|
780,147
|
|
Pro Forma Information (Unaudited)
The unaudited pro forma information for
the years ended December 31, 2016 and 2015 presented below include the effects of the Tel3 acquisition had it been consummated
on January 1, 2015 with adjustments to give effect to pro forma events that are directly attributable to the acquisitions. These
adjustments are based upon information and assumptions available to us at the time of filing this Annual Report on Form 10-K. Accordingly,
the unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of what the
actual results of the combined company would have been if the acquisition had occurred at the beginning of the period presented,
nor is it indicative of the future results of operations.
|
|
|
Year ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenue
|
|
$
|
2,491,082
|
|
|
$
|
3,372,919
|
|
|
Cost of sales
|
|
|
2,157,492
|
|
|
|
2,509,979
|
|
|
Gross margin
|
|
|
333,590
|
|
|
|
862,940
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
8,134,108
|
|
|
|
1,971,263
|
|
|
Loss from operations
|
|
|
(7,800,518
|
)
|
|
|
(1,108,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
(534,760
|
)
|
|
|
30,000
|
|
|
Net loss
|
|
$
|
(8,335,278
|
)
|
|
$
|
(1,078,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
Transaction Processing Products,
Inc. (2016)
As discussed in
Note 1 – Organization
and Description of Business
Company completed its acquisition of Transaction Processing Products, Inc. (“TPP”)
on July 22, 2016. TPP operates as a gift card processor for retail stores which the Company can leverage as it launches its general
purpose reloadable cards. Acquisition costs were expensed as incurred. The Company executed two separate agreements as part of
the transaction; the first to purchase outstanding debt totaling $5.2 million owed by TPP to the seller in exchange for 10,000,000
shares of common stock and 7,500,000 options to purchase additional shares of stock at $0.18 per share and the second to purchase
the sellers interest in Accent InterMedia, LLC for cash consideration of $10. Where the agreements were executed simultaneously,
they were accounted for as a single transaction. The common shares issued were valued at $1,270,000 and the options issued at $898,490
resulting in total consideration of $2,168,500 when combined with the $10 of cash paid. The Company assumed net liabilities of
$1,792,912 at fair value and identifiable intangible assets totaling $1,310,058, resulting in goodwill of $2,651,354. Net liabilities
assumed consisted of the following:
|
Cash
|
|
$
|
43,583
|
|
|
Restricted cash
|
|
|
44,654
|
|
|
Accounts receivable
|
|
|
61,391
|
|
|
Inventory
|
|
|
2,214
|
|
|
Prepaid expenses and other current assets
|
|
|
9,435
|
|
|
Equipment
|
|
|
123,013
|
|
|
Note receivable
|
|
|
83,353
|
|
|
Accounts payable
|
|
|
(1,741,858
|
)
|
|
Notes payable
|
|
|
(418,697
|
)
|
|
Net liabilities assumed (net of $5.2 million intercompany payable / receivable acquired)
|
|
|
(1,792,912
|
)
|
|
|
|
|
|
|
|
Fair value of shares issued
|
|
|
1,270,000
|
|
|
Fair value of options issued
|
|
|
898,490
|
|
|
Cash paid
|
|
|
10
|
|
|
Total consideration
|
|
|
2,168,500
|
|
|
Identifiable intangible assets
|
|
|
1,310,058
|
|
|
Goodwill recorded
|
|
$
|
2,651,354
|
|
Goodwill
Goodwill of $2.65 million represents the
excess of consideration transferred over the fair value of assets acquired including identifiable intangible assets and liabilities
assumed and is attributable to TPPs strategic position value and projected profits from new products.
The preliminary purchase price allocation
resulted in goodwill of $2.65 million, which is not deductible for income tax purposes. Goodwill consists of the excess of the
purchase price over the fair value of the acquired assets and represents the estimated economic value attributable to future operations.
The purchase price allocation is preliminary and subject to revision. At this time, except for the items noted below, the Company
does not expect material changes to the value of the assets acquired or liabilities assumed in conjunction with the transaction.
Specifically, the following assets and liabilities are subject to change:
|
●
|
Intangible customer contracts
|
|
|
|
|
●
|
Intangible customer relationships
|
|
|
|
|
●
|
Deferred income tax assets and liabilities.
|
Identifiable Intangible Assets
The Company acquired intangible assets
that consisted of client contracts and client relationships which had estimated fair values of $93,190 and $1,216,868, respectively.
The intangible assets were measured at fair value using an income approach that discounts expected future cash flows to present
value. The Company will amortize the intangible assets on a straight line basis over their expected useful lives. Identifiable
intangible assets were recorded as follows:
|
Asset
|
|
Amount
|
|
|
Life (months)
|
|
|
Client Contracts
|
|
$
|
93,190
|
|
|
9
|
|
|
Client Relationships
|
|
|
1,216,868
|
|
|
53
|
|
|
Total
|
|
$
|
1,310,058
|
|
|
|
|
|
The Company exited the business in March
2017 and recorded impairment losses totaling $3,894,784 during the year ended December 31, 2016. Of this total, $1,243,430 is included
in losses from discontinued operations as intangible assets in TPP with the remaining impairment related to the goodwill with NGH.
