The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). While these statements reflect all normal recurring adjustments, which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto, which are included in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2017 as filed with the SEC on April 19, 2018.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The interim condensed financial statements included herein, presented in accordance with accounting principles generally accepted in the United States of America (GAAP), have been prepared by the Company, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim condensed financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2017 and notes thereto included in the Company's Annual Report on Form 10-K/A. The Company follows the same accounting policies in the preparation of interim reports.
Results of operations for the interim periods are not indicative of annual results.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
The Company considers cash and cash equivalents to include all stable, highly liquid investments with an original maturity of three months or less from the date of purchase.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue recognition
We have analyzed our revenue transactions pursuant to ASU 2014-09, Revenue, and there was no material impact due to the transition from ASC 605 to ASU 2014-09. Our revenues are recognized when control of the promised services is transferred to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those services. In discussion with management, we apply the following five steps to determine the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements:
a)
identify the contract with a customer;
b)
identify the performance obligations in the contract;
c)
determine the transaction price;
d)
allocate the transaction price to performance obligations in the contract; and
e)
recognize revenue as the performance obligation is satisfied.
Accounts receivable, net
Accounts receivable is reported at the customers outstanding balances, less any allowance for doubtful accounts. An allowance for doubtful accounts on accounts receivable is charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and information collected from individual customers. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired. Interest is not accrued on overdue accounts receivable.
7
Property and equipment
Property and equipment are stated at cost. Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs that do not improve or extend the lives of the respective assets are expensed. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to income
.
Depreciation is computed on the straight-line and accelerated methods for financial reporting purposes based upon the following estimated useful lives:
| |
Computer software
|
10 years
|
Computer hardware
|
5 years
|
Office furniture
|
7 years
|
Long-lived assets
The Company accounts for its long-lived assets in accordance with Accounting Standards Codification (ASC) Topic 360-10-05, Accounting for the Impairment or Disposal of Long-Lived Assets. ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the assets carrying value and fair value or disposable value.
Beneficial Conversion Feature
If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (BCF). We record a BCF as a debt discount pursuant to ASC Topic 470-20 Debt with Conversion and Other Options. In those circumstances, the convertible debt is recorded net of the discount related to the BCF and we amortize the discount to interest expense over the life of the debt using the effective interest method.
Debt Discount
The Company determines if a convertible debenture should be accounted for as liability or equity under ASC 480, Liabilities - Distinguishing Liabilities from Equity (ASC 480). ASC 480 applies to certain contracts involving a companys own equity and requires that issuers classify the following freestanding financial instruments as liabilities. Mandatorily redeemable financial instruments, obligations that require or may require repurchase of the issuers equity shares by transferring assets (e.g., written put options and forward purchase contracts), and certain obligations where at inception the monetary value of the obligation is based solely or predominantly on:
-
A fixed monetary amount known at inception, for example, a payable settleable with a variable number of the issuers equity shares with an issuance date fair value equal to a fixed dollar amount,
-
Variations in something other than the fair value of the issuers equity shares, for example, a financial instrument indexed to the S&P 500 and settleable with a variable number of the issuers equity shares, or
-
Variations inversely related to changes in the fair value of the issuers equity shares, for example, a written put that could be net share settled.
If the entity determined the instrument meets the guidance under ASC 480 the instrument is accounted for as a liability with a respective debt discount. The Company records debt discounts in connection with raising funds through the issuance of promissory notes (see Notes 9, 10 and 11). These costs are amortized to non-cash interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
8
Valuation of Derivative Instruments
ASC 815-40 requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance date and in accordance with ASC 815-40-15 to determine whether they should be considered a derivative liability and measured at their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Binomial option pricing formula and present value pricing. At September 30, 2018, we adjusted our derivative liabilities to their fair value, and reflected the changes in fair value in our condensed statements of operations.
Stock-based compensation
The Company accounts for stock-based payments to employees in accordance with ASC 718, Stock Compensation (ASC 718). Stock-based payments to employees include grants of stock, grants of stock options and issuance of warrants that are recognized in the statement of operations based on their fair values at the date of grant.
We account for stock-based payments to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees (ASC 505-50). Stock-based payments to non-employees include grants of stock, grants of stock options and issuances of warrants that are recognized in the statement of operations based on the value of the vested portion of the award over the requisite service period as measured at its then-current fair value as of each financial reporting date. The Company calculates the fair value of option grants and warrant issuances utilizing the Black-Scholes pricing model. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. ASC 718 requires forfeitures to be estimated at the time stock options are granted and warrants are issued to employees and non-employees, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term forfeitures is distinct from cancellations or expirations and represents only the unvested portion of the surrendered stock option or warrant.
We estimate forfeiture rates for all unvested awards when calculating the expense for the period. In estimating the forfeiture rate, the Company monitors both stock option and warrant exercises as well as employee termination patterns. The resulting stock-based compensation expense for both employee and non-employee awards is generally recognized as compensation under ASC Topic 505-50. In accordance with ASC 505-50, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using the Black-Scholes option-pricing model, whereby compensation cost is the excess of the fair value of the award as determined by the pricing model at the grant date or other measurement date over the amount that must be paid to acquire the stock.
