The accompanying notes are an integral part of these condensed financial statements
The accompanying notes are an integral part of these condensed financial statements
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of March 31, 2018
Note 1 - Nature of the business and Summary of Significant Account Policies
Flitways Technology Inc. (the Company), was incorporated in the State of Nevada on December 11, 2012 and established a fiscal year end of December 31. The Company is involved in the on demand transportation business providing businesses and private travelers access to book and schedule ground transportation online or by mobile device. The Company gives travelers access to customizable travel rides through a network of ground travel providers. It incorporates ride booking into the travel industry by making travel ride booking available at various travel points of sale to allow travelers to book rides that fit their lifestyle online and on its mobile application.
Financial Statement Presentation:
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018. The balance sheet as of December 31, 2017 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2017. The notes to the unaudited condensed consolidated financial statements are presented on a continuing basis unless otherwise noted.
Basis of Presentation:
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced recurring losses since its inception. The Company incurred a net loss of approximately $642,000, before the gain on change in fair value of derivative, for the three months ended March 31, 2018, and had an accumulated deficit of approximately $11,279,000 as of March 31, 2018. Since inception, the Company has financed its activities principally through debt financing. Management expects to incur additional losses and cash outflows in the foreseeable future in connection with its operating activities. These factors indicate that the Company may not be able to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.
The Companys consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company is subject to a number of risks similar to those of other similar stage companies, including dependence on key individuals, successful development, marketing and branding of products; uncertainty of product development and generation of revenues; dependence on outside sources of financing; risks associated with research, development; dependence on third-party, suppliers and collaborators; protection of intellectual property; and competition with larger, better-capitalized companies. Ultimately, the attainment of profitable operations is dependent on future events, including obtaining adequate financing to fund its operations and generating a level of revenues adequate to support the Companys cost structure. During the three months ended March 31, 2018, the Company issued a convertible promissory note, for cash, in the principal amount of $43,000, with net proceeds of approximately $40,000 and borrowed approximately $140,000 from several finance companies.
F-5
The Company will need to raise debt and equity financing in the future in order to continue its operations; however, there can be no assurance that such financing will be available in sufficient amounts and on acceptable terms, when and if needed, or at all. If results of operations for 2018 do not meet managements expectations, or additional capital is not available, management believes the Company has the ability to reduce certain expenditures. The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number of factors, including market demand for the Companys products and services, the success of product development efforts, the management of working capital, and the continuation of normal payment terms and conditions for purchase of goods and services. The Company is uncertain whether its cash balances and cash flow from operations will be sufficient to fund its operations for the next twelve months. If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows from operations, then the Company will need to raise additional funding to continue as a going concern from investors or through other avenues.
Basis of Consolidation and Reclassifications:
The condensed consolidated financial statements include the accounts of the Company and its controlled and wholly-owned subsidiary. Intercompany transactions, profits, and balances are eliminated in consolidation.
Fair Value Measurement:
The accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures.
ASC Topic 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 - inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.
On a Recurring Basis:
A financial asset or liabilitys classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.
F-6
Financial assets and liabilities carried at fair value, measured on a recurring basis as follows:
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March 31, 2018
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Description
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Level 1
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Level 2
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Level 3
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Gains (Losses)
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Derivative liability
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$
-
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$
-
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|
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$
5,307,000
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|
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|
$
745,000
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Total
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$
-
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$
-
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|
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|
$
5,307,000
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|
|
|
$
745,000
|
Our Level 3 fair value liabilities represent the fair value of warrants and beneficial conversion feature recorded related to the convertible notes outstanding at March 31, 2018. The change in the balance of the warrant liabilities during the three months ended March 31, 2018 was calculated using the Black-Scholes Model, which is classified as a gain on change in fair value of derivative liability in the consolidated statement of operations. The Black-Scholes Model does take into consideration the Companys stock price, historical volatility, and risk-free interest rate.
The following table provides a summary of the changes in fair value of the Companys derivative liabilities, which are Level 3 liabilities for the three months ended March 31, 2018:
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Balance at January 1, 2018
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$
6,128,000
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Fair value of warrants and conversion features issued
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54,000
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Fair value of warrants and conversion features converted
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(130,000)
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Change in value of warrants and conversion features
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|
(745,000)
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Balance at March 31, 2018
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5,307,000
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Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of outstanding common shares during each of the periods presented. Diluted net income per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, assuming the conversion, exercise, or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. If the inclusion of common stock equivalents in the weighted average number of common shares outstanding would be anti-dilutive these items would be omitted from the calculation of net income (loss) per common share. The dilutive effect of outstanding stock options and warrants is reflected in diluted earnings per share by application of the treasury stock method.
