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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________to _______________.
Commission file number: 000-27145
SPENDSMART NETWORKS, INC.
(f/k/a The SpendSmart Payments Company)
(Exact Name of Registrant as Specified in its Charter)
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Delaware
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33-0756798
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(State or jurisdiction of incorporation
or organization)
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(I.R.S. Employer Identification No.)
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805 Aerovista Pkwy, Suite 205
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San Luis Obispo California
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93401
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(Address and of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (877) 541-8398
Common Stock, par value $0.001 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o Nox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. YesxNoo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx Noo
Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b(2) of the Exchange Act. (Check one).
Large accelerated fileroAccelerated fileroNon-accelerated filero(1) Smaller reporting companyx
(1) Do not check if a smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Nox
The aggregate market value of the voting and non-voting common equity on June 30, 2015 held by non-affiliates of the registrant (based on the average bid and asked price of such stock on such date of $.66) was approximately $12,347,658. Shares of common stock held by each officer of the Company (or of its wholly-owned subsidiary) and director and by each person who owns 10% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Without acknowledging that any individual director of registrant is an affiliate, all directors have been included as affiliates with respect to shares owned by
At April 8, 2016, there were 39,354,620 shares outstanding of the issuer’s common stock, par value $0.001 per share.
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PART I
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5
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15
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PART II
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PART III
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PART IV
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64
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K may contain statements relating to future results of SpendSmart Networks, Inc. (including certain projections and business trends) that are “forward-looking statements.” Our actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, without limitation, statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Company to be materially different from any future results or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, those set forth herein and those detailed from time to time in our other Securities and Exchange Commission (“SEC”) filings. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Also, there can be no assurance that the Company will be able to raise sufficient capital to continue as a going concern.
PART I
As used in this Annual Report on Form 10-K, the terms "we", "us", "our", “SpendSmart”, “SpendSmart Networks, Inc.”, and the "Company" means SpendSmart Networks, Inc., a Delaware corporation, its wholly-owned subsidiary SpendSmart Networks, Inc., a California corporation or their management.
Current Business & Strategy
We are a national full-service mobile and loyalty marketing agency that offers a means for small and large business owners alike to better connect with their consumers and generate sales. We do business under the name “SMS Masterminds.” The core of our business involves two licenses which include, among other things, a proprietary SaaS (software as a service) system, proprietary marketing and sales training materials and mobile-responsive website building software.
With our mobile and loyalty marketing programs and proprietary responsive website building software, we provide proprietary loyalty systems and a suite of digital engagement and marketing services that help local merchants build relationships with consumers and drive revenues. These services are sold, implemented and supported both internally and by a vast network of certified digital marketing specialists, aka “Certified Masterminds,” who drive revenue and consumer relationships for merchants via loyalty programs, custom mobile-responsive websites, review generation and management, social media engagement, mobile marketing, mobile commerce and financial tools, such as reward systems. We enter into licensing agreements for our proprietary loyalty and mobile marketing solutions and custom mobile-responsive website building tools with “Certified Masterminds” which sell and support the technology in their respective exclusive markets. We provide training materials, best practice guides and other resources to our licensees, including access to a “Mentor,” who is an existing successful “Mastermind.” In addition to our introductory training program, our licensees have access to an online forum and knowledge base, and the ability to interface with various in house resources for needs related to merchant account management and support, as well as sales and business development.
The licensees also utilize digital loyalty tablets provided to their merchants. The loyalty tablets are proprietary tablet devices set up in physical retail locations where consumers can enter their mobile phone number to “opt-in” to receive notifications from the merchant and participate in the merchant’s loyalty program.
Our business strategy consists of delivering and managing:
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(i)
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Loyalty platforms
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Merchant funded rewards
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Loyalty rewards tablet/kiosk
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Proprietary rewards management system
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(ii)
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Mobile marketing technology
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Text and email messaging
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Customer analytics and propensity marketing
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c.
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Patent pending ‘automated engagement’ engine
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d.
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Text2Win sweepstakes features
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(iii)
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Enterprise level loyalty and mobile marketing consulting
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a.
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Monthly hands on reviews by our “Certified Masterminds”
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b.
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Campaign creation and optimization
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Localized support
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(iv) Proprietary mobile-responsive website building platform
a. Software allowing licensees and merchants to create and administer their websites
b. Audits of existing merchant websites
c. Integration of social media streams and consumer reviews into websites
We plan to pursue these strategies across a broad range of consumer, business, for-profit and non-profit organization, and government/municipal sectors. We expect to continue such partnership programs with various global for-profit and non-profit organizations.
Advertising and Marketing Strategies
SpendSmart develops the loyalty and mobile marketing license through the acquisition of interested ‘prospects’ or leads generated through various advertisements placed on web portals throughout the internet, as well as through referrals from existing licensees. These lead sources have proven to be a consistent and reliable channel for interested potential licensees. We intend to continue to look for new sources of licensee leads, as well as increase our budget to increase our volume of leads generated. All other aspects of the business will be promoted through our network of licensees in North America.
Financial Model
Our Mobile and Loyalty Marketing and website development programs provide for multiple revenue components including set up fees and recurring license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services.
We generate revenues primarily in the form of set up fees, recurring license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services. License fees are charged monthly for our support services. Business development and set-up fees primarily consist of fees for website development services (including support and unspecified upgrades and enhancements when and if they are available), training and professional services that are not essential to functionality.
We employ outside consultants to handle overflow development work on our proprietary software platforms, marketing services, legal and other specific business functions when needed. While we intend to restrict the number of new employees we add to our Company’s workforce, we believe that new personnel will be necessary in the future in the areas of project management, software programming, operations, accounting, sales and administration.
Barriers to Entry
Our Company has applied for patents in connection with our Mobile and Loyalty Marketing program and its related uses and planned future features. We believe that the business processes in connection with our Mobile and Loyalty Marketing program are original to our Company; however we may discover that others have patent claims of which we are currently unaware. Should we be successful in obtaining the grant of the patents under application and should we be successful in countering any challenges to their validity that might emerge, the lifetime of the granted patents would be twenty years. Should the patent applications in question be approved, it could give us a cost advantage from the license fees that future potential competitors would be required to pay as well as revenues from said license fees. There can be no assurance however that we will be successful in receiving such a patent or successful in countering any challenges thereto.
Competitive Business Conditions
The market for loyalty and mobile marketing services is large, growing and highly competitive. We have identified a number of providers of loyalty and mobile marketing related products and services.
Spot On is a provider of a loyalty rewards platform that utilizes a touchscreen tablet to digitize a punch card type loyalty program. At this time Spot appears to be privately held, but well financed. They are based in California. They do not appear at this time to have any kind of text based marketing component to their offering, but instead focus on digitizing the punch card experience and delivering messaging to consumers via email. Spot On does not at this time have any localized representation or support, instead they rely on selling and supporting nationally over the phone and via their website.
BellyCard is a provider of loyalty rewards platforms directly to merchants utilizing a touchscreen tablet to digitize the punch card type loyalty program. They claim to have a total of ten thousand merchants located in the US. They utilize an iPad device as their touchscreen interface and have robust customer analytics engine that the merchant can utilize to understand trends in their business. They do not at this time provide any texting capability and do not have localized support or sales teams. They instead rely on national support and an outsourced phone sales team.
In summary, while we face potential future competition in our target market for our products, we currently believe our products offer distinct features that respond to market needs not well served by the identified competitors mentioned above. However, many of these firms have longer operating histories, greater name recognition and greater financial, technical, and marketing resources than us. Increased competition from any of these sources could result in our failure to achieve and maintain an adequate level of customer demand and market share to support the cost of our operations.
Pre-Paid Credit Card
On November 26, 2014, in an effort to reduce expenses as well as focus its resources on its mobile and loyalty marketing solutions, the Company decided to begin a wind down of the operations of its pre-paid credit card product. All credit card related operations ceased on or about January 26, 2015. The Company will maintain certain card customer data for five (5) years. The pre-paid card program included our general-purpose card and our SpendSmart MasterCard Teen Prepaid Card.
Corporate History
Our Company was originally incorporated in the State of Colorado on May 14, 1990 as “Snow Eagle Investments, Inc.” and was inactive from 1990 until 1997. In April 1997, the Company acquired the assets of 1st Net Technologies, LLC, a California limited liability company, and the Company changed its name to “1st Net Technologies, Inc.” and operated as an Internet commerce and services business. In August 2001, the Company suspended its operations. In September of 2005, the Company acquired VOS Systems, Inc. (the “VOS Subsidiary”) as its wholly owned subsidiary and the Company changed its name to “VOS International, Inc.” and traded under the symbol “VOSI.OB”. The VOS Subsidiary operated as a technology company involved in the design, development, manufacturing, and marketing of consumer electronic products.
On October 16, 2007, we sold the VOS Subsidiary and acquired BillMyParents-CA (at the time both our Colorado parent and California subsidiary were named IdeaEdge, Inc.). On May 1, 2009, our Company changed our name from IdeaEdge, Inc. to Socialwise, Inc., and our stock traded under the symbol “SCLW.OB”. On May 25, 2011, we changed our name to BillMyParents, Inc. and beginning June 13, 2011, our stock traded under the symbol “BMPI.OB.” On February, 15, 2013, we changed our name to The SpendSmart Payments Company and beginning February 28, 2013, our stock traded under the symbol “SSPC.OB.” Effective as of June 20, 2014, the Company was re-domiciled from Colorado to Delaware. Effective as of June 20, 2014, we filed an amendment to our Certificate of Incorporation changing our name to “SpendSmart Networks, Inc.”
Cautionary Note Regarding Forward-Looking Statements
This annual report on Form 10-K contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections. In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in news releases or reports, on its Internet web site or otherwise. All statements other than statements of historical facts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our business, operating results and financial condition. We have identified some of these forward-looking statements with words like “believe,” “may,” “could,” “would,” “might,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate,” “contemplate” and “continue,” the negative of these words, other words and terms of similar meaning and the use of future dates. These forward-looking statements may be contained in this section, the notes to our financial statements and elsewhere in this report, including under the heading “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our forward-looking statements generally relate to:
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our future operating expenses, anticipated burn rate and whether and how long our existing cash and cash equivalents will be sufficient to fund our operations;
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the market size and market acceptance of our products and services;
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the effect of new accounting pronouncements and other legislation; and
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our continuing losses.
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Forward-looking statements involve risks and uncertainties. These uncertainties include factors that affect all businesses as well as matters specific to us. Some of the factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements are described under the heading “Part I. Item 1A. Risk Factors” below. We caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described under the heading “Part I. Item 1A. Risk Factors” below, as well as others that we may consider immaterial or do not anticipate at this time. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. Our expectations reflected in our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including those described below under the heading “Part I. Item 1A. Risk Factors.” The risks and uncertainties described under the heading “Item 1A. Risk Factors” below are not exclusive and further information concerning us and our business, including factors that potentially could materially affect our operating results or financial condition, may emerge from time to time. We assume no obligation to update our forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we make on related subjects in our quarterly reports on Form 10-Q and current reports on Form 8-K that we file with or furnish to the Securities and Exchange Commission
Investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this herein before making an investment decision. If any of the following risks actually occur, our business, financial condition or results of operations could suffer. In that case, the market price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
OUR FAILURE TO OBTAIN ADDITIONAL ADEQUATE FINANCING WOULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
We cannot be certain that we will ever generate sufficient revenues and gross margin to achieve profitability in the future. Our failure to significantly increase revenues or to raise additional adequate and necessary financing would seriously harm our business and operating results. We have incurred significant costs in building, launching and marketing our Products as well as in our acquisition of substantially all of the assets of SMS Masterminds. We anticipate incurring additional expenses relating to customer account acquisitions, marketing, and building our infrastructure. If we fail to achieve sufficient revenues and gross margin with our Products, or our revenues grow more slowly than anticipated, or if our operating or capital expenses increased more than is expected or cannot be reduced in the event of lower revenues, our business will be materially and adversely affected and an investor could suffer the loss of a significant portion or all of his investment in our Company.
THERE ARE RISKS ASSOCIATED WITH THE ACQUISITION OF SMS MASTERMINDS.
An integral part of our current, proposed growth strategy was the consummation of the acquisition of substantially all of the assets of SMS Masterminds. The SMS Masterminds transaction involved a number of risks and presented financial, managerial and operational challenges, including: diversion of management’s attention from running the existing business; increased expenses, including legal, administrative and compensation expenses resulting from newly hired employees; increased costs to integrate personnel, customer base and business practices of the acquired assets; adverse effects on reported operating results due to possible write-down of goodwill associated with the acquisition; and dilution to stockholders due to the issuance of securities.
THERE ARE RISKS ASSOCIATED WITH THE ACQUISITION OF THE TECHXPRESS WEB BUSINESS.
Part of our growth strategy was the consummation of the acquisition of substantially all of the web assets of TechXpress. The TechXpress transaction involved a number of risks and presented financial, managerial and operational challenges, including: diversion of management’s attention from running the existing business; increased expenses, including legal, administrative and compensation expenses resulting from newly hired employees; increased costs to integrate personnel, customer base and business practices of the acquired assets; adverse effects on reported operating results due to possible write-down of goodwill associated with the acquisition; and dilution to stockholders due to the issuance of securities.
WE FACE COMPETITION FROM OTHER MOBILE AND LOYALTY SYSTEMS.
We face competition from other companies with similar product offerings. Many of these companies have longer operating histories, greater name recognition and substantially greater financial, technical and marketing resources than us. Many of these companies also have more extensive customer bases, broader customer relationships and broader industry alliances than us, including relationships with many of our potential customers. Increased competition from any of these sources could result in our failure to achieve and maintain an adequate level of customers and market share to support the cost of our operations.
WE HAVE LIMITED RESOURCES TO DEVELOP OUR PRODUCT OFFERINGS.
Our ability to successfully access the capital markets at the same time that our Company has required funding for the development and marketing of our product offerings is challenging. This has caused and will likely continue to cause us to restrict funding of the development of our products and to favor the development of one product offering over the other based on their relative estimated potentials for commercial success as evaluated by our management. We may require additional debt and/or equity financing to pursue our growth strategy. Given our limited operating history and existing losses, there can be no assurance that we will be successful in obtaining additional financing. Furthermore, the issuance by us of any additional securities pursuant to any future fundraising activities undertaken by us would dilute the ownership of existing shareholders and may reduce the price of our common stock. Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. Our current focus is our Mobile and Loyalty Marketing program. The failure of this program to be commercially successful would substantially harm our business and results of operations. Our failure to successfully obtain additional future funding may jeopardize our ability to continue our business and operations. Furthermore, in the future we may determine that it is in the best interest of our Company to severely curtail, license, jointly develop with a third party or sell one of our product offerings, which may be on terms which limit the revenue potential of the product offering to our Company.
WE RELY ON THIRD-PARTY SUPPLIERS AND DISTRIBUTORS THAT ARE SPECIFIC TO OUR BUSINESS SUCH AS CELLULAR SERVICE PROVIDERS, INTERNET SERVICE PROVIDERS, PROGRAMMERS, AND SOCIAL NETWORKS.
We will be dependent on other companies to provide necessary products and services in connection with key elements of our business. Any interruption in our ability to utilize these services, or comparable quality replacements would severely harm our business and results of operations. Should any of these adverse contingencies result, they could substantially harm our business and results of operations and an investor could suffer the loss of a significant portion or all of his investment in our Company.
CHANGES IN LAWS AND REGULATIONS TO WHICH WE ARE SUBJECT, OR TO WHICH WE MAY BECOME SUBJECT, MAY INCREASE OUR COSTS OF OPERATION, DECREASE OUR OPERATING REVENUES AND DISRUPT OUR BUSINESS.
Changes in laws and regulations or the interpretation or enforcement thereof may occur that could increase our compliance and other costs of doing business, require significant systems redevelopment, or render our products or services less profitable or obsolete, any of which could have an adverse effect on our results of operations. We could face more stringent Telephone Consumer Protection Act regulations, as well as more stringent compliance with which could be expensive and time consuming. Changes in laws and regulations governing the way our products and services are sold or in the way those laws and regulations are interpreted or enforced could adversely affect our ability to distribute our products and the cost of providing those products and services. If onerous regulatory requirements were imposed on the sale of our products and services, the requirements could lead to a loss of merchants and subscribers, which in turn could materially and adversely impact our operations. We also face the risk that our text messaging system will be found to be in violation of or used in a manner that is a violation of the Telephone Consumer Protection Act.
THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT MAY HAVE A SIGNIFICANT ADVERSE IMPACT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”). The DFA, as well as regulations promulgated thereunder, could have a significant adverse impact on the Company’s business, results of operations and financial condition.
The DFA has resulted in increased scrutiny and oversight of consumer financial services and products, primarily through the establishment of the Consumer Financial Protection Bureau (“CFPB”) within the Federal Reserve. The CFPB has broad rulemaking and enforcement authority over providers of pre-paid cards, among other credit providers. The CFPB has the authority to write regulations under federal consumer financial protection laws, and to enforce those laws. The CFPB regulations have yet to be fully promulgated and depending on how the CFPB functions, it could have a material adverse impact on our business. The impact this new regulatory regime will have on the Company’s business is uncertain at this time.
Many provisions of the DFA require the adoption of rules to implement. In addition, the DFA mandates multiple studies, which could result in additional legislative or regulatory action. Therefore, the ultimate consequences of the DFA and its impact on our Company’s business, results of operations and financial condition remain uncertain.
WE ARE SUBJECT TO VARIOUS PRIVACY RELATED REGULATIONS, INCLUDING THE GRAMM-LEACH-BLILEY ACT WHICH MAY INCLUDE AN INCREASED COST OF COMPLIANCE.
We are subject to various laws, rules and regulations related to privacy, information security and data protection, including the Gramm-Leach-Bliley Act, and we could be negatively impacted by these laws, rules and regulations. The Gramm-Leach-Bliley Act guidelines require, among other things, that each financial institution develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities and the sensitivity of any customer information at issue. Our management believes that we are currently operating in compliance with these regulations. However, continued compliance with these laws, rules and regulations regarding the privacy, security and protection of customer and employee data, or the implementation of any additional privacy rules and regulations, could result in higher compliance and technology costs for our Company.
OUR BUSINESS COULD SUFFER IF THERE IS A DECLINE IN THE USE OF SMS SERVICES OR THERE ARE ADVERSE DEVELOPMENTS WITH RESPECT TO THE SMS SERVICES INDUSTRY IN GENERAL.
As the mobile services industry evolves, consumers may find SMS services to be less attractive than other mobile messaging and communication services. Consumers might not use SMS services if less expensive services and technologies are offered. If consumer acceptance of SMS services as a form of communication does not continue to develop or develops more slowly than expected or if there is a shift form of mobile communications it could have a material adverse effect on our financial position and results of operations.
A DATA SECURITY BREACH COULD EXPOSE US TO LIABILITY AND PROTRACTED AND COSTLY LITIGATION, AND COULD ADVERSELY AFFECT OUR REPUTATION AND OPERATING REVENUES.
We, as part of the processing of payment from our licensees, and the banks that previously issued our cards, network acceptance members and/or third-party processors receive, transmit and store confidential customer and other information in connection with payments related to our licensees as well as the previous sales and uses of our prepaid cards. Encryption software and the other technologies used to provide security for storage, processing and transmission of confidential customer and other information may not be effective to protect against data security breaches by third parties. The risk of unauthorized circumvention of such security measures has been heightened by advances in computer capabilities and the increasing sophistication of hackers. Improper access to our or these third parties’ systems or databases could result in the theft, publication, deletion or modification of confidential customer and other information. A data security breach of the systems on which sensitive cardholder data and account information are stored could lead to fraudulent activity involving our products and services, reputational damage and claims or regulatory actions against us. If we are sued in connection with any data security breach, we could be involved in protracted and costly litigation. If unsuccessful in defending that litigation, we might be forced to pay damages and/or change our business practices or pricing structure, any of which could have a material adverse effect on our operating revenues and profitability. We would also likely have to pay (or indemnify the banks that issue our cards for) fines, penalties and/or other assessments imposed as a result of any data security breach. Further, a significant data security breach could lead to additional regulation, which could impose new and costly compliance obligations. In addition, a data security breach at the bank that issues our cards, network acceptance members or third-party processors could result in significant reputational harm to us and cause the use and acceptance of our cards to decline, either of which could have a significant adverse impact on our operating revenues and future growth prospects.
OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY SURROUNDING OUR SMS MESSAGING, WEB TOOLS, WEBSITE BUILDING TOOLS AND PREPAID CARDS IS UNCERTAIN.
Our future success may depend significantly on our ability to protect our proprietary rights to the intellectual property upon which our products and services will be based. Any patents we obtain in the future may be challenged by re-examination or otherwise invalidated or eventually be found unenforceable. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Competitors may attempt to challenge or invalidate our patents, or may be able to design alternative techniques or devices that avoid infringement of our patents, or develop products with functionalities that are comparable to ours. In the event a competitor infringes upon our patent or other intellectual property rights, litigation to enforce our intellectual property rights or to defend our patents against challenge, even if successful, could be expensive and time consuming and could require significant time and attention from our management. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against challenges from others.
WE ARE DEPENDENT UPON CONSUMER TASTES WITH RESPECT TO PREFERRED METHODS OF MOBILE COMMUNICATION FOR THE SUCCESS OF OUR PRODUCTS AND SERVICES.
Our product offerings’ acceptance by consumers and their consequent generation of revenues will depend upon a variety of unpredictable factors, including:
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● Public taste, which is always subject to change;
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● The quantity and popularity of other communication platforms; and
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● The fact that the sales methods chosen for the products and services we market may be ineffective.
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For any of these reasons, our programs may be commercially unsuccessful. If we are unable to market products which are commercially successful, we may not be able to recoup our expenses and/or generate sufficient revenues. In the event that we are unable to generate sufficient revenues, we may not be able to continue operating as a viable business and an investor could suffer the loss of a significant portion or all of his investment in our Company.
THE MOBILE ADVERTISING MARKET MAY DETERIORATE OR DEVELOP MORE SLOWLY THAN EXPECTED, WHICH COULD HARM OUR BUSINESS.
Advertising on mobile connected devices is an emerging industry sector. Advertisers have historically spent a smaller portion of their advertising budgets on mobile media as compared to traditional advertising methods, such as television, newspapers, radio and billboards, or internet advertising such banner ads. Future demand and market acceptance for mobile advertising is uncertain. Many advertisers still have limited experience with mobile advertising and may continue to devote larger portions of their advertising budgets to more traditional offline or online personal computer-based advertising, instead of shifting additional advertising resources to mobile advertising. In addition, our current and potential advertiser clients may ultimately find mobile advertising to be less effective than traditional advertising media or marketing methods or other technologies for promoting their products and services, and they may even reduce their spending on mobile advertising from current levels as a result. If the market for mobile advertising deteriorates, or develops more slowly than expected, we may not be able to increase our revenue.
SMS MASTERMINDS IS ONE OF THE DEFENDANTS NAMED IN A POTENTIAL CLASS-ACTION LAWSUIT FILED IN THE UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK RELATING TO ALLEGED VIOLATIONS OF THE TELEPHONE CONSUMER PROTECTION ACT.
From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief. The amount of any ultimate liability from such claims cannot be determined. On January 1, 2014, Intellectual Capital Management, LLC dba SMS Masterminds was named in a potential class-action lawsuit titled Telford v. Intellectual Capital, et al, filed in the United States District Court Eastern District of New York relating to alleged violations of the Telephone Consumer Protection Act of 1991 (the “TCPA”). The Company believed the Plaintiff’s allegations had no merit but based upon the economics of continued litigation, the Company resolved the lawsuit in May 2015 for the sum of $34,612, and the action is no longer pending. On July 8, 2015, Intellectual Capital Management, LLC dba SMS Masterminds and SpendSmart Networks, Inc. were named in a potential class-action lawsuit entitled Peter Marchelos, et al v. Intellectual Capital Management, et al, filed in the United States District Court Eastern District of New York relating to alleged violations of the Telephone Consumer Protection Act of 1991. This litigation involves the same licensee and merchant as the Telford lawsuit and the same attorneys represent the plaintiffs in this action. The claim of one of the two plaintiffs was resolved for $1,701. The Company believes the Plaintiffs’ allegations have no merit and is vigorously defending the action. Because this lawsuit is in an early stage, we are unable to predict the outcome of the lawsuit and the possible loss or range of loss, if any, associated with its resolution or any potential effect the lawsuit may have on our operations. There are no other legal claims currently pending or threatened against us that in the opinion of our management would be likely to have a material adverse effect on our financial position, results of operations or cash flows.
