PART
I — FINANCIAL INFORMATION
ITEM
1 – FINANCIAL STATEMENTS
bBOOTH,
INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
161,393
|
|
|
$
|
103,019
|
|
Accounts
Receivable
|
|
|
3,406
|
|
|
|
-
|
|
Prepaid
expenses and other current assets
|
|
|
105,871
|
|
|
|
65,922
|
|
Total
current assets
|
|
|
270,670
|
|
|
|
168,941
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
56,900
|
|
|
|
70,873
|
|
Other
assets
|
|
|
15,256
|
|
|
|
-
|
|
Total
assets
|
|
$
|
342,826
|
|
|
$
|
239,814
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
375,280
|
|
|
$
|
331,569
|
|
Accrued
expenses
|
|
|
288,852
|
|
|
|
174,443
|
|
Convertible
notes payable, current portion and net of debt discount
|
|
|
934,647
|
|
|
|
-
|
|
Notes
payable - related parties, net of debt discount
|
|
|
1,340,174
|
|
|
|
-
|
|
Notes
payable
|
|
|
125,000
|
|
|
|
725,000
|
|
Total
current liabilities
|
|
|
3,063,953
|
|
|
|
1,231,012
|
|
Notes
payable - related parties, net of debt discount
|
|
|
-
|
|
|
|
1,351,192
|
|
Total
liabilities
|
|
|
3,063,953
|
|
|
|
2,582,204
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 15,000,000 shares authorized, none issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.0001 par value, 200,000,000 shares authorized, 92,644,899 and 63,859,000 shares issued and outstanding as of September
30, 2016 (unaudited) and December 31, 2015, respectively
|
|
|
9,264
|
|
|
|
6,386
|
|
Additional
paid-in capital
|
|
|
15,882,667
|
|
|
|
14,650,519
|
|
Subscription
receivables
|
|
|
(80,000
|
)
|
|
|
-
|
|
Common
stock subscribed
|
|
|
1,541,636
|
|
|
|
-
|
|
Accumulated
deficit
|
|
|
(20,074,694
|
)
|
|
|
(16,999,295
|
)
|
Total
sharesholders’ deficit
|
|
|
(2,721,127
|
)
|
|
|
(2,342,390
|
)
|
Total
liabilities and shareholders’ deficit
|
|
$
|
342,826
|
|
|
$
|
239,814
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
bBOOTH,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
16,243
|
|
|
$
|
-
|
|
|
$
|
47,836
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expense
|
|
|
67,350
|
|
|
|
110,000
|
|
|
|
189,166
|
|
|
|
191,588
|
|
General
and administrative expense
|
|
|
854,214
|
|
|
|
1,307,875
|
|
|
|
2,408,753
|
|
|
|
3,767,012
|
|
Impairment
of intangible assets
|
|
|
-
|
|
|
|
1,104,327
|
|
|
|
-
|
|
|
|
1,104,327
|
|
Total
operating expenses
|
|
|
921,564
|
|
|
|
2,522,202
|
|
|
|
2,597,919
|
|
|
|
5.062,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(905,321
|
)
|
|
|
(2,522,202
|
)
|
|
|
(2,550,083
|
)
|
|
|
(5,062,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(185,145
|
)
|
|
|
(25,961
|
)
|
|
|
(525,316
|
)
|
|
|
(68,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(1,090,466
|
)
|
|
|
(2,548,163
|
)
|
|
|
(3,075,399
|
)
|
|
|
(5,131,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,090,466)
|
|
|
$
|
(2,548,163)
|
|
|
$
|
(3,075,399
|
)
|
|
$
|
(5,131,902)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
|
$
|
(0.01)
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04)
|
|
|
$
|
(0.08)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic and diluted
|
|
|
84,601,383
|
|
|
|
63,053,370
|
|
|
|
71,626,094
|
|
|
|
61,165,128
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
bBOOTH,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2016
|
|
|
September
30, 2015
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,075,399)
|
|
|
$
|
(5,131,902
|
)
|
Adjustments to reconcile net loss to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
16,467
|
|
|
|
357,917
|
|
Amortization of
debt discount
|
|
|
281,146
|
|
|
|
-
|
|
Impairment of intangible
assets
|
|
|
-
|
|
|
|
1,104,327
|
|
Share based compensation
- stock options
|
|
|
347,763
|
|
|
|
914,505
|
|
Share based compensation
- stocks granted to vendors
|
|
|
475,608
|
|
|
|
-
|
|
Share based compensation
- stocks granted to board members
|
|
|
321,682
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in operating assets
and liabilities:
|
|
|
|
|
|
|
|
|
Accounts Receivable.
Prepaid expenses and other current assets
|
|
|
(3,406
|
)
|
|
|
146,521
|
|
Prepaid expenses
and other current assets
|
|
|
(55,204
|
)
|
|
|
-
|
|
Accounts payable
|
|
|
43,709
|
|
|
|
-
|
|
Accrued
expenses
|
|
|
327,432
|
|
|
|
156,449
|
|
Net
cash used in operating activities
|
|
|
(1,320,202
|
)
|
|
|
(2,452,183
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property
and equipment
|
|
|
(2,494
|
)
|
|
|
(62,029
|
)
|
Acquisition
of Songstagram
|
|
|
-
|
|
|
|
(43,900
|
)
|
Net
cash used in investing activities
|
|
|
(2,494
|
)
|
|
|
(105,929
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from common
stock subscriptions
|
|
|
1,464,850
|
|
|
|
1,500,942
|
|
Stock repurchase
of common stock
|
|
|
(166,226
|
)
|
|
|
-
|
|
Payments on notes
payable
|
|
|
-
|
|
|
|
(100,000
|
)
|
Proceeds
from notes payable - related parties, net
|
|
|
82,446
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
1,381,070
|
|
|
|
1,400,942
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
58,374
|
|
|
|
(1,157,170
|
)
|
Cash,
beginning of period
|
|
|
103,019
|
|
|
|
1,172,117
|
|
Cash, end of
period
|
|
$
|
161,393
|
|
|
$
|
14,947
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
expense
|
|
$
|
11,250
|
|
|
$
|
7,500
|
|
Cash paid for income
taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing transactions:
|
|
|
|
|
|
|
|
|
Note payable issued
as payment for professional fees
|
|
$
|
-
|
|
|
$
|
125,000
|
|
Conversion of note
receivable for the acquisition of Songstagram
|
|
$
|
-
|
|
|
$
|
861,435
|
|
Common stock issuable
in connection with settlement agreement
|
|
$
|
-
|
|
|
$
|
530,000
|
|
Conversion of notes
payable to related parties to convertible notes payable
|
|
$
|
332,446
|
|
|
$
|
-
|
|
Conversion of notes
payable to convertible notes payable
|
|
$
|
600,000
|
|
|
$
|
-
|
|
Conversion of accrued
payroll to convertible notes payable
|
|
$
|
121,875
|
|
|
$
|
-
|
|
Conversion of accrued
interest on notes payable to convertible notes payable
|
|
$
|
66,463
|
|
|
$
|
-
|
|
Conversion of accrued
interest on notes payable to related parties to convertible notes payable
|
|
$
|
10,421
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
bBOOTH,
INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2016
(Unaudited)
1.
|
DESCRIPTION
OF BUSINESS
|
Organization
Cutaia
Media Group, LLC (“CMG”) was a limited liability company formed on December 12, 2012 under the laws of the State of
Nevada. On May 19, 2014, bBooth, Inc. was incorporated under the laws of the State of Nevada. On May 19, 2014, CMG was merged
into bBooth, Inc. pursuant to a Plan of Merger unanimously approved by the members of CMG. On October 17, 2014, bBooth, Inc. changed
the name of its operating company to bBooth (USA), Inc. (“bBooth”). The operations of CMG and bBooth are collectively
referred to as the “Company”.
On
October 16, 2014, the Company completed a Share Exchange Agreement with Global System Designs, Inc. (“GSD”). The Share
Exchange Agreement has been treated as a reverse merger transaction, with the Company as the acquirer for accounting purposes.
Consequently, the assets and liabilities and the historical operations that are reflected in these financial statements for periods
ended prior to the closing of the Share Exchange Agreement are those of bBooth.
In
connection with the closing of the Share Exchange Agreement, GSD changed its name to bBooth, Inc.
Nature
of Business
The
Company develops and licenses cloud-based SaaS CRM, sales lead generation, and social engagement software on mobile and desktop
platforms for sales-based organizations, consumer brands, and artists seeking greater levels of customer, consumer, and fan engagement.
The Company’s software platform is enterprise scalable and incorporates unique, proprietary, push-to-screen, interactive
audio/video messaging and communications technology.
The
Company was previously engaged in the manufacture and operation of Internet connected, broadcast-quality portable recording studio
kiosks, branded and marketed as “bBooth,” which were integrated into a social media, messaging, gaming, music streaming
and video sharing app. The bBooth kiosks were deployed in shopping malls and other high-traffic venues in the United States.