Loss per share
We report earnings (loss) per share in accordance with ASC Topic 260-10, "Earnings per Share." Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share is the same as loss per share since the effect of the assumed conversion of warrants and debt to purchase common shares would have an anti-dilutive effect. Potential common shares as of September 30, 2018 that have been excluded from the computation of diluted net loss per share amounted to 2,814,439 shares comprised of 1,292,500 options and 1,521,939 warrants. At September 30, 2018, 762,500 of the 1,292,500 potential common shares that could be issued upon the exercise of the options had vested, and all 1,521,939 common shares that could be issued upon the exercise of the warrants had vested.
Income taxes
We account for income taxes under the provisions of Income Taxes (ASC 740). The method of accounting for income taxes under ASC 740 is an asset and liability method. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of other assets and liabilities. The Company did not recognize any deferred tax liabilities or assets at December 31, 2017 or during the nine months ended September 30, 2018 or September 30, 2017.
9
Fair value of financial instruments
We account for non-recurring fair value measurements of our non-financial assets and liabilities in accordance with ASC 820-10 Fair Value Measurement. This guidance defines fair value, establishes a framework for measuring fair value and addresses required disclosures about fair value measurements. This standard establishes a three-level hierarchy for fair value measurements based upon the significant inputs used to determine fair value. Observable inputs are those which are obtained from market participants external to the Company while unobservable inputs are generally developed internally, utilizing managements estimates, assumptions and specific knowledge of the assets/liabilities and related markets. The three levels are defined as follows:
·
Level 1
- Valuation is based on quoted prices in active markets for identical assets and liabilities.
·
Level 2
- Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market.
·
Level 3
- Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the companys own estimates about the assumptions that market participants would use to value the asset or liability.
If the only observable inputs are from inactive markets or for transactions which the Company evaluates as distressed, the use of Level 1 inputs should be modified by the Company to properly address these factors, or the reliance of such inputs may be limited, with a greater weight attributed to Level 3 inputs.
Due to the short-term nature of our financial assets and liabilities, we consider their carrying amounts to approximate fair value.
Recent accounting pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects our financial reporting, we undertake a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that our financials properly reflect the change.
In June 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-07
Compensation - Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting
, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The amendments in ASU 2018-07 are effective for fiscal years beginning after December 15, 2018, including interim periods therein. We are evaluating the impact adopting this guidance will have on our financial statements.
In January 2017, the FASB issued Accounting Standards Update (ASU) 2017-04
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(ASU 2017-04). This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual period beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. We are evaluating the impact adopting this guidance will have on our financial statements.
In January 2017, the FASB issued Accounting Standards Update (ASU) 2017-01
Business Combinations (Topic 805): Clarifying the Definition of a Business
(ASU 2017-01), which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We are evaluating the impact adopting this guidance will have on our financial statements.
10
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
("ASU 2016-02"), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases with lease terms of greater than twelve months on their balance sheets. ASU 2016-02 will be effective for us beginning January 1, 2019. ASU 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are evaluating the impact adopting this guidance will have on our financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606),
(ASU 2014-09). ASU 2014-09 requires entities to recognize revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted ASU 2014-09 on January 1, 2018 using a modified retrospective method. As of and for the nine months ended September 30, 2018 the adoption of ASU 2014-09 did not have a material impact on our balance sheet, operations, stockholders' deficit or our statement of cash flows. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
NOTE 3 - GOING CONCERN
The accompanying condensed financial statements have been prepared assuming we will continue as a going concern. As shown in the accompanying condensed financial statements, we incurred a net loss of $1,056,766 and $2,401,739 for the three and nine months ended September 30, 2018, respectively, and at September 30, 2018, the accumulated deficit was $33,734,753.
To continue as a going concern, the Company may need, among other things, additional capital resources. There are no assurances that without generating new revenue during the remainder of 2018 that we will be successful without additional financing. Should revenues not grow sufficiently, and should we be unable to secure additional financing through the sale of our securities or debt, it would be unlikely for us to continue as a going concern for one year from the issuance of the financial statements.
The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. These conditions raise substantial doubt about our ability to continue as a going concern. These condensed financial statements do not include any adjustments that might arise from this uncertainty.
NOTE 4 - ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following at:
|
|
|
|
| |
|
September 30,
|
|
December 31,
|
|
2018
|
|
2017
|
Due from customers
|
$
|
22,800
|
|
$
|
-
|
Due from sale of licenses
|
|
-
|
|
|
5,000
|
Due from support service activity
|
|
-
|
|
|
91
|
Total accounts receivable, net
|
$
|
22,800
|
|
$
|
5,091
|
NOTE 5 - PREPAID EXPENSES AND DEPOSITS
Prepaid expenses and deposits consist of the following at:
|
|
|
|
| |
|
September 30,
|
|
December 31,
|
|
2018
|
|
2017
|
Prepaid insurance
|
$
|
30,000
|
|
$
|
-
|
Prepaid consulting fees - stock-based
|
|
1,289
|
|
|
12,193
|
Deposits
|
|
5,075
|
|
|
5,074
|
Total prepaid expenses and deposits
|
$
|
36,364
|
|
$
|
17,267
|
11
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following at:
|
|
|
|
| |
|
September 30,
|
|
December 31,
|
|
2018
|
|
2017
|
Office furniture & equipment
|
$
|
33,225
|
|
$
|
33,225
|
Less: accumulated depreciation
|
|
(28,119)
|
|
|
(23,980)
|
Total property and equipment, net
|
$
|
5,106
|
|
$
|
9,245
|
During the three and nine months ended September 30, 2018, we recorded depreciation expense of $1,270 and $4,138, respectively, and during the three and nine months ended September 30, 2017, we recorded depreciation expense of $1,306 and $3,993, respectively.