IF MOBILE CONNECTED DEVICES, THEIR OPERATING SYSTEMS OR CONTENT DISTRIBUTION CHANNELS, INCLUDING THOSE CONTROLLED BY OUR PRIMARY COMPETITORS, DEVELOP IN WAYS THAT PREVENT OUR ADVERTISING FROM BEING DELIVERED TO OUR USERS, OUR ABILITY TO GROW OUR BUSINESS WILL BE IMPAIRED.
Our mobile marketing business model depends upon the continued compatibility of our mobile advertising platform with most mobile connected devices, as well as the major operating systems that run on them. The design of mobile devices and operating systems is controlled by third parties with whom we do not have any formal relationships. These parties frequently introduce new devices, and from time to time they may introduce new operating systems or modify existing ones.
OUR MOBILE MARKETING SERVICES ARE PROVIDED ON MOBILE COMMUNICATIONS NETWORKS THAT ARE OWNED AND OPERATED BY THIRD PARTIES WHO WE DO NOT CONTROL AND THE FAILURE OF ANY OF THESE NETWORKS WOULD ADVERSELY AFFECT OUR ABILITY TO DELIVER OUR SERVICES TO OUR CUSTOMERS.
Our mobile marketing and advertising platform is dependent on the reliability of mobile operators who maintain sophisticated and complex mobile networks. Such mobile networks have historically, and particularly in recent years, been subject to both rapid growth and technological change. If the network of a mobile operator with which we are integrated should fail, including because of new technology incompatibility, the degradation of network performance under the strain of too many mobile consumers using it, or a general failure from natural disaster or political or regulatory shut-down, we will not be able provide our services to customers through such mobile network. This in turn, would impair our reputation and business, potentially resulting in a material, adverse effect on our financial results.
THE SUCCESS OF OUR MOBILE MARKETING BUSINESS DEPENDS, IN PART, ON WIRELESS CARRIERS CONTINUING TO ACCEPT OUR CUSTOMERS' MESSAGES FOR DELIVERY TO THEIR SUBSCRIBER BASE.
We depend on wireless carriers to deliver our customers' messages to their subscriber base. Wireless carriers often impose standards of conduct or practice that significantly exceed current legal requirements and potentially classify our messages as "spam," even where we do not agree with that conclusion. In addition, the wireless carriers use technical and other measures to attempt to block non-compliant senders from transmitting messages to their customers; for example, wireless carriers block short codes or Internet Protocol addresses associated with those senders. There can be no guarantee that our, or short codes registered to us, will not be blocked or blacklisted or that we will be able to successfully remove ourselves from those lists. Although our services typically require customers to opt-in to a campaign, minimizing the risk that its customers' messages will be characterized as spam, blocking of this type could interfere with its ability to market products and services of its customers and communicate with end users and could undermine the effectiveness of our customers' marketing campaigns. To date we have not experienced any material blocking of our messages by wireless carriers, but any such blocking could have an adverse effect on our business and results of operations.
MOBILE CONNECTED DEVICE USERS MAY CHOOSE NOT TO ALLOW ADVERTISING ON THEIR DEVICES.
The success of our mobile marketing business model depends on our ability to deliver targeted, highly relevant ads to consumers on their mobile connected devices. Targeted advertising is done primarily through analysis of data, much of which is collected on the basis of user-provided permissions. This data might include a device's location or data collected when device users view an advertisement or video or when they click on or otherwise engage with an advertisement. Users may elect not to allow data sharing for targeted advertising for a number of reasons, such as privacy concerns, or pricing mechanisms that may charge the user based upon the amount or types of data consumed on the device. Users may also elect to opt out of receiving targeted advertising from our platform. In addition, the designers of mobile device operating systems are increasingly promoting features that allow device users to disable some of the functionality, which may impair or disable the delivery of ads on their devices, and device manufacturers may include these features as part of their standard device specifications. Although we are not aware of any such products that are widely used in the market today, as has occurred in the online advertising industry, companies may develop products that enable users to prevent ads from appearing on their mobile device screens. If any of these developments were to occur, our ability to deliver effective advertising campaigns on behalf of our advertiser clients would suffer, which could hurt our ability to generate revenue.
WE MAY NOT BE ABLE TO ENHANCE OUR MOBILE MARKETING AND ADVERTISING PLATFORM TO KEEP PACE WITH TECHNOLOGICAL AND MARKET DEVELOPMENTS, OR TO REMAIN COMPETITIVE AGAINST POTENTIAL NEW ENTRANTS IN OUR MARKETS.
The market for mobile marketing and advertising services is emerging and is characterized by rapid technological change, evolving industry standards, frequent new product introductions and short product life cycles. Our current platform or platforms we may offer in the future may not be acceptable to marketers and advertisers. To keep pace with technological developments, satisfy increasing customer requirements and achieve acceptance of our marketing and advertising campaigns, we will need to enhance our current mobile marketing solutions and continue to develop and introduce on a timely basis new, innovative mobile marketing services offering compatibility, enhanced features and functionality on a timely basis at competitive prices. Our inability, for technological or other reasons, to enhance, develop, introduce and deliver compelling mobile marketing services in a timely manner, or at all, in response to changing market conditions, technologies or customer expectations could have a material adverse effect on our operating results or could result in our mobile marketing services platform becoming obsolete. Our ability to compete successfully will depend in large measure on our ability to maintain a technically skilled development and engineering staff and to adapt to technological changes and advances in the industry, including providing for the continued compatibility of our mobile marketing services platform with evolving industry standards and protocols. In addition, as we believe the mobile marketing market is likely to grow substantially, other companies which are larger and have significantly more capital to invest than us may emerge as competitors. New entrants could seek to gain market share by introducing new technology or reducing pricing. This may make it more difficult for us to sell our products and services, and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share or expected market share, any of which may significantly harm our business, operating results and financial condition.
OUR SALES EFFORTS WITH LICENSEES REQUIRES SIGNIFICANT TIME AND EXPENSE.
Attracting new licensees requires substantial time and expense, and we may not be successful in establishing new relationships or in maintaining or advancing current relationships. Further, it may be difficult for our licensees to identify, engage and market to potential merchant clients who do not currently spend on mobile advertising or are unfamiliar with our current services or platform. Furthermore, many merchant’s purchasing and design decisions typically require input from multiple internal constituencies.
The novelty of our services and our business model often requires us to spend substantial time and effort educating potential licensees about our offerings, including providing demonstrations and comparisons against other available services. This process can be costly and time-consuming. If we are not successful in streamlining our sales processes with licensees or successfully assisting licensees in selling to merchants, our ability to grow our business may be adversely affected.
IF WE CANNOT INCREASE THE CAPACITY OF OUR MOBILE ADVERTISING TECHNOLOGY PLATFORM TO MEET MERCHANT OR DEVICE USER DEMAND, OUR BUSINESS WILL BE HARMED.
We must be able to continue to increase the capacity of our technology platform in order to support substantial increases in the number of merchants and device users, to support an increasing variety of advertising formats and to maintain a stable service infrastructure and reliable service delivery for our mobile advertising campaigns. If we are unable to efficiently and effectively increase the scale of our mobile advertising platform to support and manage a substantial increase in the number of merchants and mobile device users, while also maintaining a high level of performance, the quality of our services could decline and our reputation and business could be seriously harmed. In addition, if we are not able to support emerging mobile advertising formats or services preferred by advertisers, we may be unable to obtain new advertising clients or may lose existing advertising clients, and in either case our revenue could decline.
SYSTEM FAILURES COULD SIGNIFICANTLY DISRUPT OUR OPERATIONS AND CAUSE US TO LOSE ADVERTISER CLIENTS OR ADVERTISING INVENTORY.
Our success depends on the continuing and uninterrupted performance of our own internal systems, which are utilized to send messages, and monitor the performance of advertising campaigns. Our revenue depends on the technological ability of our platform to deliver ads. Sustained or repeated system failures that interrupt our ability to provide services to clients, including technological failures affecting our ability to deliver ads quickly and accurately and to process mobile device users' responses to ads, could significantly reduce the attractiveness of our services to advertisers and reduce our revenue. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious human acts and natural disasters. In addition, any steps we take to increase the reliability and redundancy of our systems may be expensive and may not be successful in preventing system failures.
ACTIVITIES OF LICENSEES OR MERCHANTS COULD DAMAGE OUR REPUTATION OR GIVE RISE TO LEGAL CLAIMS AGAINST US.
A merchant’s promotion of their products and services may not comply with federal, state and local laws, including, but not limited to, laws and regulations relating to mobile communications. Failure of a licensee or merchant to comply with federal, state or local laws or our policies could damage our reputation and expose us to liability under these laws. We may also be liable to third parties for content in the ads it delivers if the artwork, text or other content involved violates copyrights, trademarks or other intellectual property rights of third parties or if the content is defamatory, unfair and deceptive, or otherwise in violation of applicable laws. Although we generally receive assurance from licensees that ads are lawful and that they have the right to use any copyrights, trademarks or other intellectual property included in a communication, and although we are normally indemnified by the licensees, a third party or regulatory authority may still file a claim against us. Any such claims could be costly and time-consuming to defend and could also hurt our reputation within the mobile advertising industry. Further, if we are exposed to legal liability, we could be required to pay substantial fines or penalties, redesign our business methods, discontinue some of its services or otherwise expend significant resources.
SOFTWARE AND COMPONENTS THAT WE INCORPORATE INTO OUR MOBILE ADVERTISING PLATFORM MAY CONTAIN ERRORS OR DEFECTS, WHICH COULD HARM OUR REPUTATION AND HURT ITS BUSINESS.
We use a combination of custom and third-party software, including open source software, in building our mobile advertising platform. Although we test software before incorporating it into our platform, we cannot guarantee that all of the third-party technology that we incorporate will not contain errors, bugs or other defects. We continue to launch enhancements to our mobile advertising platform, and cannot guarantee any such enhancements will be free from these kinds of defects. If errors or other defects occur in technology that we utilize in our mobile advertising platform, it could result in damage to our reputation and losses in revenue, and we could be required to spend significant amounts of additional resources to fix any problems.
OUR INABILITY TO USE SOFTWARE LICENSED FROM THIRD PARTIES, OR OUR USE OF OPEN SOURCE SOFTWARE UNDER LICENSE TERMS THAT INTERFERE WITH OUR PROPRIETARY RIGHTS, COULD DISRUPT OUR BUSINESS.
Our technology platform incorporates software licensed from third parties, including some software, known as open source software, which we use without charge. Although we monitor our use of open source software, U.S. or foreign courts have not interpreted the terms of many open source licenses to which we are subject, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our platform to our clients. In the future, we could be required to seek licenses from third parties in order to continue offering our platform, which licenses may not be available on terms that are acceptable to us, or at all. Alternatively, we may need to re-engineer our platform or discontinue use of portions of the functionality provided by our platform. In addition, the terms of open source software licenses may require us to provide software that we develop to others on unfavorable license terms. Our inability to use third-party software could result in disruptions to our business, or delays in the development of future offerings or enhancements of existing offerings, which could impair our business.
IF OUR MOBILE MARKETING AND ADVERTISING SERVICES PLATFORM DOES NOT SCALE AS ANTICIPATED, OUR BUSINESS WILL BE HARMED.
We must be able to continue to scale to support potential ongoing substantial increases in the number of users in our actual commercial environment, and maintain a stable service infrastructure and reliable service delivery for our mobile marketing and advertising campaigns. In addition, we must continue to expand our service infrastructure to handle growth in customers and usage. If our mobile marketing services platform does not efficiently and effectively scale to support and manage a substantial increase in the number of users while maintaining a high level of performance, the quality of our services could decline and our business will be seriously harmed. In addition, if we are unable to secure data center space with appropriate power, cooling and bandwidth capacity, we may not be able to efficiently and effectively scale our business to manage the addition of new customers and overall mobile marketing campaigns.
IF A PORTION OF OUR BUSINESS MODEL IS DEEMED TO BE A FRANCHISE OUR BUSINESS COULD BE INTERUPTED.
Although our business model related to the Mobile and Loyalty Program is based upon a license, we cannot guarantee that any state’s franchise department will not find our model to be a franchise and require a transition to said model with possible associated penalties, fees, costs, and business delays and interruptions.
OUR BUSINESS PRACTICES WITH RESPECT TO DATA MAY GIVE RISE TO LIABILITIES OR REPUTATIONAL HARM AS A RESULT OF GOVERNMENTAL REGULATION, LEGAL REQUIREMENTS OR INDUSTRY STANDARDS RELATING TO CONSUMER PRIVACY AND DATA PROTECTION.
In the course of providing services, we transmit and store information related to mobile devices and the ads we place with that user's consent. Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we collect across our mobile marketing platform. We strive to comply with all applicable laws, regulations, policies and legal obligations relating to privacy and data protection. However, it is possible that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure, or perceived failure, by us to comply with U.S. federal, state, or international laws, including laws and regulations regulating privacy or consumer protection, could result in proceedings or actions against us by governmental entities or others. From time to time, there are several ongoing lawsuits filed against companies in our industry alleging various violations of privacy-related laws. These proceedings could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, adversely affect the demand for our services and ultimately result in the imposition of monetary liability.
The regulatory framework for privacy issues worldwide is evolving, and various government and consumer agencies and public advocacy groups have called for new regulation and changes in industry practices, including some directed at the mobile industry in particular. It is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that would affect our business, particularly with regard to location-based services, collection or use of data to target ads and communication with consumers via mobile devices.
The U.S. government, including the Federal Trade Commission, or FTC, and the Department of Commerce, has announced that it is reviewing the need for greater regulation of the collection of consumer information, including regulation aimed at restricting some targeted advertising practices. The FTC has also proposed revisions to the Children's Online Privacy Protection Act, or COPPA, that could, if adopted, create greater compliance burdens on us. COPPA imposes a number of obligations, such as obtaining parental permission on website operators to the extent they collect certain information from children who are under 13 years old. The proposed changes would broaden the applicability of COPPA, including the types of information that would be subject to these regulations, and could apply to information that we or our clients collect through mobile devices or apps that is not currently subject to COPPA.
As we expand our operations globally, compliance with regulations that differ from country to country may also impose substantial burdens on its business. In particular, the European Union has traditionally taken a broader view as to what is considered personal information and has imposed greater obligations under data privacy regulations. In addition, individual EU member countries have had discretion with respect to their interpretation and implementation of the regulations, which has resulted in variation of privacy standards from country to country. In January 2012, the European Commission announced significant proposed reforms to its existing data protection legal framework, including changes in obligations of data controllers and processors, the rights of data subjects and data security and breach notification requirements. The EU proposals, if implemented, may result in a greater compliance burden if SMS Masterminds delivers ads to mobile device users in Europe. Complying with any new regulatory requirements could force us to incur substantial costs or require us to change our business practices in a manner that could compromise our ability to effectively pursue its growth strategy.
In addition to compliance with government regulations, we voluntarily participate in several trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct addressing the provision of location-based services, delivery of promotional content to mobile devices, and tracking of device users or devices for the purpose of delivering targeted advertising. We could be adversely affected by changes to these guidelines and codes in ways that are inconsistent with our practices or in conflict with the laws and regulations of U.S. or international regulatory authorities. If we are perceived as not operating in accordance with industry best practices or any such guidelines or codes with regard to privacy, our reputation may suffer and we could lose relationships with advertiser or developer partners.
WE DEPEND ON THIRD PARTY PROVIDERS FOR A RELIABLE INTERNET INFRASTRUCTURE AND THE FAILURE OF THESE THIRD PARTIES, OR THE INTERNET IN GENERAL, FOR ANY REASON WOULD SIGNIFICANTLY IMPAIR OUR ABILITY TO CONDUCT OUR BUSINESS.
We outsource all of our data center facility management to third parties who host the actual servers and provide power and security in multiple data centers in each geographic location. These third party facilities require uninterrupted access to the Internet. If the operation of our servers are interrupted for any reason, including natural disaster, financial insolvency of a third party provider, or malicious electronic intrusion into the data center, our business would be significantly damaged. As has occurred with many Internet-based businesses, on occasion in the past, we have been subject to "denial-of-service" attacks in which unknown individuals bombarded its computer servers with requests for data, thereby degrading the servers' performance. While we have historically been successful in relatively quickly identifying and neutralizing these attacks, we cannot be certain that we will be able to do so in the future. If either a third party facility failed, or our ability to access the Internet was interfered with because of the failure of Internet equipment in general or we become subject to malicious attacks of computer intruders, our business and operating results will be materially adversely affected.
Financial Risks
OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING THAT OUR COMPANY WILL CONTINUE AS A GOING CONCERN.
The factors described herein raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. The report of our independent registered public accounting firm includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. If we cannot generate the required revenues and gross margin to achieve profitability or obtain additional capital on acceptable terms, we will need to substantially revise our business plan or cease operations and an investor could suffer the loss of a significant portion or all of his investment in our Company.
CURRENT MACRO-ECONOMIC CONDITIONS COULD ADVERSELY AFFECT THE FINANCIAL VIABILITY OF OUR COMPANY.
Continuing recessionary conditions in the global economy threaten to cause further tightening of the credit and equity markets and more stringent lending and investing standards. The persistence of these conditions could have a material adverse effect on our access to further needed capital. In addition, further deterioration in the economy could adversely affect our corporate results, which could adversely affect our financial condition and operations.
WE DO NOT EXPECT TO PAY DIVIDENDS FOR THE FORESEEABLE FUTURE, AND WE MAY NEVER PAY DIVIDENDS AND, CONSEQUENTLY, THE ONLY OPPORTUNITY FOR INVESTORS TO ACHIEVE A RETURN ON THEIR INVESTMENT IS IF A TRADING MARKET DEVELOPS AND INVESTORS ARE ABLE TO SELL THEIR SHARES FOR A PROFIT OR IF OUR BUSINESS IS SOLD AT A PRICE THAT ENABLES INVESTORS TO RECOGNIZE A PROFIT.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends for the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, we cannot assure investors any return on their investment, other than in connection with a sale of their shares or a sale of our business. At the present time there is a limited trading market for our shares. Therefore, holders of our securities may be unable to sell them. We cannot assure investors that an active trading market will develop or that any third party will offer to purchase our business on acceptable terms and at a price that would enable our investors to recognize a profit.
OUR NET OPERATING LOSS (“NOL”) CARRY-FORWARD IS LIMITED.
We have recorded a valuation allowance amounting to our entire net deferred tax asset balance due to our lack of a history of earnings, possible statutory limitations on the use of tax loss carry-forwards generated in the past and the future expiration of our NOL. This gives rise to uncertainty as to whether the net deferred tax asset is realizable. Internal Revenue Code Section 382, and similar California rules, place a limitation on the amount of taxable income that can be offset by carry-forwards after a change in control (generally greater than a 50% change in ownership). As a result of these provisions, it is likely that given our acquisition of The SpendSmart Payments Company-CA, SMS Masterminds, and TechXpress, future utilization of the NOL will be severely limited. Our inability to use our Company’s historical NOL, or the full amount of the NOL, would limit our ability to offset any future tax liabilities with its NOL.
Corporate and Other Risks
LIMITATIONS ON DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION OF OUR COMPANY’S OFFICERS AND DIRECTORS BY US MAY DISCOURAGE STOCKHOLDERS FROM BRINGING SUIT AGAINST AN OFFICER OR DIRECTOR.
Our Company’s articles of incorporation and bylaws provide, with certain exceptions as permitted by governing state law, that a director or officer shall not be personally liable to us or our stockholders for breach of fiduciary duty as a director, except for acts or omissions which involve intentional misconduct, fraud or knowing violation of law, or unlawful payments of dividends. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director.
WE ARE RESPONSIBLE FOR THE INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS.
Should our officers and/or directors require us to contribute to their defense, we may be required to spend significant amounts of our capital. Our articles of incorporation and bylaws as well as an indemnification agreement also provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of our Company. This indemnification policy could result in substantial expenditures, which we may be unable to recoup. If these expenditures are significant, or involve issues which result in significant liability for our key personnel, we may be unable to continue operating as a going concern.
OUR EMPLOYEES, EXECUTIVE OFFICERS, DIRECTORS AND INSIDER STOCKHOLDERS BENEFICIALLY OWN OR CONTROL A SUBSTANTIAL PORTION OF OUR OUTSTANDING COMMON STOCK, WHICH MAY LIMIT YOUR ABILITY AND THE ABILITY OF OUR OTHER STOCKHOLDERS, WHETHER ACTING ALONE OR TOGETHER, TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION OF OUR COMPANY.
Additionally, this concentration of ownership could discourage or prevent a potential takeover of our Company that might otherwise result in an investor receiving a premium over the market price for his shares. Approximately half of our outstanding shares of common stock is beneficially owned and controlled by a group of insiders, including our employees, directors and executive officers. Accordingly, our employees, directors, executive officers and insider shareholders may have the power to control the election of our directors and the approval of actions for which the approval of our stockholders is required. If you acquire shares of our common stock, you may have no effective voice in the management of our Company. Such concentrated control of our Company may adversely affect the price of our common stock. Our principal stockholders may be able to control matters requiring approval by our stockholders, including the election of directors, mergers or other business combinations. Such concentrated control may also make it difficult for our stockholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into different transactions which require stockholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.
WE ARE DEPENDENT FOR OUR SUCCESS ON A FEW KEY EMPLOYEES.
Our inability to retain those employees would impede our business plan and growth strategies, which would have a negative impact on our business and the value of your investment. Our success depends on the skills, experience and performance of key members of our Company. Each of those individuals may voluntarily terminate his employment with our Company at any time. Were we to lose one or more of these key employees, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital. We do not maintain a key man insurance policy on any of our key employees.
SHOULD WE BE SUCCESSFUL IN TRANSITIONING TO A COMPANY GENERATING SIGNIFICANT REVENUES, WE MAY NOT BE ABLE TO MANAGE OUR GROWTH EFFECTIVELY, WHICH COULD ADVERSELY AFFECT OUR OPERATIONS AND FINANCIAL PERFORMANCE.
The ability to manage and operate our business as we execute our growth strategy will require effective planning. Significant rapid growth could strain our internal resources, leading to a lower quality of customer service, reporting problems and delays in meeting important deadlines resulting in loss of market share and other problems that could adversely affect our financial performance. Our efforts to grow could place a significant strain on our personnel, management systems, infrastructure and other resources. If we do not manage our growth effectively, our operations could be adversely affected, resulting in slower growth and a failure to achieve or sustain profitability.
Capital Market Risks
OUR COMMON STOCK IS THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT OR NEAR ASK PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OR OTHERWISE DESIRE TO LIQUIDATE YOUR SHARES.
There is limited market activity in our stock and we may be too small to attract the interest of many brokerage firms and analysts. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained. While we are trading on OTCQB, the trading volume we will develop may be limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in over-the-counter stocks and certain major brokerage firms restrict their brokers from recommending over-the-counter stocks because they are considered speculative, volatile, thinly traded and the market price of the common stock may not accurately reflect the underlying value of our Company. The market price of our common stock could be subject to wide fluctuations in response to quarterly variations in our revenues and operating expenses, announcements of new products or services by us, significant sales of our common stock, including “short” sales, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.