The
Company’s business has evolved from one based primarily on our mall-based bBooth kiosks and mobile apps, narrowly focused
on talent discovery, to a cloud-based, enterprise level SaaS platform, branded and marketed as bNotifi, developed to address a
much larger target market that includes corporate users, consumer brands, and media companies, among others. Our bNotifi technology
represents a new innovative platform for CRM, lead-generation, advertising, fan engagement, and consumer brand activation. Through
fully integrated mobile, desktop, and web based applications, our bNotifi technology provides push-to-screen, media-rich, interactive
audio/video messaging and communications for higher levels of social engagement and interactive online training and teaching applications,
as well as an enterprise scale lead generation and customer retention platform for sales professionals and others. Our bNotifi
platform also includes a robust back-end administration console with data collection capabilities, among other features, designed
to provide small, medium and large-scale enterprise users, among others, with the ability to send, receive and manage enhanced,
media-rich, highly-engaging messaging for both internal and external communications.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
accompanying condensed consolidated balance sheet as of December 31, 2015, which has been derived from the Company’s audited
financial statements as of that date, and the unaudited condensed consolidated financial information of the Company as of September
30, 2016 and for the three and nine months ended September 30, 2016 and 2015, have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) for interim financial information and with
the instructions to Form 10-Q and Article 8-03 of Regulation S-X. In the opinion of management, such financial information includes
all adjustments considered necessary for a fair presentation of the Company’s financial position at such date and the operating
results and cash flows for such periods. Operating results for the interim period ended September 30, 2016 are not necessarily
indicative of the results that may be expected for the entire year.
Certain
information and footnote disclosure normally included in financial statements in accordance with GAAP have been omitted pursuant
to the rules of the United States Securities and Exchange Commission (“SEC”). These unaudited financial statements
should be read in conjunction with the Company’s audited financial statements and accompanying notes included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 30, 2016.
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of bBooth, Inc. and Songstagram, Inc. (“Songstagram”).
All significant intercompany transactions have been eliminated in consolidation.
Going
Concern
The
Company has incurred operating losses since inception and has negative cash flows from operations. It also has an accumulated
deficit of $20,074,694 (unaudited) as of September 30, 2016. As a result, the Company’s continuation as a going concern
is dependent on its ability to obtain additional financing until it can generate sufficient cash flows from operations to meet
its obligations. Management intends to continue to seek additional debt or equity financing to continue its operations. Management
also intends to look at mergers with, or acquisitions of, other related entities to grow its business and customer base.
These
financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations
and continue its operations for the next fiscal year. The continuation of the Company as a going concern is dependent upon its
ability to obtain necessary debt or equity financing to continue operations until it begins generating positive cash flow.
There
is no assurance that the Company will ever be profitable. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that
may result should the Company be unable to continue as a going concern.
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 reported periods. Significant estimates include the value
of share based payments. Amounts could materially change in the future.
Cash
and Cash Equivalents
The
Company considers all highly liquid holdings with maturities of three months or less at the time of purchase to be cash equivalents.
The Company did not hold any cash equivalents at September 30, 2016 and December 31, 2015.
Property
and Equipment
Property
and equipment are recorded at historical cost and depreciated on a straight-line basis over their estimated useful lives of approximately
five years once the individual assets are placed in service.
Long-Lived
Assets
The
Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value
may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash
flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying
amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available,
or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. There was
no impairment of assets identified during the three and nine months ended September 30, 2016. As of September 30, 2015, the Company
made this analysis and determined there were no reliable predictors of future cash flows in connection with the intangible assets.
Accordingly, the Company concluded that impairment of this asset was appropriate and recorded an impairment charge of $1,104,327
for the nine months ended September 30, 2015.
Income
Taxes
The
Company accounts for income taxes under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 740 “Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities
are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting
and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse. The deferred tax assets of the Company relate primarily to operating loss carryforwards for federal income tax purposes.
A full valuation allowance for deferred tax assets has been provided because the Company believes it is not more likely than not
that the deferred tax asset will be realized. Realization of deferred tax assets is dependent on the Company generating sufficient
taxable income in future periods.
The
Company periodically evaluates its tax positions to determine whether it is more likely than not that such positions would be
sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their
technical merits. The Company accrues interest and penalties, if incurred, on unrecognized tax benefits as components of the income
tax provision in the accompanying consolidated statements of operations. As of September 30, 2016 and December 31, 2015, the Company
has not established a liability for uncertain tax positions.
Share
Based Payment
The
Company issues stock options, common stock, and equity interests as share-based compensation to employees and non-employees. The
Company accounts for its share-based compensation to employees in accordance with FASB ASC 718 “Compensation – Stock
Compensation.” Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award,
and is recognized as expense over the requisite service period.
The
Company accounts for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB
ASC 505-50
“
Equity - Based Payments to Non-Employees
.”
Measurement of share-based payment transactions
with non-employees is based on the fair value of whichever is more reliably measurable: (
a
) the goods or services received;
or (
b
) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the
performance completion date. For interim periods, the fair value is estimated and the percentage of completion is applied to that
estimate to determine the cumulative expense recorded.
The
Company values stock compensation based on the market price on the measurement date. As described above, for employees this is
the date of grant, and for non-employees, this is the date of performance completion. The Company values stock options and warrants
using the Black-Scholes option pricing model.
Research
and Development Costs
Research
and development costs consist of expenditures for the research and development of new products and technology. These costs are
primarily expenses paid to vendors contracted to perform research projects and develop enhancements and modifications for and
to the Company’s bNotifi technology and related applications. Research and development costs are expensed as incurred. Total
research and development expense for the nine months ended September 30, 2016 and 2015 was $189,166 and $191,588, respectively,
and for the three months ended September 30, 2016 and 2015 was $67,350 and $110,000, respectively.
Net
Loss Per Share
Basic
net loss per share is computed by using the weighted-average number of common shares outstanding during the period. Diluted net
loss per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive
potential common shares consist of incremental common shares issuable upon exercise of stock options. No dilutive potential common
shares were included in the computation of diluted net loss per share because their impact was anti-dilutive. As of September
30, 2016, the Company had a total of 11,593,333 options and 16,449,734 warrants outstanding, which were excluded from the computation
of net loss per share because they are anti-dilutive. As of September 30, 2015, the Company had total of 9,075,000 options and
648,000 warrants which were excluded from the computation of net loss per share because they are anti-dilutive.
Fair
Value of Financial Instruments
The
Company’s financial instruments include cash and notes payable. The principal balance of the notes payable approximates
fair value because the current interest rates and terms offered to the Company for similar debt are substantially the same.
Recent
Accounting Pronouncements
There
are no recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect
on its financial position, results of operations, or cash flows.
The
Company has the following notes payable as of September 30, 2016 and December 31, 2015:
Note
|
|
Note
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
September 30, 2016
|
|
|
Balance
at
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable 1
|
|
September
30, 2014
|
|
Due
upon demand
|
|
|
5.0
|
%
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
$
|
100,000
|
|
Note
payable 2
|
|
February
26, 2015
|
|
Due
upon demand
|
|
|
12.0
|
%
|
|
$
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
Note
payable 3
|
|
March
21, 2015
|
|
March
20, 2017
|
|
|
12.0
|
%
|
|
$
|
125,000
|
|
|
|
125,000
|
|
|
|
125,000
|
|
Note
payable 4
|
|
April
2, 2015
|
|
Due
upon demand
|
|
|
12.0
|
%
|
|
$
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
Note
payable 5
|
|
April
15, 2015
|
|
Due
upon demand
|
|
|
12.0
|
%
|
|
$
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
Note
payable 6
|
|
April
30, 2015
|
|
Due
upon demand
|
|
|
12.0
|
%
|
|
$
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable
|
|
|
|
|
|
|
|
|
|
$
|
125,000
|
|
|
$
|
725,000
|
|
|
●
|
September
30, 2014
– The Company entered into a Demand Promissory Note with a third party lender for total borrowings
of $100,000. The outstanding principal is due on demand.
|
|
|
|
|
●
|
February
26, 2015
– The Company entered into an unsecured loan agreement with a third party lender in the principal amount
of $200,000. The loan bears interest at the rate of 12% per annum and is due on demand.
|
|
|
|
|
●
|
March
21, 2015
– The Company entered into an agreement with DelMorgan Group LLC (“DelMorgan”), pursuant
to which DelMorgan agreed to act as the Company’s exclusive financial advisor. In connection with the agreement, the
Company paid DelMorgan $125,000, which was advanced by a third party lender in exchange for an unsecured note payable issued
by the Company bearing interest at the rate of 12% per annum payable monthly beginning on April 20, 2015. The note payable
is due on the earlier of March 20, 2017, or upon completion of a private placement transaction, as defined in the agreement.
