The accompanying notes are an integral part of these condensed consolidated financial statements
The accompanying notes are an integral part of these condensed consolidated financial statements
The accompanying notes are an integral part of these condensed consolidated financial statements
Notes to Condensed Consolidated Financial Statements
June 30, 2017
(unaudited)
NOTE
1 -
ORGANIZATION
Cleartronic, Inc. (the Company) was incorporated in Florida on November 15, 1999.
The Company, through its wholly owned subsidiary VoiceInterop, Inc., designs, builds and installs unified group communication solutions, including unique hardware and customized software, for public and private enterprises and markets those services and products under the VoiceInterop brand name. VoiceInterop is the Companys operating subsidiary.
In
September 2014, the Company formed ReadyOp Communications, Inc. (a Florida
corporation), as a wholly owned subsidiary to facilitate the marketing of ReadyOp
software. The Companys two operating subsidiaries are VoiceInterop, Inc.
and ReadyOp Communications, Inc.
In
November 2016, the Company cancelled its Licensing Agreement with Collabria
LLC of Tampa, Florida (Collabria) and acquired all of the intellectual
property related to Collabrias command and control software, trade-named
ReadyOp. In addition the Company acquired Collabrias client list. In
exchange for these assets the Company issued Collabria 3,000,000 restricted
shares of the Companys Series E Convertible Preferred stock. The Company
assumed none of Collabrias liabilities.
NOTE
2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying unaudited interim consolidated financial statements contain the consolidated accounts of Cleartronic, Inc. and its subsidiaries, VoiceInterop, Inc. and ReadyOp Communications, Inc. All material intercompany transactions and balances have been eliminated.
BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q of Regulation S-K. They may not include all information and footnotes required by United States generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended September 30, 2016 included in the Companys Annual Report on Form 10-K filed with the United States Securities and Exchange Commission. The unaudited interim consolidated financial statements should be read in conjunction with those financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting solely of normal and recurring adjustments have been made. Operating results for the nine months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2017.
-5-
USE OF ESTIMATES
In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and operations for the reporting period. Although these estimates are based on managements knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.
CASH AND CASH EQUIVALENTS
For financial statement purposes, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company did not own any cash equivalents at June 30, 2017 and September 30, 2016.
ACCOUNTS RECEIVABLE
The Company provides an allowance for uncollectible accounts based upon a periodic review and analysis of outstanding accounts receivable balances. Uncollectible receivables are charged to the allowance when deemed uncollectible. Recoveries of accounts previously written off are used to credit the allowance account in the periods in which the recoveries are made.
The Company provided $2,000 and $2,000 allowances for doubtful accounts as of June 30, 2017 and September 30, 2016, respectively.
LICENSING AGREEMENT
In November 2016, the Company cancelled its Licensing Agreement with Collabria, LLC. As a result of this cancellation the Company amortized the remaining balance of the licensing agreement in the amount of $240,332 for the nine months ended June 30, 2017.
ASSET ACQUISITION
In November 2016, the Company acquired the ReadyOp software platform and the Collabria customer base from Collabria LLC. In exchange for these assets the Company issued 3,000,000 shares of restricted Series E Convertible Preferred stock valued at $292,240. This valuation was based on internal calculations and validated by a third party valuation expert. The ReadyOp software platform was valued at $195,600 to be amortized over three years, amortization expense recognized for the three and nine month period ended June 30, 2017 was $16,301 and $38,033, respectively. The Collabria customer base was valued at $96,640 to be amortized over two years, amortization expense recognized for three and nine month period ended June 30, 2017 was $12,079 and $28,187, respectively.
CONCENTRATION OF CREDIT RISK
The Company currently maintains cash balances at one FDIC-insured banking institution. Deposits held in noninterest-bearing transaction accounts are insured up to a maximum of $250,000 at all FDIC-insured institutions.
RESEARCH AND DEVELOPMENT COSTS
The
Company expenses research and development costs as incurred. For the
nine months ending June 30, 2017 and 2016, the Company had $68,452 and $8,636,
respectively, in research and development costs from continuing operations.