The Company applied the criteria under ASC205 and determined the business was held for sale as of December 31, 2016 and shown as
discontinued operations as a result.
NOTE 17 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date of the filing of this report on Form 10-K.
The Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of
this report that would have a material impact on its consolidated financial statements, except for the following:
Common Stock Issuances and Convertible
Note Settlement
On January 9, 2018, the Company issued
3,443,847 shares of common stock previously committed to be issued for its acquisition of Limecom, Inc. Additionally, on February
7, 2018, the Company issued a total of 11,428,572 shares of common stock previously committed to be issued for cash received during
the year ended December 31, 2017.
On January 12, 2018, the Company settled
a convertible note payable outstanding for a cash payment of $30,000 and the issuance of 600,000 shares of common stock. The common
stock carried a total value of $26,640 on the date of issuance resulting in total consideration of $56,640. There was $48,897 of
principal and accrued interest of approximately $30,000 outstanding at the time of settlement.
Entry into Material Service Agreements
On February 15, 2018, the Company entered
into Service Agreements with COMTEL DIRECT, LLC D.B.A. MSG TELCO (“MSG”) and Wiztel USA, Inc (“Wiztel”).
NXGH’s Agreement with MSG will be
compensated in stock for MSG supplying NXGH with up to $50 million gross revenue of wholesale telecommunications services (the
“Services”) with a minimum of 2.5% margin over a 1 year period starting from date of the agreement with the possibility
for an additional $50 million gross revenue of wholesale telecommunications services (the “Additional Services”) during
the same 1 year term (the “Term”). If the parties have not reached $100 million in Gross Revenue upon expiration of
the Term, this Agreement will automatically be extended for an additional 60 days. Any additional term extension must be agreed
by both parties in writing. Either Party may terminate this Agreement with respect to a material breach incapable of cure within
thirty (30) days after written notice, or if the other party (a) becomes insolvent or admits its inability to pay its debts generally
as they become due; (b) becomes subject, voluntarily or involuntarily, to any proceeding under any domestic or foreign bankruptcy
or insolvency law, which is not fully stayed within seven business days or is not dismissed or vacated within 45 days after filing;
(c) is dissolved or liquidated or takes any corporate action for such purpose; (d) makes a general assignment for the benefit of
creditors; or (e) has a receiver, trustee, custodian or similar agent appointed by order of any court of competent jurisdiction
to take charge of or sell any material portion of its property or business. NXGH must continue to file its SEC 10-Q and 10-K reports.
NXGH will have the right to accept or reject
the telecommunications traffic provided by MSG in NXGH’s sole discretion. For the initial $50 million in Gross Revenue or
any part thereof provided through MSG, NXGH will issue one (1) Restricted NXGH Common Share for each $10 in Gross Revenue on a
quarterly basis during the 12 months from the Effective Date. The Parties agree that after the initial $50 million in Gross Revenue
has been achieved, for the remainder of the 1 year period, Contractor will receive (1) Warrant for each $10 in Additional Gross
Revenue, up to 5 million warrants of the Company. Each warrant is exercised to purchase 1 restricted NXGH common share at $0.10
per share exercisable for a period of two (2) years from the date that each warrant is issued to MSG. NXGH shall reserve a total
of 10 million authorized but unissued Shares required to meet the contemplated commitment. Shares and Warrants will be deemed “restricted
securities” as defined under Rule 144(a)(3) of the Securities Act of 1933, as amended. The process to calculate and deliver
the shares and warrants is detailed in the agreement.
Under NXGH’s Agreement with Wiztel,
Wiztel will be compensated in stock for supplying NXGH with up to $50 million gross revenue of wholesale telecommunications services
(the “Services”) with a minimum of 2.5% margin over a 1 year period starting from date on the agreement. Wiztel will
charge NXGH a total of $10.00 for the Services in addition to the 5 million shares of restricted NXGH stock. Upon reaching the
milestone of $50 million in gross revenue within 1 year, Wiztel will receive 5 million restricted shares of NXGH. Wiztel will receive
the 5 million shares of NXGH restricted stock 30 days after NXGH certifies that NXGH has received the $50 million in gross revenue
with a minimum of 2.5% profit within the one (1) year period. In the event that Wiztel does not provide the minimum $50 million
in revenue exclusive of taxes, at a 2.5% profit to NXGH, Wiztel understands that Wiztel will only be entitled to receive a pro
rata number of shares as relates to the 5 million shares of restricted NXGH common stock. That the pro rata number of shares will
be determined by NXGH. Either Party may terminate this agreement with 120 days written notice. If this Agreement is terminated
by NXGH without cause prior to completion of the Services but where the Services have been partially performed, Wiztel will be
entitled to pro rata payment of the Compensation to the date of termination provided that there has been no breach of contract
on the part of Wiztel.