The Company expects this transaction to take place in the next twelve months. As a result, the $125,000 note payable has been
classified as a current liability as of September 30, 2016 and December 31, 2015 in the accompanying condensed consolidated
financial statements.
|
On
April 4, 2016. the Company issued an unsecured convertible note payable to Oceanside Strategies, Inc. (“Oceanside”)
in the amount of $680,268. This note supersedes and replaces all previous notes and current liabilities due to Oceanside for sums
Oceanside loaned to the Company in 2014 and 2015 which amounted to $600,000 of principal balance and $80,268 of accrued interest
as of April 4, 2016. This note bears interest at the rate of 12% per annum, compounded annually. In consideration for Oceanside’s
agreement to convert the prior notes from current demand notes and extend the maturity date to December 4, 2016, the Company granted
Oceanside the right to convert up to 30% of the amount of such note into shares of the Company’s common stock at $0.07 per
share and issued 2,429,530 share purchase warrants, exercisable at $0.07 per share until April 4, 2019 (see note 5).
Total
notes payable outstanding as of September 30, 2016 and December 31, 2015 amounted to $125,000 and $725,000, respectively. All
outstanding amounts are either due on demand, or expected to become due in the next 12 months, and have therefore all been classified
as current liabilities.
Total
interest expense for notes payable for the nine months ended September 30, 2016 and 2015 was $26,219 and $46,025, respectively.
Total interest expense for notes payable for the three months ended September 30, 2016 and 2015 was $3,781 and $23,945, respectively.
4.
|
NOTES
PAYABLE – RELATED PARTIES
|
The
Company has the following related parties notes payable:
Note
|
|
Issuance
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
September 30, 2016
|
|
|
Balance
at
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
1
|
|
Year
2015
|
|
April
1,2017
|
|
|
12.0
|
%
|
|
$
|
1,203,242
|
|
|
$
|
1,198,883
|
|
|
$
|
1,248,883
|
|
Note
2
|
|
December
2015
|
|
April
1, 2017
|
|
|
12.0
|
%
|
|
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
Note
4
|
|
December
1, 2015
|
|
April
1,2017
|
|
|
12.0
|
%
|
|
|
189,000
|
|
|
|
189,000
|
|
|
|
189,000
|
|
Note
5
|
|
December
1, 2015
|
|
April
1, 2017
|
|
|
12.0
|
%
|
|
|
111,901
|
|
|
|
111,901
|
|
|
|
111,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,499,784
|
|
|
|
1,749,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
discount
|
|
|
|
|
|
|
|
|
|
|
|
|
(159,610
|
)
|
|
|
(398,593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable – related parties, net
|
|
|
|
|
|
|
|
|
|
$
|
1,340,174
|
|
|
$
|
1,351,192
|
|
|
●
|
On
various dates during the year ended December 31, 2015, Rory J. Cutaia, the Company’s majority shareholder and Chief
Executive Officer, loaned the Company total principal amounts of $1,203,242. The loans were unsecured and all due on demand,
bearing interest at 12% per annum. On December 1, 2015, the Company entered into a Secured Convertible Note agreement with
Mr. Cutaia whereby all outstanding principal and accrued interest owed to Mr. Cutaia from previous loans amounting to an aggregate
total of $1,248,883 and due on demand, was consolidated under a note payable agreement, bearing interest at 12% per annum,
and converted from due on demand to due in full on April 1, 2017. In consideration for Mr. Cutaia’s agreement to consolidate
the loans and extend the maturity date, the Company granted Mr. Cutaia a senior security interest in substantially all current
and future assets of the Company. Per the terms of the agreement, at Mr. Cutaia’s discretion, he may convert up to $374,665
of outstanding principal, plus accrued interest thereon, into shares of common stock at a conversion rate of $0.07 per share.
|
|
|
|
|
●
|
On
December 1, 2015, the Company entered into an Unsecured Convertible Note with Mr. Cutaia in the amount of $189,000, bearing
interest at 12% per annum, representing a portion of Mr. Cutaia’s unpaid salary for 2015. The note extends the payment
terms of Mr. Cutaia’s accrued salary from on-demand to due in full on April 1, 2017. The outstanding principal and accrued
interest may be converted at Mr. Cutaia’s discretion into shares of common stock at a conversion rate of $0.07.
|
|
|
|
|
●
|
On
December 1, 2015, the Company entered into an Unsecured Note agreement with a consulting firm owned by Michael Psomas, a former
member of the Company’s Board of Directors, in the amount of $111,901 representing unpaid fees earned for consulting
services previously rendered but unpaid as of November 30, 2015. The outstanding amounts bear interest at 12% per annum, and
are due in full on April 1, 2017.
|
On
December 1, 2015, the Company granted 8,920,593 warrants to Mr. Cutaia and 799,286 warrants to Mr. Psomas as consideration for
agreeing to extend the payment terms of their respective note payable balances to a maturity date of April 1, 2017. The warrants
are immediately vested and have an exercise price of $0.07 and expire on November 30, 2018. The warrants have been valued using
the Black-Scholes valuation model and have an aggregate value of $424,758. The value has been recorded as a discount to the outstanding
notes payable - related parties on the accompanying consolidated balance sheet, and is being amortized into interest expense over
the extended maturity periods of April 1, 2017. During the three months ended September 30, 2016, the Company recorded amortization
of $80,242 of the discount into interest expense. The remaining discount balance as of September 30, 2016 amounted to $159,611.
Total
interest expense for notes payable to related parties for the nine months ended September 30, 2016 and 2015 was $144,177 and $23,850,
respectively. Total interest expense for notes payable to related parties for the three months ended September 30, 2016 and 2015
was $23,850 and $17,965, respectively.
5.
|
CONVERTIBLE
NOTES PAYABLE
|
The
Company has the following convertible notes payable:
Note
|
|
Issuance
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
September 30, 2016
|
|
|
Balance
at
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
1
|
|
April
4, 2016
|
|
August
4, 2017
|
|
|
12.0
|
%
|
|
$
|
343,326
|
|
|
$
|
343,326
|
|
|
$
|
-
|
|
Note
2
|
|
April
4, 2016
|
|
August
4, 2017
|
|
|
12.0
|
%
|
|
|
121,875
|
|
|
|
121,875
|
|
|
|
-
|
|
Note
3
|
|
April
4, 2016
|
|
December
4, 2016
|
|
|
12.0
|
%
|
|
|
680,268
|
|
|
|
680,268
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,145,469
|
|
|
|
-
|
|
Debt
discount
|
|
|
|
|
|
|
|
|
|
|
|
|
(210,822
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
convertible notes payable, net of debt discount
|
|
|
|
|
|
|
$
|
934,647
|
|
|
$
|
-
|
|
The
Company has the following convertible notes payable as of September 30, 2016:
|
●
|
Note
1 (April 4, 2016)
– The Company issued a secured convertible note to the Chief Executive Officer (“CEO”)
and a director of the Company, in the amount of $343,325.56, which represents additional sums that the CEO advanced to the
Company during the period from December 2015 through March 2016, and is in addition to all pre-existing loans made by, and
notes held by the CEO. This note bears interest at the rate of 12% per annum, compounded annually. In consideration for this
agreement to extend the repayment date to August 4, 2017, the Company granted to the CEO the right to convert up to 30% of
the amount of the such note into shares of the Company’s common stock at $0.07 per share and issued 2,452,325 share
purchase warrants, exercisable at $0.07 per share until April 4, 2019, which warrants represent 50% of the amount of such
note.
|
|
|
|
|
●
|
Note
2 (April 4, 2016)
– The Company issued an unsecured convertible note payable to the CEO in the amount of $121,875,
which represents the amount of the accrued but unpaid salary owed to the CEO for the period from December 2015 through March
2016. In consideration for this agreement to extend the payment date to August 4, 2017, the Company granted to the CEO the
right to convert the amount of the such note into shares of the Company’s common stock at $0.07 per share. This note
bears interest at the rate of 12% per annum, compounded annually.
|
|
|
|
|
●
|
Note
3 (April 3, 2016)
– The Company issued an unsecured convertible note payable to Oceanside Strategies, Inc. (“Oceanside”)
in the amount of $680,268. This note supersedes and replaces all previous notes and current liabilities due to Oceanside for
sums Oceanside loaned to the Company in 2014 and 2015. This note bears interest at the rate of 12% per annum, compounded annually.
In consideration for Oceanside’s agreement to convert the prior notes from current demand notes and extend the maturity
date to December 4, 2016, we granted Oceanside the right to convert up to 30% of the amount of such note into shares of the
Company’s common stock at $0.07 per share and issued 2,429,530 share purchase warrants, exercisable at $0.07 per share
until April 4, 2019 (see note 3).
|
The
warrants issued as part of issuances of convertible notes payable was valued using the Black-Scholes method and amounted to $252,987.
The Company recorded this amount as an off-set to convertible debt as a debt discount and is amortized over the life of the convertible
notes payable as interest expense. The Company had $21,082 of interest expense for the three and nine months ended September 30,
2016 as a result of amortization of debt discount related to convertible notes payable.
The
Company incurred additional $68,916 and $34,647 of interest expense from convertible notes payable for the nine and three months
ended September 30, 2016, respectively.