-6-
REVENUE RECOGNITION AND DEFERRED REVENUES
Unified group communication solutions consist of three elements to be provided to customers: software licenses and equipment purchased from third-party vendors, proprietary hardware that is manufactured on contract to required specifications and installation and integration of the hardware and software into a cohesive communication source.
The Company's revenue recognition policies are in accordance with Accounting Standards Codification 605-10 Revenue Recognition (ASC 605-10). Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the contract price is fixed or determinable, and collectability is reasonably assured. No right of return privileges are granted to customers after shipment. The Company recognizes revenue for the elements separately as the sales of the equipment and software, installation and integration, and support services represent separate earnings processes that are generally specified under separate agreements.
Revenue from the resale of equipment utilized in unified group communication solutions is recognized when shipped. For software licenses, the Company does not provide any services that are considered essential to the functionality of the software, and therefore revenue is recognized upon delivery of the software, provided (1) there is evidence of an arrangement, (2) collection of the fee is considered probable and (3) the fee is fixed and determinable.
The Company also provides support to customers under separate contracts varying from one to five years. The Companys obligations under its service contracts vary by the length of the contract. In all cases the Company is the primary obligor to provide first level support to the client. If the contract has less than one year of service and support remaining on the contract it is classified as a current liability, if longer it is classified as a non-current liability.
Installation and integration services are recognized upon completion.
EARNINGS PER SHARE
Basic income (loss) per common share is calculated using the weighted average number of shares outstanding during the periods reported. Diluted earnings per share include the weighted average effect of all dilutive securities outstanding during the periods presented. Diluted per share loss is the same as basic per share loss when there is a loss from continuing operations. Accordingly, for purposes of dilutive earnings per share, the Company excluded the effect of warrants and options.
As
of June 30, 2017 and 2016, we had no options and warrants outstanding.
As
of June 30, 2017 and 2016, the Company had 566,496 and 40,750 shares of Series
A Convertible Preferred stock outstanding, respectively. As of June 30, 2017, 40,750
shares of Series A Convertible Preferred stock outstanding are convertible
into 4,075,000 shares of common stock and 525,476 shares of Series A
Convertible Preferred stock outstanding are convertible after a two-year period
from the issuance date. As of June 30, 2017 and 2016, we had 2,563,375 shares
of Series C Convertible Preferred stock outstanding which are convertible into
12,816,875 shares of common stock, respectively. As of June 30, 2017 and 2016,
we had 670,904 shares of Series D Preferred stock outstanding which are convertible
into 3,354,520 shares of common stock. As of June 30, 2017 and 2016, we had
3,000,000 and -0- shares of Series E Convertible Preferred stock outstanding.
As of June 30, 2017 and 2016, no shares of Series E Convertible Preferred stock
outstanding are convertible into shares of common stock. 3,000,000 shares of
restricted Series E Convertible Preferred stock outstanding are convertible
after a two-year period from the issuance date. As of June 30, 2017, we had
no convertible notes outstanding. There was one convertible note outstanding
in the amount of $12,625 on June 30, 2016, which was convertible into shares
of common stock at a discount to the current market price of the stock.
-7-
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted ASC topic 820, Fair Value Measurements and Disclosures (ASC 820), formerly SFAS No. 157 Fair Value Measurements, effective January 1, 2009. ASC 820 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There was no impact relating to the adoption of ASC 820 to the Companys consolidated financial statements.
ASC 820 also describes three levels of inputs that may be used to measure fair value:
§
Level
1: Observable inputs that reflect unadjusted quoted prices for identical
assets or liabilities traded in active markets.
§
Level
2: Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly.
§
Level
3: Inputs that are generally observable. These inputs may be used with internally
developed methodologies that result in managements best estimate of
fair value.