NOTE 7 - RESIDUAL CONTRACTS
To raise immediate cash, in 2017, we sold our remaining merchant processing portfolio to a larger merchant processor (the Purchaser) at industry standard multiples. We were paid a percentage of the net revenues generated by each merchant. As with any type of portfolio, there is attrition, which can come from (1) the merchant processing fewer dollars in sales, or (2) the merchant closing its business (i.e. going out of business), or (3) the merchant taking its processing business to another ISO/processor. The sales agreement with the Purchaser allows zero attrition.
From July 2017 to January 2018, the average monthly residual was less than half of the valuation of the original guaranteed portfolio monthly residual. Any uncured shortfall of the guaranteed residual may be requested by the Purchaser. The Agreement also stipulated that we board a minimum number of Merchant Accounts per year for two years with the Purchaser. The Purchaser may demand that we pay them a specific amount for the number of unacquired Merchant Accounts below the Minimum Requirement per month. From July 1, 2017 to November 1, 2018 (17 months) Spindle has not boarded any merchants on the Purchasers platform, and it is likely that we may not board a merchant in the remaining 7 months. As of December 31, 2017, Management recorded a contingent liability of $171,312 as a potential return for consideration received and $126,000 for not boarding merchants, totaling $297,312.
NOTE 8 - INTANGIBLE ASSETS, NET
On April 18, 2017, we entered into an agreement to acquire specific digital marketing software assets from CoverCake, Inc., specifically, CoverCake's intelligent algorithms for data mining and consumer engagement. The transaction closed on May 30, 2017. The purchase price was 300,000 shares of Spindle unregistered common stock valued at $43,500 along with launch and revenue-based payments as certain performance targets were met, and the software was to be amortized over three years. During the three and nine months ended September 30, 2017, the Company recorded amortization expense of $9,793 and $23,340, respectively.
In the Fourth Quarter of 2017, after review of the marketplace and competitor products, and the cost of necessary software development, management did not deem the CoverCake transaction to be economically viable and the CoverCake software and related amortization was fully impaired.
NOTE 9 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE, NET OF UNAMORTIZED DISCOUNT
Notes Payable
The following table is a summary of the changes of our Promissory Note liabilities as of September 30, 2018:
|
|
| |
Balance at December 31, 2017
|
|
$
|
44,552
|
Repayments on notes
|
|
|
--
|
Balance at September 30, 2018
|
|
$
|
44,552
|
12
On December 15, 2011, we issued a Promissory Grid Note (Grid Note) to a former director of the Company under various terms and at September 30, 2018, the Grid Note had a balance of $44,552. The Grid Note included warrants to purchase up to 250,000 shares of our common stock at a price per share of $1.00. No related warrants have been exercised as of September 30, 2018, nor were any principal payments made on the Grid Note during the three and nine months ended September 30, 2018. During the three and nine months ended September 30, 2017, the Company repaid $0 and $4,000 of the Grid Note principal balance, respectively. During the three and nine months ended September 30, 2018, interest expense of $557 and $1,671 was recorded, respectively. During the three and nine months ended September 30, 2017, interest expense of $557 and $1,771 was recorded, respectively.
Convertible Notes Payable
Convertible notes payable consists of the following:
|
|
|
|
|
| |
|
|
September 30, 2018
|
|
December 31, 2017
|
Convertible notes payable, interest free to annual interest rate of 10%, due date ranges from May 2018 to April 2019 and convertible into common stock at prices ranging from $0.03 to $0.135 per share.
|
|
$
|
651,500
|
|
$
|
317,000
|
Unamortized debt discount
|
|
|
(148,709)
|
|
|
(61,878)
|
Balance at end of period
|
|
$
|
502,791
|
|
$
|
255,122
|
The following table is a summary of the changes of our Convertible Notes Payable as of September 30, 2018:
|
|
| |
Balance at December 31, 2017
|
|
$
|
255,122
|
Issuance of notes
|
|
|
462,000
|
Repayment of notes in cash
|
|
|
(22,500)
|
Repayment of notes in shares
|
|
|
(105,000)
|
Issuance of replacement notes
|
|
|
37,500
|
Replacement of notes
|
|
|
(37,500)
|
Increase in debt discount
|
|
|
(377,260)
|
Amortization of debt discount
|
|
|
290,429
|
Balance at September 30, 2018
|
|
$
|
502,791
|
On September 11, 2018, we entered into a Bridge Note Agreement totaling $7,500 with one of our investors. This Bridge Note is interest free, secured by the Companys assets, convertible to shares of the Companys restricted stock at $0.03 per share and has a maturity date of February 16, 2019. There was no discount attributable to this note.