Common
Stock
The
Company’s common stock activity for the nine months ended September 30, 2016 is as follows:
|
|
Shares
|
|
Outstanding
at December 31, 2015
|
|
|
63,859,000
|
|
Share
repurchases
|
|
|
(8,311,324
|
)
|
Shares
issued to vendors for services
|
|
|
3,811,667
|
|
Shares
issued to board of directors for services
|
|
|
1,150,000
|
|
Shares
issued from stock subscription
|
|
|
32,135,556
|
|
Outstanding
at September 30, 2016
|
|
|
92,644,899
|
|
Stock
Repurchases
– On January 28, 2016, the Company entered into stock repurchase agreements (the “Repurchase Agreements”)
with three former employees and consultants to acquire an aggregate total of 9,011,324 shares of the Company’s common stock.
Pursuant to the terms of the agreements, the Company had the right to purchase the shares at a price of $0.02 per share on or
before April 15, 2016. In accordance with the terms of the Repurchase Agreements, the Company repurchased 8,311,324 shares for
total of $166,226 during the six months and three months ended September 30, 2016.
Shares
Issued to Vendors
– The Company issued common shares to vendors for services rendered and are expensed based on
fair market value of the stock price at the date of grant. For the nine months ended September 30, 2016, the Company issued 3,811,667
number of shares to vendors and recorded stock compensation expense of $475,608. For the three months ended September 30, 2016,
the Company issued 1,411,667 number of shares to vendors and recorded stock compensation expense of $217,403.
Shares
Issued to Board of Directors
– The Company issued common shares to board of directors for services rendered and
are expensed based on fair market value of the stock price at the date of grant. For the nine months ended September 30, 2016,
the Company issued 1,150,000 number of shares to board of directors and recorded stock compensation expense of $321,682. For the
three months ended September 30, 2016, the Company issued 750,000 number of shares to board of directors and recorded stock compensation
expense of $97,500.
Shares
Issued from Stock Subscription
– The Company issued stock subscription to investors. For the nine months ended September
30, 2016, the Company issued 32,135,556 common shares for a net proceed of $1,464,850. For the three months ended September 30,
2016, the Company issued 11,713,334 common shares for a net proceed of $545,850.
Stock
Options
Effective
October 16, 2014, the Company adopted the 2014 Stock Option Plan (the “Plan”) under the administration of the board
of directors to retain the services of valued key employees and consultants of the Company.
At
its discretion, the Company grants share option awards to certain employees and non-employees, as defined by ASC 718, Compensation—Stock
Compensation, under the 204 Stock Option Plan (the “Plan”) and accounts for its share-based compensation in accordance
with ASC 718.
The
fair value of each share option award on the date of grant is estimated using the Black-Scholes method based on the following
weighted-average assumptions:
|
|
3
Months Ended
September
30,
|
|
|
9
Months Ended
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rate
|
|
|
1.22
|
%
|
|
|
1.07
|
%
|
|
|
1.22%
- 1.24%
|
|
|
|
1.07%
- 1.65%
|
|
Expected term (years)
|
|
|
1
– 2 years
|
|
|
|
2
- 3 years
|
|
|
|
1
– 2 years
|
|
|
|
2
- 3 years
|
|
Expected volatility
|
|
|
87.18%
– 153.07%
|
|
|
|
81.80
|
%
|
|
|
87.19%
– 153.07
%
|
|
|
|
81.80
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with
the expected term of the share option award; the expected term represents the weighted-average period of time that share option
awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior;
the expected volatility is based upon historical volatility of the Company’s common stock and peers; and the expected dividend
yield is based upon the Company’s current dividend rate and future expectations
A
summary of option activity for the nine months ended September 30, 2016 is presented below.
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2015
|
|
|
7,656,250
|
|
|
$
|
0.66
|
|
|
|
4.03
|
|
|
|
|
|
Granted
|
|
|
5,610,000
|
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or
expired
|
|
|
(1,672,917
|
)
|
|
|
0.93
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
11,593,333
|
|
|
$
|
0.34
|
|
|
|
0.90
|
|
|
$
|
1,623,067
|
|
Vested and expected to vest at September
30, 2016
|
|
|
6,288,669
|
|
|
$
|
0.45
|
|
|
|
|
|
|
$
|
880,414
|
|
Exercisable at September 30, 2016
|
|
|
5,105,276
|
|
|
$
|
0.49
|
|
|
|
|
|
|
$
|
714,739
|
|
The
Company recognized $115,874 and $347,763 in share-based compensation expense for the three and nine months ended September 30,
2016, respectively, compared to $ 476,732 and $ 729,773 in share-based compensation expense for the three and nine months ended
September 30, 2015, respectively. As of September 30, 2016, total unrecognized stock-based compensation expense was $1,261,402,
which is expected to be recognized as an operating expense through November 2018.
Warrants
The
Company has the following warrants as of September 30, 2016:
|
|
Issuance
Date
|
|
Expiration
Date
|
|
Warrant
Shares
|
|
|
Exercise
Price
|
|
Warrant #1
|
|
November 12, 2014
|
|
November 12, 2019
|
|
|
600,000
|
|
|
$
|
0.50
|
|
Warrant #2
|
|
March 21, 2015
|
|
March 20, 2018
|
|
|
48,000
|
|
|
$
|
0.10
|
|
Warrant #3
|
|
October 30, 2015
|
|
October 30, 2020
|
|
|
600,000
|
|
|
$
|
0.50
|
|
Warrant #4
|
|
December 1, 2015
|
|
April 1, 2017
|
|
|
9,719,879
|
|
|
$
|
0.07
|
|
Warrant #5
|
|
April 4, 2016
|
|
October 30, 2020
|
|
|
600,000
|
|
|
$
|
0.50
|
|
Warrant #6
|
|
April 4, 2016
|
|
April 4, 2019
|
|
|
2,452,325
|
|
|
$
|
0.07
|
|
Warrant #7
|
|
April 4, 2016
|
|
April 4, 2019
|
|
|
2,429,530
|
|
|
$
|
0.07
|
|
Outstanding at September 30, 2016
|
|
|
|
|
16,449,734
|
|
|
|
|
|
On
November 12, 2014, the Company granted warrants to a consultant to purchase 600,000 shares of common stock at an exercise price
of $0.50 per share. The warrants expire on November 12, 2019 and were fully vested on the grant date.
On
March 21, 2015, in connection with the DelMorgan agreement, the Company issued 48,000 warrants, each exercisable into one share
of common stock at an exercise price of $0.10 per share. The warrants were fully vested on the date of the grant and expire on
March 20, 2018. The warrants have been valued using the Black-Scholes pricing model as of the contract date. The total value of
$20,114 has been recorded as a component of prepaid expenses and other current assets in the accompanying condensed consolidated
balance sheet and is being amortized over the life of the agreement.
On
October 30, 2015, the Company granted warrants to a consultant to purchase 600,000 shares of common stock at an exercise price
of $0.50 per share. The warrants expire on October 30, 2020 and were fully vested on the grant date.
On
December 1, 2015, the Company granted 9,719,879 warrants as consideration for the Company’s Chief Executive Officer and
a member of the Board of Directors for agreeing to extend the payment terms of his note payable balances to a maturity date of
April 1, 2017. The warrants have exercise price of $0.07 per share.
On
April 4, 2016, the Company issued a secured convertible note to the Chief Executive Officer (“CEO”) and member of
the Board of Directors, in the amount of $343,326, which represents additional sums that the CEO advanced to the Company during
the period from December 2015 through March 2016, and is addition to all pre-existing loans made by, and notes held by the CEO.
This note bears interest at the rate of 12% per annum, compounded annually. In consideration for this agreement to extend the
repayment date to August 4, 2017, the Company granted to the CEO the right to convert up to 30% of the amount of the such note
into shares of the Company’s common stock at $0.07 per share and issued 2,452,325 share purchase warrants, exercisable at
$0.07 per share until April 4, 2019, which warrants represent 50% of the amount of such note.
On
April 4, 2016, the Company issued an unsecured convertible note payable to Oceanside Strategies, Inc. (“Oceanside”)
in the amount of $680,268. This note supersedes and replaces all previous notes and current liabilities due to Oceanside for sums
Oceanside loaned to the Company in 2014 and 2015. This note bears interest at the rate of 12% per annum, compounded annually.
In consideration for Oceanside’s agreement to convert the prior notes from current demand notes and extend the maturity
date to December 4, 2016, we granted Oceanside the right to convert up to 30% of the amount of such note into shares of the Company’s
common stock at $0.07 per share and issued 2,429,530 share purchase warrants, exercisable at $0.07 per share until April 4, 2019
7.
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases
In
June 2015, the Company entered into an facility operating lease agreement for its office which provides for monthly rent of $6,700
through June 25, 2016. In June 2016, the Company moved to a new facility and entered into a new facility operating lease agreement
for its office which provided for monthly rent $3,130 through June 2017.
The
Company had total rent expense for the nine months ended September 30, 2016 and 2015 of $69,455 and $123,328, respectively, and
three months ended September 30, 2016 and 2015 of $16,263 and $13,425, respectively.
