Notes to Condensed Financial Statements
(Unaudited)
NOTE 1 – BASIS OF FINANCIAL STATEMENT
PRESENTATION
Klever Marketing, Inc. (the “Company”)
was created to develop, market and distribute an electronic shopping cart or mobile telephone device for in-store advertising,
promotion and media content and retail shopper services and has not commenced its planned principal operations. The Company’s
activities since inception have consisted principally of developing various applications of its electronic shopping cart concept
including its mobile application for smart phones which the Company is currently testing in retail supermarkets, obtaining patents
and trademarks related to its technology, and raising capital. The Company’s activities are subject to significant risks
and uncertainties including failing to secure additional funding needed to finalize development of the Company’s technology
and to commercialize its product in a profitable manner.
The accompanying unaudited, condensed financial
statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting
principles (“GAAP”) have been condensed or omitted in accordance with such rules and regulations. The information furnished
in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which, in the
opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures
and information presented are adequate to make the information not misleading, it is suggested that these interim condensed financial
statements be read in conjunction with the Company's audited financial statements and notes thereto included in its December 31,
2016 Annual Report on Form 10-K. Operating results for the three months and nine months ended September 30, 2017 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2017.
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
The Company’s significant accounting
policies are described in the notes to the Company’s audited financial statements included in its December 31, 2016 Annual
Report on Form 10-K.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income (Loss) Per Common Share
Basic net income (loss) per share of common
stock is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share of common stock is computed by dividing net income (loss) by the sum of the weighted average
number of common shares outstanding and the dilutive potential common share equivalents than outstanding. Potential dilutive common
share equivalents consist of shares issuable upon exercise of outstanding stock options and the exercise of convertible preferred
stock.
For the nine months ended September 30,
2017, 28,740,529 common stock equivalents related to convertible preferred stock have been included in the calculation of diluted
income per common share. For the three months ended September 30, 2017 and 2016 and for the nine months ended September 30, 2016
these common stock equivalents have not been included in the calculation of diluted loss per share because they are anti-dilutive.
Common stock equivalents related to the conversion of stock options have not been included in the calculation of diluted loss per
common share for all periods because they are anti-dilutive. Therefore, basic income or loss per common share is the same as diluted
income or loss per common share for the three months ended September 30, 2017 and 2016 and the nine months ended September 30,
2016.
Reclassifications
Certain amounts in the 2016 condensed financial
statements have been reclassified to conform with the current year presentation.
Recently Issued Accounting Pronouncements
In July 2017, the FASB issued Accounting
Standards Update ("ASU") 2017-11, "Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Non-controlling Interests with a Scope Exception." Part I of this update addresses the complexity of accounting
for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II
of this update addresses the difficulty of navigating Topic 480, "Distinguishing Liabilities from Equity," because of
the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of
the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities
and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting
effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The
Company is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting
pronouncement.
In January 2017, the FASB issued Accounting
Standards Update (“ASU”) No. 2017-4, “Intangibles – Goodwill and Other (Topic 350): “Simplifying
the Test for Goodwill Impairment.” This update simplifies how an entity is required to test goodwill for impairment by eliminating
Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting
unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this update, an entity should
perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.
An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s
fair value. An entity should apply the amendments in this update on a prospective basis. An entity is required to disclose the
nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual
period and in the interim period within the first annual period when the entity initially adopts the amendments in this update.
A public business entity that is an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. The Company is currently unable to determine the impact on
its financial statements of the adoption of this new accounting pronouncement.
In January 2017, the FASB issued ASU No.
2017-1, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this update
clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas
of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU are effective for public
business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after
December 15, 2019. The amendments in this Update are to be applied prospectively on or after the effective date. The Company is
currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.
Although there are several other new accounting
pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not
believe any of these accounting pronouncements has had or will have a material impact on its financial position or results of operations.
NOTE 3 – GOING CONCERN UNCERTAINTY
As shown in the accompanying condensed
financial statements, during the nine months ended September 30, 2017 and 2016, the Company did not generate any revenue from product
sales and reported net income of $42,871 (resulting primarily from a favorable debt settlement) and a net loss of $215,293, respectively.
As of September 30, 2017, the Company’s current liabilities exceeded its current assets by $846,830 and the Company had a
total stockholders’ deficit of $233,523. As of September 30, 2017, the Company had $4,203 of cash. These factors, among
others, raise substantial doubt that the Company will be able to continue as a going concern.
The Company will require additional funding
during the next twelve months to finance the growth of its current operations and achieve its strategic objectives. These factors,
as well as the uncertain conditions that the Company faces relative to capital raising activities, create substantial doubt as
to the Company’s ability to continue as a going concern. The Company is seeking to raise additional capital principally through
private placement offerings and is targeting strategic partners in an effort to finalize the development of its products and begin
generating revenues. The ability of the Company to continue as a going concern is dependent upon the success of future capital
offerings or alternative financing arrangements and expansion of its operations. The accompanying financial statements do not include
any adjustments that might be necessary should the Company be unable to continue as a going concern. Management is actively pursuing
additional sources of financing sufficient to generate enough cash flow to fund its operations through calendar year 2017 and into
calendar year 2018. However, management cannot make any assurances that such financing will be secured.
