UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

 

☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2014

 

or

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 333-187248

 

INEEDMD HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		45-4487461
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

650 First Avenue, Third Floor

New York, New York 10016

(Address of principal executive offices)

 

(212) 256-9669

(Registrant’s telephone number, including area code)

 

Securities registered under Section 12(b) of the Exchange Act: None

 

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.001 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer	☐		Non-accelerated filer	☐
Accelerated filer	☐		Smaller reporting company	☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

Aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2014: $0.

 

As of April 24, 2015, the registrant has one class of common equity, and the number of shares issued and outstanding of such common equity is 48,014,424.

 

Documents Incorporated By Reference: None.

  

  

 

EXPLANATORY NOTE 

 

The purpose of this Amendment No.1 (the “Amendment”) to the iNeedMD Holdings, Inc. (the “Company”) Annual Report on Form 10-K for the period ended December 31, 2014, originally filed with the U.S. Securities and Exchange Commission on April 15, 2015 (the “Form 10-K”), is solely to correct a scrivener’s error by adding a conformed signature to the auditor’s report in the Amendment. 

 

No other changes have been made in this Amendment to the Form 10-K. This Amendment speaks as of the original date of the Form 10-K and does not reflect events that may have occurred subsequent to the original filing date. 

 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

(d) Exhibits. Exhibit No. Description

 

Exhibit No.		Description
2.1		Acquisition and Plan of Merger Agreement dated December 17, 2014 by and among Clutterbug Move Management, Inc., Clutterbug Acquisition Corp., and iNeedMD Holdings, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2014).
3.1		Certificate of Incorporation of Clutterbug Move Management, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Form S-1 filed with the Securities and Exchange Commission on March 14, 2013).
3.2		By-Laws of Clutterbug Move Management, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Form S-1 filed with the Securities and Exchange Commission on March 14, 2013).
3.3		Certificate of Incorporation of iNeedMD, Inc. (incorporated herein by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2014).
3.4		By-Laws of iNeedMD, Inc. (incorporated herein by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2014).
3.5		Amended Certificate of Incorporation of iNeedMD Holdings, Inc. (incorporated herein by reference to Exhibit 3.5 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2015).
16.1		Letter by KLJ & Associates LLP dated December 24, 2014 (incorporated herein by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2014).
31.1		Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).*
31.2		Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).*
32.1		Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).*
32.2		Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).*
99.1		Letter of Resignation from Victoria Young, dated December 24, 2014 (incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2014).

 

*	Filed Herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	INEEDMD HOLDINGS, INC.
Date: April 24, 2015	By:	/s/ Thomas A. Nicolette
	Name:	Thomas A. Nicolette
	Title:	Chief Executive Officer
		(Principal Executive Officer)
		(Principal Financial Officer)
		(Principal Accounting Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Dr. Govindan Gopinathan		Chairman		April 24, 2015
Dr. Govindan Gopinathan
/s/ Thomas A. Nicolette		Chief Executive Officer, Principal Executive		April 24, 2015
Thomas A. Nicolette		Officer, Principal Financial Officer, Principal
		Accounting Officer
/s/ Patrice McMorrow		Executive Vice President of Business Development		April 24, 2015
Patrice McMorrow

 

 

 

 

 

 

 

 

 

 

 

 

 

iNeedMD Holdings, Inc.

 

Financial Statements

 

December 31, 2014 and 2013

 

 

 

 

 

 

 

 

 

 

 

iNeedMD Holdings, Inc.

 

Index to the Financial Statements

 

December 31, 2014 and 2013

 

Contents	Page(s)
Report of Independent Registered Public Accounting Firm	F-2
Balance Sheets at December 31, 2014 and 2013	F-3
Consolidated Statements of Operations for the Year Ended December 31, 2014 and 2013	F-4
Consolidated Statements of Stockholders’ Equity (Deficit) at December 31, 2014 and 2013	F-5
Consolidated Statements of Cash Flows for the Year Ended December 31, 2014 and 2013	F-6
Notes to the Financial Statements	F-7

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

To the Board of Directors and Stockholders of

iNeedMD Holdings, Inc.

 

We have audited the accompanying balance sheets of iNeedMD Holdings, Inc. as of December 31, 2014 and 2013, and the related statements of operations, stockholders equity (deficit), and cash flows for the two years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of iNeedMD Holdings, Inc. as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the two years then ended, in conformity with U.S. generally accepted accounting principles.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company had a net loss and net cash used in operations of $40,312,486 and $4,566,234, respectively and has an accumulated deficit totaling $115,340,329 and does not generate any significant revenue. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Rosenberg Rich Baker Berman & Company

 

Somerset, New Jersey

April 15, 2015

 

 

iNeedMD Holdings, Inc.

Consolidated Balance Sheets

 

		December 31,
		2014				2013
Assets
Current Assets
Cash		$	2,457,622			$	853,908
Accounts receivable, net			—				—
Inventory			148,476				—
Prepaid expenses			9,931				588
Prepaid Interest			—				10,473
Debt issuance costs, net			—				88,480
Total Current Assets			2,616,029				953,449
Property and equipment, net			48,549				—
Other Assets
Security Deposits			7,941				—
Total Other Assets			7,941				—
Total Assets		$	2,672,519			$	953,449
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable and accrued liabilities		$	247,904			$	489,057
Deferred revenue			36,975				—
Convertible notes payable, net of debt discount of $59,177 and $566,667, respectively			140,823				183,333
Note payable			—				250,000
Derivative Liability			1,898,636				898,312
Total Current Liabilities			2,324,338				1,820,702
Non-current Liabilities:
Convertible notes payable, net of debt discount of $0 and $125,844 respectively			—				74,156
Derivative liability			—				389,932
Total Non-current Liabilities			—				464,088
Total Liabilities			2,324,338				2,284,790
Commitments and contingencies
Stockholders' Equity (Deficit)
Preferred Stock par value $0.001: 10,000,000 shares authorized; 400 and 400 shares issued and outstanding, respectively			—				—
Class A Common Stock par value $0.001: 65,000,000 shares authorized; 48,014,424 and 52,271 shares issued and outstanding, respectively			48,014				52
Additional paid-in capital			115,640,496				73,696,450
Accumulated deficit			(115,340,329	)			(75,027,843	)
Total Stockholders' Equity (Deficit)			348,181				(1,331,341	)
Total Liabilities and Stockholders' Equity (Deficit)		$	2,672,519			$	953,449

 

See accompanying notes to the financial statements.

 

 

iNeedMD Holdings, Inc.