Financial instruments consist principally of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and deferred revenue. The carrying amounts of such financial instruments in the accompanying condensed consolidated balance sheet approximate their fair values due to their relatively short-term nature. The fair value of long-term debt is based on current rates at which the Company could borrow funds with similar remaining maturities. The carrying amounts approximate fair value. It is managements opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.
The Company revalues its derivative liability at every reporting period and recognizes gains or losses in the interim condensed consolidated statement of operations that are attributable to the change in the fair value of the derivative liability. The Company has no other assets or liabilities measured at fair value on a recurring basis.
INVENTORY
Inventory
consists of components held for assembly and finished goods held for resale
or to be utilized for installation in projects. Inventory is valued at lower
of cost or market on a first-in, first-out basis. The Companys policy
is to record a reserve for technological obsolescence or slow-moving inventory
items. The Company only carries finished goods to be shipped along with
completed circuit boards and parts necessary for final assembly of finished
product. The Companys prior policy was to record a reserve for technological
obsolescence of component parts. That policy was discontinued in 2014 as all
existing inventory is considered current and usable. The reserve was $0 as
of June 30, 2017 and September 30, 2016, respectively.
EQUITY INSTRUMENTS ISSUED TO PARTIES OTHER THAN EMPLOYEES FOR ACQUIRING GOODS OR SERVICES
The
Company accounts for equity instruments issued to parties other than employees
for acquiring goods or services under guidance of section 505-50-30 of
the FASB ASC. Pursuant to FASB ASC Section 505-50-30, all transactions
in which goods or services are the consideration received for the issuance
of equity instruments are accounted for based on the fair value of the consideration
received or the fair value of the equity instrument issued, whichever is more
reliably measurable. The measurement date used to determine the
fair value of the equity instrument issued is the earlier of the date
on which the performance is complete or the date on which it is probable
that performance will occur.
-8-
DERIVATIVE INSTRUMENTS
The Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 810-10-05-4 of the FASB Accounting Standards Codification and paragraph 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the Statement of Operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company had advertising costs of $1,899 during the three months ended June 30, 2017, and $200 during the three months ended June 30, 2016. For the nine months ending June 30, 2017 and 2016, the Company had $4,602 and $2,578 in advertising costs, respectively.
NOTE 3 -
GOING
CONCERN
The
Company's condensed consolidated financial statements are prepared using accounting
principles generally accepted in the United States of America applicable
to a going concernwhich contemplates the realization of assets and liquidation
of liabilities in the normal course of business. The Company believes the Asset
Purchase Agreement with Collabria will allow the Company to generate additional
income from the sale of ReadyOp software and will assist in expanding the distribution
of the AudioMate AM360 line of IP gateway devices. In order to continue as
a going concern, the Company will need, among other things, additional capital
resources. Management is currently seeking funding from significant shareholders
and outside funding sources sufficient to meet its minimal operating expenses.
However, management cannot provide any assurances that the Company will be
successful in accomplishing any of its capital funding plans.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 4 -
NOTES
PAYABLE TO STOCKHOLDERS
As of June 30, 2017 and September 30, 2016, the Company has unsecured notes payable to stockholders totaling $110,115 and $132,676, respectively. These notes range in interest from 8% to 15% which are payable quarterly. All the notes mature December 31, 2017. In November 2015, the Company entered into a promissory note for $50,000 with a stockholder, officer and director of the Company. The note bears an 8% interest rate, is unsecured and is due on December 31, 2016. In December 2016, the maturity date was extended to December 31, 2017.
In November 2016, the Company repaid the principal amount of $15,000 of a note payable to a shareholder.
In April 2017, the Company repaid the principal amount of $7,891 of a note payable to a shareholder.
Interest expense on the notes payable to stockholders was $4,398 and $3,699 for the three months ended June 30, 2017 and 2016, respectively. Interest expense on the notes payable to stockholders was $11,135 and $10,535 for the nine months ended June 30, 2017 and 2016, respectively.
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NOTE 5 -
EQUITY TRANSACTIONS
Common stock issued for conversion of notes payable
In June 2016, a shareholder and director converted $10,000 of a $50,000 promissory note into 500,000 shares of common stock.