On
October 3, 2016, the Company entered into a Consulting Agreement (the “Agreement”) with a third-party consulting firm
(the “Consultants”) for three months, ending on December 31, 2016. The Company will compensate the Consultants in
the amount of $2,500 and restricted stock of 175,000 shares for Consultant’s services as defined in the Agreement.
ITEM
1A – RISK FACTORS
An
investment in our common stock involves a number of very significant risks. You should carefully consider the following risks
and uncertainties in addition to other information in this annual report in evaluating our company and its business before purchasing
our securities. Our business, operating results and financial condition could be seriously harmed as a result of the occurrence
of any of the following risks. You could lose all or part of your investment due to any of these risks.
Risks
Related to Our Business
We
have incurred losses to date and we expect our operating expenses to increase in the foreseeable future, which may make it more
difficult for us to achieve and maintain profitability.
To
date, we have generated very little revenues from our operations and have incurred losses since inception. Our net loss was $3,075,399
for the nine months ended September 30, 2016. As of September 30, 2016, we had an accumulated deficit of $20,074,694. We will
need to raise additional working capital to continue our normal and planned operations. We will need to generate and sustain significant
revenue levels in future periods in order to become profitable, and, even if we do, we may not be able to maintain or increase
our level of profitability. We anticipate that our operating expenses will increase substantially in the foreseeable future as
we undertake increased technology and production efforts to support our various business units and increase our marketing and
sales efforts to drive an increase in the number of consumers utilizing our services. In addition, as a public company, we will
incur significant accounting, legal and other expenses that we did not incur as a private company. These expenditures will make
it necessary for us to continue to raise additional working capital and make it harder for us to achieve and maintain profitability.
Our efforts to grow our business may be more costly than we expect, and we may not be able to generate sufficient revenue to offset
our higher operating expenses. If we are forced to reduce our expenses, our growth strategy could be compromised. We may incur
significant losses in the future for a number of reasons, including unforeseen expenses, difficulties, complications and delays
and other unknown events. As a result, we can provide no assurance as to whether or when we will achieve profitability. If we
are not able to raise sufficient working capital or to achieve and maintain profitability, the value of our company and our common
stock could decline significantly.
Our
ability to grow and compete in the future will be adversely affected if adequate capital is not available to us or not available
on terms favorable to us.
The
ability of our business to continue its normal and planned operations and to grow and compete will depend on the availability
of adequate capital. We cannot assure you that we will be able to obtain equity or debt financing on acceptable terms, or at all,
to continue our normal and planned operations and to implement our growth strategy. As a result, we cannot assure you that adequate
capital will be available to continue our normal and planned operations and to finance our current growth plans, take advantage
of business opportunities, or respond to competitive pressures, any of which could harm our business.
We
will need substantial additional funding to continue our operations, which could result in dilution to our stockholders. We may
not be able to raise capital when needed, if at all, which could cause us to have insufficient funds to pursue our operations,
or to delay, reduce or eliminate our development of new programs or commercialization efforts.
We
expect to incur additional costs associated with operating as a public company and to require substantial additional funding to
continue to pursue our business and continue with our expansion plans. We may also encounter unforeseen expenses, difficulties,
complications, delays and other unknown factors that may increase our capital needs and/or cause us to spend our cash resources
faster than we expect. Accordingly, we expect that we will need to obtain substantial additional funding in order to continue
our operations. To date, we have financed our operations entirely through equity investments by founders and other investors and
the incurrence of debt, and we expect to continue to do so in the foreseeable future. Additional funding from those or other sources
may not be available when or in the amounts needed, on acceptable terms, or at all. If we raise capital through the sale of equity,
or securities convertible into equity, it would result in dilution to our existing stockholders, which could be significant depending
on the price at which we may be able to sell our securities. If we raise additional capital through the incurrence of additional
indebtedness, we would likely become subject to further covenants restricting our business activities, and holders of debt instruments
may have rights and privileges senior to those of our equity investors. In addition, servicing the interest and principal repayment
obligations under debt facilities could divert funds that would otherwise be available to support development of new programs
and marketing to current and potential new clients. If we are unable to raise capital when needed or on attractive terms, we could
be forced to delay, reduce or eliminate development of new programs or future marketing efforts. Any of these events could significantly
harm our business, financial condition and prospects.
Security
breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and
reputation to suffer.
In
the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business
information and that of our customers, and personally identifiable information of our customers and employees. The secure processing,
maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures,
our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance
or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly
disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings,
liability under laws that protect the privacy of personal information, regulatory penalties, a disruption of our operations, damage
to our reputation, or a loss of confidence in our business, any of which could adversely affect our business, revenues and competitive
position.
Our
business is highly competitive and any failure to adapt to changing consumer preferences may adversely affect our business and
financial results.
We
operate in a highly competitive, consumer-driven and rapidly changing environment. Our success will, to a large extent, be dependent
on our ability to acquire, develop, adopt, upgrade and exploit new and existing technologies to address consumers’ changing
demands and distinguish our services from those of our competitors. We may not be able to accurately predict technological trends
or the success of new products and services. If we choose technologies or equipment that are less effective, cost-efficient or
attractive to our customers than those chosen by our competitors, or if we offer services that fail to appeal to consumers, are
not available at competitive prices or that do not function as expected, our competitive position could deteriorate, and our business
and financial results could suffer. The ability of our competitors to introduce new technologies, products and services more quickly
than we do may adversely affect our competitive position. Furthermore, advances in technology, decreases in the cost of existing
technologies or changes in competitors’ product and service offerings may require us in the future to make additional research
and development expenditures or to offer products and services at no additional charge or at a lower price. In addition, the uncertainty
of our ability, and the costs, to obtain intellectual property rights from third parties could impact our ability to respond to
technological advances in a timely and effective manner.
We
expect that the success of our business will be highly correlated to general economic conditions.
We
expect that demand for our products and services will be highly correlated with general economic conditions, as we expect a substantial
portion of our revenue will be derived from discretionary spending by individuals, which typically falls during times of economic
instability. Declines in economic conditions in the United States or in other countries in which we may operate may adversely
impact our financial results. Because such declines in demand are difficult to predict, we or the industry may have increased
excess capacity as a result. An increase in excess capacity may result in declines in prices for our products and services. Our
ability to grow or maintain our business may be adversely affected by sustained economic weakness and uncertainty, including the
effect of wavering consumer confidence, high unemployment and other factors.
Legal
challenges to our intellectual property rights could adversely affect our financial results and operations.
We
rely on licenses and other agreements with our vendors and other parties and other intellectual property rights to conduct our
operations. Legal challenges to our intellectual property rights and claims of intellectual property infringement by third parties
could require that we enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability or
be enjoined preliminarily or permanently from further use of the intellectual property in question or from the continuation of
our businesses as currently conducted. We may need to change our business practices if any of these events occur, which may limit
our ability to compete effectively and could have an adverse effect on our results of operations. Even if we believe any such
challenges or claims are without merit, they can be time-consuming and costly to defend and divert management’s attention
and resources away from our business.
The
capacity, reliability and security of our information technology hardware and software infrastructure are important to the operation
of our current business, which would suffer in the event of system failures. Likewise, our ability to expand and update our information
technology infrastructure in response to our growth and changing needs is important to the continued implementation of our new
service offering initiatives. Our inability to expand or upgrade our technology infrastructure could have adverse consequences,
which could include the delayed provision of services or implementation of new service offerings, and the diversion of development
resources. We rely on third parties for various aspects of our hardware and software infrastructure. Third parties may experience
errors or disruptions that could adversely impact us and over which we may have limited control. Interruption and/or failure of
any of these systems could disrupt our operations and damage our reputation, thus adversely impacting our ability to provide our
services, retain our current users and attract new users. In addition, our information technology hardware and software infrastructure
may be vulnerable to unauthorized access, misuse, computer viruses or other events that could have a security impact. If one or
more of such events occur, our customer and other information processed and stored in, and transmitted through, our information
technology hardware and software infrastructure, or otherwise, could be compromised, which could result in significant losses
or reputational damage. We may be required to expend significant additional resources to modify our protective measures or to
investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses.
We
are dependent on third parties to, among other things, supply our booths, develop our applications, provide the bandwidth necessary
to transmit content, and utilize the content derived therefrom for the potential generation of revenues.
We
depend on third party service providers, suppliers and licensors to supply some of the services, hardware, software and operational
support necessary to provide some of our products and services. Some of these third parties do not have a long operating history
or may not be able to continue to supply the equipment and services we desire in the future. Some of our vendors and service providers
represent our sole source of supply or have, either through contract or as a result of intellectual property rights, a position
of some exclusivity. If demand exceeds these vendors’ capacity, or if these vendors experience operating or financial difficulties
or are otherwise unable to provide the equipment or services we need in a timely manner, at our specifications and at reasonable
prices, our ability to provide some products and services might be materially adversely affected, or the need to procure or develop
alternative sources of the affected materials or services might delay our ability to serve our users. These events could materially
and adversely affect our ability to retain and attract users, and have a material negative impact on our operations, business,
financial results and financial condition.