On August 16, 2018, we entered into two Bridge Note Agreements totaling $25,000 with two of our investors. These Bridge Notes are interest free, secured by the Companys assets, convertible to shares of the Companys restricted stock at $0.035 per share and have maturity dates of February 16, 2019. The total discount attributable to these notes was $3,572. During the three and nine months ended September 30, 2018, interest expense related to the beneficial conversion features totaled $815.
On May 3, 2018, we entered into two Bridge Note Agreements totaling $22,500 with one of our investors. The two Bridge Notes are interest free, secured by the Companys assets, convertible to shares of the Companys restricted stock at $0.05 per share and had original maturity dates of November 3, 2018. The holder of the Notes has waived the maturity dates to January 31, 2019. The total discount attributable to these notes was $13,500. During the three and nine months ended September 30, 2018, interest expense related to the beneficial conversion features totaled $6,750 and $11,005, respectively.
13
On April 13, 2018, we signed a convertible promissory note (the Convertible Note) with Labrys Fund, LP, a Delaware limited partnership (the Holder). The principal amount of the Convertible Note is $200,000 and matures on April 13, 2019. The Convertible Note carries an original issue discount of $20,000 and accrues interest at the rate of 10% per annum. The Convertible Note may be prepaid by the Company with various redemption premiums applicable depending on when the Company prepays the principal balance. The Convertible Note is convertible into shares of the Companys common stock at a conversion price of 35% discount to the lowest trading price during the previous twenty trading days to the date of a notice of conversion. The Convertible Note is convertible, at the Holders election, only after 180 days after issuance.
The debt discount and derivative liability recorded at issuance were $200,000 and $448,165, respectively. The Convertible Note discount is amortized to interest expense over the term of the note and at September 30, 2018 had an unamortized balance of $106,849. During the three and nine months ended September 30, 2018, interest expense of $5,041 and $9,315 was recorded, respectively. During the three and nine months ended September 30, 2018, interest expense related to amortization of the discount on the unpaid note of $50,411 and $93,151 was recorded, respectively.
On January 30, 2018, we signed a convertible promissory note (Convertible Note) with a third party (Holder). The Convertible Note is subordinate to the convertible note owed to Michael Kelly which the Company filed with its Current Report on Form 8-K on February 1, 2018 and amended on February 6, 2018. The principal amount of the Convertible Note is $152,000 and matures on January 30, 2019. The Convertible Note bears an annual interest rate of 10% per annum. Upon an event of default, the interest rate shall increase to 18% for as long as the event of default is continuing (Default Interest). The Convertible Note may be converted, at the Holders discretion, into the Companys common stock at any time after 180 days at a 35% discount to the lowest trading price during the previous 20 trading days to the date of a conversion notice. Until the 90th day after the Issuance Date, the Company may pay the principal at a cash redemption premium of 120%, in addition to outstanding interest, without the Holders consent; from the 91st day to the 120th day after the Issuance Date, the Company may pay the principal at a cash redemption premium of 125%, in addition to outstanding interest, without the Holders consent; from the 121st day to the Prepayment Date, the Company may pay the principal at a cash redemption premium of 130%, in addition to outstanding interest, without the Holders consent. After the 180th up to the Maturity Date this Note shall have a cash redemption premium of 135% of the then outstanding principal amount of the Note, plus accrued interest and Default Interest, if any, which may only be paid by the Company upon Holders prior written consent. At any time on or after the Maturity Date, the Company may repay the then outstanding principal plus accrued interest and Default Interest, if any, to the Holder and may be converted to stock under certain circumstances. The total value of the Convertible Note balance, if converted to stock at September 30, 2018, would be $254,224. The debt discount and derivative liability recorded at issuance were $152,000 and $174,234, respectively. The Convertible Note discount is amortized to interest expense over the term of the note and at September 30, 2018 has an unamortized balance of $38,274. During the three and nine months ended September 30, 2018, interest expense of $3,322 and $9,610, and interest expense related to amortization of the discount on the unpaid note of $51,261 and $113,726 were recorded, respectively. During the three and nine months ended September 30, 2018, the holder of the note converted $50,000 of debt to 3,032,329 shares of the Companys common stock.
During the three months ended March 31, 2018, we entered into two Bridge Note Agreements totaling $37,500 with one of our investors. These Bridge Notes were rolled into a new Bridge Note (the New Note) with a total of $55,000, maturing September 15, 2018. The New Note was secured by a copy of the Companys Payment Service Provider (PSP) software code, and convertible to shares of the Companys restricted stock at a price of $0.08 per share. The discounts attributable to the two Bridge Notes rolled into the New Note totaled $8,188 which was expensed as interest at the date of the New Note. There was no discount attributable to the New Note, as the conversion price of $0.08 was the same as the share price on the date the New Note was issued. The New Note was converted into 687,500 shares of Spindle common stock in April 2018.
During the three months ended March 31, 2017, we entered into three Bridge Note Agreements totaling $46,000 with one of our investors. These three Bridge Notes were paid in full during 2017. The Bridge Notes also included warrants to purchase two shares of the Companys common stock, at a price of $0.135, for each dollar loaned to Spindle. The total discount attributable to these transactions was $32,716. During the three and nine months ended September 30, 2017, interest expense related to the warrants and the beneficial conversion feature totaled $14,142 and $32,716, respectively. During the three and nine months ended September 30, 2017, $15,000 and $46,000 was paid on these Bridge Notes. No warrants related to these three Bridge Notes have been exercised.