NOTE 4 – INTANGIBLE ASSETS
Intangible assets consist of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Capitalized software development costs
|
|
$
|
552,503
|
|
|
$
|
552,503
|
|
Patents and trademarks
|
|
|
168,564
|
|
|
|
159,664
|
|
Accumulated amortization of patents and trademarks
|
|
|
(107,760
|
)
|
|
|
(83,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
613,307
|
|
|
$
|
628,878
|
|
The Company capitalizes software development
costs incurred from the time technological feasibility has been obtained until the product is generally released to customers.
Amortization of capitalized software development costs begins when the products are available to customers and is computed using
the straight-line method over the remaining estimated economic life of the product. Currently, the Company anticipates amortization
of software development costs to commence in fiscal year 2018. The Company achieved technological feasibility with regard to its
mobile phone technology during the fourth quarter of 2010. No software development costs were incurred and capitalized during the
three months and nine months ended September 30, 2017, and no amortization expense for software development costs was recorded
for the three and nine months ended September 30, 2017 and 2016.
The costs of patents and trademarks are
amortized on a straight-line basis over 5 years from the date the patent or trademark is issued. Intangible assets with indefinite
lives are tested for impairment on an annual basis or when the facts and circumstances suggest that the carrying amount of the
assets may not be recovered. Amortization expense for patents and trademarks was $8,429 and $7,584 for the three months ended September
30, 2017 and 2016 and $24,471 and $21,627 for the nine months ended September 30, 2017 and 2016, respectively.
NOTE 5 – ACCRUED LIABILITIES
Accrued liabilities consist of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Compensation - officers and bookkeeper
|
|
$
|
523,625
|
|
|
$
|
472,625
|
|
Taxes
|
|
|
41,689
|
|
|
|
40,769
|
|
Accrued interest – related party
|
|
|
2,509
|
|
|
|
1,230
|
|
|
|
$
|
567,823
|
|
|
$
|
514,624
|
|
NOTE 6 – PREFERRED STOCK
Authorized Shares
In accordance with the Company’s
bylaws, the Company has authorized a total of 2,000,000 shares of preferred stock, par value $0.01 per share, for all classes.
Effective April 9, 2017, the Board of Directors of the Company approved an increase in the number of authorized shares of preferred
stock to: 300,000 shares of Class A Voting Preferred Stock (“Class A Shares”); 250,000 shares of Class B Voting Stock
(“Class B Shares”) and 400,000 shares of Class C Voting Preferred Stock (“Class C Shares”). As of September
30, 2017 and December 31, 2016, there were 488,608 and 468,688 total preferred shares issued and outstanding for all classes. As
of September 30, 2017, all of the Company’s outstanding preferred shares are owned by a Company that is controlled by the
Company’s CEO.
Preferred Stock Dividends
As of September 30, 2017, the Company had
accrued and unpaid preferred stock dividends totaling $21,864 compared to $7,909 as of December 31, 2016. To date, all accrued
dividends for preferred stock have been authorized for payment through the issuance of shares of preferred and common stock based
on the ratios for each class of preferred stock described below.
Class A Voting Preferred Stock
As of September 30, 2017 and December 31,
2016, there were 156,376 and 150,000 Class A Shares outstanding, respectively. Each Class A Share is convertible into 99.035 shares
of common stock. Holders of Class A Shares are entitled to receive dividends at the rate of $2.20 per share per annum, payable
semi-annually. Dividends are cumulative and may be paid in cash or in kind through the distribution of .0425 Class A Shares,
Series 1, for each outstanding Class A Share, on each dividend payment date. Class A Shares carry a liquidation preference of $26.00
per share plus any accrued but unpaid dividends on such shares, if any, and adjusted for combinations, splits, dividends or distributions
of shares of stock with respect to such shares. Class A shares are redeemable by the Company, in whole or in part, at the option
of the Board of Directors of the Company, at any time.
Class B Voting Preferred Stock
As of September 30, 2017 and December 31,
2016, there were 123,732 and 118,688 Class B Shares outstanding, respectively. Each Class B Share is convertible into 64.754 shares
of common stock. Holders of Class B Shares are entitled to receive dividends at the rate of $1.70 per share per annum, payable
semi-annually. Dividends are cumulative and may be paid in cash or in kind through the distribution of .0425 Class B Shares for
each outstanding Class B Share, on each dividend payment date. Class B Shares carry a liquidation preference of $17.00 per share
plus any accrued but unpaid dividends on such shares, if any, and adjusted for combinations, splits, dividends or distributions
of shares of stock with respect to such shares. Class B shares are redeemable by the Company, in whole or in part, at the option
of the Board of Directors of the Company, at any time.