Consolidated Statements of Operations

 

		For the Year Ended December 31,
		2014				2013
Revenue		$	910			$	7,539
Cost of revenue			306				5,880
Gross margin			604				1,659
Operating expenses
Compensation			35,038,488				64,761,772
Consulting fees			1,015,522				297,258
Consulting fees - related party			278,000				107,600
Sales and marketing			336,944				149,976
Sales and marketing - related party			20,000				18,500
Research and development			697,142				37,069
General and administrative			1,207,946				281,921
Total operating expenses			38,594,042				65,654,096
Income from operations			(38,593,438	)			(65,652,437	)
Other income (expenses)
Interest income			237				-
Proceeds from insurance settlement			36,365				-
Interest expense			(96,444	)			(99,393	)
Amortization of debt discount			(1,233,334	)			(250,000	)
Amortization of deferred financing costs			(129,459	)			(28,626	)
Debt conversion expense			(100,000	)			-
Derivative expense			(1,141,407	)			(133,087	)
Change in fair value of derivative liabilities			944,994				(139,280	)
Total other income (expenses)			(1,719,048	)			(650,386	)
Net loss		$	(40,312,486	)		$	(66,302,823	)
Net loss per common share
Basic and diluted- Common A shares		$	(1.45	)		$	(1,318.23	)
Weighted average common A shares outstanding - basic and diluted			27,865,356				50,297

 

See accompanying notes to the financial statements.

 

 

iNeedMD Holdings, Inc.

Consolidated Statements of Stockholders’ Equity (Deficit)

For the Years Ended December 31, 2014 and 2013

 

		Preferred Stock								Common A Stock								Additional								Total Stockholders'
		Par Value $0.0001								Par Value $0.0001								Paid-in				Accumulated				Equity
		Shares				Amount				Shares				Amount				Capital				Deficit				(Deficit)
Balance - December 31, 2012			400			$	—				17,836			$	18			$	7,782,1112			$	(8,725,020	)		$	(942,890	)
Share-based compensation - Class A common stock			—				—				32,765				33				64,779,339				—				64,779,372
Issuance of Class A common stock for cash			—				—				1,670				1				1,134,999				—				1,135,000
Net loss			—				—				—				—				—				(66,302,823	)			(66,302,823	)
Balance - December 31, 2013			400			$	—				52,271			$	52			$	73,696,450			$	(75,027,843	)		$	(1,331,341	)
Share-based compensation - Class A common stock			—				—				33,891,703				3,3892				33,857,811				—				33,891,703
Issuance of Class A common stock in conjunction with convertible note			—				—				100,000				100				66,567				—				66,667
Conversion of Notes payable into Class A common stock			—				—				200,000				200				199,800				—				200,000
Issuance of Class A common stock in conjunction with legal settlement			—				—				20,000				20				19,980				—				20,000
Beneficial Conversion Feature on convertible note			—				—				—				—				133,333				—				133,333
Issuance of Class A common stock for cash			—				—				450				—				450,000				—				450,000
Issuance of Class A common stock in an offering- net proceeds			—				—				8,400,000				8,400				7,055,565				—				7,063,965
Issuance of warrants to consultants			—				—				—				—				516,340				—				516,340
Reverse merger fees			—				—				—				—				(350,000	)			—				(350,000	)
Additional Shares resulting from the reverse merger			—				—				5,350,000				5,350				(5,350	)			—				—
Net loss			—				—				—				—				—				(40,312,486	)			(40,312,486	)
Balance - December 31, 2014			400			$	—				48,014,424			$	48,014			$	115,640,496			$	(115,340,329	)		$	348,181

 

See accompanying notes to the financial statements.

 

 

iNeedMD Holdings, Inc.

Consolidated Statements of Cash Flows

 

		For the Year Ended December 31,
		2014				2013
Cash Flows From Operating Activities:
Net loss		$	(40,312,486	)		$	(66,302,823	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation expense			8,680				—
Loss on disposal of property and equipment			9,788				—
Amortization of debt issuance costs on notes payable			129,459				28,626
Amortization of debt discount on notes payable			1,233,334				250,000
Derivative expense			1,141,407				133,087
Change in fair value of derivative liabilities			(944,994	)			139,280
Share based payments- Class A common stock			33,891,703				64,779,372
Share based payments- warrants issued to consultants			516,340				—
Debt Conversion Expense			100,000				—
Changes in operating assets and liabilities:
Inventory			(148,476	)			—
Prepaid expenses			(9,343	)			7,178
Prepaid interest			10,473				(4,715	)
Security deposits			(7,941	)			—
Accounts payable and accrued liabilities			(221,153	)			17,592
Deferred revenue			36,975				—
Net Cash Used by Operating Activities			(4,566,234	)			(952,403	)
Cash Flows from Investing Activities:
Purchase of property and equipment			(67,017	)			—
Repayment of loans to consultants			—				47,000
Reverse merger fees			(350,000	)			—
Net Cash (Used In) Provided by Investing Activities			(417,017	)			47,000
Cash Flows from Financing Activities:
Net repayment to related party			—				(87,300	)
Payment of debt issuance costs			(27,000	)			(90,000	)
Proceeds from the issuance of convertible notes			600,000				750,000
Repayment of notes payable			(150,000	)			—
Repayment of convertible notes			(1,350,000	)			—
Net proceeds from the issuance of Class A common stock			7,513,965				1,135,000
Net Cash Provided By Financing Activities			6,586,965				1,707,700
Net change  in cash			1,603,714				802,297
Cash at beginning of year			853,908				51,611
Cash at end of year		$	2,457,622			$	853,908
Supplemental disclosures of cash flow information:
Interest paid		$	67,444			$	83,320
Income taxes			—				—
Supplemental disclosure of non-cash investing and financing activities:
Debt issuance costs paid in the form of stock warrants on convertible notes payable		$	13,979			$	27,106
Debt discount in conjunction with the recording of the original value of the derivative liability		$	400,000			$	750,000
Debt discount in conjunction with Class A common stock issued with convertible notes payable		$	66,667			$	—
Debt discount in conjunction with beneficial conversion feature		$	133,333			$	—
Issuance of Class A common stock in conjunction with a legal settlement		$	20,000			$	—
Conversion of notes payable into Class A common stock		$	200,000			$	—

 

 

See accompanying notes to the financial statements.

 

 

iNeedMD Holdings, Inc.

Notes to the Consolidated Financial Statements

December 31, 2014 and 2013

 

Note 1 - Organization and Operations

 

INeedMD Holdings, Inc. (“iNeedMD” or the “Company”) was incorporated on February 16, 2000, under the laws of the State of Delaware. The Company is a medical device company that has developed a disposable device used in the diagnosis, prevention, and monitoring of cardiovascular disease. On January 27, 2014, a new subsidiary was formed in India called iNeedMD Medical Device Private Ltd. The purpose of the formation of the subsidiary was to provide sales and distribution in India.