Common stock issued for conversion of preferred stock
In December 2015, two shareholders converted 7,280 shares of Series C Convertible Preferred stock into 36,400 shares of common stock.
Common stock issued for cash
In
December 2015, a shareholder purchased 250,000 shares of common stock for $5,000
in cash.
Preferred stock issued for cash
In November 2016, the Company sold 525,746 shares of Series A Convertible Preferred stock to a private investor and director for $262,873 in cash.
Preferred stock issued for acquisition of assets
In November, 2016, the Board of Directors approved the Asset Purchase Agreement between the Company and Collabria LLC (Collabria). Under the terms of the Agreement, the Company acquired all of the intellectual property of Collabria, including its ReadyOp command, control and communication platform trade named ReadyOp (the ReadyOp Platform). In addition, the Company acquired Collabrias customer base (Collabria Client List). The Company assumed no liabilities of Collabria under this Agreement. The terms of the Agreement called for the Company to issue 3,000,000 (Three million) shares of restricted Series E Convertible Preferred stock to Collabria with a fair value of $292,240. Shares of the Series E Convertible Preferred have the following conversion rights and provisions: After a period of two (2) years following the date of issuance, each one (1) share of Series E Preferred shall be convertible into one hundred (100) shares of fully paid and non-assessable Common Stock at the sole option of the holder of Series E Preferred.
Amendment to the Articles of Incorporation
In November 2016, the Board of Directors voted to amend the Companys Articles of Incorporation to designate the Series A and Series E Convertible Preferred Stock setting forth the rights and preferences of the Series A and E Convertible Preferred Stock, par value $.00001 per share. Among other things, the Certificate of Designation for the Series A Preferred (i) provides for liquidation rights. Among other things, the Certificate of Designation of the Series E Preferred Stock; (i) provides that each share of Series E Preferred Stock shall be one hundred votes for any election or other vote placed before the shareholders of the Corporation
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NOTE 6 -
RELATED PARTY
TRANSACTIONS
The Company leases its office space from another entity that is also a stockholder. Rent expense paid to the related party was $11,203 and $10,669 for the three months ended June 30, 2017 and 2016, respectively and $33,245 and $31,758 for the nine months ended June 30, 2017 and 2016, respectively.
In December 2016, the Board of Directors accepted the resignation of Larry M. Reid as Chief Executive Officer of the corporation and appointed Mr. Reid as Chief Financial Officer. The Board also appointed Marc Moore as Chief Executive Officer.
Under the terms of an employment agreement effective on November 28, 2016, Mr. Moore as CEO receives an annual salary of $200,000. The term of agreement is for a one-year period beginning on the effective date and shall automatically renew and continue in effect for additional one-year periods.
Under
the terms of an employment agreement effective on March 13, 2015, Mr. Reid
as CFO receives an annual salary of $96,000. The term of agreement is for a
one-year period beginning on the effective date and shall automatically renew
and continue in effect for additional one-year periods.
In November 2015, the Company entered into a promissory note for $50,000 with a stockholder, officer and director of the Company. The note bears an 8% interest rate, is unsecured and is due on December 31, 2016. In December 2016, the maturity date was extended to December 31, 2017.
In November 2016, the Company sold 525,746 shares of Series A Convertible Preferred stock to a private investor and director for $262,873 in cash.
In November 2016, the Company repaid the principal amount of $15,000 of a note payable to a shareholder.
In April 2017, the Company repaid the principal amount of $7,891 of a note payable to a shareholder.
In November 2016, the Company cancelled its Licensing Agreement with Collabria LLC of Tampa, Florida (Collabria) and acquired all of the intellectual property related to Collabrias command and control software, trade-named ReadyOp. In addition the Company acquired Collabrias client list. In exchange for these assets the Company issued Collabria 3,000,000 shares of the Companys restricted Series E Convertible Preferred stock with a fair value of $292,240. The Company assumed none of Collabrias liabilities.