14
During the twelve months ended December 31, 2017, we entered into seven Bridge Note Agreements totaling $145,000 with one of our investors. The seven Bridge Notes were interest free, secured by the Companys assets, convertible to shares of the Companys restricted stock at $0.10 and $0.135 per share and had maturity dates ranging from June 30, 2017 to June 29, 2018. The holder has waived the maturity dates for all of the Notes to January 31, 2019. Three of the seven Bridge Notes included warrants to purchase two shares of the Companys common stock, at an exercise price of $0.135 or $0.20 per share, for each dollar loaned to Spindle. The total discount attributable to the seven transactions was $98,457, which was fully amortized at September 30, 2018. During the three and nine months ended September 30, 2018, interest expense related to the warrants and the amortization of the discount on the unpaid note balances totaled $0 and $16,904, respectively. During the three and nine months ended September 30, 2018, we repaid $0 and $15,000, respectively, on one of these notes.
In December 2016, we entered into a $5,000 Bridge Note Agreement with one of our investors. The Bridge Note was secured by the Companys assets, had a maturity date of February 12, 2017 and included warrants to purchase two shares of the Companys common stock for each dollar loaned to Spindle. The total discount attributable to this transaction was $525, which was expensed to interest during the three months ended March 31, 2017. At September 30, 2018, the $5,000 Bridge Note was paid in full, though none of the warrants related to this Note have been exercised.
On May 18, 2016, we entered into a $182,000 Convertible Promissory Note (the Note) with an investor in the Company. The Note bears an interest rate of 6% per annum and had a maturity date of May 18, 2018. The Holder of the Note waived the maturity date while the Company and the Holder are negotiating new terms for the Note. The total value of the Note, if converted to stock, would be $404,444, therefore a discount in the amount of $182,000 was recorded, which was amortized to interest expense over the original term of the Note.
During the three and nine months ended September 30, 2018, interest expense of $2,488 and $7,440 and interest expense related to amortization of the discount on the unpaid notes of $0 and $44,974 was recorded, respectively. The discount was fully amortized at September 30, 2018. During the three and nine months ended September 30, 2017, interest expense of $2,525 and $7,494 and interest expense related to amortization of the discount on the unpaid notes of $21,047 and $62,453 was recorded, respectively. The Company made principal payments of $0 and $2,500 on the Note during the three and nine months ended September 30, 2018, respectively.
In December 2016, we entered into a $5,000 Bridge Note Agreement with one of our investors. The Bridge Note was paid in full during the quarter ended March 31, 2018. The Bridge Note included warrants to purchase two shares of the Companys common stock for each dollar loaned to Spindle. None of the warrants have been exercised. The total discount attributable to this transaction was $525, which was fully amortized in 2017.
NOTE 10 - CONVERTIBLE NOTES PAYABLE - RELATED PARTY, NET OF UNAMORTIZED DISCOUNT
Convertible notes payable to related parties consists of the following:
|
|
|
|
|
| |
|
|
September 30, 2018
|
|
December 31, 2017
|
Convertible notes payable, annual interest rate of 6% to 10%, due date ranges from October 2018 to March 2019 and convertible into common stock at a price of $0.10 to $0.135 per share.
|
|
$
|
319,000
|
|
$
|
319,000
|
Unamortized debt discount
|
|
|
(13,235)
|
|
|
(192,294)
|
Balance at end of period
|
|
$
|
305,765
|
|
$
|
126,706
|
The following table is a summary of the changes of our Convertible Notes Payable - Related Party as of September 30, 2018:
|
|
| |
Balance at December 31, 2017
|
|
$
|
126,706
|
Amortization of debt discount
|
|
|
179,059
|
Balance at September 30, 2018
|
|
$
|
305,765
|
15
On October 17, 2017, we entered into a Convertible Note Agreement with a stockholder of over 5% of the Company. The Note was revised and amended on November 27, 2017, and is for a promissory note up to $359,000, convertible to stock under certain circumstances. At September 30, 2018, the Company had borrowed $219,000 under this agreement. The Note bears an interest rate of 10% per annum and had a maturity date of October 17, 2018. The Note has not been renewed as it is subject to litigation as described in Part II, Item 1. Legal Proceedings in this Form 10-Q. The total value of the Note balance, if converted to stock at September 30, 2018, would be $498,456. The discount and derivative liability recorded at issuance were $219,000 and $311,125, respectively. The Note discount is amortized to interest expense - related party over the term of the note and at September 30, 2018 has an unamortized balance of $13,235. During the three and nine months ended September 30, 2018, interest expense of $5,520 and $16,380 and interest expense related to amortization of the discount on the unpaid note of $59,050 and $175,223 were recorded, respectively.
On March 3, 2017, we entered into a $100,000 Bridge Note Agreement with a stockholder of over 5% of the Company. The Bridge Note was secured by the Companys assets, was convertible to shares of the Companys restricted stock at $0.10 per share and included warrants to purchase two shares of the Companys common stock, at a price of $0.15, for each dollar loaned to Spindle. This Bridge Note had no stated maturity date. The total discount attributable to this transaction was $100,000. The Bridge Note was converted to Spindle stock on March 3, 2017, and interest expense related to the warrants and the beneficial conversion factor totaling $100,000 was recorded. At September 30, 2018, the warrants related to the Bridge Loan had not been exercised.