The components of basic and diluted earnings (loss) per share for the three months ended March 31, 2018 and 2017 were as follows:
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March 31, 2018
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March 31, 2017
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Numerator - net income (loss)
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$
103,000
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$
(524,000)
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Denominator
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Weighted-average number of common shares outstanding
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70,300,392
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56,416,921
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Dilutive effect of warrants and conversion feature
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629,699,608
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-
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Common stock and common stock equivalents used for diluted earnings (loss) per share
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700,000,000
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56,416,921
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F-7
The Company did not have authorized shares to honor all the outstanding dilutive instruments outstanding as of March 31, 2018. The shortfall is approximately 150,000,000 shares as of March 31, 2018.
Recent Accounting Pronouncements
In July 2017, the FASB issued 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 Noncontrolling Interests with a Scope Exception, (ASU 2017-11). 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 noncontrolling 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 assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842) which requires companies leasing assets to recognize on their balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on contracts longer than one year. The lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities for short-term leases. How leases are recorded on the balance sheet represents a significant change from previous GAAP guidance in Topic 840. ASU 2016-02 maintains a distinction between finance leases and operating leases similar to the distinction under previous lease guidance for capital leases and operating leases. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated results of operations, cash flows and financial position. ASU 2016-02 is effective for fiscal periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated results of operations, cash flows and financial position.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, issued as a new Topic, ASC Topic 606. The new revenue recognition standard supersedes all existing revenue recognition guidance. Under this ASU, an entity should recognize revenue when it transfers 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. ASU 2015-14, issued in August 2015, deferred the effective date of ASU 2014-09 to the first quarter of 2018, with early adoption permitted in the first quarter of 2017. The Company adopted this pronouncement as of January 1, 2018. The adoption of this pronouncement had no material impact on the Companys consolidated results of operations, cash flows and financial position.
Note 2 Notes payable
During the three months ended March 31, 2018, the Company borrowed approximately $140,000 from several finance companies. The total amount to be repaid is approximately $170,000. The payment terms vary from daily payments, weekly or monthly. The outstanding principal balances, in the aggregate, as of March 31, 2018 was approximately $134,000, and these notes mature through March 2019.
F-8
Note 3 - Convertible Promissory Notes
As of March 31, 2018, convertible promissory notes payable consisted of the following:
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Principal
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$
597,000
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Additional note
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43,000
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Principal Converted
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(43,000)
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Net balance
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597,000
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Default principal
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483,000
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Discounts
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(93,000)
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Notes payable, net
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$
987,000
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In February 2018, the Company issued a convertible promissory note in the amount of $43,000 (the February 2018 Note). The total proceeds were approximately $40,000, due to approximately $3,000 for debt issuance costs. The February 2018 Note accrues interest at 8% per annum with the principal and accrued interest due and payable in November 2018. The principal amount and all accrued interest are convertible into shares of the Companys common stock beginning on the 181
st
day from the issuance date until the later of the maturity date or upon an event of default. The principal and all unpaid and accrued interest is convertible at a rate calculated at 63% of the average for the lowest three trading prices for the Companys common stock during the 10-day period ending on the latest complete trading day prior to the conversion date. Events of default include, the following among others, non-compliance with the Exchange Act, delisting of the Companys common stock, failure to issue converted shares, financial statement restatements and cross default with other financial instruments. Should the Company be found in default, the interest rate would be adjusted to 22% and the amount due would be equal to 150% or 200% of the sum of the then outstanding principal amount of the note, accrued and unpaid interest on the unpaid principal amount of the note to the date of payment, default interest, if any, on the amounts referred to above.
The February 2018 Note contains a prepayment provision. If the February 2018 Note is paid in full prior to 30 days after the issued date the principal payment would be 112% of the amount of the promissory note. The prepayment penalty increase by 5% for each 30-day period following for total amount of 137% on the 180
th
day, at which the Company shall have no right to prepay the principal amount.