 

Effective December 24, 2014, Clutterbug Move Management, Inc. a Nevada corporation (“Clutterbug), Clutterbug Acquisition Corp, a Nevada corporation and wholly-owned subsidiary of Clutterbug (“Merger Sub”), iNeedMD and Victoria Young an individual (the “Majority Shareholder”), entered into an Acquisition Agreement and Plan of Merger (the “Agreement”) pursuant to which the Merger Sub was merged with and into iNeedMD, with iNeedMD surviving as a wholly-owned subsidiary of Clutterbug (the “Merger”). The transaction (the “Closing”) took place on December 24, 2014 (the “Closing Date”). Clutterbug acquired, through a reverse triangular merger, all of the outstanding capital stock of iNeedMD in exchange for issuing iNeedMD’s shareholders (the “iNeedMD Shareholders”), pro-rata, a total of 42,464,424 shares of Clutterbug’s common stock. Immediately after the Merger was consummated, the Majority Shareholder of Clutterbug cancelled 5,350,000 shares of her restricted common stock of Clutterbug (the “Cancellation”). In consideration of the Cancellation of such common stock, iNeedMD paid the Majority Shareholder an aggregate of $350,000 and released the other affiliates from certain liabilities. In addition, iNeedMD agreed to spinout to the Majority Shareholder any and all assets related to the Company’s senior move management and assistance services business within 30 days after the Closing. As a result of the Merger and the Cancellation, the iNeedMD Shareholders became the majority shareholders of the Company. 

 

Our consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Note 2 - Significant and Critical Accounting Policies and Practices

 

The Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.

 

Basis of Presentation

 

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules and regulations of the Securities and Exchange Commission.

 

Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

 

 

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

 

Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.

 

Fair Value of Financial Instruments

 

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

Level 1		Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2		Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3		Pricing inputs that are generally unobservable inputs and not corroborated by market data.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amount of the Company’s financial assets and liabilities, such as cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short maturity of those instruments.

 

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative liabilities at every reporting period and recognizes gains or losses in the statements of operations that are attributable to the change in the fair value of the derivative liabilities.

 

Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis

 

Level 3 Financial Liabilities – Derivative conversion features and warrant liabilities

 

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheets as of December 31, 2014:

 

		Carrying				Fair Value Measurement Using
		Value				Level 1				Level 2				Level 3				Total
Derivative conversion features and warrant liabilities		$	1,898,636			$	-			$	-			$	1,898,636			$	1,898,636

 

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheets as of December 31, 2013:

 

		Carrying				Fair Value Measurement Using
		Value				Level 1				Level 2				Level 3				Total
Derivative conversion features and warrant liabilities		$	1,288,244			$	-			$	-			$	1,288,244			$	1,288,244

 

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2014 and 2013:

 

		Fair Value Measurement Using Level 3 Inputs Total Derivative Liabilities
Balance, December 31, 2012		$	238,771
Total (gains) or losses (realized/unrealized) included in statement of operations			139,280
Purchases, issuances and settlements			910,193
Balance, December 31, 2013			1,288,244
Total (gains) or losses (realized/unrealized) included in statement of operations			(944,994	)
Purchases, issuances and settlements			1,555,386
Balance, December 31, 2014		$	1,898,636

 

 

Changes in the unobservable input values could potentially cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable inputs used in the fair value measurements are the expected volatility assumption and fair value of the Company’s common stock price. A significant increase (decrease) in the expected volatility and/or fair value of the Company’s common stock price assumptions could potentially result in a higher (lower) fair value measurement.

 

Cash Equivalents

 

Cash is maintained in an operating account and a savings account. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

Concentration of Credit Risk

 

The Company maintains its cash in bank deposit accounts that at times exceed federally insured limits. These cash balances are maintained at creditworthy financial institutions. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions.

 

Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company determines when receivables are past due or delinquent based on how recently payments have been received.

 

Outstanding account balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Bad debt expense is included in general and administrative expenses, if any.

 

The Company does not have any off-balance-sheet credit exposure to its customers.

 

The allowance for doubtful accounts was $0 and $4,119 at December 31, 2014 and 2013, respectively.

 

Inventory

 

Inventory are stated using the first-in, first-out (FIFO) valuation method. Inventory was comprised solely of finished goods of $148,476 and $0 at December 31, 2014 and December 31, 2013, respectively.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives. Asset lives for financial statement reporting of depreciation are:

 

Computer equipment	3-5 years
Leasehold improvements	5 years

 

 

Debt Issuance Costs

 

Debt issuance costs are amortized using the straight-line method over the term of the notes.

 

Derivative Instruments

 

The Company evaluates its convertible debt and warrants to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with Paragraph 810-10-05-4 of the Codification and Paragraph 815-40-25 of the Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

 

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. 

 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current to correspong with its host instrument.

 

The Company marks to market the fair value of the remaining embedded derivative warrants at each balance sheet date and records the change in the fair value of the remaining embedded derivative warrants as other income or expense in the statements of operations.

 

The Company utilizes the Monte Carlo model that values the liability of the debt conversion feature derivative financial instruments and derivative warrants based on a probability weighted discounted cash flow model with the assistance of the third party valuation firm. The reason the Company selected the Monte Carlo model is that in many cases there may be multiple embedded features or the features of the bifurcated derivatives may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument. Therefore, the fair value may not be appropriately captured by simple models. In other words, simple models such as Black-Scholes may not be appropriate in many situations given the complex features and terms of conversion option (e.g., combined embedded derivatives). The Monte Carlo model is based on future projections of the various potential outcomes. The features that are analyzed and incorporated into the model include the exercise and full reset features. Based on these features, there are two primary events that can occur; the holder exercises the derivative instrument or the derivative instrument is held until it expires. The Monte Carlo model analyzes the underlying economic factors that influence which of these events would occur, when they are likely to occur, and the specific terms that would be in effect at the time (i.e. stock price, exercise price, volatility, etc.). Projections are then made on the underlying factors which lead to potential scenarios. Probabilities are assigned to each scenario based on management projections. This leads to a cash flow projection and a probability associated with that cash flow. A discounted weighted average cash flow over the various scenarios is completed to determine the value of the derivative instrument.

 

Related Parties

 

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

 

 

The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. The disclosures shall include: (a.) the nature of the relationship(s) involved; (b.) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c.) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d.) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

 

Commitments and Contingencies

 

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which is only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time, that these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.

 

Revenue Recognition

 

The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

 

Deferred Revenue (Liability)

 

The Company receives up-front payments for goods.  These payments are initially deferred and subsequently recognized when the goods are shipped. Deferred revenue at December 31, 2014 and 2013 was $36,975 and $0, respectively.

 

Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services

 

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).

 

Pursuant to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. If shares of the Company are thinly traded the use of share prices established in the Company’s most recent PPM, or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

 

The fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes-Merton option-pricing valuation model. The ranges of assumptions for inputs are as follows:

 

	●	Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification, the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
	●	Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii), a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
	●	Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
	●	Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.

 

Pursuant to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.

 

 

Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a stock option that the counterparty has the right to exercise expires unexercised.

 

Pursuant to ASC paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.

 

Advertising Costs

 

Advertising Costs are expensed as incurred. Advertising Expenses were $35,252 and $2,113 for the years ended December 31, 2014 and 2013, respectively.

 

Income Tax Provision

 

The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.

 

The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”). Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

 

The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.