On March 25, 2016, we entered into a $100,000 Note Purchase Agreement with a stockholder of over 5% of the Company. The note is convertible to stock under certain circumstances, bears an interest rate of 6% per annum and has a maturity date of March 25, 2019. The total value of the note, if converted to stock, would be $133,333 and therefore a discount in the amount of $33,333 was recorded. This amount is amortized to interest expense - related party over the term of the note.
During the three and nine months ended September 30, 2018, interest expense of interest expense related to amortization of the discount on the unpaid note of zero and $3,856 was recorded, respectively. During the three and nine months ended September 30, 2017, interest expense of $1,512 and $4,488, and interest expense related to amortization of the discount on the unpaid note of $4,201 and $12,466 was recorded, respectively. The discount was fully amortized at September 30, 2018.
In December 2016, we entered into a $10,500 Bridge Note Agreement with one of our directors. The Bridge Note was secured by the Companys assets and included warrants to purchase two shares of the Companys common stock for each dollar loaned to Spindle. The total discount attributable to this transaction was $1,102 and was fully expensed to interest in the three months ended March 31, 2017. At September 30, 2017, the $10,500 Bridge Note had been paid in full. No warrants related to this Bridge Note have been exercised.
NOTE 11 - DERIVATIVE LIABILITIES
The following table summarizes fair value measurements by level at September 30, 2018 for assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
| |
|
Level I
|
Level II
|
Level III
|
Total
|
Derivative liability on note payable
|
$
|
--
|
$
|
--
|
$
|
807,362
|
$
|
807,362
|
Derivative liability on note payable - related party
|
$
|
--
|
$
|
--
|
$
|
498,457
|
$
|
498,457
|
The following table summarizes fair value measurements by level at December 31, 2017 for assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
| |
|
Level I
|
Level II
|
Level III
|
Total
|
Derivative liability on note payable - related party
|
$
|
--
|
$
|
--
|
$
|
261,784
|
$
|
261,784
|
16
The Company issued a convertible promissory note in January 2018 and a convertible promissory note to a related party in 2017. The convertible notes require us to record the value of the conversion features as liabilities, at fair value, pursuant to ASC 815, including provisions in the notes that protect the holder from declines in our stock price, which is considered outside the control of the Company. The derivative liabilities are marked-to-market each reporting period and changes in fair value are recorded as a non-operating gain or loss in our statement of operations, until they are completely settled. The fair value of the conversion features is determined each reporting period using the Black-Scholes option pricing model and is affected by changes in inputs to that model including our stock price, expected stock price volatility, interest rates and expected term. The assumptions used in valuing the derivative liabilities at September 30, 2018 were as follows:
|
|
|
| |
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Significant assumptions (weighted-average):
|
|
|
|
|
Risk-free interest rate at grant date
|
|
2.59%
|
|
1.41% - 1.76%
|
Expected stock price volatility
|
|
275.63%
|
|
187.14% - 198.52%
|
Expected dividend payout
|
|
--
|
|
--
|
Expected option life (in years)
|
|
1
|
|
1
|
Expected forfeiture rate
|
|
0%
|
|
0%
|
The following is a reconciliation of the derivative liabilities at September 30, 2018 and December 31, 2017:
|
|
|
|
|
| |
|
|
Notes Payable
|
|
Notes Payable
Related Party
|
Value at December 31, 2017
|
|
$
|
--
|
|
$
|
261,784
|
Initial value at debt issuance
|
|
|
622,399
|
|
|
--
|
Increase in value
|
|
|
184,963
|
|
|
236,673
|
Value at September 30, 2018
|
|
$
|
807,362
|
|
$
|
498,457
|
NOTE 12 - STOCKHOLDERS DEFICIT
The Company is authorized to issue up to 50,000,000 shares of preferred stock, par value $0.001. There are no preferred shares issued or outstanding as of September 30, 2018
The Company is authorized to issue up to 300,000,000 shares of common stock, par value $0.001. During the three months ended March 31, 2018, the Company:
·
Authorized the issuance of 3,000,000 shares of common stock to third-party consultants as payment for their services. The estimated fair value of these shares totaled $200, and $240,000 was recorded as consulting expense.
·
Authorized the issuance of 6,000 shares of common stock valued at $580 to employees and members of our Board of Directors for their services. These shares were unissued at June 30, 2018.
·
Issued 100,000 shares of common stock valued at $14,000 to a third-party consultant. These shares were authorized but unissued at December 31, 2017.
We also recorded a beneficial conversion feature on convertible debt of $8,188 to additional paid-in capital.
During the three months ended June 30, 2018, the Company:
·
Issued 3,000,000 shares of common stock that were unissued at March 31, 2018.
·
Issued 687,500 shares of common stock valued at $55,000 as repayment of debt at the exercise of the conversion feature of a note payable.
·
Issued 464,700 shares of common stock valued at $23,235 as repayment of debt to third parties.
·
Authorized the issuance of 4,600,000 shares of common stock for cash proceeds totaling $230,000. At June 30, 2018 these shares were unissued.