Entrance into Non-Binding Letter
of Intent
On February 26, 2018, the Company signed
a non-binding letter of intent with Cima Telecom, Inc. (“Cima”) agreeing that both parties will confirm the basic terms
upon which NextGroup shall move forward in the negotiation of definitive agreements to license the Knetic and Auris technology
platforms owned by Cima, in exchange for equity securities in NextGroup.
Cima intends to grant NextGroup
a fully paid, royalty-free, world-wide, perpetual, non-sublicensable license (the “License”) to utilize the Auris
and Knetic platforms and intellectual properties included in such platforms for the Financial Technology (“FINTECH”)
worldwide vertical markets. The License to be granted shall be exclusive for use within the FINTECH space, which for purposes
of the License shall be defined as “connecting banking and prepaid card usage. Cima will agree to not license the Platforms
to any other person or entity for use within the FINTECH space. Rather, NextGroup shall have the right to grant its customers,
and its customers’ end-users, access to the services provided by the platforms. NextGroup may transfer the License to any
subsidiaries or affiliates provided that NextGroup shall not have the right to sell, assign, sub-license, or convey the License
or Platforms to any third-parties.
As consideration for the License, NextGroup
intends to convey to Cima shares of capital stock of NextGroup comprising an ownership interest of twenty-five percent (25%) of
the issued and outstanding equity securities of NextGroup, based upon NextGroup’s valuation of Fifty Million Dollars ($50,000,000).
Prior to closing, the Company will be required to increase its authorized common stock or effect a reverse stock split to have
adequate common shares to issue. Cima and NextGroup anticipate that the closing of the Transaction (the “Closing”)
will take place as soon as reasonably practicable, and will work towards a Closing to occur within sixty (60) days of the execution
and delivery of this Letter by the Parties. Simultaneously with the Closing, Cima will deliver the source code for the Platform
to an escrow agent, to hold in escrow subject to the terms and conditions of an escrow agreement in a form acceptable to Cima (the
“Escrow Agreement”).
NextGroup and Cima intend to enter into
a definitive purchase agreement (“Purchase Agreement”) incorporating the terms and conditions of this Letter relating
to the acquisition of the Shares, and such customary representations, warranties, covenants and conditions, including indemnification
provisions, confidentiality provisions, and other customary provisions for Purchase Agreements of this type which are reasonably
acceptable to the parties.
Cima and NextGroup intend to execute certain
instruments and documents ancillary to the Purchase Agreement (the “Ancillary Documents”), which set forth and govern
the rights, preferences, and restrictions relating to Cima’s ownership interest in, and the operation of, NextGroup, including,
without limitation: (i) standard financial reporting and information rights; (ii) voting rights; and (iii) the right to request
that the shareholders of NextGroup elect one (1) director selected by Cima to NextGroup’s board of directors (the “Board”),
and if the shareholders do not elect such individual to the Board, then the right to require NextGroup’s management to present
a proxy to its shareholders recommending that the director selected by Cima be elected to the Board. The Ancillary Documents may
include, without limitation, an amended and restated certificate of incorporation, amended and restated by-laws, voting agreement,
investors’ rights agreement, and such other documents and instruments reasonable necessary to effectuate the Transaction.
NextGroup and Cima further intend to execute
an exclusive license agreement (“License Agreement”), memorializing the worldwide License of the Platforms, and an
agreement governing the administration of the Platforms (the “Administration Agreement”). Additionally, NextGroup and
Cima intend to execute a software maintenance and support agreement (“Maintenance Agreement”, collectively, with the
Escrow Agreement, License Agreement, and Administration Agreement, the “Platform Agreements”), commencing as of the
Closing of the Transaction and continuing for a period of four (4) years thereafter, pursuant to which Cima will provide certain
maintenance and support services to NextGroup in connection with the Platform, and NextGroup will pay Cima Three Million Five Hundred
Thousand Dollars ($3,500,000), as follows: (a) year-one: Five Hundred Thousand Dollars ($500,000), paid over the second (2nd) six-month
period of the year; (b) year-two: Five Hundred Thousand Dollars ($500,000); (c) year-three: One Million Dollars ($1,000,000); and
(d) year-four: One Million Five Hundred Thousand Dollars ($1,500,000.00). The agreed upon maintenance and support services costs
set forth above will not be increased by Cima during the term of the Maintenance Agreement.
The execution and delivery of the Purchase
Agreement, Ancillary Documents, and Platform Agreements are material conditions of the Transactions, and shall be delivered at
Closing.
The terms and conditions of the Transactions
will be subject to and conditioned upon: (i) Cima’s complete and reasonable investigation and analysis of NextGroup and its
businesses (the “Due Diligence Investigation”); (ii) the Parties negotiating and signing a definitive Purchase Agreement,
Ancillary Documents, and Platform Documents(including any conditions set forth therein); and (iii) the Parties obtaining all third
party consents and approvals, if any, necessary for Cima’s acquisition or receipt of the Shares (“Third Party Consents”).
Each party hereto will bear its own costs
and expenses in connection with the transactions contemplated in this transaction, including the costs and expenses of accountants,
lawyers and advisors.