Our
business may be affected by changing consumer preferences or by failure of the public to accept any new product offerings we may
pursue.
The
production and distribution of entertainment content is an inherently risky business because the revenue that may be derived depends
primarily on the content’s acceptance by the public, which is difficult to predict. Consumer and audience tastes change
frequently and it is a challenge to anticipate what offerings will be successful at a certain point in time. In addition, competing
entertainment content, the availability of alternative forms of entertainment and leisure time activities, general economic conditions,
piracy and increasing digital and on-demand distribution offerings may also affect the audience for our content. Our expenses
may increase as we invest in new programming ideas, and there is no guarantee that the new programming will be successful or generate
sufficient revenue to recoup the expenditures.
Risks
Related to Ownership of our Common Stock
Our
board of directors is authorized to issue additional shares of our common stock that would dilute existing stockholders.
We
are currently authorized to issue up to 200,000,000 shares of common stock and 15,000,000 shares of preferred stock, of which
92,644,899 shares of common stock and no shares of preferred stock are currently issued and outstanding as of September 30, 2016.
We expect to seek additional financing in order to provide working capital to our business. Our board of directors has the power
to issue any or all of such authorized but unissued shares at any price they consider sufficient, without stockholder approval.
The issuance of additional shares of common stock in the future will reduce the proportionate ownership and voting power of current
stockholders.
Trading
on the OTC Bulletin Board and the OTCQB may be volatile and sporadic, which could depress the market price of our common stock
and make it difficult for our stockholders to resell their shares.
Our
common stock is quoted on the Over the Counter Bulletin Board and on the OTCQB operated by the OTC Markets Group, Inc. Trading
in stock quoted on these markets is often thin and characterized by wide fluctuations in trading prices, due to many factors that
may have little to do with our operations or business prospects. This volatility could depress the market price of our common
stock for reasons unrelated to operating performance. Moreover, neither of these markets are a stock exchange, and trading of
securities on these markets is often more sporadic than the trading of securities listed on a national securities exchange like
the NASDAQ or the NYSE. Accordingly, stockholders may have difficulty reselling any of our shares.
A
decline in the price of our common stock could affect our ability to raise further working capital, it may adversely impact our
ability to continue operations and we may go out of business.
A
prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction
in our ability to raise capital. Because we may attempt to acquire a significant portion of the funds we need in order to conduct
our planned operations through the sale of equity securities, a decline in the price of our common stock could be detrimental
to our liquidity and our operations because the decline may cause investors not to choose to invest in our stock. lf we are unable
to raise the funds we require for all our planned operations, we may be forced to reallocate funds from other planned uses and
may suffer a significant negative effect on our business plan and operations, including our ability to develop new products and
continue our current operations. As a result, our business may suffer, and not be successful and we may go out of business. We
also might not be able to meet our financial obligations if we cannot raise enough funds through the sale of our common stock
and we may be forced to go out of business.
Because
we do not intend to pay any cash dividends on our shares of common stock in the near future, our stockholders will not be able
to receive a return on their shares unless they sell them.
We
intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any
cash dividends on our common stock in the near future. The declaration, payment and amount of any future dividends will be made
at the discretion of the board of directors, and will depend upon, among other things, the results of operations, cash flows and
financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There
is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount
of any such dividend. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they
sell them.
If
we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet
our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory
scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on
the market price for shares of our common stock.
Effective
internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. We maintain a system
of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal
executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles.
As
a public company, we have significant requirements for enhanced financial reporting and internal controls. We are required to
document and test our internal control procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley
Act of 2002
, which requires annual management assessments of the effectiveness of our internal controls over financial reporting
and a report by our independent registered public accounting firm addressing these assessments. The process of designing and implementing
effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and economic
and regulatory environments, and to expend significant resources to maintain a system of internal controls that is adequate to
satisfy our reporting obligations as a public company.
We
cannot assure you that we will, in the future, identify areas requiring improvement in our internal control over financial reporting.
We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we
will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth.
If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet
our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory
scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on
the market price for shares of our common stock.
The
market price of our common stock may be volatile.
The
market price of our common stock may be highly volatile. Some of the factors that may materially affect the market price of our
common stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions or
trends in the industry in which we operate, or sales of our common stock. These factors may materially adversely affect the market
price of our common stock, regardless of our performance. In addition, public stock markets have experienced extreme price and
trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons
frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect
the market price of our common stock.
Because
our directors and executive officers are among our largest stockholders, they can exert significant control over our business
and affairs and have actual or potential interests that may depart from those of investors.
Certain
of our executive officers and directors own a significant percentage of our outstanding capital stock. As of the date of this
annual report, our executive officers and directors and their respective affiliates beneficially own over 50% of our outstanding
voting stock. The holdings of our directors and executive officers may increase further in the future upon vesting or other maturation
of exercise rights under any of the options or warrants they may hold or in the future be granted, or if they otherwise acquire
additional shares of our common stock. The interests of such persons may differ from the interests of our other stockholders.
As a result, in addition to their board seats and offices, such persons will have significant influence and control over all corporate
actions requiring stockholder approval, irrespective of how our company’s other stockholders may vote, including the following
actions:
|
●
|
to
elect or defeat the election of our directors;
|
|
|
|
|
●
|
to
amend or prevent amendment of our certificate of incorporation or by-laws;
|
|
|
|
|
●
|
to
effect or prevent a merger, sale of assets or other corporate transaction; and
|
|
|
|
|
●
|
to
control the outcome of any other matter submitted to our stockholders for a vote.
|
This
concentration of ownership by itself may have the effect of impeding a merger, consolidation, takeover or other business consolidation,
or discouraging a potential acquirer from making a tender offer for our common stock, which in turn could reduce our stock price
or prevent our stockholders from realizing a premium over our stock price.
Penny
stock rules will limit the ability of our stockholders to sell their stock.
The
Securities and Exchange Commission has adopted regulations which generally define a “penny stock” to be any equity
security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject
to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements
on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited
investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess
of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document
in a form prepared by the Securities and Exchange Commission that provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing
the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer
and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special
written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the
secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the
ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit
the marketability of our common stock.
The
Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements that may also limit a stockholder’s
ability to buy and sell our stock.
In
addition to the “penny stock” rules described above, FINRA has adopted rules that require that, in recommending an
investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other
information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced
securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend
that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on
the market for our shares.
Trends,
Risks and Uncertainties
We
have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to
what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise.
Investors should carefully consider all of such risk factors before making an investment decision with respect to our common stock.
ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
This
quarterly report contains “forward-looking statements”. All statements other than statements of historical fact are
“forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any
projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management
for future operations; any statements concerning proposed new services, products or developments; any statements regarding future
economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.
Forward-looking
statements may include the words “may,” “could,” “estimate,” “intend,” “continue,”
“believe,” “expect” or “anticipate” or other similar words. These forward-looking statements
present our estimates and assumptions only as of the date of this quarterly report. Accordingly, readers are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. Except as required
by applicable law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information,
future events or otherwise, even if experience or future changes make it clear that any projected results or events expressed
or implied therein will not be realized. You are advised, however, to consult any further disclosures we make in future public
filings, statements and press releases.
Forward-looking
statements in this quarterly report include express or implied statements concerning our future revenues, expenditures, capital
and funding requirements; the adequacy of our current cash and working capital to fund present and planned operations and financing
needs; our proposed expansion of, and demand for, product offerings; the growth of our business and operations through acquisitions
or otherwise; and future economic and other conditions both generally and in our specific geographic and product markets. These
statements are based on currently available operating, financial and competitive information and are subject to various risks,
uncertainties and assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking
statements due to a number of factors including, but not limited to, those set forth below in the section entitled “Risk
Factors” in this quarterly report, which you should carefully read. Given those risks, uncertainties and other factors,
many of which are beyond our control, you should not place undue reliance on these forward-looking statements. You should be prepared
to accept any and all of the risks associated with purchasing any securities of our company, including the possible loss of all
of your investment.
In
this quarterly report, unless otherwise specified, all references to “common shares” refer to the common shares in
our capital stock.
As
used in this quarterly report on Form 10-Q, the terms “we”, “us” “our” and “bBooth”
refer to bBooth, Inc., a Nevada corporation, and our wholly-owned subsidiary, bBooth (USA), Inc. unless otherwise specified.
The
discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial
statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate estimates
and judgments, including those described in greater detail below. We base our estimates on historical experience and on various
other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
The
following discussion should be read together with the information contained in the unaudited condensed consolidated financial
statements and related notes included in Item 1 – Financial Statements, in this Form 10-Q.
Overview
We
develop and license cloud-based SaaS CRM, sales lead generation, and social engagement software on mobile and desktop platforms
for sales-based organizations, consumer brands, and artists seeking greater levels of customer, consumer, and fan engagement.
Our software platform is enterprise scalable and incorporates unique, proprietary, push-to-screen, interactive audio/video messaging
and communications technology.