·
Authorized the issuance of 36,000 shares of common stock to Company advisors for their services. The estimated fair value of these shares totaled $2,520. At June 30, 2018, 16,000 of these shares were unissued.
17
We also recorded a beneficial conversion feature on convertible debt of $13,500 to additional paid-in capital.
During the three months ended September 30, 2018, the Company:
·
Issued 3,032,329 shares of common stock valued at $91,416 as a $50,000 repayment of debt at the exercise of the conversion feature of a note payable, resulting in a loss of $3,873 on the transaction.
·
Issued 157,880 shares of common stock valued at $15,788 as repayment of debt to third parties, resulting in a gain on the transaction of $12,630.
·
Issued 60,000 shares of common stock valued at $2,796 as payment to Company directors and advisors for their services.
·
Authorized the issuance of 56,000 shares of common stock to Company directors and advisors for their services. The estimated fair value of these shares totaled $1,496. At September 30, 2018, 20,000 of these shares were unissued.
We also recorded a beneficial conversion feature on convertible debt of $3,572 to additional paid-in capital.
NOTE 13 - OPTIONS AND WARRANTS
On October 29, 2012, our stockholders approved the 2012 Stock Incentive Plan (the Plan) that governs equity awards to our management, employees, directors and consultants. On November 7, 2013, our stockholders approved an amendment to the Plan which increased the total authorized amount of common stock issuable under the Plan from 3,000,000 to 6,000,000 shares. On October 12, 2018, the Company filed a Certificate of Change to the Companys Articles of Incorporation with the Nevada Secretary of State increasing the Companys number of authorized shares from 300,000,000 shares of common stock, par value $0.001 to 600,000,000 shares of common stock, par value $0.001 effective the date of filing.
Options:
During the three months ended September 30, 2018, the Company granted 400,000 employee options to purchase shares of common stock at an exercise price of $0.033 per share, with grant date fair values of $0.033. These options vest in equal annual increments over three years and expire ten years from the grant date. Also, during the three months ended September 30, 2018, the Company granted an officer 500,000 options to purchase shares of common stock at an exercise price of $0.04, with a grant date fair value of $0.04. These options vested in full on August 2, 2018 and expire ten years from the grant date.
The following is a summary of the status of the Companys stock options as of September 30, 2018:
|
|
|
|
| |
|
Number of Options
|
|
Weighted-Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
Outstanding at December 31, 2017
|
2,067,500
|
|
$0.309
|
|
7.40
|
Granted
|
900,000
|
|
$0.037
|
|
9.84
|
Exercised
|
--
|
|
--
|
|
--
|
Forfeited/Cancelled
|
(1,675,000)
|
|
$0.337
|
|
--
|
Outstanding at September 30, 2018
|
1,292,500
|
|
$0.094
|
|
9.18
|
Exercisable at September 30, 2018
|
762,500
|
|
$0.103
|
|
8.98
|
Stock-based compensation expense of $23,636 and $25,366 was recognized during the three and nine months ended September 30, 2018, respectively, as amortization of various options over the life of the related vesting periods. The increased amount is due to the immediate vesting of 500,000 options issued to an officer of the Company in August of 2018. Stock-based compensation expense of $5,876 and $37,244 was recognized during the three and nine months ended September 30, 2017, respectively, as amortization of various options over the life of the related vesting periods, and an additional $14,583 was recorded as salary paid in stock in 2017.
18
Warrants:
The following is a summary of the status of the Companys stock warrants as of September 30, 2018:
|
|
|
|
| |
|
Number of Warrants
|
|
Weighted-Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
Exercisable at December 31, 2017
|
1,621,939
|
|
$0.217
|
|
2.35
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
1,671,939
|
|
$0.225
|
|
2.06
|
Granted
|
--
|
|
--
|
|
--
|
Exercised
|
--
|
|
--
|
|
--
|
Forfeited/Cancelled
|
(150,000)
|
|
$0.500
|
|
--
|
Outstanding at September 30, 2018
|
1,521,939
|
|
$0.198
|
|
1.48
|
Exercisable at September 30, 2018
|
1,521,939
|
|
$0.198
|
|
1.48
|
NOTE 14 - SUBSEQUENT EVENTS
On October 12, 2018, the Company filed a Certificate of Change to the Companys Articles of Incorporation with the Nevada Secretary of State increasing the Companys number of authorized shares from 300,000,000 shares of common stock, par value $0.001 to 600,000,000 shares of common stock, par value $0.001 effective the date of filing. On November 16, 2018, the Companys Board of Directors approved a resolution to increase the number of authorized shares from 600,000,000 to 1,000,000,000 shares of common stock, par value $0.001.