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NOTE 7 - COMMITMENTS
AND CONTINGENCIES
Obligation
Under Operating Lease
The Company leases approximately 1,700 square feet for its principal offices in Boca Raton, Florida at a monthly rental of approximately $3,200. The lease, which provides for annual increases of base rent of 4%, expires on November 30, 2018. The Company also subleases office space for a satellite office in Tampa, Florida for engineering and support staff. The current sublease is month to month and has a base rent of $2,000 per month.
Rent expense incurred during the three months ended June 30, 2017 and 2016 was $11,203 and $10,269, respectively and $33,245 and $31,758 for the nine months ended June 30, 2017 and 2016, respectively.
Revenue and Accounts Receivable Concentration
Approximately 10% of the Companys revenues for the nine months ended June 30, 2017 were derived from one customer. No one customer accounted for 10% or more of the Companys revenue for the nine months ended June 30, 2016. As of June 30, 2017 five customers accounted for approximately 60% of the Companys total outstanding accounts receivable. As of June 30, 2016, six customers accounted for approximately 78% of the Companys total outstanding accounts receivable.
Major Supplier and Sole Manufacturing Source
During
2014, the Company developed a proprietary interoperable communications solution.
The Company relies on no major supplier for its products and services. The
Company has contracted with a single local manufacturing facility to provide
completed circuit boards used in the assembly of its IP gateway devices. Interruption
to the manufacturing source presents additional risk to the Company. The Company
believes that other commercial facilities exist at competitive rates to match
the resources and capabilities of its existing manufacturing source.
Employment Agreements
In December 2016, the Board of Directors accepted the resignation of Larry M. Reid as Chief Executive Officer of the corporation and appointed Mr. Reid as Chief Financial Officer. The Board also appointed Marc Moore as Chief Executive Officer.
Under the terms of an employment agreement effective on November 28, 2016, Mr. Moore as CEO receives an annual salary of $200,000. The term of agreement is for a one-year period beginning on the effective date and shall automatically renew and continue in effect for additional one-year periods.
Under the terms of an employment agreement effective on March 13, 2015, Mr. Reid as CFO receives an annual salary of $96,000. The term of agreement is for a one-year period beginning on the effective date and shall automatically renew and continue in effect for additional one-year periods.
-12-
Exclusive Licensing Agreement
On May 5, 2017, the Company entered into an Exclusive Licensing Agreement with Sublicensing Terms (the Agreement) with the University of Southern Florida Research Foundation, Inc. (USFRF) relating to an exclusive license of certain patent rights in connection with one of USFRFs U.S. Patent Applications. Both parties recognize that the research and development work provided by the Company was sufficient for USFRF to enter into the Agreement with the Company.
The Agreement is effective April 25, 2017 and continues until the later of the date that no Licensed Patent remains a pending application or an enforceable patent or the date on which the Licensees obligation to pay royalties expires.
The Company paid USFRF a License Issue Fee of $3,000 and $7,253.50 as reimbursement of expenses associated with the filing of the Licensed Patent. The Company agreed to complete the first commercial sale of products to the retail customer on or before January 31, 2019 or USFRF has the right to terminate the agreement. In addition, the Company agreed that it will have made and tested a prototype by August 31, 2018 or USFRF has the right to terminate the agreement. The company agreed to pay USFRF a royalty of 3% for sales of all Licensed Products and Licensed Processes and agreed to pay USFRF minimum royalty payments as follows:
|
|
Payment
|
Year(1)
|
$1,000
|
2019
|
$4,000
|
2020
|
$8,000
|
2021
|
(1)and
every year thereafter on the same date, for the life of the agreement.
In
the event the Company proposes to sell any Equity Securities, then USFRF will
have the right to purchase 5% of the securities issued in such offering on
the same terms and conditions are offered to other purchasers in such
financing.
NOTE 8 - SUBSEQUENT
EVENTS
In
July 2017, a shareholder converted 10,000 shares of Series C Convertible Preferred
stock into 50,000 shares of common stock.
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