THE APPLICATION OF THE “PENNY STOCK” RULES TO OUR COMMON STOCK COULD LIMIT THE TRADING AND LIQUIDITY OF THE COMMON STOCK, ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND INCREASE YOUR TRANSACTION COSTS TO SELL THOSE SHARES.
As long as the trading price of our common stock is below $5 per share, our common stock will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder's ability to buy and sell our stock. In addition to the "penny stock" rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. These regulations may have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing the transaction costs for sales and purchases of our common stock as compared to other securities. The stock market in general and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include 1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; 2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; 3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; 4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and 5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices as well as the regulatory disclosure requirements set forth above could increase the volatility of our share price, may limit investors’ ability to buy and sell our securities and have an adverse effect on the market price for our shares of common stock.
WE MAY NOT BE ABLE TO ATTRACT THE ATTENTION OF MAJOR BROKERAGE FIRMS, WHICH COULD HAVE A MATERIAL ADVERSE IMPACT ON THE MARKET VALUE OF OUR COMMON STOCK.
Security analysts of major brokerage firms may not provide coverage of our common stock since there is no incentive to brokerage firms to recommend the purchase of our common stock. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It will also likely make it more difficult to attract new investors at times when we require additional capital.
WE MAY BE UNABLE TO LIST OUR COMMON STOCK ON NASDAQ OR ON ANY SECURITIES EXCHANGE.
Although we intend to apply to list our common stock on NASDAQ in the future, we cannot assure you that we will be able to meet the initial listing standards, including the minimum per share price and minimum capitalization requirements, or that we will be able to maintain a listing of our common stock on this trading. Until such time as we qualify for listing on NASDAQ or another national securities exchange, our common stock will continue to trade on OTCQB or another over-the-counter quotation system where an investor may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock. In addition, rules promulgated by the SEC impose various practice requirements on broker-dealers who sell securities that fail to meet certain criteria set forth in those rules to persons other than established customers and accredited investors. Consequently, these rules may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. It would also make it more difficult for us to raise additional capital.
FUTURE SALES OF OUR EQUITY SECURITIES COULD PUT DOWNWARD SELLING PRESSURE ON OUR SECURITIES, AND ADVERSELY AFFECT THE STOCK PRICE.
There is a risk that this downward pressure may make it impossible for an investor to sell his or her securities at any reasonable price, if at all. Future sales of substantial amounts of our equity securities in the public market, or the perception that such sales could occur, could put downward selling pressure on our securities, and adversely affect the market price of our common stock.
WE HAVE IDENTIED A MATERIAL WEAKNESS IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING. IF WE FAIL TO DEVELOP OR MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD. AS A RESULT, CURRENT AND POTENTIAL STOCKHOLDERS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH WOULD HARM OUR BUSINESS AND THE TRADING PRICE OF OUR STOCK.
During the preparation of our consolidated financial statements for the year ended December 31, 2015, we and our independent registered public accounting firm identified deficiencies in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board. See “Report of Management on Internal Control over Financial Reporting.” Management determined the control deficiencies constitute a material weakness in our internal control over financial reporting.
The existence of a material weakness could result in errors in our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in the trading price of our stock.
Not applicable.
Our corporate offices are located in San Luis Obispo, CA, where we lease approximately 7,500 square feet of office space in two locations. The building that we lease at 805 Aerovista Parkway is owned by Alexander P Minicucci Trust, which is a related party transaction due to the trust being controlled by the Company's chief executive officer. The total monthly payment for both locations is approximately, $15,678 including association and common area maintenance charges. We also had offices in Des Moines, IA, where we leased approximately 500 square feet of office space. The monthly payments for the facility were approximately $600, including common area maintenance charges. We closed our Des Moines offices on June 30, 2015. We believe our facilities are in good condition and adequate to meet our current and anticipated requirements.
From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief. The amount of any ultimate liability from such claims cannot be determined. On January 1, 2014, Intellectual Capital Management, LLC dba SMS Masterminds was named in a potential class-action lawsuit titled Telford v. Intellectual Capital, et al, filed in the United States District Court Eastern District of New York relating to alleged violations of the Telephone Consumer Protection Act of 1991 (the “TCPA”). The Company believed the Plaintiff’s allegations had no merit but based upon the economics of continued litigation, the Company resolved the lawsuit in May 2015 for the sum of $34,612, and the action is no longer pending. On July 8, 2015, Intellectual Capital Management, LLC dba SMS Masterminds and SpendSmart Networks, Inc. were named in a potential class-action lawsuit entitled Peter Marchelos, et al v. Intellectual Capital Management, et al, filed in the United States District Court Eastern District of New York relating to alleged violations of the Telephone Consumer Protection Act of 1991. This litigation involves the same licensee and merchant as the Telford lawsuit and the same attorneys represent the plaintiffs in this action. The claim of one of the two plaintiffs was resolved for $1,701. The Company believes the Plaintiff’s allegations have no merit. There are no other legal claims currently pending or threatened against us that in the opinion of our management would be likely to have a material adverse effect on our financial position, results of operations or cash flows.
Not applicable.
Part II
Our common stock trades publicly on the OTCQB under the symbol "SSPC." The OTCQB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities. The OTCQB securities are traded by a community of market makers that enter quotes and trade reports. This market is extremely limited and any prices quoted may not be a reliable indication of the value of our common stock. The following table sets forth the high and low bid prices per share of our common stock by the OTCQB for the periods indicated as reported on the OTCQB.
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High
|
Low
|
|||||||
|
Year ended December 31, 2015
|
||||||||
|
First Quarter
|
$ | 1.17 | $ | 0.71 | ||||
|
Second Quarter
|
$ | 0.80 | $ | 0.55 | ||||
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Third Quarter
|
$ | 0.70 | $ | 0.43 | ||||
|
Fourth Quarter
|
$ | 0.50 | $ | 0.14 | ||||
|
Year ended December 31, 2014
|
||||||||
|
First Quarter
|
$ | 1.59 | $ | 0.71 | ||||
|
Second Quarter
|
$ | 3.34 | $ | 1.00 | ||||
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Third Quarter
|
$ | 1.65 | $ | 1.01 | ||||
|
Fourth Quarter
|
$ | 1.20 | $ | 0.73 | ||||
The quotes represent inter-dealer prices, without adjustment for retail mark-up, markdown or commission and may not represent actual transactions. The trading volume of our securities fluctuates and may be limited during certain periods. As a result of these volume fluctuations, the liquidity of an investment in our securities may be adversely affected.
Holders of Record
As of April 8, 2016, 39,354,620 shares of our common stock were issued and outstanding, and held by approximately 2,000 stockholders.
Transfer Agent
Our transfer agent is TranShare Corporation, 4626 South Broadway, Englewood, CO 80113, Telephone (303) 662-1112.
Dividends
We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our Board of Directors.
Securities Authorized for Issuance under Equity Compensation Plans
The table below sets forth information as of December 31, 2015 with respect to compensation plans under which our common stock is authorized for issuance.
On January 8, 2013, our Board of Directors approved the adoption of our 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan was approved by our shareholders on February 15, 2013. The 2013 Plan provides for granting of stock-based awards including: incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock. The total number of shares of common stock that may be issued pursuant to stock awards under the 2013 Plan shall not exceed in the aggregate 10,000,000 shares of the common stock of our Company. On August 4, 2011, our Board of Directors approved the adoption of the SpendSmart Networks, Inc. 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan has been approved by our shareholders. The 2011 Plan provides for granting of stock-based awards including: incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock. The total number of shares of common stock that may be issued pursuant to stock awards under the 2011 Plan shall not exceed in the aggregate 1,666,667 shares of the common stock of our Company. We also have a stockholder-approved Plan (the IdeaEdge, Inc. 2007 Equity Incentive Plan - the “2007 Plan”, previously approved by our shareholders). The 2007 Plan has similar provisions and purposes as the 2011 Plan. The total number of shares of common stock that may be issued pursuant to stock awards under the 2007 Plan shall not exceed in the aggregate 266.666 shares of the common stock of our Company. The table below sets forth information as of December 31, 2015 with respect to our 2007 Plan, 2011 Plan, and 2013 Plan: Upon shareholder approval of the 2013 Plan, our Board has expressed its intentions to issue no more shares under the 2011 and 2007 Plans.
|
Plan Category
|
Number of securities to be issued upon exercise of outstanding options
|
Weighted-average exercise price of outstanding options
|
Number of securities remaining available for future issuance under equity compensation plans
|
|||||||||
|
Equity compensation plans approved by shareholders (2007 Plan)
|
- | - | 266,666 | |||||||||
|
Equity compensation plans approved by shareholders (2011 Plan)
|
533,333 | 7.29 | 1,133,334 | |||||||||
|
Equity compensation plan approved by shareholders (2013 Plan)
|
1,963,000 | 1.16 | 8,037,000 | |||||||||
|
Total
|
2,496,333 | 2.47 | 9,437,000 | |||||||||
Disclosure not required as a result of our Company’s status as a smaller reporting company.
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this report. See “FORWARD LOOKING STATEMENTS” paragraph above and Part I. Item 1. Business-Cautionary Note Regarding Forward-Looking Statements.
Overview and Financial Condition
Discussions with respect to our Company’s operations included herein refer to our operating subsidiary, SpendSmart Networks, Inc.-CA and the consolidated results of the company. The Company purchased SpendSmart Networks, Inc.-CA on October 16, 2007. On February 11, 2014, we acquired substantially all of the assets of Intellectual Capital Management, LC, dba “SMS Masterminds”. As a result of the SMS Masterminds asset acquisition, the company is a national full-service mobile and loyalty marketing agency that offers a means for small and large business owners alike to better connect with their consumers. Through our mobile and loyalty marketing programs and proprietary website building software, the company provides proprietary loyalty systems and a suite of digital engagement and marketing services that help local merchants build relationships with consumers and drive revenues. These services are sold, implemented and supported both internally and by a vast network of certified digital marketing specialists, aka “Certified Masterminds,” who drive revenue and consumer relationships for merchants via loyalty programs, custom websites, social media engagement, mobile marketing, mobile commerce and financial tools, such as reward systems. We enter into licensing agreements for our proprietary loyalty and mobile marketing solutions and custom website building tools with “Certified Masterminds” which sell and support the technology in their respective markets. We provide training materials, best practice guides and other resources to our licensees. The licensees also utilize loyalty kiosks provided to their merchants. The loyalty kiosks are tablet devices set up in physical retail locations where Consumers can enter their mobile phone number to “opt-in” to receive notifications from the merchant.
We generate revenues primarily in the form of set up fees, recurring license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services. License fees are charged monthly for our support services. Set-up fees primarily consist of fees for website development services (including support and unspecified upgrades and enhancements when and if they are available), training and professional services that are not essential to functionality.
In November 2014, we began winding down our prepaid card product offerings and completed that process in January 2015.
Comparison of Results of Operations for the Years Ended December 31, 2015 and December 31, 2014
The Company had total revenues of $5,588,002 for the year ended December 31, 2015 and $4,036,196 for the year ended December 31, 2014.
Our revenues increased $1,551,806 or 38.4% over the prior year due to our acquisition of SMS and TechXpress (which happened in third quarter 2014). This was the result of expanding into more markets throughout the country in 2015 with our Engage license. In 2015, we expanded our product line to offer the Thrive license to licensees, which increased their ability to market directly to merchants.
Comparison of Operating Expenses for the Years Ended December 31, 2015 and December 31, 2014
In order to better represent our financial results and to make them comparable to leading companies in the mobile marketing industry, we have classified our operating expenses into four major categories: (1) selling and marketing; (2) personnel related; (3) operations; and (4) general and administrative expenses. We do not allocate common expenses to any of these expense categories.
Selling and marketing expenses
Selling and marketing expenses for the years ended December 31, 2015 and 2014 totaled $582,042 and $753,466, respectively. This was a decrease of $171,424. In 2015, we focused our marketing efforts on those territories where we had a better opportunity to expand into immediately.
Personnel related expenses
Personnel related expenses totaled $6,426,273 during the year ended December 31, 2015 and $7,316,885 for the year ended December 31, 2014. This amounted to a decrease of $890,612 or a 12.2% decrease from 2014 to 2015. Overall increases in wage and salary related expenses reflected the acquisition of SMS during the first quarter and TechXpress during the third quarter of 2014 offset by lower stock based compensation expense (lower option and warrant grants made to directors and executive officers). Other personnel related expenses include employer taxes, employee benefits and other employee related costs.
Processing expenses
Processing expenses totaled $1,465,576 for the year ended December 31, 2015 ($1,048,377 for the year ended December 31, 2014). This resulted in an increase of $417,199 compared to 2014. This increase was related to our increased number of licensees compared to 2014 and the infrastructure costs needed to handle them. This related to the increase in our licensees from 123 at the end of 2014 and 190 at the end of 2015.
Amortization of intangible assets
Amortization of intangible assets totaled $337,879 for the year ended December 31, 2015 and $288,700 for the year ended December 31, 2014, respectively. This resulted in an increase of $49,179 from 2014 to 2015. The amount for our SMS acquisition was $324,290 and $283,754 for 2015 and 2014, respectively and the TechXpress acquisition was $13,589 and $4,946 for 2015 and 2014, respectively.
General and administrative expenses
General and administrative expenses totaled $3,467,554 for the year ended December 31, 2015 and $2,144,740 for the year ended December 31, 2014. This resulted in an increase of $1,322,814 or 61.7% from 2014 to 2015. We had increases in investor relations consulting, and insurance expense during the year offset by decreases in legal and accounting expenses. In 2015, the Company accelerated depreciation on our kiosks, which have seven inch screens, to reduce their net book value to zero due to technological obsolescence.
Bad debt expense
Bad debt expenses totaled $1,417,952 for the year ended December 31, 2015 and $686,641 for the year ended December 31, 2014. We recorded bad debt write offs due to non-performing accounts in our receivables as well as our third party Notes Receivable.
Impairment on intangible assets
Impairment expenses totaled $1,189,246 for the year ended December 31, 2015 and $0 for the year ended December 31, 2014. We recorded impairment expense on our intangible assets of $1,083,875 related to our SMS customer base and $105,371 related to our TechXpress customer base for the year ended December 31, 2015.
Impairment on goodwill
Impairment expenses related to our goodwill totaled $3,202,276 for the year ended December 31, 2015 and $0 for the year ended December 31, 2014. As part of our annual impairment assessment at year end, we noted that our future cashflow will be lower than originally anticipated and as a result, our goodwill has been fully impaired as of December 31, 2015. We recorded impairment expense due to the goodwill impairment analysis that was done at December 31, 2015.
Earn-out liability expense
The change in fair value of Earn-out liability expenses totaled $594,216 for the year ended December 31, 2015 and $13,582 for the year ended December 31, 2014. We recorded the change in earn-out liability due to our updated operating assumptions in the underlying valuation related to the SMS acquisition.
Comparison of Non-operating Income and Expense for the Years Ended December 31, 2015 and December 31, 2014
For the years ended December 31, 2015 and 2014, net interest income totaled $140,276 and $1,805, respectively. This was an increase of $138,471. This related to the increase in our financings related to new licensees from 45 at the end of 2014 and 120 at the end of 2015.
For the years ended December 31, 2015 and 2014, interest expense totaled $143,663 and $3,271, respectively. This related to our convertible notes and our notes payable serviced during 2015.
For the years ended December 31, 2015 and 2014, other income totaled $4,149 and $0, respectively.
For the years ended December 31, 2015 and 2014, amortization of debt discount totaled ($456,475) and $0, respectively. The increase was due to the convertible notes financings during the year ended December 31, 2015.
During the year ended December 31, 2015, we recognized a gain from the change in the fair value of derivative liabilities of $457,811 (and a loss of $14,759 in 2014). These derivative liabilities are the fair value of warrants issued in fiscal 2010 with anti-dilution privileges and warrants issued in fiscal 2012 with certain registration privileges and the fair value of the bifurcated conversion options in convertible notes.
Comparison of Discontinued Operations for the Years Ended December 31, 2015 and December 31, 2014
On November 26, 2014, as part of SpendSmart Networks, Inc.'s (the "Company") efforts to reduce expenses as well as focus its resources on its Mobile and Loyalty Marketing Division, the Company decided to begin a wind down of the operations of its Card Division. We have classified this as discontinued operations. For the years ended December 31, 2015 and 2014, the net loss from discontinued operations totaled $0 and $3,983,107, respectively.
Comparison of Net Loss and Net Loss per Share for the Years Ended December 31, 2015 and December 31, 2014
For the years ended December 31, 2015 and 2014, our net loss was $11,904,482 and $8,205,256, respectively. Our basic and diluted net loss per share was $.63 and $.51 for the years ended December 31, 2015 and December 31, 2014, respectively. Common stock equivalents and outstanding options and warrants were not included in the calculations due to their effect being anti-dilutive.
Liquidity and Capital Resources for the Years Ended December 31, 2015 and December 31, 2014
We have primarily financed our operations to date through the sale of unregistered equity. At December 31, 2015, our total current assets were $899,439. Total current liabilities were $5,071,215, long-term liabilities were $0, and our stockholders’ deficiency totaled ($1,948,272).
We may raise additional funding through the sale of unregistered common stock and warrants although there can be no assurance that we will be successful in raising such funds. This description of our recent financing and our future plans does not constitute an offer to sell or the solicitation of an offer to buy our securities, nor shall such securities be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same. As of December 31, 2015, we had raised $661,424 related to our Tender Offer financing. During the year, we raised approximately $2,160,000 from our convertible notes financings and raised an additional $2,023,000 in 2016 related to our Tender Offer financing.
We had a decrease in cash for the year of $771,814. We had significant cash outlays relating to ramping up staffing during the year to handle our increased licensee base, increased software development costs to improve our technology related to new product offerings, and an increase in licensee financings, offset by financings. Our cash and cash equivalents balance at December 31, 2015 totaled $470,341.
Going Concern
As noted above (and by our independent registered public accounting firm in their report on our consolidated financial statements, there exists substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not contain any adjustments related to the outcome of this uncertainty.
Our recurring losses, negative working capital, and accumulated deficit balances increase the risks of our Company to continue operations. We currently have remediation plans focused on reducing our workforce and overall overhead expenses.
We currently plan to raise capital through additional financings in order to fund our operations.
Contractual Obligations
With the exception of employment agreements, lease agreements, and the endorsement agreement described elsewhere herein, we have no outstanding contractual obligations through the date of this report that are not cancellable at our Company’s option.
Critical Accounting Policies Involving Management Estimates and Assumptions
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related 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. We continually evaluate our estimates and judgments and we base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.
In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we must make a variety of estimates that affect the reported amounts and related disclosures. We have identified the following accounting policies that we believe require application of management’s most subjective judgments, often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our significant accounting policies are described in more detail in the notes to consolidated financial statements included elsewhere in this filing. If actual results differ significantly from our estimates and projections, there could be a material effect on our financial statements.
Revenue Recognition
We generate revenues primarily in the form of set up fees, recurring license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services. License fees are charged monthly for our support services. Business development and set-up fees primarily consist of fees for website development services (including support and unspecified upgrades and enhancements when and if they are available), training and professional services that are not essential to functionality. Our 2015 revenue of $5,588,002 is net of $95,284 in reserves associated with initial package fee that hadn’t been realized per our revenue recognition policy as of December 31, 2015.
We recognize revenues when all of the following conditions are met:
|
●
|
there is persuasive evidence of an arrangement;
|
|
|
|
|
●
|
the products or services have been delivered to the customer;
|
|
●
|
the amount of fees to be paid by the customer is fixed or determinable; and
|
|
●
|
the collection of the related fees is probable.
|
Signed agreements are used as evidence of an arrangement. Electronic delivery occurs when we provide the customer with access to the software via a username and password. We assess whether a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction. We do offer extended payment terms with regards to the setup fee with typical terms of payment due between one and three years from delivery of license. We assess collectability of the set-up fee based on a number of factors such as collection history and creditworthiness of the customer. If we determine that collectability is not probable, revenue is deferred until collectability becomes probable, generally upon receipt of cash.
License arrangements may also include set-up fees such as website development, delivery of tablets, professional services and training services, which are typically delivered within 30 days of the contract term. In determining whether set-up fee revenues should be accounted for separately from license revenues, we evaluate whether the set-up fees are considered essential to the functionality of the license using factors such as the nature of our products; whether they are ready for use by the customer upon receipt; the nature of our implementation services, which typically do not involve significant customization to or development of the underlying software code; the availability of services from other vendors; whether the timing of payments for license revenues is coincident with performance of services; and whether milestones or acceptance criteria exist that affect the realizability of the license fee. Substantially all of our set-up fee arrangements are recognized as the services are performed. Payments received in advance of services performed are deferred and recognized when the related services are performed.
We do not offer refunds and therefore have not recorded any sales return allowance for any of the years presented. Upon a periodic review of outstanding accounts receivable under the extended payment terms, amounts that are not being paid timely are deemed to be uncollectible and are written off against the allowance for doubtful accounts.
Deferred revenue consists substantially of amounts invoiced in advance of revenue recognition for our products and services described above. We recognize deferred revenue as revenue only when the revenue recognition criteria are met.
Stock Based Compensation
We account for stock based compensation arrangements through the measurement and recognition of compensation expense for all stock based payment awards to employees and directors based on estimated fair values. We use the Black-Scholes option valuation model to estimate the fair value of our stock options and warrants at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of options and warrants. We use historical company data among other information to estimate the expected price volatility and the expected forfeiture rate and not comparable company information, due to the lack of comparable publicly traded companies that exist in our industry.
Derivatives
We account for certain of our outstanding warrants as derivative liabilities. These derivative liabilities are ineligible for equity classification due to provisions of the instruments that may result in an adjustment to their conversion or exercise prices. The fair value of these liabilities is estimated using option pricing models that are based on the individual characteristics of our warrants, preferred and common stock, the derivative liability on the valuation date as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases which amended guidance for lease arrangements in order to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. The guidance, which is required to be adopted in the first quarter of 2019, will be applied on a modified retrospective basis beginning with the earliest period presented. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within that fiscal year. Since we did not previously have any debt issuance costs, there was not a need for retrospective application. The guidance was adopted for the year ended December 31, 2015. The adoption did not have a material impact on the financial statements.
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), with an effective date for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, for public business entities, certain not-for-profit entities, and certain employee benefit plans. The effective date for ASU 2014-09 was deferred by one year through the issuance of ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact, if any, the pronouncement will have on both historical and future financial positions and results of operations.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2015.
Item 7A – Quantitative and Qualitative Disclosures About Market Risk
Not applicable to smaller reporting companies.
SPENDSMART NETWORKS, INC.
Index
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24
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25
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26
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27
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28
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29
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The Board of Directors and Stockholders of
SpendSmart Networks, Inc.
We have audited the accompanying consolidated balance sheets of SpendSmart Networks, Inc. (the “Company") as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for each of the years then ended. The 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 consolidated financial position of SpendSmart Networks, Inc. as of December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has recurring losses and has yet to establish a profitable operation and at December 31, 2015 has negative working capital and stockholders’ deficit. These factors among others raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ EisnerAmper LLP
Iselin, New Jersey
April 14, 2016
SPENDSMART NETWORKS, INC.