On October 16, 2018 (the Issuance Date), the Company closed a convertible promissory note (the Convertible Note) with Power Up Lending Group LTD (Holder). The principal amount of the Convertible Note is $75,000 and matures on October 9, 2019 (the Maturity Date). The Convertible Note bears interest at the rate of 10% per annum. Upon an event of default, the interest rate shall increase to 18% for as the event of default is continuing (Default Interest). The Convertible Note may be converted, at the Holders discretion, into the Companys common stock at any time after 180 days (the Prepayment Date) at a 35% discount to the average of the lowest two closing bid prices during the 15 trading days prior to the date of a conversion notice. Until the 30th day after the Issuance Date, the Company may pay the principal at a cash redemption premium of 110%, in addition to outstanding interest, without the Holders consent; from the 31st day to the 60th day after the Issuance Date, the Company may pay the principal at a cash redemption premium of 115%, in addition to outstanding interest, without the Holders consent; from the 61st day after the Issuance Date to the 90th day, the Company may pay the principal at a cash redemption premium of 120%, in addition to outstanding interest, without the Holders consent; from the 91st day after the Issuance Date to the 120th day, the Company may pay the principal at a cash redemption premium of 125%, in addition to outstanding interest, without the Holders consent; from the 121st day after the Issuance Date to the 150th day, the Company may pay the principal at a cash redemption premium of 130%, in addition to outstanding interest, without the Holders consent; from the 151st day after the Issuance Date to the 180th day, the Company may pay the principal at a cash redemption premium of 135%, in addition to outstanding interest, without the Holders consent. After the expiration of 180 days following the Issuance Date, the Company shall have no right of repayment. At any time on or after the Maturity Date, the Company may repay the then outstanding principal plus accrued interest and Default Interest, if any, to the Holder.
Between October 16 and November 12, 2018, a Holder of one of the Companys convertible notes elected to convert a total of $63,857 in Company debt, fees and interest due to shares of Spindle common stock. Per the terms of the note, the conversion prices were calculated to between $.00325 and $.0078 per share, resulting in a total issuance of 15,866,882 shares to the Holder.
19
On October 1, 2018, a Holder of one of the Companys convertible notes elected to convert $30,000 in Company debt to shares of Spindle common stock. Per the terms of the note, the conversion price was calculated to be $.0078 per share, resulting in the issuance of 3,846,153 shares to the Holder. On November 5, 2018, the same Holder elected to convert $17,664 in Company debt to shares of Spindle common stock. Per the terms of the note, the conversion price was calculated to be $.003575 per share, resulting in the issuance of 4,940,992 shares to the Holder
NOTE 15 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following table presents certain supplemental cash flow information:
|
|
|
|
| |
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
Cash paid for interest
|
$
|
24,392
|
|
$
|
1,442
|
Cash paid for income taxes
|
$
|
-
|
|
$
|
-
|
Debt converted into common stock
|
$
|
105,000
|
|
$
|
-
|
Cash advances converted to common stock
|
$
|
62,258
|
|
$
|
-
|
Proceeds from convertible note payable from note replacement
|
$
|
37,500
|
|
$
|
-
|
Payment on convertible note payable from note replacement
|
$
|
(37,500)
|
|
$
|
-
|
Shares issued for asset purchases
|
$
|
-
|
|
$
|
(43,500)
|
Discount on convertible notes
|
$
|
52,000
|
|
$
|
-
|
Cancellation of shares issued for services
|
$
|
-
|
|
$
|
(142,900)
|
Accounts receivable reduced to sale of assets
|
$
|
-
|
|
$
|
(1,656)
|
Increase in prepaid due to prepaid share-based compensation
|
$
|
-
|
|
$
|
(445,580)
|
Shares issued to settle accrued liabilities
|
$
|
-
|
|
$
|
(266,300)
|
Shares issued to settle accrued liabilities - related party
|
$
|
-
|
|
$
|
(30,747)
|
Repayment of advance in shares
|
$
|
-
|
|
$
|
(12,000)
|
Notes payable reclassified from convertible notes payable
|
$
|
-
|
|
$
|
(5,000)
|
Convertible notes payable reclassified from notes payable
|
$
|
-
|
|
$
|
5,000
|
Repayment of notes payable - related party in lieu of shares
|
$
|
-
|
|
$
|
(131,000)
|
Initial BF credited to paid-in capital
|
$
|
-
|
|
$
|
(34,343)
|
Discount on notes payable reclassified to discount on notes payable - related party
|
$
|
-
|
|
$
|
(100,000)
|
NOTE 16 - COMMITMENTS AND CONTINGENCIES
On June 4, 2018, the Company received service of a complaint in a lawsuit captioned
Michael Kelly and iOT Broadband, LLC vs. Jack Scott and Spindle, Inc.
, No. DC-18-06656 (Dist. Ct. Dallas County, TX). The complaint purports to assert a claim of breach of contract against Spindle, claims of fraud against Jack Scott, the Interim CEO of the Company, and a claim of breach of fiduciary duty against both Dr. Scott and the Company in connection with an Amended and Restated Senior Unsecured Convertible Promissory Note (the Note) owned by Mr. Kelly who purports to have assigned his interest and rights in the note to iOT.
The Company believes that it will successfully defend against the actions described above, and it intends to pursue counterclaims against the plaintiffs which may, if successful, result in an award of damages in favor of the Company. However, the Company does anticipate that it will incur significant additional legal expenses as it pursues a vigorous defense against each of these actions. The parties to the lawsuit are currently in the discovery process. While the Company believes that it will successfully defend against these actions, no assurances can be given as to: (i) the outcome of these or legal proceedings and (ii) the related impact of an unanticipated adverse outcome of these proceedings on the Company's financial condition, results of operations or near-term liquidity.
20