The
Company was previously engaged in the manufacture and operation of Internet connected, broadcast-quality portable recording studio
kiosks, branded and marketed as “bBooth,” which were integrated into a social media, messaging, gaming, music streaming
and video sharing app. The bBooth kiosks were deployed in shopping malls and other high-traffic venues in the United States.
The
Company’s business has evolved from one based primarily on our mall-based bBooth kiosks and mobile apps, narrowly focused
on talent discovery, to a cloud-based, enterprise level SaaS platform, branded and marketed as bNotifi, developed to address a
much larger target market that includes corporate users, consumer brands, and media companies, among others. Our bNotifi technology
represents a new innovative platform for CRM, lead-generation, advertising, fan engagement, and consumer brand activation. Through
fully integrated mobile, desktop, and web based applications, our bNotifi technology provides push-to-screen, media-rich, interactive
audio/video messaging and communications for higher levels of social engagement and interactive online training and teaching applications,
as well as an enterprise scale lead generation and customer retention platform for sales professionals and others. Our bNotifi
platform also includes a robust back-end administration console with data collection capabilities, among other features, designed
to provide small, medium and large-scale enterprise users, among others, with the ability to send, receive and manage enhanced,
media-rich, highly-engaging messaging for both internal and external communications.
Critical
Accounting Policies
For
a summary of our critical accounting policies, refer to Note 2 of our unaudited condensed consolidated financial statements included
under Item 1 – Financial Statements in this Form 10-Q.
Results
of Operations for the Three Months Ended September 30, 2016 as Compared to the Three Months Ended September 30, 2015.
Revenues
We
generated $16,243 revenue for the three months ended September 30, 2016 compared to $0 for the three months ended September 30,
2015.
Operating
Expenses
Research
and development expenses were $67,350 for the three months ended September 30 2016, as compared to $110,000 for the three months
ended September 30, 2015. The decrease was primarily due to decrease in software develop enhancements and modifications during
the current quarter.
General
and administrative expenses for the three months ended September 30, 2016 and 2015 was $854,214 and $1,307,875, respectively.
The decrease was primarily due to reduction of salary related expenses due to reduction of headcounts.
Interest
expense, net, for the three months ended September 30, 2016 amounted to $185,145. This represented interest expense on outstanding
notes payable, notes payable to related parties, convertible notes payable and amortization of debt discount during this timeframe.
The amount of interest expense for the same period in 2015 was $25,961. The increase in interest expense for the three months
ended September 30, 2016 compared to the same period in 2015 was due to increase in borrowings and amortization of convertible
debt discount.
Results
of Operations for the Nine Months Ended September 30, 2016 as Compared to the Nine September Ended September 30, 2015.
Revenues
We
generated $47,836 revenue for the nine months ended September 30, 2016 compared to $0 for the nine months ended September 30,
2015.
Operating
Expenses
Research
and development expenses were $189,166 for the nine months ended September 30 2016, as compared to $191,588 for the nine months
ended September 30, 2015. The decrease was primarily due to increase in software develop enhancements and modifications during
the period.
General
and administrative expenses for the nine months ended September 30, 2016 and 2015 was $2,408,753 and $3,767,012, respectively.
The decrease was primarily due to reduction of salary related expenses and consulting expenses due to reduction of headcounts
and related activities.
Interest
expense, net, for the nine months ended September 30, 2016 amounted to $525,316. This represented interest expense on outstanding
notes payable, convertible notes payable and amortization of debt discount during this timeframe. The amount of interest expense
for the same period in 2015 was $68,975. The increase in interest expense for the three months ended September 30, 2016 compared
to the same period in 2015 was due to increase in borrowings and amortization of convertible debt discount.
Liquidity
and Capital Resources
The
following is a summary of our cash flows from operating, investing and financing activities for the nine months ended September
30, 2016 and 2015.
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2016
|
|
|
September
30, 2015
|
|
|
|
|
|
|
|
|
Cash used in operating activities
|
|
$
|
(1,320,202
|
)
|
|
$
|
(2,452,183
|
)
|
Cash used in investing activities
|
|
|
(2,494
|
)
|
|
|
(105,929
|
)
|
Cash provided by financing activities
|
|
|
1,381,070
|
|
|
|
1,400,942
|
|
Increase / (Decrease)
in cash
|
|
$
|
58,374
|
|
|
$
|
(1,157,170
|
)
|
For
the nine months ended September 30 2016, our cash flows used in operating activities amounted to $1,320,202 compared to cash used
in 2015 of $2,452,183. The primary reason for the change relates to higher spending in 2015 relating to consulting, professional
fees and salary related costs in order to execute our business plan compared to 2016.
We
had $2,494 cash used in investing activities during the nine months ended September 30, 2016 for acquisition of property and equipment.
Our cash used in investing activities in 2015 consisted of $62,029 paid for the acquisition of property and equipment and $43,900
paid for the acquisition of Songstagram.
Our
cash provided by financing activities for the nine months ended September 30, 2016 amounted to $1,381,070 which represented $1,464,850
of proceeds received from issuances of common stock and $82,446 of additional net borrowings from our Chief Executive Officer
reduced by repurchase of shares in the amount of $166,226. Our cash provided by financing activities for the nine months ended
September 30, 2015 amounted to $1,400,942 from proceeds received from issuances of common stock of $1,500,942 and reduced by payments
on notes payable of $100,000.
As
of September 30, 2016, we had cash of $161,393. We estimate our operating expenses for the next three months may continue to exceed
any revenues we generate, and we may need to raise capital through either debt or equity offerings to continue operations.
We
are in the early stages of our business. We are required to fund growth from financing activities, and we intend to rely on a
combination of equity and debt financings. Due to market conditions and the early stage of our operations, there is considerable
risk that our company will not be able to raise such financings at all, or on terms that are not overly dilutive to our existing
shareholders. We can offer no assurance that we will be able to raise such funds.
Going
Concern
We
have incurred operating losses since inception and have negative cash flows from operations. We also have an accumulated deficit
of $20,074,694 as of September 30, 2016. As a result, our continuation as a going concern is dependent on our ability to obtain
additional financing until we can generate sufficient cash flows from operations to meet our obligations. Management intends to
continue to seek additional debt or equity financing to continue our company’s operations. Management also intends to look
at mergers with, or acquisitions of, other related entities to grow our company’s business and customer base.
These
financial statements have been prepared on a going concern basis, which implies that we will continue to meet our obligations
and continue our operations for the next fiscal year. The continuation of our company as a going concern is dependent upon our
ability to obtain necessary debt or equity financing to continue operations until we begin generating positive cash flow.
There
is no assurance that we will ever be profitable. The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result
should we be unable to continue as a going concern.
NOTES
PAYABLE
The
Company has the following notes payable as of September 30, 2016 and December 31, 2015:
Note
|
|
Note Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
September 30, 2016
|
|
|
Balance
at
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable 1
|
|
September 30, 2014
|
|
Due upon demand
|
|
|
5.0
|
%
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
$
|
100,000
|
|
Note payable 2
|
|
February 26, 2015
|
|
Due upon demand
|
|
|
12.0
|
%
|
|
$
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
Note payable 3
|
|
March 21, 2015
|
|
March 20, 2017
|
|
|
12.0
|
%
|
|
$
|
125,000
|
|
|
|
125,000
|
|
|
|
125,000
|
|
Note payable 4
|
|
April 2, 2015
|
|
Due upon demand
|
|
|
12.0
|
%
|
|
$
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
Note payable 5
|
|
April 15, 2015
|
|
Due upon demand
|
|
|
12.0
|
%
|
|
$
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
Note payable 6
|
|
April 30, 2015
|
|
Due upon demand
|
|
|
12.0
|
%
|
|
$
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable
|
|
|
|
|
|
|
|
|
|
|
|
$
|
125,000
|
|
|
$
|
725,000
|
|
●
|
September
30, 2014
– The Company entered into a Demand Promissory Note with a third party lender for total borrowings
of $100,000. The outstanding principal is due on demand.
|
|
|
●
|
February
26, 2015
– The Company entered into an unsecured loan agreement with a third party lender in the principal amount
of $200,000. The loan bears interest at the rate of 12% per annum and is due on demand.
|
|
|
●
|
March
21, 2015
– The Company entered into an agreement with DelMorgan Group LLC (“DelMorgan”), pursuant
to which DelMorgan agreed to act as the Company’s exclusive financial advisor. In connection with the agreement, the
Company paid DelMorgan $125,000, which was advanced by a third party lender in exchange for an unsecured note payable issued
by the Company bearing interest at the rate of 12% per annum payable monthly beginning on April 20, 2015. The note payable
is due on the earlier of March 20, 2017, or upon completion of a private placement transaction, as defined in the agreement.