Consolidated Balance Sheets|
December 31,
|
December 31,
|
|||||||
|
2015
|
2014
|
|||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
470,341
|
$
|
1,242,155
|
||||
|
Accounts receivable, net of allowance for doubtful accounts of $295,759 at December 31, 2015 and $188,527 at December 31, 2014
|
141,830
|
155,786
|
||||||
|
Customer short-term notes receivable, net of allowance for doubtful accounts of $632,422 at December 31, 2015, and $286,571 at December 31, 2014
|
276,168
|
473,846
|
||||||
|
Third party short-term notes receivable, net of allowance for doubtful accounts of $0 at December 31, 2015 and 2014
|
-
|
416,133
|
||||||
|
Prepaid expenses
|
11,100
|
6,090
|
||||||
|
Total current assets
|
899,439
|
2,294,010
|
||||||
|
Long-term assets:
|
||||||||
|
Customer long-term notes receivable, net of allowance for doubtful accounts of $461,702 at December 31, 2015, and $349,954 at December 31, 2014
|
199,669
|
678,851
|
||||||
|
Property and equipment, net of accumulated depreciation of $1,035,960 on December 31, 2015 and $83,854 on December 31, 2014
|
896,146
|
581,124
|
||||||
|
Intangible assets, net of accumulated amortization of $626,579 on December 31, 2015 and $288,700 on December 31, 2014
|
1,570,575
|
3,097,700
|
||||||
|
Goodwill
|
-
|
3,202,276
|
||||||
|
Other assets
|
18,274
|
30,000
|
||||||
|
Total long-term assets
|
2,684,664
|
7,589,951
|
||||||
|
Other assets of discontinued operations
|
-
|
145,903
|
||||||
|
TOTAL ASSETS
|
$
|
3,584,103
|
$
|
10,029,864
|
||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Convertible notes
|
$
|
1,817,320
|
$
|
-
|
||||
|
Notes payable
|
70,262
|
-
|
||||||
|
Due to related party
|
100,000
|
-
|
||||||
|
Accounts payable and accrued liabilities
|
1,491,282
|
337,673
|
||||||
|
Accrued interest payable
|
23,090
|
-
|
||||||
|
Deferred revenue
|
751,912
|
791,704
|
||||||
|
Deferred acquisition related payable
|
10,000
|
20,000
|
||||||
|
Cash received in connection with tender offer
|
661,424
|
-
|
||||||
|
Derivative liabilities - convertible options
|
179
|
-
|
||||||
|
Derivative liabilities - warrants
|
-
|
47,209
|
||||||
|
Total current liabilities
|
4,925,469
|
1,196,586
|
||||||
|
Long-term liabilities:
|
||||||||
|
Earn-out liablity
|
-
|
594,216
|
||||||
|
Total long-term liabilities
|
-
|
594,216
|
||||||
|
Other liabilities of discontinued operations
|
375,951
|
869,140
|
||||||
|
Total liabilities
|
5,301,420
|
2,659,942
|
||||||
|
Stockholders equity:
|
||||||||
|
Series C Preferred; $0.001 par value; 4,299,081 shares authorized; 3,700,729 and 3,757,229 shares issued and outstanding as of December 31, 2015 and December 31, 2014, respectively
|
3,701
|
3,757
|
||||||
|
Common stock; $0.001 par value; 300,000,000 shares authorized; 20,458,761 and 18,435,239 shares issued and outstanding as of December 31, 2015 and December 31, 2014, respectively
|
20,459
|
18,435
|
||||||
|
Additional paid-in capital
|
90,879,480
|
88,064,205
|
||||||
|
Accumulated deficit
|
(92,620,957
|
)
|
(80,716,475
|
)
|
||||
|
Total stockholders' equity
|
(1,717,317
|
)
|
7,369,922
|
|||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
3,584,103
|
$
|
10,029,864
|
||||
See accompanying notes to the consolidated financial statements.
|
SPENDSMART NETWORKS, INC.
|
||||||||
|
Consolidated Statements of Operations
|
||||||||
|
For the years ended December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Revenues:
|
||||||||
|
Mobile Marketing / Licensing
|
$
|
5,588,002
|
$
|
4,036,196
|
||||
|
Total revenues
|
5,588,002
|
4,036,196
|
||||||
|
Operating expenses:
|
||||||||
|
Selling and marketing
|
582,042
|
753,466
|
||||||
|
Personnel related
|
6,426,273
|
7,316,885
|
||||||
|
Mobile Platform Processing
|
1,465,576
|
1,048,377
|
||||||
|
Amortization of intangible assets
|
337,879
|
288,700
|
||||||
|
General and administrative
|
3,467,554
|
2,144,740
|
||||||
|
Bad debt
|
1,417,952
|
686,641
|
||||||
|
Impairment on intangible assets
|
1,189,246
|
-
|
||||||
|
Impairment on goodwill
|
3,202,276
|
-
|
||||||
|
Change in fair value of earn-out liability
|
(594,216
|
)
|
(13,582
|
)
|
||||
|
Total operating expenses
|
17,494,582
|
12,225,227
|
||||||
|
Loss from operations
|
(11,906,580
|
)
|
(8,189,031
|
)
|
||||
|
Non-operating income (expense):
|
||||||||
|
Interest income
|
140,276
|
1,805
|
||||||
|
Amortization of debt discount
|
(456,475)
|
|
(3,271
|
)
|
||||
| Interest expense | (143,663 | ) | ||||||
|
Other income (expense)
|
4,149
|
-
|
||||||
|
Change in fair value of financial instruments
|
457,811
|
(14,759
|
)
|
|||||
|
Total non-operating income (loss)
|
2,098
|
(16,225
|
)
|
|||||
|
Net loss from continuing operations
|
(11,904,482
|
)
|
(8,205,256
|
)
|
||||
|
Discontinued operations:
|
||||||||
|
Loss from discontinued operations
|
-
|
(3,983,107
|
)
|
|||||
|
Net loss
|
$
|
(11,904,482
|
)
|
$
|
(12,188,363
|
)
|
||
|
Basic and diluted net loss per share
|
||||||||
|
Net loss from continuing operations
|
$
|
(0.63
|
)
|
$
|
(0.51
|
)
|
||
|
Loss from discontinued operations
|
$
|
-
|
$
|
(0.25
|
)
|
|||
|
Basic and diluted net loss per share
|
$
|
(0.63
|
)
|
$
|
(0.76
|
)
|
||
|
Basic and diluted weighted average common shares outstanding used in computing net loss per share
|
18,972,053
|
16,052,990
|
||||||
See accompanying notes to the consolidated financial statements.
|
SPENDSMART NETWORKS, INC.
|
||||||||||||||||||||||||||||
|
Statements of Changes in Stockholders' Deficit and Redeemable Preferred and Common Stock (not classified as equity)
|
||||||||||||||||||||||||||||
|
For the years ended December 31, 2015 and December 31, 2014
|
||||||||||||||||||||||||||||
|
Series C
|
Additional
|
Total
|
||||||||||||||||||||||||||
|
Preferred Stock
|
Common Stock
|
Paid-In
|
Accumulated
|
Stockholders'
|
||||||||||||||||||||||||
|
Shares
|
Par Value
|
Shares
|
Par Value
|
Capital
|
Deficit
|
Equity (deficit)
|
||||||||||||||||||||||
|
Balance as of December 31, 2013
|
-
|
-
|
10,398,527
|
10,398
|
67,905,486
|
(68,528,112
|
)
|
(612,228
|
)
|
|||||||||||||||||||
|
SMS acquisition
|
-
|
-
|
5,250,000
|
5,250
|
3,308,348
|
-
|
3,313,598
|
|||||||||||||||||||||
|
TechXpress acquisition
|
-
|
-
|
596,315
|
596
|
437,922
|
-
|
438,518
|
|||||||||||||||||||||
|
Issuance of Series C Preferredredeemable common and preferred stock and warrants for cash, net
|
4,072,426
|
4,072
|
-
|
-
|
10,467,931
|
-
|
10,472,003
|
|||||||||||||||||||||
|
Conversions of notes payable to preferred stock
|
226,655
|
227
|
-
|
-
|
141,862
|
-
|
142,089
|
|||||||||||||||||||||
|
Conversions of preferred stock to common stock
|
(541,852
|
)
|
(542
|
)
|
2,167,408
|
2,168
|
(1,626
|
)
|
-
|
-
|
||||||||||||||||||
|
Issuance of common stock for services
|
-
|
-
|
22,989
|
23
|
19,977
|
-
|
20,000
|
|||||||||||||||||||||
|
Stock based compensation from stock options and warrants
|
-
|
-
|
-
|
-
|
5,784,305
|
-
|
5,784,305
|
|||||||||||||||||||||
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
(12,188,363
|
)
|
(12,188,363
|
)
|
|||||||||||||||||||
|
Balance as of December 31, 2014
|
3,757,229
|
$
|
3,757
|
18,435,239
|
$
|
18,435
|
$
|
88,064,205
|
$
|
(80,716,475
|
)
|
$
|
7,369,922
|
|||||||||||||||
|
Conversions of preferred stock to common stock
|
(56,500
|
)
|
(56
|
)
|
226,000
|
226
|
(170
|
)
|
-
|
-
|
||||||||||||||||||
|
Warrant conversions
|
-
|
-
|
750,000
|
750
|
126,750
|
-
|
127,500
|
|||||||||||||||||||||
|
Warrants issued in conjunction with convertible notes
|
-
|
-
|
-
|
-
|
386,118
|
-
|
386,118
|
|||||||||||||||||||||
|
Issuance of common stock for services
|
-
|
-
|
1,047,522
|
1,048
|
495,240
|
-
|
496,288
|
|||||||||||||||||||||
|
Stock based compensation from stock options and warrants
|
-
|
-
|
-
|
-
|
1,807,337
|
-
|
1,807,337
|
|||||||||||||||||||||
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
(11,904,482
|
)
|
(11,904,482
|
)
|
|||||||||||||||||||
|
Balance as of December 31, 2015
|
3,700,729
|
$
|
3,701
|
20,458,761
|
$
|
20,459
|
$
|
90,879,480
|
$
|
(92,620,957
|
)
|
$
|
(1,717,317
|
)
|
||||||||||||||
See accompanying notes to consolidated financial statements.
|
SPENDSMART NETWORKS, INC.
|
||||||||
|
Consolidated Statements of Cash Flows
|
||||||||
|
For the years ended
|
||||||||
|
December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$
|
(11,904,482
|
)
|
$
|
(12,188,363
|
)
|
||
|
Less: Loss from discontinued operations
|
-
|
(3,983,107
|
)
|
|||||
|
Net loss from continuing operations
|
(11,904,482
|
)
|
(8,205,256
|
)
|
||||
|
Adjustments to reconcile net loss to net cash used in operating activities
|
||||||||
|
Depreciation expense
|
902,517
|
83,854
|
||||||
|
Amortization of intangible asset
|
337,879
|
288,700
|
||||||
|
Amortization of debt discount
|
456,475
|
-
|
||||||
|
Stock-based compensation
|
1,807,337
|
5,784,305
|
||||||
|
Issuance of common stock for services
|
496,288
|
20,000
|
||||||
|
Change in fair value of financial instruments
|
(457,811
|
)
|
14,759
|
|||||
|
Accrued interest income on notes receivable from third party
|
(27,339
|
)
|
(6,133
|
)
|
||||
|
Accrued interest expenses on notes payable
|
35,000
|
-
|
||||||
|
Impairment of goodwill
|
3,202,276
|
-
|
||||||
|
Impairment of intangible assets
|
1,189,246
|
-
|
||||||
|
Change in fair value of earn-out liability
|
(594,216
|
)
|
(13,582
|
)
|
||||
|
Provision for bad debt
|
2,111,418
|
686,641
|
||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Accounts receivable
|
(427,671
|
)
|
(19,847
|
)
|
||||
|
Customer short-term notes receivable
|
(598,385
|
)
|
(698,103
|
)
|
||||
|
Customer long-term notes receivable
|
(72,074
|
)
|
(952,708
|
)
|
||||
|
Deferred revenue
|
(39,792
|
)
|
541,907
|
|||||
|
Prepaid insurance
|
(5,010
|
)
|
(2,023
|
)
|
||||
|
Other assets
|
11,726
|
(30,000
|
)
|
|||||
|
Accounts payable and accrued liabilities
|
1,141,699
|
53,947
|
||||||
|
Net cash used in operating activities from continuing operations
|
(2,434,919
|
)
|
(2,453,539
|
)
|
||||
|
Net cash used in discontinued operations
|
(347,286
|
)
|
(4,137,481
|
)
|
||||
|
Net cash used in operating activities
|
(2,782,205
|
)
|
(6,591,020
|
)
|
||||
|
Cash flows from investing activities:
|
||||||||
|
Acquisition of TechXpress web business
|
-
|
(454,641
|
)
|
|||||
|
Acquisition of Intellectual Capital Management LLC ("SMS")
|
-
|
(1,000,000
|
)
|
|||||
|
Issuance of notes receivable to third party
|
-
|
(410,000
|
)
|
|||||
| Repayment of note receiveable |
121,000
|
- | ||||||
|
Payment of deferred acquisition payable-Intellectual Capital Mgmt, LLC
|
(10,000
|
)
|
(380,000
|
)
|
||||
|
Sale of property and equipment
|
-
|
251
|
||||||
|
Payment on long-term liabilities (SBA Loans)
|
-
|
(226,522
|
)
|
|||||
|
Software development costs
|
(912,212
|
)
|
(283,080
|
)
|
||||
|
Purchase of property and equipment
|
(305,326
|
)
|
(382,149
|
)
|
||||
|
Net cash used in investing activities from continuing operations
|
(1,106,538
|
)
|
(3,136,141
|
)
|
||||
|
Net cash used in discontinued operations
|
-
|
-
|
||||||
|
Net cash used in investing activities
|
(1,106,538
|
)
|
(3,136,141
|
)
|
||||
|
Cash flows from financing activities:
|
||||||||
|
Net proceeds from issuance of preferred stock, common stock, and warrants
|
-
|
10,472,003
|
||||||
|
Net proceeds from warrant conversions
|
127,500
|
-
|
||||||
|
Proceeds from issuance of notes
|
200,000
|
-
|
||||||
|
Cash received in connection with tender offer
|
661,424
|
-
|
||||||
|
Repayment of notes
|
(129,738
|
)
|
-
|
|||||
|
Proceeds from issuance of related party financing
|
100,000
|
-
|
||||||
|
Proceeds from issuance of convertible debt
|
2,157,743
|
-
|
||||||
|
Net cash provided by financing activities from continuing operations
|
3,116,929
|
10,472,003
|
||||||
|
Net cash used in discontinued operations
|
-
|
-
|
||||||
|
Net cash provided by financing activities
|
3,116,929
|
10,472,003
|
||||||
|
Net (decrease) increase in cash and cash equivalents
|
(771,814
|
)
|
744,842
|
|||||
|
Cash and cash equivalents at beginning of the year
|
1,242,155
|
497,313
|
||||||
|
Cash and cash equivalents at end of the period
|
$
|
470,341
|
$
|
1,242,155
|
||||
|
Non-cash Investing and Financing Activities:
|
||||||||
|
The Company had conversion of 56,500 shares of Series C preferred stock into 226,000 shares of common stock during the year ended December 31, 2015.
|
||||||||
|
The Company recorded a debt discount of $786,988 during the year ended December 31, 2015, of which $386,118 was the value of the 1,983,340 warrants issued and $410,780 was the fair value of the bifurcated conversion option.
|
||||||||
|
The Company had conversion of two notes payable into 226,655 shares of Series C preferred stock during the year ended December 31, 2014.
|
||||||||
|
The Company issued 5,250,000 shares of common stock as part of of the SMS acquisition and 596,315 shares of common stock as part of the TechXpress acquisition during the year ended December 31, 2014.
|
||||||||
|
The Company had conversion of 541,852 shares of Series C preferred stock into 1,333,736 shares of common stock during the year ended December 31, 2014.
|
||||||||
SPENDSMART NETWORKS, INC.
|
1.
|
Basis of Presentation and Going Concern
|
The Company is a Delaware corporation. Through the subsidiary incorporated in the state of California, SpendSmart Networks, Inc. (“SpendSmart-CA”), the Company provides proprietary loyalty systems and a suite of digital engagement and marketing servers through our Mobile and Loyalty Marketing programs and proprietary website building software that help local merchants build relationships with consumers and drive revenues. The Company is a publicly traded company trading on the OTC Bulletin Board under the symbol “SSPC.” The accompanying audited consolidated financial statements include the accounts of the Company and SpendSmart-CA as of December 31, 2015 and 2014 and for the years ended December 31, 2015 and 2014, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany balances and transactions have been eliminated.
As of December 31, 2015, the Company’s audited consolidated financial statements included an opinion containing an explanatory paragraph as to the uncertainty of the Company’s ability to continue as a going concern. The Company has continued to incur net losses through December 31, 2015 and have yet to establish profitable operations. At December 31, 2015, the company has a working capital deficiency of $4,026,030 and a stockholders deficiency of ($1,717,317). These factors among others create a substantial doubt about our ability to continue as a going concern. The Company’s audited consolidated financial statements as of and for the periods ended December 31, 2015 do not contain any adjustments for this uncertainty.
The Company currently plans to attempt to raise additional required capital through the sale of unregistered shares of the Company’s preferred or common stock. All additional amounts raised will be used for our future investing and operating cash flow needs. However there can be no assurance that we will be successful in consummating such financing. This description of our recent financing and future plans for financing does not constitute an offer to sell or the solicitation of an offer to buy our securities, nor shall such securities be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same.
The Company’s Offer to Amend and Exercise Warrants Tender Offer closed on February 8, 2016. Pursuant to the Offer to Amend and Exercise, an aggregate of 16,172,144 Original Warrants were tendered by their holders and were amended and exercised in connection therewith for an aggregate exercise price of approximately $2,425,822.
2. Discontinued Operations
On November 26, 2014, as part of SpendSmart Networks, Inc.'s (the "Company") efforts to reduce expenses as well as focus its resources on its Mobile and Loyalty Marketing Division, the Company decided to begin a wind down of the operations of its pre-paid credit card. All pre-paid card related operations ceased on January 26, 2015. The Company corresponded with its customers to affect an orderly wind down of its operations.
As a result of the wind-down, the Consolidated Financial Statements and related Notes for the periods presented herein reflect the pre-paid credit card operations as a discontinued operation. Currently, the Company is only satisfying liabilities related to the pre-paid card operations.
Operating results of discontinued operations were as follows:
|
For the years ended December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Revenues:
|
-
|
770,890
|
||||||
|
Selling and Marketing
|
-
|
196,646
|
||||||
|
Personnel
|
-
|
2,910,284
|
||||||
|
Processing
|
-
|
1,647,067
|
||||||
|
Total operating expenses
|
-
|
4,753,997
|
||||||
|
Net loss from discontinued operations
|
-
|
3.983,107
|
||||||
|
December 31,
|
December 31,
|
|||||||
|
2015
|
2014
|
|||||||
|
Other assets of discontinued operations:
|
||||||||
|
Amounts due from credit cards:
|
$
|
-
|
$
|
145,903
|
||||
|
Total assets
|
-
|
145,903
|
||||||
|
Other liabilities of discontinued operations:
|
||||||||
|
Accrued personnel comp:
|
$
|
10,000
|
$
|
284,231
|
||||
|
Accounts Payable
|
$
|
365,951
|
$
|
584,909
|
||||
|
Total liabilities
|
375,951
|
869,140
|
||||||
|
Net liabilities of discontinued operations:
|
$
|
375,951
|
$
|
723,237
|
||||
|
3.
|
Summary of Significant Accounting Policies
|
Loans Receivable and Accounts Receivable
The Company extends credit to its customers in the normal course of business and performs ongoing credit evaluations of its customers. Loans and accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time loan and accounts receivable are past due and the customer's current ability to pay its obligation to the Company. The Company writes off loans and accounts receivable when they become uncollectible.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, fair value of financial instruments, at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include recoverability and useful lives of intangible assets, the valuation allowance related to the Company's deferred tax assets, the allowance for doubtful accounts and notes and accounts receivable and the fair value of stock options and warrants granted to employees, consultants, directors, investors and placement agents.
Revenue Recognition
The Company generates revenues primarily in the form of set up fees, license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services. License fees are charged monthly for support services. Business development and set-up fees primarily consist of fees for website development services (including support and unspecified upgrades and enhancements when and if they are available), training and professional services that are not essential to functionality. The Company offers two licenses consisting of our Engage license and our Thrive license. The revenues for Engage and Thrive license set-up fees are recognized over the training and implementation periods of one month, respectively.
We recognize revenues when all of the following conditions are met:
● there is persuasive evidence of an arrangement;
● the products or services have been delivered to the customer;
● the amount of fees to be paid by the customer is fixed or determinable; and
● the collection of the related fees is probable.
Signed agreements are used as evidence of an arrangement. Electronic delivery occurs when we provide the customer with access to the software. We assess whether a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction. We do offer extended payment terms with regards to the setup fee with typical terms of payment due between one and three years from delivery of license. We assess collectability of the set-up fee based on a number of factors such as collection history and creditworthiness of the customer. If we determine that collectability is not probable, revenue is deferred until collectability becomes probable, generally upon receipt of cash.
License arrangements may also include set-up fees such as website development, delivery of tablets, professional services and training services, which are typically delivered within 90 days of the contract term. In determining whether set-up fee revenues should be accounted for separately from license revenues, we evaluate whether the set-up fees are considered essential to the functionality of the license using factors such as the nature of our products; whether they are ready for use by the customer upon receipt; the nature of our implementation services, which typically do not involve significant customization to or development of the underlying software code; the availability of services from other vendors; whether the timing of payments for license revenues is coincident with performance of services; and whether milestones or acceptance criteria exist that affect the realizability of the license fee. Substantially all of our set-up fee arrangements are recognized as the services are performed. Payments received in advance of services performed are deferred and recognized when the related services are performed.
We do not offer refunds and therefore have not recorded any sales return allowance for any of the periods presented. Upon a periodic review of outstanding accounts and notes receivable, amounts that are deemed to be uncollectible are written off against the allowance for doubtful accounts.
Deferred revenue consists substantially of amounts invoiced in advance of revenue recognition for our products and services described above. We recognize deferred revenue as revenue only when the revenue recognition criteria are met.
Cash and cash equivalents
The Company considers all investments with an original maturity of three months or less to be cash equivalents. Cash equivalents primarily represent funds invested in money market funds, bank certificates of deposit and U.S. government debt securities whose cost equals fair market value.
From time to time, the Company has maintained bank balances in excess of insurance limits established by the Federal Deposit Insurance Corporation. The Company has not experienced any losses with respect to cash. Management believes the Company is not exposed to any significant credit risk with respect to its cash and cash equivalents.
Property and Equipment
Property and equipment (including kiosks) had been recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to five years). Costs incurred for maintenance and repairs are expensed as incurred and expenditures for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives. Depreciation expense for the years ended December 31, 2015 and 2014 was $628,999 and $28,250, respectively. The Company accelerated the depreciation in the amount of approximately $496,000 on the kiosks, which have seven inch screens, to reduce their net book value to zero due to technological obsolescence. In the fourth quarter, they were replaced by new ten inch screens and some new seven inch screens which will be able to run offline from wifi, have faster processors and ultra-sharp screens, and have licensee reporting tools.
Software Capitalization
The Company accounts for computer software used in the business in accordance with ASC 350 “Intangibles-Goodwill and Other”. ASC 350 requires computer software costs associated with internal use software to be charged to operations as incurred until certain capitalization criteria are met. Costs incurred during the preliminary project stage and the post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property, equipment and software. These costs generally consist of internal labor during configuration, coding, and testing activities. Capitalization begins when (i) the preliminary project stage is complete, (ii) management with the relevant authority authorizes and commits to the funding of the software project, and (iii) it is probable both that the project will be completed and that the software will be used to perform the function intended. We capitalized $912,212 and $283,080 in software for the years ended December 31, 2015 and 2014, respectively. Software depreciation expense for the years ended December 31, 2015 and 2014 was $273,517 and $25,629, respectively.
Valuation of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the estimated fair value of the assets. We conducted an impairment analysis on our intangible assets and goodwill and determined that we had an impairment related to our intangible assets of $1,189,246 and on our goodwill of $3,202,276 at December 31, 2015.
Income Tax Expense Estimates and Policies
As part of the income tax provision process of preparing the Company’s financial statements, the Company is required to estimate the Company’s provision for income taxes. This process involves estimating our current tax liabilities together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Management then assesses the likelihood that the Company deferred tax assets will be recovered from future taxable income and to the extent believed that recovery is not likely, a valuation allowance is established. Further, to the extent a valuation allowance is established and changes occur to this allowance in a financial accounting period, such changes are recognized in the Company’s tax provision in the Company’s consolidated statement of operations. The Company’s use of judgment in making estimates to determine the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance is recorded against our net deferred tax assets.