The Company determined that the variable conversion rate of the February 2018 Note would be an embedded feature to be bifurcated and accounted for as a derivative in accordance with ASC 818-15 Derivatives and Hedging. Therefore, the conversion feature was accounted for at fair value on the date of issuance. The fair value of approximately $55,000, at issuance, was determined using the Black-Scholes Option Pricing Model. At each reporting period, the change in fair value will be recorded in the statement of operations under other income (expense). The assumptions used in the Black-Scholes Pricing Model was a term of 0.78 years, volatility rate of 278%, rate of quarterly dividends 0% and a risk free interest rate of 1.67%. The original fair value was first recorded as a note discount for $40,000 and the remaining $15,000 was recorded as financing expenses.
As of March 31, 2018, the Company is in default for all but $131,000 of its convertible promissory notes. The Company was required to record an approximately 54,000, default penalty for the quarter ended March 31, 2018.
During the three months ended March 31, 2018, certain of the convertible note holders converted principal and accrued interest of approximately $43,000 and $7,000, respectively. The Company was required to issue 12,700,000 shares of the Companys common stock with a fair market value, as of the dates of issuance, of approximately $180,000.
F-9
Note 4 Stockholders Deficit
In October 2017, the Board of Directors, with the approval of a majority vote of its shareholders approved the filing of a Certificate of Designation establishing the designations, preferences, limitations and relative rights of the Companys series A preferred stock. The board of directors authorized the designation of 1,000,000 shares of series A preferred stock. The terms of the certificate of designation of the series A preferred stock, include the right to vote in aggregate, on all shareholder matters equal to 1,000 votes per share of series A preferred stock and each series A preferred stock share are not convertible into shares of our common stock.
On January 30, 2018, after review and recommendation from the Board, the Company entered into an agreement for conversion of indebtedness to series A voting preferred stock with its majority shareholder, pursuant to which it was agreed that $50,000 of due to related party would be converted to 1,000,000 shares of the Companys series A voting preferred stock.
Also, on January 30, 2018, the majority shareholder, elected to exercise his 2017 Options, pursuant to his employment agreement to which it was agreed that approximately $166,000 of the remainder of the notes payable related party and deferred compensation would be used as payment of the pay the exercise price for 7,000,000 shares of the Companys common stock. As the Company did not have available sufficient number of authorized shares, the exercise of the option has been suspended until such time the Company has sufficient number of authorized shares to honor the exercise of the stock option.
On March 19, 2018, the Company filed a Certificate of Amendment with the Nevada Secretary of State to increase its authorized capital of its common stock from 500,000,000 shares of common stock to 700,000,000 shares of common stock, par value $0.001 per share. The Increase in Authorized was effective with the Nevada Secretary of State on March 19, 2018, when the Certificate of Amendment was filed. The Increase in Authorized was approved by the Board of Directors and the shareholders holding a majority of the total issued and outstanding shares of common stock on February 8, 2018.
Note 5 Subsequent Events
The Company has evaluated subsequent events through June 14, 2018, the date the condensed consolidated financial statements were available to be issued and concluded that no material subsequent events have occurred that would require recognition in the financial statements or disclosures in the notes to the financial statements except as discussed below:
On May 21, 2018, the Company filed a Certificate of Amendment with the Nevada Secretary of State to increase its authorized capital of its common stock from 700,000,000 shares of common stock to 1,200,000,000 shares of common stock, par value $0.001 per share. The increase in authorized was effective with the Nevada Secretary of State on May 21, 2018, when the certificate of amendment was filed. The Increase in authorized was approved by the board of directors and the shareholders holding a majority of the total issued and outstanding shares of common stock on April 5, 2018.
In April 2018, the Company borrowed approximately $67,000 from several finance companies. The total amount to be repaid is approximately $94,000.
During April and May of 2018, certain of the convertible note holders converted principal and accrued interest of approximately $12,000 and $3,000, respectively. The Company was required to issue 8,800,000 shares of the Companys common stock.
F-10
In June 2018, the Company received a letter of demand from one of the convertible note holders (Noteholder). The Noteholder asserts the Company has breached several default provisions of the convertible promissory note dated March 6, 2017 (Convertible Note) in the principal amount of $110,000. The Noteholder has demanded payment of approximately $475,000, or for the Company to cure certain breach of default, as to provide the Noteholder to convert the principal and interest into shares of the Companys common stock and file the Companys form 10Q for the three months ended March 31, 2018. Management believes the Company has properly accrued and recorded all penalties and interest due the Noteholder as of March 31, 2018. Should the Company agree with the Noteholders assessment of certain defaults occurring during the quarter ending June 30, 2018, it may record an additional expense and increase its liability to the Noteholder by approximately $270,000 as of the date of the letter.
F-11