The Company expects this transaction to take place in the next twelve months. As a result, the $125,000 note payable has been
classified as a current liability as of September 30, 2016 and December 31, 2015 in the accompanying condensed consolidated.
|
On
April 4, 2016. the Company issued an unsecured convertible note payable to Oceanside Strategies, Inc. (“Oceanside”)
in the amount of $680,268. This note supersedes and replaces all previous notes and current liabilities due to Oceanside for sums
Oceanside loaned to the Company in 2014 and 2015 which amounted to $600,000 of principal balance and $80,268 of accrued interest
as of April 4, 2016. This note bears interest at the rate of 12% per annum, compounded annually. In consideration for Oceanside’s
agreement to convert the prior notes from current demand notes and extend the maturity date to December 4, 2016, the Company granted
Oceanside the right to convert up to 30% of the amount of such note into shares of the Company’s common stock at $0.07 per
share and issued 2,429,530 share purchase warrants, exercisable at $0.07 per share until April 4, 2019.
Total
notes payable outstanding as of September 30, 2016 and December 31, 2015 amounted to $125,000 and $725,000, respectively. All
outstanding amounts are either due on demand, or expected to become due in the next 12 months, and have therefore all been classified
as current liabilities.
Total
interest expense for notes payable for the nine months ended September 30, 2016 and 2015 was $26,219 and $46,025, respectively.
Total interest expense for notes payable for the three months ended September 30, 2016 and 2015 was $3,781 and $23,945, respectively.
NOTES
PAYABLE – RELATED PARTIES
The
Company has the following related parties notes payable:
Note
|
|
Issuance Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
September 30, 2016
|
|
|
Balance
at
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 1
|
|
Year 2015
|
|
April 1,2017
|
|
|
12.0
|
%
|
|
$
|
1,203,242
|
|
|
$
|
1,198,883
|
|
|
$
|
1,248,883
|
|
Note 2
|
|
December 2015
|
|
April 1, 2017
|
|
|
12.0
|
%
|
|
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
Note 4
|
|
December 1, 2015
|
|
April 1,2017
|
|
|
12.0
|
%
|
|
|
189,000
|
|
|
|
189,000
|
|
|
|
189,000
|
|
Note 5
|
|
December 1, 2015
|
|
April 1, 2017
|
|
|
12.0
|
%
|
|
|
111,901
|
|
|
|
111,901
|
|
|
|
111,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,499,784
|
|
|
|
1,749,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
discount
|
|
|
|
|
|
|
|
|
|
|
|
|
(159,610
|
)
|
|
|
(398,593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable – related parties, net
|
|
|
|
|
|
|
|
|
|
$
|
1,340,174
|
|
|
$
|
1,351,192
|
|
●
|
On
various dates during the year ended December 31, 2015, Rory J. Cutaia, the Company’s majority shareholder and Chief
Executive Officer, loaned the Company total principal amounts of $1,203,242. The loans were unsecured and all due on demand,
bearing interest at 12% per annum. On December 1, 2015, the Company entered into a Secured Convertible Note agreement with
Mr. Cutaia whereby all outstanding principal and accrued interest owed to Mr. Cutaia from previous loans amounting to an aggregate
total of $1,248,883 and due on demand, was consolidated under a note payable agreement, bearing interest at 12% per annum,
and converted from due on demand to due in full on April 1, 2017. In consideration for Mr. Cutaia’s agreement to consolidate
the loans and extend the maturity date, the Company granted Mr. Cutaia a senior security interest in substantially all current
and future assets of the Company. Per the terms of the agreement, at Mr. Cutaia’s discretion, he may convert up to $374,665
of outstanding principal, plus accrued interest thereon, into shares of common stock at a conversion rate of $0.07 per share.
|
|
|
●
|
On
December 1, 2015, the Company entered into an Unsecured Convertible Note with Mr. Cutaia in the amount of $189,000, bearing
interest at 12% per annum, representing a portion of Mr. Cutaia’s unpaid salary for 2015. The note extends the payment
terms of Mr. Cutaia’s accrued salary from on-demand to due in full on April 1, 2017. The outstanding principal and accrued
interest may be converted at Mr. Cutaia’s discretion into shares of common stock at a conversion rate of $0.07.
|
|
|
●
|
On
December 1, 2015, the Company entered into an Unsecured Note agreement with a consulting firm owned by Michael Psomas, a former
member of the Company’s Board of Directors, in the amount of $111,901 representing unpaid fees earned for consulting
services previously rendered but unpaid as of November 30, 2015. The outstanding amounts bear interest at 12% per annum, and
are due in full on April 1, 2017.
|
On
December 1, 2015, the Company granted 8,920,593 warrants to Mr. Cutaia and 799,286 warrants to Mr. Psomas as consideration for
agreeing to extend the payment terms of their respective note payable balances to a maturity date of April 1, 2017. The warrants
are immediately vested and have an exercise price of $0.07 and expire on November 30, 2018. The warrants have been valued using
the Black-Scholes valuation model and have an aggregate value of $424,758. The value has been recorded as a discount to the outstanding
notes payable - related parties on the accompanying consolidated balance sheet, and is being amortized into interest expense over
the extended maturity periods of April 1, 2017. During the three months ended September 30, 2016, the Company recorded amortization
of $80,242 of the discount into interest expense. The remaining discount balance as of September 30, 2016 amounted to $159,611.
Total
interest expense for notes payable to related parties for the nine months ended September 30, 2016 and 2015 was $144,177 and $23,850,
respectively. Total interest expense for notes payable to related parties for the three months ended September 30, 2016 and 2015
was $23,850 and $17,965, respectively.
CONVERTIBLE
NOTES PAYABLE
The
Company has the following convertible notes payable:
Note
|
|
Issuance Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
September 30, 2016
|
|
|
Balance
at
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 1
|
|
April 4, 2016
|
|
August 4, 2017
|
|
|
12.0
|
%
|
|
$
|
343,326
|
|
|
$
|
343,326
|
|
|
|
-
|
|
Note 2
|
|
April 4, 2016
|
|
August 4, 2017
|
|
|
12.0
|
%
|
|
|
121,875
|
|
|
|
121,875
|
|
|
|
-
|
|
Note 3
|
|
April 4, 2016
|
|
December 4, 2016
|
|
|
12.0
|
%
|
|
|
680,268
|
|
|
|
680,268
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,145,469
|
|
|
|
-
|
|
Debt
discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(210,822
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
convertible notes payable, net of debt discount
|
|
|
|
|
|
|
|
|
|
$
|
934,647
|
|
|
|
-
|
|
The
Company has the following convertible notes payable as of September 30, 2016:
●
|
Note
1 (April 4, 2016)
– The Company issued a secured convertible note to the Chief Executive Officer (“CEO”)
and a director of the Company, in the amount of $343,325.56, which represents additional sums that the CEO advanced to the
Company during the period from December 2015 through March 2016, and is addition to all pre-existing loans made by, and notes
held by the CEO. This note bears interest at the rate of 12% per annum, compounded annually. In consideration for this agreement
to extend the repayment date to August 4, 2017, the Company granted to the CEO the right to convert up to 30% of the amount
of the such note into shares of the Company’s common stock at $0.07 per share and issued 2,452,325 share purchase warrants,
exercisable at $0.07 per share until April 4, 2019, which warrants represent 50% of the amount of such note.
|
|
|
●
|
Note
2 (April 4, 2016)
– The Company issued an unsecured convertible note payable to the CEO in the amount of $121,875,
which represents the amount of the accrued but unpaid salary owed to the CEO for the period from December 2015 through March
2016. In consideration for this agreement to extend the payment date to August 4, 2017, the Company granted to the CEO the
right to convert the amount of the such note into shares of the Company’s common stock at $0.07 per share. This note
bears interest at the rate of 12% per annum, compounded annually.
|
|
|
●
|
Note
3 (April 4, 2016)
– The Company issued an unsecured convertible note payable to Oceanside Strategies, Inc. (“Oceanside”)
in the amount of $680,268. This note supersedes and replaces all previous notes and current liabilities due to Oceanside for
sums Oceanside loaned to the Company in 2014 and 2015. This note bears interest at the rate of 12% per annum, compounded annually.
In consideration for Oceanside’s agreement to convert the prior notes from current demand notes and extend the maturity
date to December 4, 2016, we granted Oceanside the right to convert up to 30% of the amount of such note into shares of the
Company’s common stock at $0.07 per share and issued 2,429,530 share purchase warrants, exercisable at $0.07 per share
until April 4, 2019
|
The
warrants issued as part of issuances of convertible notes payable was valued using the Black-Scholes method and amounted to $252,987.
The Company recorded this amount as an off-set to convertible debt as a debt discount and is amortized over the life of the convertible
notes payable as interest expense. The Company had $21,082 of interest expense for the three and nine months ended September 30,
2016 as a result of amortization of debt discount related to convertible notes payable.
The
Company incurred additional $68,916 and $34,647 of interest expense from convertible notes payable for the nine and three months
ended September 30, 2016, respectively.
ITEM
3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4 - CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended, (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our reports
under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to our management, including our principal executive officer
and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
We
carried out an evaluation under the supervision and with the participation of our management, including our principal executive
officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d- 15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based on this evaluation,
our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not
effective as of September 30, 2016.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.