There are various factors that may cause these tax assumptions to change in the near term, and the Company may have to record a future valuation allowance against our deferred tax assets.
The Company recognizes the benefit of an uncertain tax position taken or expected to be taken on the Company’s income tax returns if it is “more likely than not” that such tax position will be sustained based on its technical merits. The Company does not have any unrecognized tax benefits or accrued penalties and interest. If such matters were to arise, the Company would recognize interest and penalties related to income tax matters in income tax expense.
Stock Based Compensation
The Company accounts for stock based compensation arrangements through the measurement and recognition of compensation expense for all stock based payment awards to employees and directors based on estimated fair values. The Company uses the Black-Scholes option valuation model to estimate the fair value of the Company’s stock options and warrants at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of options and warrants. The Company uses historical company data among other information to estimate the expected price volatility and the expected forfeiture rate and does not use comparable company information.
Derivatives - Warrants
The Company accounts for the common stock warrants granted and still outstanding as of December 31, 2015 in connection with certain financing transactions (“Transactions”) in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. The fair value of the warrants issued by the Company in connection with the Transactions has been estimated using a Monte Carlo simulation.
The Company accounts for certain of its outstanding warrants issued in fiscal 2010, 2012 and 2013 (“2010 Warrants,” “2012 Warrants” and “2013 Warrants, respectively) as derivative liabilities. The 2010 Warrants were determined to be ineligible for equity classification due to provisions of the respective instruments that may result in an adjustment to their conversion or exercise prices. The Company recognized gains of $47,209 and $26,505 in the fair value of derivatives for the years ended December 31, 2015 and 2014, respectively. These derivative liabilities which arose from the issuance of the 2010 Warrants resulted in an ending balance of derivative liabilities of $0 and $47,209 as of December 31, 2015 and 2014, respectively.
Derivatives - Bifurcated Conversion Option in Convertible Notes
The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued Convertible Notes with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, Accounting for Derivative Financial Instruments and Hedging Activities, in certain instances, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.
The Convertible Notes issued during the year ended December 31, 2015 are subject to anti-dilution adjustments that allow for the reduction in the Conversion Price, as defined in the agreement, in the event the Company subsequently issues equity securities including Common Stock or any security convertible or exchangeable for shares of Common Stock for a price less than the current conversion price. The Company bifurcated and accounted for the conversion option in accordance with ASC 815 as a derivative liability, since this conversion feature is not considered to be indexed to the Company’s own stock.
The Company’s derivative liability has been measured at fair value at December 31, 2015 using a Monte-Carlo Simulation. Inputs into the model require estimates, including such items as estimated volatility of the Company’s stock, estimated probabilities of additional financing, risk-free interest rate, and the estimated life of the financial instruments being fair valued. In addition, since the conversion price contains an anti-dilution adjustment, the probability that the Conversion Price of the Notes would decrease as the share price decreased was also incorporated into the valuation calculation.
The Company recognized a gain of $410,602 and a gain of $0 in the fair value of derivatives for the year ended December 31, 2015 and 2014, respectively. These derivative liabilities which arose from the issuance of the convertible notes resulted in an ending balance of derivative liabilities of $179 and $0 as of December 31, 2015 and December 31, 2014, respectively. Subsequent changes to the fair value of the derivative liabilities will continue to require adjustments to their carrying value that will be recorded as other income (in the event that their value decreases) or as other expense (in the event that their value increases). The fair value of these liabilities is estimated using Monte Carlo pricing models that are based on the individual characteristics of the Company’s warrants, preferred and common stock, as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread.
Net Loss per Share
The Company calculates basic earnings per share (“EPS”) by dividing the Company’s net loss by the weighted average number of common shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive.
Fair value of assets and liabilities
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value for applicable assets and liabilities, we consider the principal or most advantageous market in which we would transact and we consider assumptions market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:
|
●
|
Level 1: Observable inputs such as quoted prices in active markets;
|
|
●
|
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
|
●
|
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The Company’s financial instruments are cash and cash equivalents, accounts payable, accounts receivable, notes receivable, earn-out liability, and derivative liabilities. The recorded values of cash equivalents and accounts payable approximate their fair values based on their short-term nature. The fair value of derivative liabilities is estimated using option pricing models that are based on the individual characteristics of our warrants, preferred and common stock, the derivative liability on the valuation date as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread. The derivative liabilities are the only Level 3 fair value measures.
A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s derivative warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of December 31, 2015 and 2014 is as follows:
|
Date of Valuation
|
December 31, 2014
|
|||
|
Stock Price
|
1.00
|
|||
|
Volatility (Annual)
|
66% to 67
|
% | ||
|
Number of assumed financings
|
1
|
|||
|
Number of anti-dilutive warrants
|
129,167
|
|||
|
Total warrants outstanding
|
23,933,927
|
|||
|
Total shares outstanding
|
18,435,239
|
|||
|
Strike Price
|
0.75
|
|||
|
Risk-free Rate
|
0.21
|
%
|
||
|
Maturity Date
|
8/13/15 to 11/24/15
|
|||
|
Expected Life
|
.62 to .90 years
|
|||
All of the derivative warrant liabilities expired in 2015 and as a result no further remeasurement was required.
A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s conversion options that are categorized within Level 3 of the fair value hierarchy as of December 31, 2015 is as follows:
|
Date of Valuation
|
December 31, 2015
|
|||
|
Stock Price
|
$
|
0.15
|
||
|
Volatility (Annual)
|
66%
|
|||
|
Strike Price
|
$
|
0.75
|
||
|
Risk-free Rate
|
1.4
|
%
|
||
|
Maturity Date
|
6/26/16
|
|||
At December 31, 2015 and 2014, the estimated fair values of the liabilities measured on a recurring basis are as follows:
|
Fair Value Measurements at
|
||||||||||||||
|
December 31, 2015:
|
||||||||||||||
|
Carrying
Value |
Level 1
|
Level 2
|
Level 3
|
|||||||||||
|
Financial Assets
|
||||||||||||||
|
Earn-out liability
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Derivative liabilities-convertible options
|
$
|
179
|
$
|
-
|
$
|
-
|
$
|
179
|
||||||
|
Total securities
|
$
|
179
|
$
|
-
|
$
|
-
|
$
|
179
|
||||||
|
Fair Value Measurements at
|
||||||||||||||
|
December 31, 2014:
|
||||||||||||||
|
Carrying
Value |
Level 1
|
Level 2
|
Level 3
|
|||||||||||
|
Financial Assets
|
||||||||||||||
|
Earn-out liability
|
$
|
594,216
|
$
|
-
|
$
|
-
|
$
|
594,216
|
||||||
|
Derivative liability - warrants
|
$
|
47,209
|
$
|
-
|
$
|
-
|
$
|
47,209
|
||||||
|
Total securities
|
$
|
641,425
|
$
|
-
|
$
|
-
|
$
|
641,425
|
||||||
The following tables present the activity for Level 3 liabilities for the years ended December 31, 2015 and 2014:
|
Fair Value Measurement Using
|
||||||||||||
|
Significant Unobservable Inputs
|
||||||||||||
|
(Level 3)
|
||||||||||||
|
Warrant Derivative Liabilities
|
Conversion
Notes
|
Earn Out Liability
|
||||||||||
|
Beginning balance at December 31, 2014
|
$
|
47,209
|
$
|
-
|
$
|
594.216
|
||||||
|
Additions during the year
|
-
|
410,781
|
-
|
|||||||||
|
Total unrealized (gains) or losses included in net loss
|
(47,209
|
)
|
(410,602
|
)
|
(594,216
|
)
|
||||||
|
Transfers in and/or out of Level 3
|
-
|
-
|
-
|
|||||||||
|
Ending balance at December 31, 2015
|
$
|
-
|
$
|
179
|
$
|
0
|
||||||
|
Fair Value Measurement Using
|
||||||||||||
|
Significant Unobservable Inputs
|
||||||||||||
|
(Level 3)
|
||||||||||||
|
Warrant Derivative Liabilities
|
Conversion
Notes
|
Earn Out Liability
|
||||||||||
|
Beginning balance at December 31, 2013
|
$
|
26,505
|
$
|
142,089
|
$
|
607,898
|
||||||
|
Additions during the year
|
-
|
-
|
(13,682
|
)
|
||||||||
|
Total unrealized (gains) or losses included in net loss
|
20,704
|
(5,945
|
)
|
|||||||||
|
Transfers in and/or out of Level 3
|
-
|
(136,144
|
)
|
-
|
||||||||
|
Ending balance at December 31, 2014
|
$
|
47,209
|
$
|
-
|
$
|
594,216
|
||||||
Advertising
The Company expenses advertising costs as incurred. The Company has no existing arrangements under which we provide or receive advertising services from others for any consideration other than cash. Advertising expenses from continuing operation (primarily in the form of Internet direct marketing) totaled $320,044 and $227,349 for the years ended December 31, 2015 and 2014, respectively.
Litigation
From time to time, the Company may become involved in litigation and other legal actions. The Company estimates the range of liability related to any pending litigation where the amount and range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated losses with no best estimate in the range, the Company records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.
Goodwill
The Company accounts for goodwill and other intangible assets under ASC 350 “Intangibles – Goodwill and Other” (“ASC 350”). ASC 350 requires an evaluation of impairment by assessing qualitative factors, and if necessary, applying a fair-value based test. The goodwill impairment test requires qualitative analysis to determine whether is it more likely than not that the fair value of a reporting unit is less than the carrying amount, including goodwill. An indication of impairment through analysis of these qualitative factors initiates a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of the Company’s reporting units based on discounted cash flow models using revenue and profit forecasts and comparing the estimated fair values with the carrying values of the Company’s reporting units which include the goodwill. If the estimated fair values are less than the carrying values, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of the Company’s “implied fair value” requires the Company to allocate the estimated fair value to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value. The Company tested goodwill impairment at December 31, 2015 and concluded that goodwill was fully impaired. Goodwill was written down in the amount of $3,202,276.
Intangible assets
Intangible assets consist of intellectual property/technology, customer lists, and trade-name/marks acquired in business combinations under the purchase method of accounting are recorded at fair value net of accumulated amortization since the acquisition date. Amortization is calculated using the straight line method over the estimated useful lives at the following annual rates:
|
Useful Lives
|
||||
|
IP/technology
|
10 | |||
|
Customer lists
|
10 | |||
|
Trade-name/marks
|
10 | |||
The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of finite-lived intangible asset may not be recoverable. Recoverability of a finite-lived intangible asset is measured by a comparison of its carrying amount to the undiscounted future cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is determined based on discounted cash flows.
According to the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 360 (“ASC 360”), a long-lived asset (group) that is held and used should be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount (book value) of the long-lived asset (group) might not be recoverable (i.e. information indicates that an impairment might exist). As a result, companies are not required to perform an impairment analysis (i.e. test the asset (group) for recoverability and potentially measure an impairment loss) if indicators of impairment are not present. Instead, entities would assess the need the need for an impairment write-down only if an indicator of impairment is present. Companies are responsible for routinely assessing whether impairment indicators are present.
Based on the impairment analysis completed, it was determined that our Customer lists were fully impaired. This resulted in the write down of these intangible assets of $1,189,246.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases which amended guidance for lease arrangements in order to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. The guidance, which is required to be adopted in the first quarter of 2019, will be applied on a modified retrospective basis beginning with the earliest period presented. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within that fiscal year. Since we did not previously have any debt issuance costs, there was not a need for retrospective application. The guidance was adopted for the year ended December 31, 2015. The adoption did not have a material impact on the financial statements.
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), with an effective date for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, for public business entities, certain not-for-profit entities, and certain employee benefit plans. The effective date for ASU 2014-09 was deferred by one year through the issuance of ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact, if any, the pronouncement will have on both historical and future financial positions and results of operations.
Segments
The Company operates in one reportable segment now due to the discontinuance of our Card Division. On November 26, 2014, the Company decided to wind down the operations of the Card Division and focus on its Mobile and Loyalty Marketing Division in an effort to reduce expenses and focus its resources elsewhere. Accordingly, no segment disclosures have been presented herein.
4. Accounts Receivable, Short-Term and Long-Term Notes Receivable
Management reviews accounts receivable, short-term and long-term notes receivable on a monthly basis to determine if any receivables are potentially uncollectible. An allowance for doubtful accounts is determined based on a combination of historical experience, length of time outstanding, customer credit worthiness, and current economic trends. As of December 31, 2014, the Company had recorded an allowance for doubtful accounts of $825,052. We recorded a bad debt reserve of $1,788,946 during the year ended December 31, 2015 and wrote off uncollectable accounts during the year ended December 31, 2015 in the amount of $1,224,115, all of which were fully reserved. As of December 31, 2015, the Company has recorded an allowance for doubtful accounts of $1,389,883.
Long-term receivables relate to notes receivable from the financing of set-up and license fees. Initial set up and licensing fees were $22,500 and clients typically contributed cash up front of 20% and the remaining 80% is financed over a 3 year term.
Notes receivable aged over 60 days past due are considered delinquent and notes receivable aged over 90 days past due with known collection issues are placed on non-accrual status. Interest revenue is not recognized on notes receivable while on non-accrual status. Cash payments received on non-accrual receivables are applied towards the principal. When notes receivable on non-accrual status are again less than 60 days past due, recognition of interest revenue for notes receivable is resumed. We charge interest rates on our notes receivable averaging 13% which approximates a fair value. We recorded approximately $140,276 in interest for the year ended December 31, 2015.
The allowance for doubtful accounts on long-term receivables is the Company's best estimate of the amount of probable credit losses related to the Company's existing note receivables. The allowance for doubtful accounts is the Company's best estimate of probable credit losses related to trade receivables and notes receivable based upon the aging of the receivables, historical collection data, internal assessments of credit quality and the economic conditions in the business subprime industry, as well as in the economy as a whole. The Company charges off uncollectable amounts against the reserve in the period in which it determines they are uncollectable. Unearned income on notes receivable is amortized using the effective interest method. The Company determines the allowance for doubtful accounts related to notes receivable based upon a reserve for known collection issues, as well as a reserve based upon aging, both of which are based upon history of such losses and current economic conditions. Based upon the Company's methodology, the notes receivable balances with reserves and the reserves associated with those balances are as follows:
|
December 31, 2015
|
||||||||||||||||||||||||
|
Gross
|
Reserve
|
Net
|
||||||||||||||||||||||
|
Current
|
Long-Term
|
Current
|
Long-Term
|
Current
|
Long-Term
|
|||||||||||||||||||
|
Customer Notes Receivable
|
908,590 | 661,371 | 632,422 | 461,702 | 276,168 | 199,669 | ||||||||||||||||||
|
Accounts Receivable
|
437,589 | - | 295,759 | - | 141,830 | - | ||||||||||||||||||
The roll forward of the allowance for doubtful accounts related to notes receivable and accounts receivable is as follows:
|
Notes Receivable
|
Accounts Receivable
|
|||||||||||
|
Current
|
Long-Term
|
|||||||||||
|
Balance at December 31, 2013
|
-
|
-
|
-
|
|||||||||
|
Incremental Provision
|
286,571
|
349,954
|
188,527
|
|||||||||
|
Recoveries
|
-
|
-
|
-
|
|||||||||
|
Charge offs
|
-
|
-
|
-
|
|||||||||
|
Balance at December 31, 2014
|
286,571
|
349,954
|
188,527
|
|||||||||
|
Notes Receivable
|
Accounts Receivable
|
|||||||||||
|
Current
|
Long-Term
|
|||||||||||
|
Balance at December 31, 2014
|
286,571
|
349,954
|
188,527
|
|||||||||
|
Incremental Provision
|
796,063
|
551,256
|
441,627
|
|||||||||
|
Recoveries
|
-
|
-
|
-
|
|||||||||
|
Charge offs
|
(450,212
|
)
|
(439,508
|
)
|
(334,395
|
)
|
||||||
|
Balance at December 31, 2015
|
632,422
|
461,702
|
295,759
|
|||||||||
5. Business Combinations
SMS Acquisition
On February 11, 2014, the Company, through its wholly-owned subsidiary, SpendSmart Networks, Inc., acquired substantially all of the assets of Intellectual Capital Management, Inc., d/b/a SMS Masterminds (“SMS Masterminds”) a Nevada corporation, including but not limited to certain intellectual property and accounts receivable, pursuant to the terms of an Asset Purchase Agreement (the “Asset Purchase Agreement”).
Pursuant to the Asset Purchase Agreement, the Company acquired substantially all of the assets of SMS Masterminds. In consideration of the purchased assets, the Company agreed to issue to SMS Masterminds five million two hundred and fifty thousand shares of the Company’s common stock and a cash payment of $1.4 million, of which $400,000 has been deferred. The Company paid $10,000 and $380,000 during the years ended December 31, 2015 and 2014, respectively, to the sellers related to this deferment. $10,000 of this deferment remains outstanding as of December 31, 2015 and was paid out during the first quarter 2016.
The Company also agreed to pay the sellers an earn-out payment relating to fifteen percent of the earnings generated by SMS Masterminds after the acquisition and an additional earn-out payment tied to the EBITDA of the Company after the acquisition of SMS Masterminds, of up to $2,000,000 in aggregate. The Company paid $0 during the years ended December 31, 2015 and 2014 related to this earn-out agreement.
The fair value of the total consideration at the date of acquisition is as follows:
|
Consideration Paid
|
||||
|
Cash Paid and to be paid - to sellers
|
$
|
1,400,000
|
||
|
5,250,000 Common Stock issued to SMS
|
3,313,598
|
|||
|
Fair value of earn-out at acquisition date
|
607,798
|
|||
|
Total Consideration Paid
|
$
|
5,321,396
|
||
The transaction was accounted for using the acquisition method required by Topic 805, Business Combinations. Accordingly, goodwill was measured as the excess of the total consideration including the fair value of any non-controlling interest on acquisition date over the amounts assigned to the identifiable assets acquired and liabilities assumed.
On the acquisition date, the fair value of net assets acquired was $5,321,396. The fair value of stock issued to the seller as part of the consideration was based on reference to quoted market values of SSPC stock as of the date of acquisition. We had originally estimated the fair value of the earn-out liability to be $846,785 and then revised the amount to $607,798 upon review of additional information during the measurement period. The final allocation of the total consideration to the fair value of the assets acquired and liabilities assumed as of the date of the acquisition is as follows:
|
Accounts receivable
|
$
|
318,708
|
||
|
Identifiable intangible assets
|
3,242,900
|
|||
|
Goodwill
|
2,458,375
|
|||
|
Total assets
|
6,019,983
|
|||
|
Accounts payable and accrued expenses
|
222,268
|
|||
|
Deferred Revenue
|
249,797
|
|||
|
Long-term liabilities (SBA loan)
|
226,522
|
|||
|
Total liabilities
|
698,587
|
|||
|
Net assets acquired
|
$
|
5,321,396
|
Fair valuation methods used for the identifiable net assets acquired in that acquisition make use of projected and discounted cash flows using company specific interest rates. IP/Technology, Customer Base, and Trademarks are being amortized over ten years using the straight-line method. Amortization expense related to intangible assets was $283,754 for the year ended December 31, 2014, was $324,290 for the year ended December 31, 2015, and will be $190,890 for each of the years ended December 31, 2016 through 2023 and $23,861 in the year ended December 31, 2024.
TechXpress Web Acquisition
On September 18, 2014, the Company through its wholly-owned subsidiary SpendSmart Networks, CA, purchased substantially all of the web related assets of TechXpress, Inc. (“TechXpress”), a California corporation, pursuant to the terms of an Asset Purchase Agreement (the “Asset Purchase Agreement”).
The final fair value assigned to the total consideration is as follows:
|
Consideration Paid:
|
||||
|
Cash consideration
|
$
|
454,641
|
||
|
596,315 common stock issued to TechXpress
|
438,518
|
|||
|
Total consideration paid
|
$
|
893,159
|
||
The transaction was accounted for using the acquisition method required by Topic 805, Business Combinations. Accordingly, goodwill has been measured as the excess of the total consideration including the fair value of any non-controlling interest on acquisition date over the amounts assigned to the identifiable assets acquired and liabilities assumed.
On the acquisition date, the fair value of net assets acquired was $893,159. The fair value of stock issued to the seller as part of the consideration was based on reference to quoted market values of SSPC stock as of the date of acquisition. The final allocation of the total consideration to the fair value of the assets acquired as of the date of the acquisition is as follows:
|
Accounts receivable, net
|
$
|
5,758
|
||
|
Identifiable intangible assets
|
143,500
|
|||
|
Goodwill
|
743,901
|
|||
|
Net assets acquired
|
$
|
893,159
|
Fair valuation methods used for the identifiable net assets acquired in that acquisition make use of projected and discounted cash flows using company specific interest rates. Amortization expense related to intangible assets was $4,947 for the year ended December 31, 2014, was $13,589 for the year ended December 31, 2015, and will be $2,250 for each of the years ended December 31, 2016 through 2023 and $281 in the year ended December 31, 2024.
Pro forma
The following unaudited pro forma financial information presents results as if the acquisition of SMS Masterminds and the TechXpress Web business had occurred on January 1, 2013 (in thousands):
| Year Ended December 31, | ||||
| (Unaudited) | 2014 | |||
| Total revenue | $ | 3,695 | ||
| Net loss | $ | (8,174 | ) | |
For purposes of the pro forma disclosures above, the primary adjustments for the year ended December 31, 2014 include the amortization of the intangible assets purchased in the acquisition.
6. Short Term Note Receivable
The Company issued a Convertible Promissory Note (the “Note”) for a principal amount of $410,000 to a third party in September 2014. The Note bears interest at the rate of 5.25% per annum. For the years ended December 31, 2014 and December 31, 2015, the Company has recorded $6,133 and $27,380 of interest income from this Note. $90,000 of the principal amount was paid during first quarter of 2015, $20,000 was paid during the second quarter of 2015, and $11,000 was paid during the third quarter of 2015. The remaining balance of $322,513 was written off during the year ended December 31, 2015.
7. Redeemable Preferred Stock and Warrants
In 2012, the Company issued a total of 10,165 shares of our Series B Preferred Stock (convertible into 1,694,167 shares of the Company’s Common Stock), and five year warrants to purchase up to an additional 1,111,042 shares of our Common Stock at exercise prices ranging between $7.50 and $9.00 per share. The Series B Convertible Preferred Stock automatically converted to common stock on January 19, 2013.
8. Convertible Promissory Notes
During the year ended December 31, 2015, the Company closed on a private offering and sold 22.25 units (the “Units”) to accredited investors with each such Unit consisting of a 9% Convertible Promissory Note with the principal face value of $50,000 (the “Notes”) and a warrant to purchase 66,667 shares of the Company’s common stock (the “Warrant”). The Company also agreed to provide piggy-back registration rights to the holders of the Units. The Notes have a term of twelve (12) months, pay interest semi-annually at 9% per annum and can be voluntarily converted by the holder into shares of common stock at an exercise price of $0.75 per share, subject to adjustments for stock dividends, splits, combinations and similar events. In addition, if the Company issues or sells common stock at a price below the conversion price then in effect, the conversion price of the Notes shall be adjusted downward to such price but in no event shall the conversion price be reduced to a price less than $0.50 per share. The Warrants have an exercise price of $.75 per share and have a term of four years. The holders of the Warrants may exercise the Warrants on a cashless basis for as long as the shares of common stock underlying the Warrants are not registered on an effective registration statement. The relative fair value ascribed to the 1,483,340 warrants issued was approximately $337,118 and was recorded to additional paid-in capital. The Company raised gross proceeds of $1,112,500 and issued warrants to acquire 1,483,340 shares of common stock. The Company used the net proceeds from the sale of the Units for general working capital.