 

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

 

The 2011 through 2013 tax years remain subject to examination by taxing authorities.

 

  

Uncertain Tax Positions

 

The Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the reporting periods ended December 31, 2014 or 2013.

 

Net Income (Loss) per Common Share

 

Net income (loss) per common share is computed pursuant to Section 260-10-45 of the Codification.  Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through convertible debt, stock options or warrants.

 

The following table shows the outstanding dilutive Class A common shares excluded from the diluted net income (loss) per share calculation as they were anti-dilutive:

 

		Outstanding Dilutive Class A Common Shares
		For the Year Ended December 31, 2014				For the Year Ended December 31, 2013
Conversion features on convertible notes			686,246				1,065,982
Stock purchase warrants			2,996,740				1,877,369
Total outstanding dilutive common shares			3,682,986				2,943,351

 

Subsequent Events

 

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company evaluated subsequent events through the date when the financial statements were issued.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers. Amendments in this Update create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and create new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2011-230—Revenue Recognition (Topic 605) and Proposed Accounting Standards Update 2011–250—Revenue Recognition (Topic 605): Codification Amendments, both of which have been deleted. The amendments in this Update are effectively for the Company for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the effects of ASU 2014-09 on the consolidated financial statements.

    

 

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-12, Compensation- Stock Compensation. The amendments in this update apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. This Accounting Standards Update is the final version of Proposed Accounting Standards Update EITF–13D–Compensation–Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which has been deleted. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and early adoption is permitted. The Company is currently evaluating the effects of ASU 2014-12 on the consolidated financial statements.

 

In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-03, Interest—Imputation of Interest. To simplify presentation of debt issuance costs, the amendments in this Update would require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs would not be affected by the amendments in this Update. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2014-250—Interest—Imputation of Interest (Subtopic 835-30), which has been deleted. The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company is currently evaluating the effects of ASU 2015-03 on the consolidated financial statements.

 

Note 3- Going Concern

 

As reflected in the accompanying financial statements, the Company has a net loss and net cash used in operations of $40,312,486 and $4,566,234, respectively, for the year ended December 31, 2014 and an accumulated deficit totaling $115,340,329. The Company does not generate significant revenue. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The ability of the Company to continue its operations as a going concern is dependent on Management's plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence.

 

The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

 

 

Note 4 – Property & Equipment

 

Property and equipment consists of the following:

 

		December 31,				December 31,
		2014				2013
Computer Equipment		$	46,938			$	-
Leasehold Improvements			9,450				-
			56,388				-
Accumulated Depreciation			(7,839	)			-
Net Property and Equipment		$	48,549			$	-

 

Depreciation expense for the years ended December 31, 2014 and 2013 was $8,680 and $0, respectively.

 

Note 5 – Convertible Notes Payable

 

Convertible notes payable consist of the following:

 

		December 31,				December 31,
		2014				2013
Ayer Notes (I and II)		$	-			$	750,000
Chertoff Note			100,000				100,000
Van Damm Note			100,000				100,000
Total Convertible Notes			200,000				950,000
Unamortized Debt Discount			(59,177	)			(692,511	)
Total Convertible Notes, Net of Debt Discount			140,823				257,489
Current Portion of Convertible Notes			140,823				183,333
Long-Term Convertible Notes less Current Portion		$	-			$	74,156

 

Chertoff and Van Damm Notes

 

On November 20, 2012, we entered into two Note Purchase Agreements whereby the investors acquired $200,000 of our convertible promissory notes for an aggregate purchase price of $200,000 in a private placement. The Notes are secured by all of the assets of the Company. The Notes bear interest at 9.5% per annum and mature three years from the date of issuance. Accrued interest on the Notes as of December 31, 2014 and 2013 was $40,186 and $21,186, respectively.

 

 

The Notes are convertible at any time by the investors into Class A common shares equal to the outstanding principal and interest to be converted, at a 30% discount to the last equity round. The notes had an initial conversion price of $1.40 subject to adjustments. If at any time following the issuance date, the company completes an equity or debt offering at a value below the conversion price, then the conversion price adjusts with a 30% discount of the purchase price per share of common stock payable by the investors in such subsequent equity financing. The note adjustment provisions, referred to as a full ratchet reset dilutive feature, require treatment as a derivative liability. The fair market value of the derivative at the commitment date was $242,630. The Company utilized a Monte Carlo model to value the anti-dilutive conversion feature of the Notes. The probability and timing of potential future financing and fundamental transactions as applicable were estimated. The following assumptions were used to value the note conversion feature at December 31, 2013: closing stock price: $1.00; exercise price $0.35; expected volatility 100%; remaining term 1.88 years; risk-free rate 1.75%, expected dividend yield 0%. The following assumptions were used to value the note conversion feature at December 31, 2014: closing stock price: $1.00; exercise price $0.35; expected volatility 89%; remaining term 0.89 years; risk-free rate 0.25%, expected dividend yield 0%.

 

On the balance sheet, the Notes were originally recorded at $0 ($200,000 net of debt discount of $200,000). The debt discount is amortized over the life of the Notes using the straight-line method as it approximates the effective interest method. As of December 31, 2014 and 2013, the unamortized debt discount on the Note was $59,177 and $125,844, respectively.

 

Ayer Note I

 

On December 9, 2013, we entered into a Note Purchase Agreement (the Note) with the Ayer Capital Partners Master Fund, LP whereby the investor acquired a $750,000 convertible promissory note for a purchase price of $750,000 in a private placement. The Note was secured by all of the assets of the Company. The Note bore interest at 1% per annum and matures on March 9, 2014. The maturity date on the Note was extended to June 7, 2014. On June 13, 2014, the noteholder signed a default and covenant waiver. The Note was repaid on July 15, 2014.  The investor had the option to convert all or a portion of the Note into equity prior to the maturity date contingent upon an equity financing by the Company at a conversion price equal to the price per share of financing securities paid by the other investors in the financing.

 

In connection with the Note, the investor received a warrant to purchase shares of Class A common stock at a price equal to 35% of the principal amount of the Note. This warrant was issued to the investor at an exercise price of $0.26878. The warrant expires on December 9, 2018. If the maturity date of the Note is extended, the warrant increases to an amount to purchase shares of Class A common stock at a price equal to 70% of the principal amount of the Note. If at any time prior to the two year anniversary of the issuance date of the Note, the Company completes an equity or debt offering at a value below the exercise price, then the exercise price adjusts to the purchase price per share of common stock payable by the investors in such subsequent equity financing. The Company analyzed the exercise feature for derivative consideration under ASC 815 and determined that the exercise feature qualified for accounting treatment as a derivative liability. The fair market value of the derivative at the commitment date was $883,087. The Company utilized a Monte Carlo model to value the anti-dilutive feature of the warrants. The probability and timing of potential future financing and fundamental transactions as applicable were estimated. The following assumptions were utilized to value the derivative liability at December 9, 2013: closing stock price: $1.00; exercise price $0.26878; expected volatility 101%; remaining term five years; risk-free rate 1.50%, expected dividend yield 0%. The following assumptions were used to value the warrant liability at December 31, 2013: closing stock price: $1,000; exercise price $268.78; expected volatility 100%; remaining term 4.94 years; risk free rate 1.75%, expected dividend yield 0%.The following assumptions were used to value the warrant liability at December 31, 2014: closing stock price: $1.00; exercise price $0.50; expected volatility 94%; remaining term 3.94 years; risk-free rate 1.38%, expected dividend yield 0%.