Class C Voting Preferred Stock
As of September 30, 2017 and December 31,
2016, there were 208,500 and 200,000 Class C Shares outstanding, respectively. Each Class C Share is convertible into 25.140 shares
of common stock. Holders of Class C Shares are entitled to receive dividends at the rate of $0.66 per share per annum, payable
semi-annually. Dividends are cumulative and may be paid in cash or in kind through the distribution of .0425 Class C Shares
for each outstanding Class C Share, on each dividend payment date. Class C Shares carry a liquidation preference of $6.60 per share
plus any accrued but unpaid dividends on such shares, if any, and adjusted for combinations, splits, dividends or distributions
of shares of stock with respect to such shares. Class C shares are redeemable by the Company, in whole or in part, at the option
of the Board of Directors of the Company, at any time.
NOTE 7 – COMMON STOCK
In accordance with the Company’s
bylaws, the Company has authorized a total of 250,000,000 shares of common stock, par value $0.01 per share. As of September 30,
2017 and December 31, 2016, there were 60,822,567 and 59,731,567 common shares issued and outstanding, respectively.
During the nine months ended September
30, 2017, the Company issued a total of 1,091,000 shares of common stock to investors for $40,300 cash.
During the nine months ended September
30, 2016, the Company issued 1,250,000 shares of common stock to an investor for $32,500 cash and 25,918 shares of common stock
to a company that is controlled by the Company’s CEO in payment of accrued preferred stock dividends.
NOTE 8 – STOCK OPTIONS
The Company’s shareholders approved,
by a majority vote, the adoption of the 1998 Stock Incentive Plan (the “Plan”). As amended on August 11, 2003, the
Plan reserves 20,000,000 shares of common stock for issuance upon the exercise of options which may be granted from time-to-time
to officers, directors, certain employees and consultants of the Company or its subsidiaries by the Board of Directors. The Plan
permits the award of both qualified and non-qualified incentive stock options.
During the nine months ended September
30, 2017, the Company did not issue any stock options.
A summary of the Company’s stock
option awards as of September 30, 2017, and changes during the nine months then ended is as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contract
Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
2,800,000
|
|
|
$
|
0.050
|
|
|
|
1.08
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable
at September 30, 2017
|
|
|
2,800,000
|
|
|
$
|
0.050
|
|
|
|
.34
|
|
|
$
|
–
|
|
The aggregate intrinsic value in the
preceding table represents the total pretax intrinsic value, based on our closing stock price of $0.0058 as of September 30, 2017,
which would have been received by the holders of in-the-money options had the option holders exercised their options as of that
date.
NOTE 9 – RELATED PARTY TRANSACTIONS
The Company periodically receives funding
from its CEO, CFO, directors and stockholders to fund operating costs of the Company. Jerry Wright, a director, loaned the Company
$30,000 during the year ended December 31, 2015, which bears interest at the rate of 6% per annum. The related party note payable
had a principal balance of $25,500 as of September 30, 2017 and December 31, 2016, and accrued interest payable of $2,360 and $1,216
as of September 30, 2017 and December 31, 2016, respectively. The loan was to have been paid by June 30, 2016, and is currently
in default.
PSF Inc., a company controlled by the Company’s
CEO, loaned the Company $6,000 during the year ended December 31, 2016, which bears interest at the rate of 4% per annum. The related
party note payable had a principal balance of $0 and $6,000 at September 30, 2017 and December 31, 2016, respectively, and accrued
interest payable of $0 and $15 as of September 30, 2017 and December 31, 2016, respectively. The loan was paid in full in July
2017.
In July 2017, a stockholder of the Company
loaned the Company $12,500, which bears interest at the rate of 5% per annum. The note is unsecured and had a principal balance
of $12,500 and accrued interest payable of $149 as of September 30, 2017.
The Company’s CEO and the bookkeeper,
who is the wife of the CEO, provide consulting services to the Company through companies controlled by the individuals. The Company
accrued $15,000 and $40,500 for compensation for the CEO during the three months ended September 30, 2017 and 2016, respectively,
and $45,000 and $121,500 during the nine months ended September 30, 2017 and 2016, respectively. The CEO voluntarily reduced his
monthly compensation to $5,000 per month effective October 1, 2016, pending completion of a major funding. Accrued compensation
to the CEO totaled $490,625 and $445,625 as of September 30, 2017 and December 31, 2016, respectively.
The bookkeeper earned $3,000 and $4,500
during the three months ended September 30, 2017 and 2016, respectively, and $6,000 and $13,500 during the nine months ended September
30, 2017 and 2016, respectively. The bookkeeper voluntarily reduced her monthly compensation to $1,000 per month effective January
1, 2017, pending completion of a major funding. Accrued compensation to the bookkeeper totaled $33,000 as of September 30, 2017
and December 31, 2016.
NOTE 10 – SUBSEQUENT EVENTS
The Company evaluated events occurring
after the date of the accompanying condensed balance sheets through the date the financial statements were issued and has identified
the following subsequent events that it believes require disclosure:
In October 2017, the Board of Directors of
the Company authorized the issuance of 6,646 shares of Class A preferred stock valued at $11,782, 5,258 shares of Class B preferred
stock valued at $6,094 and 8,862 shares of Class C preferred stock valued at $3,988 in payment of accrued preferred stock dividends
of $21,864.