The embedded conversion feature of the notes was bifurcated and accounted for as a derivative liability at approximately $393,000 on the day of issuance. The remaining proceeds were allocated based on the relative fair value of the debt and the warrant, and accordingly, approximately $730,520 of debt discount was recorded and will be amortized over the term of the debt using the effective interest method. As of December 31, 2015, the balance of the discount had been amortized down to $242,396.
On July 15, 2015, the Company issued a Convertible Promissory Note in the principal amount of $400,000 inclusive of interest. The Note is for a term of six months. The Note bears interest at twelve percent per annum. The Note is secured by the assets of the Company. The Note may be converted into shares of the Company’s common stock at $0.75 per share. The Company also issued the holder warrants to purchase 500,000 shares of the Company’s common stock. The proceeds were allocated based on the relative fair value of the debt and the warrant. The warrants have an exercise price of $0.75 per share and have a term of two years. The relative fair value ascribed to the 500,000 warrants issued was approximately $49,000 and was recorded to additional paid-in capital. This amount which was recorded as a debt discount will be amortized over the term of the debt using the effective interest method.
On October 5, 2015, the Company issued a Convertible Promissory Note to an investor in the principal amount of $150,000. The Note features a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Note bears interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the note was bifurcated and accounted for as a derivative liability at approximately $17,127 on the day of issuance. As part of the closing of the Tender Offer, these notes converted and the investor received 3,089,754 warrants with a three year exercise and an exercise price of $0.15.
On November 12, 2015, the Company issued a Convertible Promissory Note to an investor in the principal amount of $150,000. The Note features a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Note bears interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the note was bifurcated and accounted for as a derivative liability at approximately $50 on the day of issuance. As part of the closing of the Tender Offer, these notes converted and the investor received 3,002,961 warrants with a three year exercise and an exercise price of $0.15.
On November 13, 2015, the Company issued Convertible Promissory Notes to five investors in the principal amount of $287,333. The Notes feature a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Notes bears interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the notes was bifurcated and accounted for as a derivative liability at approximately $172 on the day of issuance. As part of the closing of into the Tender Offer, these notes converted and the investors received 5,811,315 warrants with a three year exercise and an exercise price of $0.15.
On November 16, 2015, the Company issued a Convertible Promissory Note to an investor in the principal amount of $48,000. The Note features a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Note bears interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the note was bifurcated and accounted for as a derivative liability at approximately $30 on the day of issuance. As part of the closing of the Tender Offer, these notes converted and the investor received 971,007 warrants with a three year exercise and an exercise price of $0.15.
9. Notes Payable
On August 26, 2015, the Company entered into a Business Promissory Note and Security Agreement with Bank of Lake Mills for the principal sum of $200,000 and a daily interest rate of .22%. The Note is for a term of six months with a weekly repayment schedule ending February 22, 2016. The Note includes standard representations and warranties. The Note is secured by certain assets of the Company as well as a personal guarantee by Alex Minicucci. The total repayment amount including interest and principal is $244,637 to be paid pro-rata weekly ending February 22, 2016. For the year ended December 31, 2015, we recorded interest expense related to the note of $39,585. For the year ended December 31, 2015, we have paid approximately $129,738 in principal repayments related to the Note with a remaining balance of $70,262 at December 31, 2015. As of February 25, 2016, the note has been fully repaid.
10. Due to Related Party
On August 14, 2015 and September 28, 2015, the Company entered into Loan Agreements with Alex Minicucci for the principal sum of $65,000 and $35,000, respectively. The Loans were to be paid by December 31, 2015 and include an interest rate of 7%. For the year ended December 31, 2015, we recorded interest expense related to the loans of $271. The $35,000 loan has been paid in 2016 and the Company is negotiating terms related to the $65,000 loan.
11. Common Stock and Warrants
Common stock
During the year ended December 31, 2015, the company issued 1,047,522 shares of common stock, at $0.47 per share, and the Company recognized expense of $496,288 for services rendered.
During the year ended December 31, 2014, the company issued 22,989 shares of common stock, at $0.87 per share, and the Company recognized expense of $20,000 for services rendered.
Warrants
On December 4, 2015, SpendSmart Networks, Inc. (the “Company“) commenced its offer (the “Warrant Tender Offer“) to amend certain of its outstanding warrants to purchase an aggregate of 21,634,695 shares of common stock (the “ Offer to Amend and Exercise “), including: (i) outstanding warrants to purchase an aggregate of 17,918,675 shares of the Company’s common stock issued to investors who participated in the Company’s private placement financing closed on February 11, 2014, February 21, 2014, March 6, 2014, and March 14, 2014 (the “ 2014 Warrants “), of which 16,289,704 are exercisable at an exercise price of $1.10 per share, as well as warrants issued to the placement agent in connection with such financing (the “ $1.10 2014 Warrants “) and 1,628,971 are exercisable at an exercise price of $1.27 per share (the “$1.27 2014 Warrants “); (ii) outstanding warrants to purchase an aggregate of 1,711,106 shares of the Company’s common stock issued to investors who participated in the Company’s private placement financings closed on November 30, 2012, July 19, 2012, June 20, 2012, May 24, 2012 and March 31, 2012, as well as warrants issued to the placement agent in connection with such financings (the “ 2012 Warrants “), of which 1,417,799 are exercisable at an exercise price of $7.50 per share (the “ $7.50 2012 Warrants “) and 244,640 are exercisable at an exercise price of $9.00 per share (the “ $9.00 2012 Warrants “) and 48,667 are exercisable at an exercise price of $12.00 per share (the “ $12.00 2012 Warrants “); (iii) outstanding warrants to purchase an aggregate of 1,569,935 shares of the Company’s common stock issued to investors who participated in the Company’s private placement financing completed on January 19, 2011, May 20, 2011, October 21, 2011, and November 21, 2011, as well as warrants issued to the placement agent in connection with such financing (the “2011 Warrants “) of which 1,083,333 are exercisable at an exercise price of $6.00 per share (the “ $6.00 2011 Warrants“), 250,001 are exercisable at an exercise price of $7.50 per share (the “ $7.50 2011 Warrants “) and 236,601 are exercisable at an exercise price of $9.00 per share (the “ $9.00 2011 Warrants “); and (iv) outstanding warrants to purchase an aggregate of 434,979 shares of the Company’s common stock issued to investors who participated in the Company’s private placement financings closed on November 16, 2010 (the “ 2010 Warrants “), of which 125,000 are exercisable at an exercise price of $6.00 per share (the “ $6.00 2010 Warrants “) 222,479 are exercisable at an exercise price of $9.00 per share (the “ $9.00 2010 Warrants “) and 87,500 are exercisable at an exercise price of $7.50 per share (the “$7.50 2010 Warrants“ ). The 2014 Warrants, the 2012 Warrants, the 2011 Warrants, and the 2010 Warrants are collectively referred to as the “Original Warrants “.
The Offer to Amend and Exercise expired on February 5, 2016. Pursuant to the Offer to Amend and Exercise, an aggregate of 16,172,144 Original Warrants were tendered by their holders and were amended and exercised in connection therewith for an aggregate exercise price of approximately $2,425,822 following the amendment and exercise of the 16,172,144 Original Warrants. Subsequent to yearend, we issued 26,479,217 warrants related to the tender offer at an exercise price of $0.15.
Effective October 1, 2015, the Company entered into a strategic consulting agreement with Siskey Capital, LLC. Siskey Capital, LLC will provide strategic guidance in the overall operations of the company including without limitation product development, engineering, sales, personnel and business development. The retention is for nine months. In connection with the retention the Company agreed to grant Siskey Capital (1) 750,000 shares of the Company's restricted common stock, 375,000 of which shall be issued immediately and the remaining 375,000 after completion of the first phase of the consulting project, and (2) 750,000 options to purchase shares of the Company's restricted common stock with an exercise price of $0.75 to be paid quarterly and subject to the completion of certain goals. Siskey Capital will also receive a monthly per diem of $9,800. For services performed on our behalf, we issued warrants to purchase up to 750,000 shares of our common stock during the year ended December 31, 2015, to Siskey Capital at an exercise price of $.75. On December 1, 2015, these warrants were repriced to an exercise price of $.17 and exercised on December 2, 2015, resulting in gross proceeds to the company of $127,500.
On December 1, 2015, we issued warrants to purchase up to 750,000 shares of our common stock to Siskey Capital at an exercise price of $0.25.
Through December 31, 2015, we have also issued warrants to purchase up to 22,835,951 shares of our common stock to investors (and as compensation to third parties in connection with investments) related to the sale of our common stock, 26,397,410 of which remain outstanding net of exercises, cancellations and expirations (all of which are fully vested).
|
12. Convertible Preferred Stock
|
Series A Preferred Stock
At December 31, 2015 and 2014 we had 0 shares of Series A Cumulative Convertible Preferred Stock (the “Series A Stock”) outstanding.
Series B Preferred Stock
At December 31, 2015 and 2014 we had 0 shares of Series B convertible preferred stock (“Series B Stock”) outstanding.
Series C Convertible Preferred Stock
At December 31, 2015 and 2014, we had 3,700,729 and 3,757,229 shares, respectively, of Series C convertible preferred stock (“Series C Stock”) outstanding that were issued to investors for $3.00 per share. We issued 4,299,081 shares of Series C Stock and had conversions of 541,852 shares for the year ended December 31, 2014. For the year ended December 31, 2015, we had conversions of 56,500 shares.
Number of Shares: The number of shares of Series C Preferred Stock designated as Series C Preferred Stock is 4,299,081 (which shall not be subject to increase without the written consent of all of the holders of the Series C Preferred Stock or as otherwise set forth in the Certificate of Designation.
Stated Value: The initial Stated Value of each share of Series C Preferred Stock is $3.00 (as adjusted pursuant to the Certificate of Designation).
Voluntary Conversion: The Series C Preferred Stock shall be convertible at the option of the holder, into common stock at the applicable conversion price of $.75 per share, subject to adjustments for stock dividends, splits, combinations and similar events as described in the form of Certificate of Designations. In addition, the Company has the right to require the holders to convert to common stock under certain enumerated circumstances.
Mandatory Conversion: At the Company’s sole option, each outstanding share of Series C Preferred Stock may be converted into shares of Common Stock at the applicable conversion price immediately prior to the close of business on the date that the volume weighted average price of the Common Stock, based on the closing price on the or any other market or exchange where the same is traded, shall exceed $4.00 per share for any 30 consecutive trading days anytime from the Original Issue Date with an average daily trading volume of 100,000 shares (such numbers shall be proportionally adjusted for dividends, stock splits, Common Stock combinations and recapitalizations involving the Common Stock).
Voting Rights: Except as described in the Certificate of Designations, holders of the Series C Preferred Stock will vote together with holders of the Company common stock on all matters, on an as-converted to common stock basis, and not as a separate class or series (subject to limited exceptions).
Liquidation Preferences: In the event of any liquidation or winding up of the Company prior to and in preference to any Junior Securities (including common stock), the holders of the Series C Preferred Stock will be entitled to receive in preference to the holders of the Company common stock a per share amount equal to the Stated Value (as adjusted pursuant to the Certificate of Designations).
|
13.
|
Agreements for services, officer and Board of Directors’ compensation
|
Effective October 1, 2015, Jerold Rubinstein, currently a member of the Board of Directors, has been appointed Chairman of the Board. Mr. Rubinstein has served as a member of the Board of Directors and the Chairman of the Company's Audit Committee since October 1, 2013.
In connection with Mr. Rubinstein's appointment to the Board, the Company agreed to grant Mr. Rubinstein a stock option to purchase up to 1,358,696 shares of common stock at an exercise price of $0.17 per share and having a term of 5 years.
|
14.
|
Agreements with former officers
|
Effective December 31, 2014, William Hernandez-Ellsworth resigned from his position as a director of SpendSmart Networks, Inc. (the “Company”).
Effective as of January 26, 2015 (the “Effective Date”), William Hernandez-Ellsworth resigned from his position as President of SpendSmart Networks, Inc. (the “Company”).
In conjunction with Mr. Hernandez-Ellsworth’s resignation, on January 29, 2015 the Company entered into an Agreement with Mr. Hernandez-Ellsworth (the “Agreement”). Pursuant to the Agreement, and in conjunction with the closing of the Company’s card business, Mr. Hernandez-Ellsworth remained employed by the Company, on an as needed basis, for a one year term commencing on the Effective Date and was paid an annual salary of $120,000. This agreement ended in January 2016. Additionally, Mr. Hernandez-Ellsworth was: (i) permitted to participate in any group life, hospitalization or disability insurance plans, health programs, retirement plans, fringe benefit programs and other benefits that may be available to employees of the Company; (ii) provided 50,000 unvested shares of Non-Qualified Stock Options issued on March 19, 2014, and 112,500 unvested shares of Incentive Stock Options issued on March 21, 2014 (the “Incentive Stock Option”), become fully vested; and (iii) the provisions in Mr. Hernandez-Ellsworth Incentive Option that required he exercise all vested and unexercised options within ninety (90) days of his departure from the Company was deleted and shall no longer apply. The Agreement also contained customary confidentiality and non-solicitation provisions. The Company expensed all options in 2014. The Company accrued $120,000 of salary in 2014, of which $10,000 remained accrued at December 31, 2015 and paid out in 2016.
Effective February 24, 2016, Bruce Neuschwander resigned from his position as Chief Financial Officer. Mr. Neuschwander and the Company entered into a Severance Agreement and General Release wherein the Company paid Mr. Neuschwander the equivalent of one month’s salary ($12,500) and five months of health care premiums in exchange for a general release of liability. $12,500 of severance was paid out during 2016.
15. Net Loss per Share Applicable to Common Stockholders
Options, warrants, and convertible debt outstanding were all considered anti-dilutive for the year ended December 31, 2015 and 2014 due to net losses.
The following securities were not included in the diluted net income (loss) per share calculation because their effect was anti-dilutive as of the periods presented:
|
For the year ended
|
||||||||
|
December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Common stock options
|
10,337,113 | 8,807,667 | ||||||
|
Investor warrants
|
23,752,410 | 21,920,064 | ||||||
|
Compensation warrants
|
2,645,000 | 2,013,858 | ||||||
|
Excluded potentially dilutive securities
|
36,734,523 | 32,741,589 | ||||||
|
16. Stockholder’s equity
|
Stock options
On January 8, 2013, the Company’s Board of Directors approved the adoption of the SpendSmart Networks, Inc. 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan provides for granting of stock-based awards including: incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock. The total number of shares of common stock that may be issued pursuant to stock awards under the 2013 Plan (as approved by the Board of Directors but subject to future shareholder approval solicited by a Proxy Statement filed in January 2013) shall not exceed in the aggregate 3,000,000 shares of the common stock of the Company. On August 4, 2011, the Board of Directors approved the adoption of the SpendSmart Networks, Inc. 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan provides for granting of stock-based awards including: incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock. The total number of shares of common stock that may be issued pursuant to stock awards under the Plan shall not exceed in the aggregate 1,666,667 shares of the common stock of the Company. The Company also have a stockholder-approved Plan (the IdeaEdge, Inc. 2007 Equity Incentive Plan - the “2007 Plan”, previously approved by our shareholders). The 2007 Plan has similar provisions and purposes as the 2011 Plan. The total number of shares of common stock that may be issued pursuant to stock awards under the 2007 Plan (as amended) shall not exceed in the aggregate 4,000,000 shares of the common stock of our Company. Upon shareholder approval of the 2013 Plan, our Board has expressed its intentions to issue no more shares under the 2011 and 2007 Plans.
At December 31, 2015 and 2014, we have outstanding a total of 10,337,113 and 8,807,667, respectively, of incentive and nonqualified stock options granted under the 2013 Plan, 2011 Plan, and the 2007 Plan, all of which (for the purpose of computing stock based compensation) we have estimated will eventually vest. All of the options have terms of five years with expiration dates ranging from July 2016 to November 2019.
The Company’s stock option plans are administered by the Board of Directors, which determines the terms and conditions of the options granted, including exercise price, number of options granted and vesting period of such options.
For the year ended December 31, 2014, we issued 8,541,000 options, as follows. On March 19, 2014, our Company granted options to purchase up to 405,000 shares of our common stock to members of our Board of Directors. The options vest immediately; have an exercise price of $0.87 per share; and expire five years after the date of grant. The fair value at grant date of these options was $247,939.
In addition, the Company granted options to purchase up to 1,850,000 shares of our common stock to members of our Board of Directors on March 19, 2014. One half of the options vest immediately with the remaining options vesting on the one year anniversary of the grant date; have an exercise price of $0.87 per share; and expire five years after the date of grant. The fair value at grant date of these options was $1,068,350.
In March 2014, our Company granted options to purchase up to 350,000 shares of our common stock to Alex Minicucci. One fourth of the options vest immediately with the remaining options vesting over the next three years; have an exercise price of $1.15 per share; and expire five years after the date of grant. The fair value at grant date of these options was $193,925.
In March 2014, our Company granted options to purchase up to 400,000 shares of our common stock to William Hernandez. One fourth of the options vest immediately with the remaining options vesting over the next three years; have an exercise price of $1.15 per share; and expire five years after the date of grant. The fair value at grant date of these options was $221,629.
In March 2014, our Company granted options to purchase up to 1,410,000 shares of our common stock, of which 892,500 remain outstanding, to sixteen employees. The options vest over three years; have an exercise price of $1.15 per share; and expire five years after the date of grant. The fair value at grant date of these options was $781,243.
On August 1, 2014, our Company granted options to purchase up to 900,000 shares of our common stock to our Board of Directors and Chord Advisors. The options vest immediately; have an exercise price of $1.14 per share; and expire five years after the date of grant. Each of the following Board members received options as follows: Joe Proto was issued 200,000 shares, Isaac Blech was issued 225,000 shares, Cary Sucoff was issued 175,000 shares, Patrick Kolenik was issued 175,000 shares, and Jerold Rubinstein was issued 100,000 shares, and Chord Advisors was issued 25,000 shares. The fair value at grant date of these options was $617,760.
In November 2014, the Company canceled 1,000,000 in outstanding Director stock options (and 1,695,374 in warrants) and issued the Directors 1,828,000 in replacement stock options. The replacement stock options have an exercise price equal to $1.15, a term of 5 years and a provision that allows for the exercise of these options only if the stock trades above $1.75 for 5 business days or upon a change of control. The cancellation and reissuance of these stock options was treated as a modification under ASC 718 and, accordingly, total stock-based compensation expense related to these awards increased $562,936, which is being recognized over the new vesting period.
For the year ended December 31, 2015, we issued 3,666,476 options, as follows. During first quarter, 2015, our Company granted options to purchase up to 165,000 shares of our common stock to five employees. The options vest over four years; have exercise prices of $.90 to $.95 per share; and expire five years after the date of grant. The fair value at grant date of these options was $81,061.
On March 5, 2015, our Company granted options to purchase up to 360,000 shares of our common stock to members of our Board of Directors. The options vest immediately; have an exercise price of $0.92 per share; and expire five years after the date of grant. The fair value at grant date of these options was $208,974.
In May 2015, our Company granted options to purchase up to 75,000 shares of our common stock to Bruce Neuschwander. The options vest over four years; have an exercise price of $.65; and expire five years after the date of grant. The fair value at grant date of this option was $31,622.
On October 1, 2015, our Company granted options to purchase up to 1,358,696 shares of our common stock to Jerold Rubinstein. The options vest immediately; have an exercise price of $.46 per share; and expire five years after the date of grant. The fair value at grant date of these options was $410,559.
In November 2015, the Company repriced the 1,358,696 previously issued options to Jerold Rubinstein. The replacement stock options have an exercise price equal to $.17 and a term of 4.8 years. The cancellation and reissuance of these stock options was treated as a modification under ASC 718 and, accordingly, total stock-based compensation expense related to these awards increased $35,713, which was recognized in 2015.
In December, 2015, our Company granted options to purchase up to 278,500 shares of our common stock to four employees. The options vest immediately; have an exercise price of $.14 per share; and expire five years after the date of grant. The fair value at grant date of these options was $26,792.
In December, 2015, our Company granted options to purchase up to 70,584 shares of our common stock to five employees. The options vest immediately; have an exercise price of $.75 per share; and expire five years after the date of grant. The fair value at grant date of these options was $3,876.
Stock option activity during the following periods was as follows:
|
For the twelve months ended
|
||||||||
|
December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Beginning balance outstanding
|
8,807,667 | 1,566,667 | ||||||
|
Options issued during the year
|
2,307,780 | 8,541,000 | ||||||
|
Options expired during the year
|
(778,334 | ) | (1,300,000 | ) | ||||
|
Ending balance outstanding
|
10,337,113 | 8,807,667 | ||||||
Warrants
The Company issued warrants to purchase shares of the Company’s common stock to investors in connection with the issuances of restricted shares of common stock during the years ended December 31, 2015 and 2014 (the value of which was offset against the proceeds of the issuance of common stock and not charged to operations). Outstanding warrants from all sources have terms ranging from two to five and a half years.
For the year ended December 31, 2014, we did not issue any warrants to advisors, consultants and in connection with the purchase of intellectual property. Warrants to purchase up to 267,369 shares of common stock have expired and warrants to purchase up to 1,695,374 to Directors have been cancelled (and replaced with 1,828,000 in replacement stock options, as noted above). Warrants to purchase up to 2,013,858 shares of common stock remain outstanding at December 31, 2014, of which 1,962,007 have vested.
For the year ended December 31, 2014, we issued 17,918,675 warrants to new investors.
On October 1, 2015, we issued 750,000 warrants to Siskey Capital for consulting services. Effective October 1, 2015, the Company entered into a strategic consulting agreement with Siskey Capital, LLC. Siskey Capital, LLC will provide strategic guidance in the overall operations of the company including without limitation product development, engineering, sales, personnel and business development. 187,500 of those warrants vested immediately. Those 187,500 warrants were repriced on December 1, 2015 and the remaining 562,500 warrants vested on December 1, 2015, with the full 750,000 warrants exercised on December 2, 2015.
Warrant activity (including warrants issued to investors and for consulting and advisory services) for the years ended December 31, 2015 and 2014 was as follows:
|
For the twelve months ended
|
||||||||
|
December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Beginning balance outstanding
|
23,933,922 | 7,977,990 | ||||||
|
Warrants issued during the year
|
||||||||
|
For consulting and advisory services
|
1,500,000 | - | ||||||
|
In connection with sales of common, preferred stock, and notes
|
1,983,340 | 17,918,675 | ||||||
|
Warrants expired
|
(269,852 | ) | (1,962,743 | ) | ||||
|
Warrants exercised
|
(750,000 | ) | - | |||||
|
Ending balance outstanding
|
26,397,410 | 23,933,922 | ||||||
The numbers and exercise prices of all options and warrants outstanding at December 31, 2015 was as follows:
|
Shares Outstanding
|
Weighted Average Exercise Price
|
Expiration Fiscal Period
|
|
669,354
|
6.83
|
1st Qtr, 2016
|
|
1,465,833
|
6.75
|
2nd Qtr, 2016
|
|
625
|
9.00
|
3rd Qtr, 2016
|
|
666,811
|
7.55
|
4th Qtr, 2016
|
|
34,749
|
7.99
|
1st Qtr, 2017
|
|
1,709,810
|
7.05
|
2nd Qtr, 2017
|
|
576,430
|
1.53
|
3rd Qtr, 2017
|
|
1,542,338
|
6.71
|
4th Qtr, 2017
|
|
10,000
|
6.60
|
1st Qtr, 2018
|
|
22,238,123
|
1.09
|
1st Qtr, 2019
|
|
893,336
|
0.92
|
2nd Qtr, 2019
|
|
1,113,000
|
1.16
|
3rd Qtr, 2019
|
|
3,373,000
|
0.95
|
4th Qtr, 2019
|
|
525,000
|
0.92
|
1st Qtr, 2020
|
|
1,707,780
|
0.19
|
2nd Qtr, 2019
|
|
75,000
|
0.65
|
2nd Qtr, 2020
|
|
133,334
|
7.05
|
4th Qtr, 2022
|
|
36,734,523
|
Stock based compensation
Results of operations for the years ended December 31, 2015 and 2014 include stock based compensation costs totaling $1,807,337 and $5,784,306, respectively, of which $1,807,337 and $4,856,638, respectively, was charged to personnel related expenses in connection with the issuance of stock options and warrants issued to employees, directors, advisors and consultants (not including shares of stock issued directly for services). $0 and $964,380 were charged to discontinued operations, respectively.