 

On March 9, 2014, due to the maturity extension of the Note, the warrant increased to an amount to purchase shares of Class A common stock at a price equal to 70% of the principal amount of the Note. As a result, an additional derivative liability was recorded at a fair market value of $881,433. The following assumptions were used to value the warrant liability at March 9, 2014: closing stock price: $1,000; exercise price $268.78; expected volatility 100%; remaining term 4.75 years; risk-free rate 1.65%, expected dividend yield 0%. The following assumptions were used to value the warrant liability at December 31, 2014: closing stock price: $1.00; exercise price $0.50; expected volatility 94%; remaining term 3.94 years; risk-free rate 1.38%, expected dividend yield 0%.

 

 

Debt issuance costs of $117,406 pertaining to placement agent fees and commissions on the Note were recorded. The debt issuance costs are amortized over the life of the Note. Debt issuance costs were paid in the form of $60,000 in cash and stock warrants to purchase 30,000 Class A common shares. The warrants issued to the placement agent were of the same form as the warrants attached to the Note, and the market value of the derivative liability at the commitment date was $27,106.

 

On the balance sheet, the Note was originally recorded at $0 ($750,000 net of debt discount of $750,000). The debt discount was amortized over the life of the Note. As of December 31, 2014 the debt discount was fully amortized and at December 31, 2013, the unamortized debt discount on the Note was $566,667.

 

Ayer Note II

 

On February 24, 2014, we entered into a Note Purchase Agreement (the Note) with the Ayer Capital Special Situations Fund, LP whereby the investor acquired a $400,000 convertible promissory note for a purchase price of $400,000 in a private placement. The Note was secured by all of the assets of the Company. The Note bore interest at 1% per annum and the original maturity date was May 24, 2014. The maturity was subsequently extended to August 22, 2014. On June 13, 2014, the noteholder signed a default and covenant waiver. The Note was repaid on August 26, 2014. The investor had the option to convert all or a portion of the Note into equity prior to the maturity date contingent upon an equity financing by the Company at a conversion price equal to the price per share of financing securities paid by the other investors in the financing.

 

In connection with the Note, the investor received a warrant to purchase shares of Class A common stock at a price equal to 35% of the principal amount of the Note. This warrant was issued to the investor at an exercise price of $268.78. The warrant expires on February 24, 2019. If the maturity date of the Note is extended, the warrant increases to an amount to purchase shares of Class A common stock at a price equal to 70% of the principal amount of the Note. If at any time prior the two year anniversary of the issuance date of the Note, the Company completes an equity or debt offering at a value below the exercise price, then the exercise price adjusts to the purchase price per share of common stock payable by the investors in such subsequent equity financing. The Company analyzed the exercise feature for derivative consideration under ASC 815 and determined that the exercise feature qualified for accounting treatment as a derivative liability. The fair market value of the derivative at the commitment date was $455,430. The Company utilized a Monte Carlo model to value the anti-dilutive feature of the warrants. The probability and timing of potential future financing and fundamental transactions as applicable were estimated. The following assumptions were used to value the warrant liability at February 24, 2014: closing stock price: $1,000; exercise price $268.78; expected volatility 100%; remaining term five years; risk-free rate 1.57%, expected dividend yield 0%. The following assumptions were used to value the warrant liability at December, 2014: closing stock price: $1,000; exercise price $0.50; expected volatility 99%; remaining term 4.15 years; risk-free rate 1.38%, expected dividend yield 0%.

 

On May 24, 2014, due to the maturity extension of the Note, the warrant increased to an amount to purchase shares of Class A common stock at a price equal to 70% of the principal amount of the Note. As a result, an additional derivative liability was recorded at a fair market value of $204,544. The following assumptions were used to value the warrant liability on May 24, 2014: closing stock price: $1.00; exercise price $1.00; expected volatility 96%; remaining term 4.75 years; risk-free rate 1.55%, expected dividend yield 0%. The following assumptions were used to value the warrant liability at December, 2014: closing stock price: $1,000; exercise price $0.50; expected volatility 99%; remaining term 4.15 years; risk-free rate 1.38%, expected dividend yield 0%.

 

Debt issuance costs of $40,979 pertaining to placement agent fees and commissions on the Note were recorded. The debt issuance costs are amortized over the life of the Note using the straight-line method as it approximates the effective interest method. Debt issuance costs were paid in the form of $27,000 in cash and stock warrants to purchase 16,000 Class A common shares. The warrants issued to the placement agent were of the same form as the warrants attached to the Note, and the market value of the derivative liability at the commitment date was $13,979. As of September 30, 2014, the debt issuance costs were fully amortized.

 

On the balance sheet, the Note was originally recorded at $0 ($400,000 net of debt discount of $400,000). The debt discount was amortized over the life of the Note and as of December 31, 2014 the debt discount was fully amortized.

 

 

Manchanda Note

 

On June 20, 2014, we entered into a Note Purchase Agreement with Kabir Manchanda whereby the investor acquired a $200,000 convertible promissory note for a purchase price of $200,000 in a private placement. The Note bore interest at 12% per annum and matures on March 20, 2015. The Note and accrued interest can convert into Class A common stock at $0.50 per share. The Note was repaid on October 27, 2014. In addition, the noteholder received 100,000 shares of Class A common stock. The beneficial conversion feature and the common stock was recorded as a debt discount of $200,000.

 

On the balance sheet, the Note was originally recorded at $0 ($200,000 net of debt discount of $200,000). The debt discount was amortized over the life of the Note, and as of December 31, 2014 the debt discount on the Note was fully amortized.

 

Note 6 – Note Payable

 

On November 15, 2011, we entered into a Note Purchase Agreement with Richard Pinto whereby the investor acquired a $250,000 promissory note for a purchase price of $250,000 in a private placement. The Note bore interest at 21% per annum and matured on February 15, 2012. The maturity date on the Note was extended to August 1, 2014. On October 27, 2014, $150,000 of the note principal was repaid less $2,987 in previously overpaid interest. Furthermore, on November 24, 2014, the Company induced the investor to convert the remaining $100,000 of note principal by offering a conversion price of $0.50, a $0.50 discount from the market price of $1.00. As a result, the remaining $100,000 of note principal converted into 200,000 shares of Class A common stock, and the investor agreed to cancel outstanding warrants issued in connection with the note. The Company recorded a debt conversion expense of $100,000 in the consolidated Statement of Operations. Since the Company had previously overpaid on the investor’s interest payments, the Company had recorded prepaid interest of $10,473 as of December 31, 2013. This note was personally guaranteed by Govindan Gopinathan, the Executive Board Chairman and largest shareholder of the Company at the time the note was issued, and Fernando Green, the Senior Vice President of the Company at the time the note was issued.

 

In connection with the Note, warrants to purchase 25 Class A common shares were issued to the investor. The warrants have an exercise price of $2,000 per share and expire on November 1, 2016. The Company valued the warrants at $11,854 on the commitment date using a Black-Scholes-Merton option pricing model utilizing the following assumptions: closing stock price: $1,000; exercise price $2,000; expected volatility 113%; expected term five years; risk-free rate 0.90%, expected dividend yield 0%. The warrants were canceled on November 24, 2014.

 

On the balance sheet, the Note was originally recorded at $238,146 ($250,000 net of debt discount of $11,854). The debt discount was amortized over the life of the Note and is fully amortized.

 

Note 7 – Derivative Liabilities

 

The company identified derivative liabilities associated with the convertible debt and warrants issued from 2012 to 2014.

 

As a result of the application of ASC No. 815, the fair values of the Company’s derivative liabilities are summarized as follows: 

 

		Note Conversion Features				Warrants				Total
Balance December 31, 2012			238,771				-				238,771
Fair value at the commitment date			-				910,193				910,193
Change in fair value			151,161				(11,881	)			139,280
Balance, December 31, 2013			389,932				898,312				1,288,244
Fair value at the commitment date			-				1,555,686				1,555,686
Change in fair value			47,453				(992,447	)			(944,994	)
Balance, December 31, 2014		$	437,385			$	1,461,251			$	1,898,636

 

 

The Company recorded debt discount to the extent of the gross proceeds of each note, and immediately expensed the remaining derivative value if it exceeded the gross proceeds. The Company recorded a derivative expense of $1,141,407 and $133,087 for the years ended December 31, 2014 and 2013, respectively.

 

Note 8 – Related Party Transactions

 

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

 

Periodically, Govindan Gopinathan, the Executive Board Chairman and largest shareholder of the Company, advanced the Company monies and periodically, the Company repaid portions of the advances. The advances are non-interest bearing and have no specified maturity date. On December 31, 2013, the Company settled the remaining $17,600 owed to him in Class A common shares. As of December 31, 2014 and December 31, 2013, the Company owed no monies to him. In addition, Govindan Gopinathan provided consulting services for the company. Consulting expenses pertaining to his services were $148,000 and $94,600 for the years ended December 31, 2014 and 2013, respectively, and are a component of Consulting fees - related party in the Statement of Operations.

 

Arthur Tilford, a former Board member, provided consulting services for the company. Consulting expenses pertaining to his services were $20,000 and $13,000 for the years ended December 31, 2014 and 2013, respectively, and are a component of Consulting fees - related party in the Statement of Operations.

 

Andrew Mininger, a former Board member, provided consulting services for the company. Consulting expenses pertaining to his services were $20,000 and $0 for the years ended December 31, 2014 and 2013, respectively, and are a component of Consulting fees - related party in the Statement of Operations.

 

Dalen Harrison, a former Board member, provided sales and marketing services for the company. Sales and marketing expenses pertaining to his services were $20,000 and $18,500 for the years ended December 31, 2014 and 2013, respectively, and are a component of Sales and marketing- related party in the Statement of Operations.

 

Thomas Nicolette, the Chief Executive Officer, provided consulting services for the Company. Consulting expenses pertaining to his services were $90,000 and $0 for the years ended December 31, 2014 and 2013, respectively, and are a component of Consulting fees - related party in the Consolidated Statement of Operations.

 

Note 9 – Proceeds from Insurance Settlement

 

During the year ended December 31, 2014, the Company experienced two thefts at its Hicksville, New York office. The Company received an insurance settlement for $36,365, which was recorded as Proceeds from insurance settlement in the Consolidated Statement of Operations.

 

Note 10 – Stockholders’ Equity (Deficit)

 

Class A Common Stock

 

In 2013, the Company issued 1,660,000 Class A common shares to investors in private placements at prices ranging from $.50 per share to $1.00 per share for total proceeds of $1,135,000.

 

 

At December 31, 2013, the Board of Directors issued 500,000 Class A common shares to the Chief Executive Officer for services provided to the Company and to settle a $17,600 related party payable. The shares were valued at $1.00 per share and $482,400 was recorded as Compensation Expense in the Statement of Operations.

 

At December 31, 2013, the Board of Directors issued 250,000 Class A common shares to Blue Ocean Advisors, Inc. for services provided to the Company. The shares were valued at $1.00 per share and $250,000 was recorded as Compensation Expense in the Statement of Operations.

 

On January 27, 2014, the Company issued 50 Class A common shares to an investor in a private placements at $1,000 per share for total proceeds of $50,000.

 

On March 6, 2014, the Company issued 400 Class A common shares to an investor in a private placements at $1,000 per share for total proceeds of $400,000.

 

On April 20, 2014, the Company, with the ratification of the Board of Directors, amended the Company’s Certificate of Incorporation to effect a 1 for 1,000 reverse split of the Company's issued and outstanding shares of common stock. All references to numbers or values of the Company's common shares have been adjusted to reflect this 1 for 1,000 reverse split. All warrant amounts and exercise prices have been adjusted to reflect this 1 for 1,000 reverse split.

 

On April 20, 2014, the Company, with the ratification of the Board of Directors, issued 33,891,703 shares of Class A common stock to investors and consultants. The shares were valued at $1.00 per share and $33,891,703 was recorded as Compensation Expense in the Statement of Operations.

 

As discussed in Note 5, on June 20, 2014, a noteholder received 100,000 shares of Class A common stock as part of the consideration in his Note Purchase Agreement.

 

Between June and August 2014, the Company sold 8,400,000 shares of common stock to investors in exchange for $8,400,000 in gross proceeds in connection with the private placement of the Company’s stock.

 

In connection with the private placement, the Company incurred fees of $1,336,035. In addition, 840,000 five year warrants with an exercise price of $1.00 were issued to the placement agent. The Company valued the warrants at $664,869 on the commitment date using a Black-Scholes-Merton option pricing model. The value of the warrants was a direct cost of the private placement and has been recorded as a reduction in additional paid in capital.

 

In valuing the warrants issued in conjunction with the above private placements, the Company used the following assumptions:

 

●

The stock price was based upon the issuance price the in private placement, or $1.00 per share.

 

●

The risk-free interest rate assumption is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The risk free rate had a range of 1.55% – 1.74%.

 

●

The Company has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future. Therefore, the expected dividend rate was $0.

 

●

The warrant term is the life of the warrant, which was five years.

 

●

The expected volatility was benchmarked against similar companies in a similar industry. The expected volatility used had a range of 101% – 117%.

 

●

The forfeiture rate is based on the historical forfeiture rate for the Company’s unvested warrants, which was 0%.