For purposes of accounting for stock based compensation, the fair value of each option and warrant award is estimated on the date of grant using the Black-Scholes-Merton option pricing formula. Compensation expense is recognized upon actual vesting of the options. The following weighted average assumptions were utilized for the calculations during the year ended December 31, 2015 and 2014:
| 2015 | 2014 | |||||||
|
Expected life (in years)
|
2.61 years
|
3.61 years
|
||||||
|
Weighted average volatility
|
98.05 | % | 96.98 | % | ||||
|
Forfeiture rate
|
10.27 | % | 11.88 | % | ||||
|
Risk-free interest rate
|
0.95 | % | 1.16 | % | ||||
|
Expected dividend rate
|
0.00 | % | 0.00 | % | ||||
The weighted average expected option and warrant term for employee stock options granted reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all options. The Company utilized this approach as its historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term. Expected volatilities are based on the historical volatility of the Company’s stock. The Company estimated the forfeiture rate based on our expectation for future forfeitures and (for the purpose of computing stock based compensation given the contractual vesting of the Company’s options and warrants outstanding) the Company assumes that all options and warrants will vest. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at or near the time of grant. The Company has never declared or paid dividends and have no plans to do so in the foreseeable future.
As of December 31, 2015, $520,484 of total unrecognized compensation cost related to unvested stock based compensation arrangements is expected to be recognized over a weighted-average period of 23.6 months. The following table summarizes option activity in connection with stock options and warrants (which resulted in stock based compensation charges) as of and for the years ended December 31, 2015 and 2014:
|
Shares
|
Weighted
Average
Exercise Price
|
Weighted Average Remaining
Contractual
Term
|
Aggregate
Instrinsic
Value
|
||||||||||
|
Outstanding at December 31, 2014
|
10,821,525
|
$
|
2.44
|
||||||||||
|
Granted
|
3,807,780
|
0.31
|
|||||||||||
|
Forfeited
|
(778,334
|
)
|
(0.92
|
)
|
|||||||||
|
Expired
|
(118,838
|
) |
(7.24
|
) | |||||||||
|
Exercised
|
(750,000
|
)
|
(0.17
|
)
|
|||||||||
|
Outstanding at December 31, 2015
|
12,982,133
|
$
|
1.98
|
39.9 months
|
$
|
-
|
|||||||
|
Exercisable
|
11,711,738
|
$
|
2.06
|
39.6 months
|
$
|
-
|
|||||||
|
|
|||||||||||||
|
Shares
|
Weighted
Average
Exercise Price
|
Weighted Average Remaining
Contractual
Term
|
Aggregate
Instrinsic
Value
|
||||||||||
|
Outstanding at December 31, 2013
|
5,447,992
|
$
|
6.69
|
||||||||||
|
Granted
|
8,541,000
|
1.08
|
|||||||||||
|
Forfeited
|
(2,995,867
|
)
|
(5.93
|
)
|
|||||||||
|
Expired
|
(171,600
|
) |
(8.21
|
) | |||||||||
|
Exercised
|
-
|
-
|
|||||||||||
|
Outstanding at December 31, 2014
|
10,821,525
|
$
|
2.44
|
47.4 months
|
$
|
-
|
|||||||
|
Exercisable
|
7,535,886
|
$
|
2.93
|
45.8 months
|
$
|
-
|
|||||||
Additional disclosure concerning options and warrants is as follows:
|
For the Year Ended
|
||||||||
|
December 31,
|
Deccember 31,
|
|||||||
|
2015
|
2014
|
|||||||
|
Weighted average grant date fair value of options and warrants granted
|
$ | 0.18 | $ | 0.60 | ||||
|
Aggregate intrinsic value of options and warrants exercised
|
- | - | ||||||
|
Weighted average fair value of options and warrants vested
|
0.66 | 1.95 | ||||||
The range of exercise prices for options and warrants granted and outstanding (which resulted in stock based compensation charges) was as follows at December 31, 2015 and 2014:
|
|
Number of Options and Warrants
|
||||||||||
|
Exercise Price
Range |
December 31,
2015 |
December 31,
2014 |
|||||||||
| $ | .10 - $.74 | 2,462,196 | - | ||||||||
| $ | .75 - $1.20 | 7,878,584 | 8,241,000 | ||||||||
| $ | 1.21 - $3.00 | 218,000 | 5,000 | ||||||||
| $ | 3.01 - $4.50 | - | - | ||||||||
| $ | 4.51 - $12.00 | 2,423,333 | 2,575,525 | ||||||||
| $ | 12.01 - $15.00 | - | - | ||||||||
| 12,982,113 | 10,821,525 | ||||||||||
A summary of the activity of our non-vested options and warrants for the following periods:
|
For the year ended
|
||||||||
|
December 31,
|
December 31, | |||||||
|
2015
|
2014
|
|||||||
|
Non-vested outstanding, beginning
|
3,285,639 | 888,995 | ||||||
|
Granted
|
3,807,780 | 8,541,000 | ||||||
|
Vested
|
(5,279,016 | ) | (5,741,393 | ) | ||||
|
Expired
|
(544,028 | ) | (402,963 | ) | ||||
|
Non-vested outstanding, ending
|
1,270,375 | 3,285,639 | ||||||
Common Shares Reserved for Future Issuance
The following table summarizes shares of our common stock reserved for future issuance at December 31, 2015:
|
December 31,
2015 |
December 31,
2014 |
|||||||
|
Stock options outstanding
|
10,337,113 | 8,807,667 | ||||||
|
Stock options available for future grant
|
9,437,000 | 8,758,666 | ||||||
|
Warrants
|
26,397,410 | 23,933,922 | ||||||
|
Total common shares reserved for future issuance
|
46,171,523 | 41,500,255 | ||||||
|
17.
|
Income taxes
|
Deferred tax assets at December 31, 2015 and 2014 consisted of the following:
|
As of December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Deferred tax asset
|
||||||||
|
Net operating loss carryovers
|
$
|
26,991,694
|
$
|
25,062,026
|
||||
|
Accrued Payroll
|
$
|
32,400
|
$
|
-
|
||||
|
Sharebased Compensation
|
$
|
2,292,027
|
$
|
1,666,644
|
||||
|
Charitable Contribution
|
$
|
4,700
|
$
|
3,700
|
||||
|
Amortization
|
$
|
1,584,975
|
$
|
(64,669
|
) | |||
|
Depreciation
|
$
|
258,828
|
$ |
22,173
|
||||
|
Allowance for Doubtful Account
|
$
|
555,953
|
$
|
330,021
|
||||
|
Total deferred tax assets
|
31,720,577
|
27,019,895
|
||||||
|
Valuation Allowance
|
(31,720,577
|
)
|
(27,019,895
|
)
|
||||
|
Deferred tax asset, net of allowance
|
$
|
-
|
$
|
-
|
||||
As of December 31, 2015, the Company had federal and state net operating loss carryovers of approximately $66.2 million and $66.4 million, which will begin to expire in 2028. The net operating loss carryover may be subject to limitation under Internal Revenue Code section 382, should there be a greater than 50% ownership change as determined under the regulations.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. The Company has determined that, based on objective evidence currently available, it is more likely than not that the deferred tax assets will not be realized in future periods. Accordingly, the Company has provided a valuation allowance for the full amount of the deferred tax assets at December 31, 2015 and 2014.
A reconciliation of the expected tax benefit computed at the U.S. federal and state statutory income tax rates to our tax benefit is as follows:
|
For the years ended
|
||||||||
|
December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Statutory federal income tax rate
|
-34.0
|
%
|
-34.0
|
%
|
||||
|
State taxes, net of federal tax benefit
|
-5.0
|
%
|
-6.3
|
%
|
||||
|
Valuation Allowance
|
39.0
|
%
|
40.3
|
%
|
||||
|
Income tax provision
|
0.0
|
%
|
0.0
|
%
|
||||
We file income tax returns in the U.S. and in the state of California with varying statutes of limitations. Our policy is to recognize interest expense and penalties related to income tax matters as a component of our provision for income taxes. There were no accrued interest and penalties associated with uncertain tax positions as of December 31, 2015. The majority of our operations are in California and the Company believes it has no tax positions which could more-likely-than not be challenged by tax authorities. We have no unrecognized tax benefits and thus no interest or penalties included in the financial statements. The Company is subject to examination for tax years after 2010 for federal purposes and after 2011 for California state tax purposes.
|
18.
|
Commitments
|
We leased space in Des Moines, Iowa until June 30, 2015 and currently lease space in two locations San Luis Obispo, California. The building that we lease at 805 Aerovista Parkway is owned by Alexander P Minicucci Trust, which is a related party transaction due to the trust being controlled by the Company's chief strategy officer. Rent expense was $169,511 and $162,266 for the years ended December 31, 2015 and 2014, respectively. Future rental commitments under contract total $193,073 as of December 31, 2015. For the second building that we lease in San Luis Obispo, California, the rent expense was $19,307 and $0 for the years ended December 31, 2015 and 2014, respectively. Future rental commitments under contract total $167,906 as of December 31, 2015.
|
19.
|
Employee benefit plan
|
We have an employee savings plan (the “Plan”) pursuant to Section 401(k) of the Internal Revenue Code (the “Code”), covering all of our employees. Participants in the Plan may contribute a percentage of compensation, but not in excess of the maximum allowed under the Code. Our Company may make contributions at the discretion of its Board of Directors. During the years ended December 31, 2015 and 2014, we made contributions to the Plan totaling $83,359 and $54,696, respectively.
|
20.
|
Subsequent events
|
Effective January 31, 2016, the Company ended the consulting agreement with Siskey Capital.
The Company’s Offer to Amend and Exercise Warrants (warrant tender offer) closed on February 8, 2016. Pursuant to the Offer to Amend and Exercise, an aggregate of 16,172,144 Original Warrants were tendered by their holders and were amended and exercised in connection therewith for an aggregate proceeds of approximately $2,425,822. $200,000 of the Convertible Promissory Note issued on July 15, 2015 participated in the warrant tender offer and $200,000 from the Tender Offer proceeds were used to pay off the remaining balance. $485,333 of the Convertible Promissory Notes issued on November 12, 2015, November 13, 2015, and November 16, 2015 converted into the warrant tender offer, including interest accrued.
On February 17, 2016, $200,000 of the outstanding Convertible Promissory Note issued on July 15, 2015 was paid and the remainder of the Note was converted into 1,333,334 shares of common stock and 1,333,334 warrants with an exercise price of $.15.
Effective February 24, 2016, Bruce Neuschwander resigned his position as Chief Financial Officer. Effective March 4, 2016, the Company appointed Brett Schnell as Chief Financial Officer. Mr. Schnell has been employed with the Company since October 2012 as its Controller.
On February 25, 2016, the Company made its final payment and was released from its Business Promissory Note and Security Agreement with Bank of Lake Mills.
Effective March 21, 2016, the Company granted to the following directors and employees the following restricted stock or options: (a) Director Joseph Proto, 350,000 restricted shares of common stock vesting fifty percent upon grant and fifty percent on the one year anniversary or based upon a change in control; (b) Director John Eyler, options to purchase 464,331 shares of common stock vesting fifty percent upon grant and fifty percent on the one year anniversary or based upon a change in control; (c) director Cary Sucoff 350,000 restricted shares of common stock vesting fifty percent upon grant and fifty percent on the one year anniversary or based upon a change in control; (d) director Pat Kolenik 350,000 restricted shares of common stock vesting fifty percent upon grant and fifty percent on the one year anniversary or based upon a change in control; (e) Director Chris Leong, options to purchase 464,331 shares of common stock vesting fifty percent upon grant and fifty percent on the one year anniversary or based upon a change in control; (g) Chairman Jerold Rubinstein, options to purchase 663,330 shares of common stock vesting fifty percent upon grant and fifty percent on the one year anniversary or based upon a change in control, and options to purchase 1,261,745 shares of common stock vested upon grant; (h) Vice Chairman Isaac Blech, options to purchase 663,330 shares of common stock vesting fifty percent upon grant and fifty percent on the one year anniversary or based upon a change in control; (i) Director Alex Minicucci, options to purchase 464,331 shares of common stock vesting fifty percent upon the one year anniversary and fifty percent on the two year anniversary or based upon a change in control; (j) employee Luke Wallace, options to purchase 397,998 shares of common stock vesting fifty percent upon the one year anniversary and fifty percent on the two year anniversary or based upon a change in control; (k) employee Brett Schnell, options to purchase 198,999 shares of common stock vesting fifty percent upon the one year anniversary and fifty percent on the two year anniversary or based upon a change in control; and (l) employee Tim Boris options to purchase 397,998 shares of common stock vesting fifty percent upon the one year anniversary and fifty percent on the two year anniversary or based upon a change in control. All of the options have an exercise price of $0.12 and a term of five years.
Effective March 24, 2016, Alex Minicucci resigned his position as Chief Executive Officer and was appointed to the position of Chief Strategy Officer. Mr. Minicucci also resigned his position as a member of the Board of Directors. The Board of Directors appointed Chairman Jerold Rubinstein to the position of interim Chief Executive Officer. Mr. Rubinstein will serve as interim Chief Executive Officer until the appointment of a permanent Chief Executive Officer. Mr. Rubinstein has served as a member of the Board of Directors and Chairman of the Company's Audit Committee since October 2013.
On March 29, 2016, the Company amended the March 30, 2015 9% Convertible Promissory Note with a principal amount of $300,000 as follows: the maturity date was extended to eighteen months, the conversion price was lowered to $0.15 per share, the provision limiting the conversion price adjustment to that of the Series C Preferred Stock was removed, and an option to be repaid prior to the maturity date in the event the Company raises capital in excess of three million dollars was added. The Company also amended the warrant issued in conjunction with the Convertible Promissory Note reducing the exercise price to $0.15 and issued a new warrant to purchase 400,002 shares of the Company's common stock with a $0.15 exercise price and a three year expiration.
On March 30, 2016, the Company amended the March 30, 2015 9% Convertible Promissory Note with a principal amount of $262,500 as follows: the maturity date was extended to eighteen months, the conversion price was lowered to $0.15 per share, the provision limiting the conversion price adjustment to that of the Series C Preferred Stock was removed, and an option to be repaid prior to the maturity date in the event the Company raises capital in excess of three million dollars was added. The Company also amended the warrant issued in conjunction with the Convertible Promissory Note reducing the exercise price to $0.15 and issued a new warrant to purchase 350,002 shares of the Company's common stock with a $0.15 exercise price and a three year expiration.
On April 4, 2016, the Company amended the May 5, 2015 9% Convertible Promissory Note with a principal amount of $275,000 as follows: the maturity date was extended to eighteen months, the conversion price was lowered to $0.15 per share, the provision limiting the conversion price adjustment to that of the Series C Preferred Stock was removed, and an option to be repaid prior to the maturity date in the event the Company raises capital in excess of three million dollars was added. The Company also amended the warrant issued in conjunction with the Convertible Promissory Note reducing the exercise price to $0.15 and issued a new warrant to purchase 366,667 shares of the Company's common stock with a $0.15 exercise price and a three year expiration.
None.
|
(a)
|
Evaluation of disclosure controls and procedures.
|
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities and Exchange Commission Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Securities and Exchange Commission Rule 13a-15(e) and 15d-15(e), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not operating effectively as of December 31, 2015. Our disclosure controls and procedures were not effective because of the “material weakness” described below.
|
(b)
|
Management’s annual report on internal control over financial reporting.
|
SEC rules implementing Section 404 of the Sarbanes-Oxley Act of 2002 require our 2015 Annual Report on Form 10-K to contain management’s report regarding the effectiveness of internal control over financial reporting. As a basis for our report, we tested and evaluated the design, documentation, and operating effectiveness of our internal control.
Management is responsible for establishing and maintaining effective internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, of SpendSmart Networks, Inc. and its subsidiaries. The Company’s internal control over financial reporting consists of policies and procedures that are designed and operated to provide reasonable assurance about the reliability of the Company’s financial reporting and its process for preparing financial statements in accordance with generally accepted accounting principles (“GAAP”). There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Based on management's evaluation as of December 31, 2015, our management identified the material weaknesses set forth below in our internal control over financial reporting:
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(i)
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The Company's process for internally reporting material information in a systematic manner to allow for timely filing of material information is ineffective, due to its inherent limitations from being a small company, and there exist material weaknesses in internal control over financial reporting that contribute to the weaknesses in our disclosure controls and procedures. These weaknesses include:
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insufficient segregation of duties and oversight of work performed in our finance and accounting function due to limited and qualified personnel; and
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lack of controls in place to ensure that all material transactions and developments impacting the financial statements are reflected and financial reporting is produced timely.
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(c)
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Changes in internal control over financial reporting.
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There have been no changes in the Company's internal control over financial reporting that occurred during the year ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Our company's management concluded that in light of the material weaknesses described above, our company did not maintain effective internal control over financial reporting as of December 31, 2015 based on the criteria set forth in Internal Control—Integrated Framework (2013) issued by the COSO.
This Report on Form 10-K does not include an attestation report of the Company’s independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent public accounting firm pursuant to permanent rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Form 10-K.
Term of Office
Our directors are elected by our stockholders to a term of one year and to serve until their successor is duly elected and qualified, or until their death, resignation or removal. Each of our officers is appointed by our Board of Directors to a term of one year and serves until their successor is duly elected and qualified, or until their death, resignation or removal from office.
Our current Board of Directors consists of eight directors.
The following table sets forth certain information regarding our executive officers and directors as of the date of this Annual Report:
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Name
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Age
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Position
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Alex Minicucci
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37
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former Chief Executive Officer/Director 1
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William Hernandez
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59
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former President2
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Isaac Blech
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66
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Director
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Joseph Proto
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59
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Director
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Cary Sucoff
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64
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Director
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Patrick M. Kolenik
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64
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Director
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Ka Cheong Christopher Leong
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73
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Director
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Jerold Rubinstein
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77
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Director/Chairman of the Board/interim Chief Executive Officer
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Bruce Neuschwander
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64
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former Chief Financial Officer 3
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Brett Schnell
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48
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Chief Financial Officer 4
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John Eyler, Jr.
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67
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Director
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1 On March 24, 2015, Mr. Minicucci resigned from his position as Chief Executive Officer and as a Director from the Company
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2 On December 31, 2014, Mr. Hernandez resigned from his position as a Director and on January 26, 2015, resigned from the Company
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3 On February 24, 2016 Mr. Neuschwander resigned from his position of Chief Financial Officer
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4 On March 4, 2016, the Company appointed Brett Schnell to the position of Chief Financial Officer
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Alex Minicucci was our Chief Executive Officer until March 24, 2016 at which time he assumed the title of Chief Strategy Officer. Mr. Minicucci is a serial entrepreneur with almost two decades of experience in web, ecommerce, and mobile marketing. In November 2008, Mr. Minicucci founded SMS Masterminds, subsequently earning several recognitions such as Top 20 under 40 Entrepreneur in 2013. Mr. Minicucci served as the Chief Executive Officer of SMS Masterminds until February 11, 2014. From 2006 to 2008, he served as Chief Operating Officer of TechXpress, Inc., a managed services IT firm. Between 2000 and 2003, Mr. Minicucci built and sold one of the nation’s largest virtual tour providers, USA Virtual Tours, to MediaNews Group. In the late 1990’s, Mr. Minicucci started and ran one of the first web development firms in central California, TooPhat.com, Inc., focused on next generation web development combined with interactive 3D environments. Mr. Minicucci is an Eagle Scout and active mentor to business students at Cal Poly San Luis Obispo.
Mr. Isaac Blech was appointed to the Board of Directors on March 10, 2011. He currently serves on the Board of Directors of Contrafect Corp., a biotech company specializing in novel methods to treat infectious disease; Cerecor, Inc., a biopharmaceutical company focused on activity in the human brain; Medgenics, Inc., a company that has developed a novel technology for the manufacture and delivery of therapeutic proteins; and Premier Alliance Group, Inc. (PIMO), a public company that provides business and technology consulting services to primarily Fortune 500 companies. Previously, Mr. Blech was an investor, advisor and director in a number of well-known companies, primarily focused in biotechnology.
Mr. Blech is the owner of 1,500,000 shares of our Company’s common stock and warrants to purchase up to an additional 1,337,500 million shares of our Company’s common stock. Mr. Blech has been a successful investor and a member of a number of Boards of Directors. We believe Mr. Blech’s past experience will be a tremendous benefit to our Company. Included among Mr. Blech’s more notable successes were:
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Celgene Corporation – Mr. Blech was a founding shareholder of Celgene in 1986. Celgene has introduced two major cancer drugs and has a stock market valuation (as of September 6, 2011) of approximately $27 billion.
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ICOS Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of ICOS beginning in 1991. ICOS discovered the drug Cialis and was later acquired by Eli Lilly for over $2 billion.
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Nova Pharmaceutical Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of Nova from 1982 to 1990. Nova developed a treatment for brain cancer and subsequently merged with Scios Corporation which was later purchased for $2 billion by Johnson and Johnson.
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Pathogeneses Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of Pathogeneses from 1992 to 1997. Pathogeneses created TOBI for the treatment of cystic fibrosis and was later acquired by Chiron Corp for $660 million.
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Genetic Systems Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of GSC from 1981 to 1986. GSC developed the first inexpensive and accurate test to diagnose chlamydia and was later acquired by Bristol Myers for approximately $300 million.
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Mr. Joseph Proto was appointed to our Board of Directors on January 26, 2012 and was appointed Chairman of the Board of Directors on November 28, 2013, replacing Mike McCoy. Mr. Proto resigned his position as Chariman of the Board of Directors on October 1, 2015. Mr. Proto will remain a member of the Board of Directors. Mr. Proto is a seasoned and successful senior executive and entrepreneur with three decades in the billing and payments industry. Mr. Proto is currently the Chairman and Chief Executive Officer of electronic billing company Transactis Inc. He founded REMITCO, a remittance processing company where he also served as President for 11 years, which was acquired in 2000 by First Data Corp. Mr. Proto also founded Financial Telesis (CashFlex), a payment processor to 65 of the top 100 banks in the U.S., which was acquired by CoreStates/Wachovia and is now a part of Wells Fargo. In 2004, Mr. Proto co-founded Windham Ventures, an investment company focusing on financial technology and life sciences companies, where he currently serves as a founding partner.
Mr. Cary Sucoff was appointed to our Board of Directors on May 23, 2011. Mr. Sucoff has served as an advisor to our Company since September 2009 through his firm Equity Source Partners, LLC, a firm he has owned and operated since February 2006. He has been key to our success in fundraising since joining our firm. Additionally, Mr. Sucoff is an attorney (non-practicing) and contributes valuable insights in the area of legal matters in addition to those areas for which he is contracted with our Company. We believe Mr. Sucoff’s broad and diversified background serves as a strong asset to our Company. Mr. Sucoff has over 30 years of securities industry experience encompassing supervisory, banking and sales responsibilities. He has participated in the financing of hundreds public and private companies.
Mr. Sucoff currently serves on the following Boards of Directors: Contrafect Corp. (CFRX), The SpendSmart Payments Company (SSPC), root9B Technologies (RTNB) and Legacy Education Alliance, Inc. (LEAI). In addition, Mr. Sucoff currently serves as a consultant to Multimedia Platforms, Inc. (MMPW) and Sapience Therapeutics.