 

 

As discussed in Note 13, on October 10, 2014, the Company reached a settlement with a former sales consultant for and issued 20,000 shares of Class A common stock valued at $1.00 per share.

 

As discussed in Note 6, on November 24, 2014, a noteholder received 200,000 shares of Class A common stock valued at $1.00 as consideration for converting $100,000 of note principal.

 

On December 24, 2014, as a result of the reverse merger with Clutterbug, 3,800,000 of Clutterbug’s shares were cancelled.

 

Class B Common Stock

 

On January 2, 2013, the Compensation Committee, with the ratification of the Board of Directors, awarded 32,014,686 Class B common shares to reward certain individuals of the Company for past and current performance that they have contributed to the success of the Company. The shares were valued at $2.00 per share and $64,029,372 was recorded as Compensation Expense in the Statement of Operations.

 

Class B common shares carry the same voting rights as Class A common shares, but there are a few key differences:

 

1.

Class B common shares can only be issued by the Company, without cost, to senior management for their contributions to the Company.

 

2.

A Class B common shareholder forfeits his Class B common shares upon termination of employment for any reason other than the shareholder’s death or disability.

 

3.

Class B common shareholders have no dividend rights.

 

4.

Transferability of Class B common shares carries significant restrictions.

 

5.

Upon a liquidity event, each Class B common share automatically converts in to one Class A common share, but the Class A common shares get liquidation preference.

 

On April 20, 2014, the Company, with the ratification of the Board of Directors, amended the Company’s Certificate of Incorporation to eliminate the common B class of stock. All of the existing Class B common shares as of April 20, 2014 were converted into the same number of Class A common shares. All references to numbers or values of the Company's common shares have been adjusted to reflect this share conversion.

 

Warrants

 

The following is a summary of the Company’s warrant activity during the years ended December 31, 2013 and 2014:

 

		Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life
Outstanding – December 31, 2012			1,040			$	1,050.00				2.57
Granted			1,008				268.78				4.94
Exercised			-				-
Forfeited/Cancelled			(170	)			1,010.00
Outstanding – December 31, 2013			1,878			$	647.55				3.52
Granted			3,494,992				0.62				4.30
Exercised			-				-
Forfeited/Cancelled			(130	)			1,384.62
Outstanding – December 31, 2014			3,496,740			$	0.83				4.30
Exercisable – December 31, 2014			2,996,740			$	0.89				4.26

  

 

At December 31, 2014 and 2013, the total intrinsic value of warrants outstanding and exercisable was $1,328,000 and $714,672, respectively.

 

As of December 31, 2014 and 2013, unrecognized compensation costs related to non-vested warrants was $172,114 and $-, respectively. The cost is expected to be amortized over a weighted average period of 0.50 years.

 

Note 11 – Income Taxes

 

Deferred Tax Assets

 

At December 31, 2014, the Company has available for federal income tax purposes a net operating loss (“NOL”) carry-forward of approximately $25,554,000 net of (i) $100,801,000 in accumulated share-based compensation (ii) $2,681,000 of accumulated interest and derivative expense associated with the derivative liabilities (iii) $100,000 in debt conversion expense and (iv) $(860,000) of accumulated change in the fair value of derivative liabilities included in the Statements of Operations, that may be used to offset future taxable income through the fiscal year ending December 31, 2034. No tax benefit has been reported with respect to these net operating loss carry-forwards in the accompanying financial statements since the Company believes that the realization of its net deferred tax asset of approximately $5,112,000 was not considered more likely than not based upon the Company’s losses since inception. Accordingly, the potential tax benefits of the net loss carry-forwards are fully offset by a valuation allowance of $5,112,000. The valuation allowance increased approximately $1,805,000 and $408,000 for the years ended December 31, 2014 and 2013, respectively.

 

Components of deferred tax assets are as follows:

 

		December 31,
		2014				2013
Net deferred tax assets – Non-current:
Expected income tax benefit from NOL carry-forwards		$	5,112,000			$	3,307,000
Less valuation allowance			(5,112,000	)			(3,307,000	)
Deferred tax assets, net of valuation allowance		$	-			$	-

 

Income Tax Provision in the Consolidated Statements of Operations

 

A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows:

 

		For the Year Ended
		December 31,
		2014				2013
U.S. statutory federal tax rate			(34.0	)%			(34.0	)%
State income taxes, net of federal tax benefit			(0.5	)%			(0.1	)%
Share based compensation			29.2	%			33.3	%
Other permanent differences			0.8	%			0.2	%
Change in valuation allowance			4.5	%			0.6	%
Effective income tax rate			0.0	%			0.0	%

 

 

Note 12 – Significant Risks and Uncertainties

  

Accounts Payable Concentrations

 

Accounts payable from a single vendor in any one year can exceed 10.0% of our total purchases. As of December 31, 2014, three vendors represented 66% of our accounts payable. As of December 31, 2013, one vendor represented 73% of our accounts payable. The loss of any key vendor would have to be replaced by others or our inability to do so may have a material adverse effect on our business and financial condition.

 

Note 13 – Commitments and Contingencies

 

Operating Leases

 

Prior to December 1, 2013, the Company had a month-to-month commercial lease with ProSuites, LLC, at Glen Cove, New York for office space. The Company paid $926 a month in rent. The Company canceled the lease effective November 30, 2014.

 

Effective December 1, 2013, the Company entered into a commercial real estate lease with ProSuites, LLC, at 480 Forest Ave. for new office space located in Locust Valley. The initial term of the Lease is for one year ending on November 30, 2014. Pursuant to the Lease, the Company paid base rent of $1,750 per month. The lease expired on November 30, 2014 and was not renewed.

 

On April 25, 2014, the Company signed a 36 month lease agreement for its office facilities in Hicksville, New York commencing on June 1, 2014 and expiring on June 1, 2017. The lease requires base annual rent of approximately $51,000 for the first year, with 4% increments each year thereafter. Rent expense is recognized on a straight line basis over the term of the lease. Effective September 1, 2014, the lessor released the Company from its remaining obligations under the lease in exchange for the lessor retaining the Company’s three month security deposit totaling $12,750. The release of the security deposit to the lessor resulted in $12,750 of additional rent expense during the year ended December 31, 2014.

 

On June 18, 2014, the Company signed a 60 month lease agreement for its office facilities in New York, New York commencing on July 1, 2014 and expiring on June 30, 2019. The lease requires base annual rent of approximately $46,260 for the first year, with 3% increments each year thereafter. Rent expense is recognized on a straight line basis over the term of the lease. As of December 31, 2014, the Company has a deferred rent balance of $1,442, which is a component of Accounts Payable and Accrued Liabilities in the Consolidated Balance Sheet.

 

Rent expense was $71,478 and $11,114 for the years ended December 31, 2014 and 2013, respectively.