Mr. Sucoff is the President of New England Law/Boston and has been a member of the Board of Trustees for over 25 years. He is the Chairman of the Endowment Committee. Mr. Sucoff has recently been a member of the Adjunct Faculty of New England Law/Boston where he taught a third year seminar entitled “Perspectives In Law: Lawyers as Entrepreneurs and as Representatives of Entrepreneurs”. Mr. Sucoff received a B.A. from SUNY Binghamton (1974) and a J.D. from New England School of Law (1977) where he was the Managing Editor of the Law Review and graduated Magna Cum Laude. Mr. Sucoff has been a member of the Bar of the State of New York since 1978.
Mr. Patrick M. Kolenik was appointed to our Board of Directors on August 30, 2011. Mr. Kolenik has over forty years of securities industry experience. Mr. Kolenik was the Chief Executive Officer of Sherwood Securities Corp. where he has been involved with more than 200 successful public and private financings. Since 2003, Mr. Kolenik has been a consultant to both public and private companies through his company PK Advisors. Mr. Kolenik currently serves on the Board of Directors of Premier Alliance Group, Inc. (PIMO) a public company that provides business and technology consulting services. Mr. Kolenik also serves on the Board of Directors of American Roadside Burgers, Inc. Mr. Kolenik has also been elected to the Board of Directors of Stratus Media Group (SMDI), a public company that owns and operates more than 140 live events.
Mr. Kolenik has advised our Company since May 2009 in the area of investment banking, fund raising and capital markets. We have greatly benefited from Mr. Kolenik’s contributions to date and look forward to his future guidance in his role as a member of our Board of Directors.
Dr. Ka Cheong Christopher Leong was appointed to our board on October 29, 2012. Dr. Leong is a co-founder and the President of Transpac Capital, a venture capital firm based in Singapore. Transpac was formed in 1989 through the amalgamation of Techno-Ventures Hong Kong, which Dr. Leong co-founded in 1986, and Transtech Capital Management of Singapore, both pioneers of venture capital in their respective countries. Prior to his venture capital career, Dr. Leong was the CEO of Amoy Canning Corporation Limited, a food and packaging conglomerate listed on the stock exchange of Hong Kong. Prior to Amoy he founded Convenience Foods Limited in Hong Kong, which he sold to RJR Nabisco. Prior to his industrial career, Dr. Leong was a Senior Scientist at American Science and Engineering in Cambridge, MA. Dr. Leong has been a chairman of the Hong Kong Venture Capital Association, and is one of the founding inductees to the Singapore Venture Capital Hall of Fame in 2010 for his pioneering work in venture capital. Dr. Leong obtained a BS and a PhD degree from Massachusetts Institute of Technology, Cambridge, MA.
Mr. Jerold Rubinstein was appointed to our board on October 1, 2013. Mr. Rubinstein was appointed Chairman of the Board, replacing Joseph Proto. On March 24, 2016, Mr. Rubinstein was appointed Chief Executive Officer. Since June 28, 2012, Mr. Rubinstein has served as the Chairman of the Board, CEO and a director of Stratus Media Group, Inc., and joined the board of Stratus Group Media, Inc. in April 2011. Mr. Rubinstein is the chairman of the audit committee of CKE Restaurants, the parent company of Carl’s Jr. Restaurants and Hardees Restaurants. Mr. Rubinstein also serves as the non-executive chairman of US Global investors Inc., a mutual fund advisory company. Mr. Rubinstein has started and sold many companies over the years, including Bel Air Savings and Loan and DMX, a cable and satellite music distribution company. Mr. Rubinstein started and sold XTRA Music Ltd., a satellite and cable music distribution company in Europe. Most recently Mr. Rubinstein consults with and serves on 3 early stage development companies. Mr. Rubinstein is both a CPA and attorney.
Mr. John Eyler was appointed to our board on November 25, 2014. Mr. Eyler retired from Toys "R" Us, Inc. as President and Chief Executive Officer in July, 2005. Mr. Eyler joined Toys "R" Us in January, 2000 and served as Chairman of the Board of Directors as well as Chairman of the Toys "R" Us Childrens fund from 2001 to 2005. Mr. Eyler was Chairman and Chief Executive Officer of FAO Schwarz from 1992 to 2000 and spent his entire career prior to that in retailing including becoming Chairman and Chief Executive Officer of May D & F, a department store in Denver Colorado at the age of 32. He served on the Board of the Andre Agassi Charitable Foundation for eight years, was a member of the NYC 2012 Board and a Board member of the Donna Karan Corporation from 1999 to 2001. For the past five years Mr. Eyler has served as President of Titan Sculpture Inc. which represents Roberto Santo's sculptures and paintings globally. He is an Advisory Board member of the College of the Environment at the University of Washington, and manages a charitable foundation created upon his retirement with a primary focus on improving the lives of children. A graduate of the University of Washington in 1969 with a degree in Finance, Mr. Eyler received an MBA from the Harvard Graduate School of Business in 1971.
In evaluating director nominees, our Company considers the following factors:
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The appropriate size of the Board;
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Our needs with respect to the particular talents and experience of our directors;
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The knowledge, skills and experience of nominees;
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Experience with accounting rules and practices; and
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The nominees’ other commitments.
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Our Company’s goal is to assemble a Board of Directors that brings our Company a variety of perspectives and skills derived from high quality business, professional and personal experience. Other than the foregoing, there are no stated minimum criteria for director nominees.
Specific talents and qualifications that we considered for the members of our Company’s Board of Directors are as follows:
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Mr. Blech is the owner of a significant number of shares of our Company’s common stock and warrants to purchase additional shares of our Company’s common stock. Mr. Blech has been a successful investor and a member of a number of Boards of Directors. We believe Mr. Blech’s past experience will be a tremendous benefit to our Company. Included among Mr. Blech’s more notable successes were:
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o
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Celgene Corporation – Mr. Blech was a founding shareholder of Celgene in 1986. Celgene has introduced two major cancer drugs and had a stock market valuation (as of March 8, 2011) of approximately $25 billion.
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o
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ICOS Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of ICOS beginning in 1991. ICOS discovered the drug Cialis and was later acquired by Eli Lilly for over $2 billion.
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o
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Nova Pharmaceutical Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of Nova from 1982 to 1990. Nova developed a treatment for brain cancer and subsequently merged with Scios Corporation which was later purchased for $2 billion by Johnson and Johnson.
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o
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Pathogeneses Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of Pathogeneses from 1992 to 1997. Pathogeneses created TOBI for the treatment of cystic fibrosis and was later acquired by Chiron Corp for $660 million.
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o
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Genetic Systems Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of GSC from 1981 to 1986. GSC developed the first inexpensive and accurate test to diagnose chlamydia and was later acquired by Bristol Myers for approximately $300 million.
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Mr. Proto is a seasoned and successful senior executive and entrepreneur with three decades in the billing and payments industry. Mr. Proto is currently the Chairman and Chief Executive Officer of electronic billing company Transactis Inc. Mr. Proto also founded REMITCO, a remittance processing company, which was acquired in 2000 by First Data Corp., and Financial Telesis (CashFlex), a payment processor to 65 of the top 100 banks in the U.S., which was acquired by CoreStates/Wachovia and is now a part of Wells Fargo. In 2004, Mr. Proto co-founded Windham Ventures, an investment company focusing on financial technology and life sciences companies, where he currently serves as a founding partner.
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Mr. Kolenik’s vast securities industry history and work as a consultant to both public and private companies allows us to benefit from wisdom he has accrued from many varied companies and situations. Mr. Kolenik’s other public and private company Board service has been valuable as he has been a Company interface to our investors and potential investors since 2009 (prior to his appointment to the Board). We expect to further benefit from his expertise, now as a recently added member of our Board of Directors.
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Mr. Sucoff has advised our Company since September 2009 in the area of investment banking, fund raising and capital markets. He has been key to our success in fundraising since joining our firm. Additionally, Mr. Sucoff is an attorney (non-practicing) and contributes valuable insights in the area of legal matters in addition to those areas for which he is contracted with our Company. Mr. Sucoff’s broad and diversified background has been a strong asset to our Company.
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Dr. Leong is a co-founder and the President of Transpac Capital, a venture capital firm based in Singapore. Transpac was formed in 1989 through the amalgamation of Techno-Ventures Hong Kong, which Dr. Leong co-founded in 1986, and Transtech Capital Management of Singapore, both pioneers of venture capital in their respective countries. Prior to his venture capital career, Dr. Leong was the CEO of Amoy Canning Corporation Limited, a food and packaging conglomerate listed on the stock exchange of Hong Kong. Prior to Amoy he founded Convenience Foods Limited in Hong Kong, which he sold to RJR Nabisco.
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There are no family relationships among members of our management or our Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and beneficial owners of more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Directors, executive officers and greater than 10% beneficial owners are required by SEC regulations to furnish to us copies of all Section 16(a) reports they file.
Based solely on our review of the reports, we believe that all required Section 16(a) reports were timely filed during our last fiscal year. None of our directors, executive officers or greater than 10% beneficial owners filed any Form 5s.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to, among other persons, our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Our Code of Business Conduct and Ethics is available, free of charge, to any stockholder upon written request to our Corporate Secretary at SpendSmart Networks, Inc., 805 Aerovista Parkway, Suite 205, San Luis Obispo, California 93401.
Involvement in Certain Legal Proceedings
To the best of our knowledge, except as disclosed below, none of our directors or executive officers has, during the past ten years, involved in any of the items below that the Company deems material to their service on behalf of the Company:
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been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
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had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
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been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
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been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
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been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
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been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
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Brett Schnell, our Company CFO, had a Chapter 7 Bankruptcy filed in the state of Minnesota on June 22, 2011 and subsequently discharged on October 4, 2011. Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.
Corporate Governance
The business and affairs of the company are managed under the direction of our board. In the fiscal year ended December 31, 2015, we held four special board meetings. Each of our directors has attended all meetings either in person or via telephone conference.
The information required by this item will be incorporated by reference from the information under the caption “Compensation of Named Executive Officers” contained in our 2015 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be incorporated by reference from the information under the caption “Security Ownership of Certain Beneficial Owners and Management” contained in our 2015 Proxy Statement.
Item 13 – Certain Relationships and Related Transactions, and Director Independence
Related Party Transactions. Our Company closely reviews transactions between the Company and persons or entities considered to be related parties (collectively “related parties”). Our Company considers entities to be related parties where an executive officer, director or a 5% or more beneficial owner of our common stock (or an immediate family member of these persons) has a direct or indirect material interest. Transactions of this nature require the approval of our management and our Board of Directors. We believe such transactions were at terms comparable to those we could have obtained from unaffiliated third parties. Since January 1, 2012, we have not had any transactions in which any of our related parties had or will have a direct or indirect material interest, nor are any such transactions currently proposed, except as noted below.
On November 16, 2015, the Company issued a Convertible Promissory Note to an investor, Windham-BMP Investment I, LLC, in the principal amount of $48,000. The Note features a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Note bears interest at nine percent per annum and has a maturity date of six months. Mr. Proto and Mr. Eyler, Jr., our Directors, are general partners of Windham. As part of the closing of the tender offer, these Notes converted and Windham received 971,007 warrants with a three year exercise and an exercise price of $0.15.
On November 13, 2015, the Company issued Convertible Promissory Notes to four investors; Isaac Blech in the principal amount of $34,000, West Charitable Remainder Unitrust in the principal amount of $80,000, River Charitable Remainder Trust in the principal amount of $53,333, and Liberty Charitable Remainder Trust in the principal amount of $40,000. The Notes feature a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Notes bears interest at nine percent per annum and has a maturity date of six months. Mr. Blech, our Director, has controlling interest in the aforementioned Trusts. As part of the closing of the tender offer, these Notes converted and the Trusts received 4,195,059 warrants with a three year exercise and an exercise price of $0.15.
On July 15, 2015, the Company issued a Convertible Promissory Note in the principal amount of $400,000 inclusive of interest to Techno-Ventures. The Note is for a term of six months. The Note bears interest at twelve percent per annum. The Note is secured by the assets of the Company. The Note may be converted into shares of the Company’s common stock at $0.75 per share. The Company also issued the holder warrants to purchase 500,000 shares of the Company’s common stock. The proceeds were allocated based on the relative fair value of the debt and the warrant. The warrants have an exercise price of $0.75 per share and have a term of two years. The relative fair value ascribed to the 500,000 warrants issued was approximately $49,000 and was recorded to additional paid-in capital. This amount will be amortized over the term of the debt using the effective interest rate method. Dr. Ka Cheong Chrisopher Leong, our Director, is the co-founder and President of Techno-Ventures.
On June 26, 2015 the Company issued and sold 3.0 units (the “Units”) to Alex Minicucci with each such Unit consisting of a 9% Convertible Promissory Note with the principal face value of $50,000 (the “Notes”) and a warrant to purchase 66,667 shares of the Company’s common stock (the “Warrant”). The Company also agreed to provide piggy-back registration rights to the holders of the Units. The Notes have a term of twelve (12) months, pay interest semi-annually at 9% per annum and can be voluntarily converted by the holder into shares of common stock at an exercise price of $0.75 per share, subject to adjustments for stock dividends, splits, combinations and similar events as described in the Notes. In addition, if the Company issues or sells common stock at a price below the conversion price then in effect, the conversion price of the Notes shall be adjusted downward to such price but in no event shall the conversion price be reduced to a price less than $0.50 per share. The Warrants have an exercise price of $.75 per share and have a term of four years. The holders of the Warrants may exercise the Warrants on a cashless basis for as long as the shares of common stock underlying the Warrants are not registered on an effective registration statement. Mr. Minicucci was our former CEO and Director.
The building that we lease at 805 Aerovista Parkway is owned by Alexander P Minicucci Trust, which is a related party transaction due to the trust being controlled by the Company's chief executive officer. The Company assumed the lease at or near the time of the asset purchase agreement between the Company and SMS Masterminds/Intellectual Capital at which time the office became the company's corporate headquarters. No payments were made at the time of the asset purchase agreement related to this lease.
On March 6, 2014, the Company conducted and closed an offering of its Series C Convertible Preferred Stock. Windham-BMP Investment I, LLC (“Windham”) purchased an aggregate of 55,533 shares of Series C Preferred Stock and warrants to purchase 222,132 shares of common stock at an exercise price of $1.10 per share for an aggregate purchase price of $166,599. Mr. Proto, our Chairman, is a general partner of Windham. In addition, Transpac Investments Limited (“Transpac”) purchased an aggregate of 250,000 shares of Series C Preferred Stock and warrants to purchase 1,000,000 shares of common stock at an exercise price of $1.10 per share for an aggregate purchase price of $750,000. Dr. Ka Cheong Christopher Leong, our Director, is the co-founder and President of Transpac.
Director Independence. Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship which, in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
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the director is, or at any time during the past three years was, an employee of the company;
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the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);
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a family member of the director is, or at any time during the past three years was, an executive officer of the company;
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the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
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the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or
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the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit.
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Messrs. Blech, Proto, Sucoff, Kolenik, Eyler, and Leong are the only members of the Board of Directors that are considered independent.
Item 14 – Principal Accountant Fees and Services
Principal Accountant Fees and Services
|
|
(1)
|
Audit Fees
|
Our audit fees for 2015 were $121,900 which included our 10-K and 10-Q’s.
Our audit fees for 2014 were $121,080 which included our 10-K and 10-Q’s.
|
For the Twelve
Months Ended
|
||||||||
|
December 31,
|
December 31,
|
|||||||
|
2015
|
2014
|
|||||||
|
Audit Fees
|
$
|
121,900
|
$
|
121,080
|
||||
There were no fees billed in 2015 for assurance and related services by EisnerAmper LLP that are reasonably related to the performance of the audit or review of the registrant's financial statements and are not reported under item (1).
(3) Tax Fees
No fees were billed for professional services rendered by EisnerAmper LLP for tax compliance, tax advice, and tax planning for the years ended December 31, 2015 and 2014.
(4) All Other Fees
No aggregate fees were billed for professional services provided by EisnerAmper LLP, other than the services reported in items (1) through (3) for the years ended December 31, 2015 and 2014.
(5) Audit Committee
The registrants Audit Committee approved EisnerAmper LLP’s performance of services on for the audit of the registrant’s annual financial statements for the twelve months ended December 31, 2015 and 2014.
|
Exhibit No.
|
Description
|
|
2.1
|
Share Exchange Agreement with IdeaEdge, Inc., a California corporation (1)
|
|
2.2
|
Purchase Agreement for VOS Systems, Inc. by Allan Ligi (1)
|
|
3.1
|
Amended and Restated Articles of Incorporation (2)
|
|
3.1a
|
Amendment to Amended and Restated Articles of Incorporation (13)
|
|
3.2
|
Bylaws (3)
|
|
3.3
|
Certificate of Designations for the Series A Cumulative Convertible Preferred Stock (4)
|
|
10.2
|
2007 Equity Incentive Plan (1)
|
|
10.10
|
Change of Control Agreement with Jonathan Shultz dated August 11, 2008(5)
|
|
10.25
|
Investor relations agreement dated February 12, 2010 (6)
|
|
10.26
|
Stock contribution and disposition restriction agreement with Chris Nicolaidis dated February 11, 2010 (6)
|
|
10.27
|
Investor relations agreement with Kay Holdings, Inc. dated May 10, 2010 (7)
|
|
10.28
|
Agreement with Equity Source Partners, LLC dated April 30, 2010 (7)
|
|
10.30
|
Investor relations agreement with Two Eight, Inc. dated April 7, 2010 (7)
|
|
10.31
|
Financial Advisory Services agreement with Iroquois Master Fund Ltd. dated June 24, 2010 (8)
|
|
10.32
|
Investor Relations Agreement with Kay Holdings, Inc. dated December 29, 2010(9)
|
|
10.33
|
Subscription Agreement dated January 19, 2011(10)
|
|
10.34
|
Common Stock Purchase Warrant dated January 19, 2011(10)
|
|
10.35
|
Registration Rights Agreement dated January 19, 2011(10)
|
|
10.39
|
Employment agreement between the Company and James Collas dated January 31, 2011 (11)
|
|
10.40
|
Employment agreement between the Company and Jonathan Shultz dated January 31, 2011(11)
|
|
10.43
|
Agreement and Release between the Company and James P. Collas dated April 26, 2011 (12)
|
|
10.46
|
Warrant Agreement with Mark Sandson dated July 19, 2011 (14)
|
|
10.47
|
Stock Option Modification Agreement with Jonathan Shultz dated July 19, 2011 (14)
|
|
10.48
|
Form of Warrant Agreement with named members of Company’s Board of Directors dated August 4, 2011(15)
|
|
10.49
|
Stock Option Agreement with Jonathan Shultz dated August 4, 2011(15)
|
|
10.50
|
Investor Relations Agreement with SPN Investments, Inc. dated August 5, 2011(15)
|
|
10.51
|
Employment Agreement with Michael R. McCoy dated September 19, 2011 (16)
|
|
10.52
|
Stock Option Agreement with Michael R. McCoy dated September 19, 2011 (16)
|
|
10.53
|
Warrant Agreement with Patrick Kolenik dated September 19, 2011 (16)
|
|
10.54
|
Form of Common Stock Purchase Warrant dated October 21, 2011(17)
|
|
10.55
|
Form of Subscription Agreement dated October 21, 2011 (17)
|
|
10.56
|
Form of Registration Rights Agreement dated October 21, 2011 (17)
|
|
10.57
|
Warrant Agreement with Isaac Blech dated November 1, 2011 (18)
|
|
10.58
|
Form of Common Stock Purchase Warrant dated November 21, 2011(19)
|
|
10.59
|
Form of Subscription Agreement dated November 21, 2011 (19)
|
|
10.60
|
Form of Registration Rights Agreement dated November 21, 2011(19)
|
|
10.61
|
Employment Agreement with Evan Jones dated May 1, 2011 (20)
|
|
10.62
|
Warrant Agreement with Robert DeSantis dated March 26, 2012 (21)
|
|
10.63
|
Amended Employment Agreement with Michael R. McCoy dated July 24, 2012 (22)
|
|
10.64
|
Stock Option Agreement with Michael R. McCoy dated July 24, 2012 (22)
|
|
10.65
|
Warrant Agreement with Isaac Blech dated July 23, 2012 (22)
|
|
10.67
|
Warrant Agreement with Cary Sucoff dated July 23, 2012 (22)
|
|
10.68
|
Warrant Agreement with Joseph Proto dated July 23, 2012 (22)
|
|
10.69
|
Warrant Agreement with Patrick Kolenik dated July 23, 2012 (22)
|
|
10.70
|
Warrant Agreement with Jesse Itzler dated July 23, 2012 (22)
|
|
10.71
|
Warrant Agreement with Dr. Ka Cheong Christopher Leong dated October 29, 2012 (23)
|
|
10.72
|
Employment Agreement with William Hernandez dated November 12, 2012 (24)
|
|
10.73
|
Form of Subscription Agreement (25)
|
|
10.74
|
Form of Common Stock Purchase Warrant (25)
|
|
10.75
|
Form of Registration Rights Agreement (25)
|
|
11.1
|
Statement re Computation of Per Share Earnings (20)
|
|
14.1
|
Code of Business Conduct and Ethics (21)
|
|
21.1*
|
Listing of Subsidiaries (20)
|
|
24.1
|
Power of Attorney (contained in the signature page to this Transition Report on Form 10-K)
|
|
31.1*
|
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, by Chief Executive Officer
|
|
31.2*
|
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, by Chief Financial Officer
|
|
32.1*
|
Certification pursuant to 18 U.S.C. §1350 by Chief Executive Officer
|
|
32.2*
|
Certification pursuant to 18 U.S.C. §1350 by Chief Financial Officer
|
|
*
|
Filed as an exhibit to this report
|
|
(1)
|
Incorporated by reference from the registrant’s Definitive Proxy Statement filed on September 21, 2007
|
|
(2)
|
Incorporated herein by reference to the registrant's Form 8-K filed on October 22, 2007
|
|
(3)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on September 22, 2005
|
|
(4)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on June 11, 2008
|
|
(5)
|
Incorporated herein by reference to the registrant’s Form 10-QSB filed on August 14, 2008
|
|
(6)
|
Incorporated herein by reference to the registrant’s Form 10-Q filed on February 12, 2010
|
|
(7)
|
Incorporated herein by reference to the registrant’s Form 10-Q filed on May 14, 2010
|
|
(8)
|
Incorporated herein by reference to the registrant’s Form 10-Q filed on August 12, 2010
|
|
(9)
|
Incorporated herein by reference to the registrant’s Form 10-K filed on December 29, 2010
|
|
(10)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on January 19, 2011
|
|
(11)
|
Incorporated herein by reference to the registrant’s Form 10-Q filed on February 1, 2011
|
|
(12)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on April 26, 2011
|
|
(13)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on May 13, 2011
|
|
(14)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on July 21, 2011
|
|
(15)
|
Incorporated herein by reference to the registrant’s Form 10-Q filed on August 10, 2011
|
|
(16)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on September 22, 2011
|
|
(17)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on October 25, 2011
|
|
(18)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on November 4, 2011
|
|
(19)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on November 25, 2011
|
|
(20)
|
Included within the financial statements filed in this Transition Report on Form 10-K
|
|
(21)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on November 10, 2005
|
|
(20)
|
Incorporated by reference to the registrant’s form 10-K filed on December 21, 2011
|
|
(21)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on April 4, 2012
|
|
(22)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on July 27, 2012
|
|
(23)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on November 1, 2012
|
|
(24)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on November 16, 2012
|
|
(25)
|
Incorporated herein by reference to the registrant’s Form 8-K filed on December 6, 2012
|
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 14, 2016
| SpendSmart Networks Inc., a Delaware corporation
By: /s/ JEROLD RUBINSTEIN
Jerry Rubinstein, Chief Executive Officer
(Principal Executive Officer)
|
Power of Attorney
We, the undersigned directors and/or officers of SpendSmart Networks, Inc., a Delaware corporation, hereby severally constitute and appoint Jerold Rubinstein, acting individually, his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Transition Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done that such Transition Report on Form 10-K and its amendments shall comply with the Securities Act, and the applicable rules and regulations adopted or issued pursuant thereto, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities and on the dates stated.
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