 

Future minimum lease payments under these non-cancelable operating leases are approximately as follows:

 

Year Ending December 31
2015		$	47,070
2016			48,363
2017			49,813
2018			51,308
2019			26,033
Total		$	222,587

 

 

Financial Advisory and Investment Banking Agreement

 

The Company entered into an exclusive Financial Advisory and Investment Banking Agreement with Spartan Capital Securities, LLC (“Spartan”) effective January 17, 2014 and amended on June 9, 2014 (the “Spartan Advisory Agreement”). Pursuant to the Spartan Advisory Agreement, Spartan is acting as the Company’s exclusive financial advisor and placement agent to assist the Company in connection with a best efforts private placement (the “Financing”) of up to $7.4 million of the Company’s equity securities (the “Securities”) and a reverse merger. The Company upon closing of the Financing shall pay consideration to Spartan, in cash, a fee in an amount equal to 10% of the aggregate gross proceeds raised in the Financing. The Company shall grant and deliver to Spartan at the closing of the Financing, for nominal consideration, five year warrants (the “Warrants”) to purchase a number of shares of the Company’s Common Stock equal to 10% of the number of shares of Common Stock (and/or shares of Common Stock issuable upon exercise of securities or upon conversion or exchange of convertible or exchangeable securities) sold at such closing. The Warrants shall be exercisable at any time during the five year period commencing on the closing to which they relate at an exercise price equal to the purchase price per share of Common Stock paid by investors in the Financing or, in the case of exercisable, convertible, or exchangeable securities, the exercise, conversion or exchange price thereof. If the Financing is consummated by means of more than one closing, Spartan shall be entitled to the fees provided herein with respect to each such closing.

 

Along with the above fees, the Company shall pay (i) a $10,000 engagement fee upon execution of the agreement, (ii) up to $60,000 for expenses incurred by Spartan in connection with this Financing, together with cost of background checks on the officers and directors of the Company and (iii) a monthly fee of $10,000 for 36 months contingent upon Spartan successfully completing the $6 million Financing.

 

Consulting Agreement

 

On July 1, 2014, Thomas Nicolette entered into a two year consulting agreement to serve as the Company’s Chief Operating Officer (“COO”) conditioned upon and effective upon the Company receiving investment funding of at least $5,000,000. On July 18, 2014, the Company had received the minimum investment funding and the agreement became effective. The COO received monthly fees of $15,000. In addition, the COO received warrants to purchase 1,000,000 shares of the Class A common stock, with 500,000 warrants vesting on July 1, 2014 and 500,000 warrants vesting on June 30, 2015. The warrants are exercisable for five years at an exercise price of $0.50. During the year ended December 31, 2014, the Company recorded $516,340 in compensation expense pertaining to these warrants.

 

In valuing the warrants issued to Mr. Nicolette, the Company used the following assumptions:

 

●

The stock price was based upon the issuance price in the private placement, or $1.00 per share.

 

●

The risk-free interest rate assumption is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The risk free rate was 1.66%.

 

●

The Company has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future. Therefore, the expected dividend rate was $0.

 

●

The warrant term is the expected life of the warrant, which was 2.5 years.

 

●

The expected volatility was benchmarked against similar companies in a similar industry. The expected volatility used was 90%.

 

●

The forfeiture rate is based on the historical forfeiture rate for the Company’s unvested warrants, which was 0%.

 

On November 12, 2014, Thomas Nicolette resigned from his position as Company’s Chief Operating Officer and was promoted to Chief Executive Officer. He also was added as a member of the Board of Directors. Mr. Nicolette’s consulting agreement remains in effect until amended to reflect his new expanded responsibilities.

 

Employment Agreements

 

On May 5, 2014, Robert Riola entered into a three year employment agreement to serve as the Company’s Chief Technology Officer (“CTO”) conditioned upon and effective upon the Company receiving investment funding of at least $5,000,000. On July 18, 2014, the Company had received the minimum investment funding and the agreement became effective. The CTO shall receive a base salary of $185,000. Until the Company reaches a quarterly adjusted EBITDA as defined in the agreement, 50% of the CTO’s salary is deferred. The CTO shall be entitled to consideration for a discretionary annual bonus payable in cash and/or share-based compensation.

 

 

On November 12, 2014, Robert Riola resigned from his position as the Company’s Chief Technology Officer. He remained an employee of the Company. His deferred salary was forfeited as the Company did not reach the quarterly adjusted EBITDA target.

 

On May 27, 2014, Govindan Gopinathan entered into a three year employment agreement to serve as the Company’s Chief Executive Officer (“CEO”) conditioned upon and effective upon the Company receiving investment funding of at least $5,000,000. On July 18, 2014, the Company had received the minimum investment funding and the agreement became effective. The CEO shall receive a base salary of $380,000. Until the Company reaches a quarterly adjusted EBITDA as defined in the agreement, 50% of the CEO’s salary is deferred. The CEO shall be entitled to consideration for a discretionary annual bonus payable in cash and/or share-based compensation.

 

On November 12, 2014, Govindan Gopinathan resigned from his position as Company’s Chief Executive Officer. His deferred salary was forfeited as the Company did not reach the quarterly adjusted EBITDA target. Effective December 24, 2014, Govindan Gopinathan was appointed as the Executive Chairman of the Board of Directors.

 

Management Transition Agreement

 

On September 12, 2014, the Company signed a management transition agreement with a former management consultant of the Company. The management consultant assisted with the orderly transition of management and the transfer of information, documentation and knowledge that the consultant may possess about the business and affairs of the Company. In exchange, the Company paid the management consultant a nonrefundable fee of $125,000 upfront, and commencing on October 15, 2014, the Company paid the management consultant $12,500 per month for the next twelve months contingent upon the management consultant’s continued cooperation. For the year ended December 31, 2014, the Company paid the management consultant $162,500 in connection with the management transition agreement, which is recorded as a component of Consulting expense in the Consolidated Statement of Operations.

 

Litigations, Claims and Assessments

 

In 2013, a former sales consultant who was terminated by the Company commenced an action against the Company. The former sales consultant claimed that he had a signed employment agreement with the Company and that the Company breached the terms of his employment agreement by improperly terminating him. He sought unpaid salary for the duration of the term of the employment agreement, together with stock warrants he claimed was allegedly due him. INeedMD claimed that the alleged employment agreement that the former consultant presented in court is a fraudulent document, the document was not executed by Dr. Gopinathan, the Company’s CEO, and such employment and the effective date of the employment agreement was specifically conditioned upon the Company first being properly funded. On October 10, 2014, the matter was settled for $35,000 in cash and 20,000 shares of Class A common stock valued at $1.00 per share.

 

Note 14 – Subsequent Events

 

On January 1, 2015, the Company issued warrants to purchase 500,000 shares of the Company’s common stock to Patrice McMorrow, Executive Vice President of Business Development. The warrants are exercisable for five years at an exercise price of $0.50 per share. 250,000 of the warrants vest on January 1, 2015 and the other 250,000 warrants vest on September 30, 2015.

 

 

 

F-27