UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One) 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

or

 

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

 

For the transition period from __________________ to __________________

 

Commission file number: 000-55220

 

	WOWIO INC.
(Exact name of registrant as specified in its charter)

 

Texas		27-2908187
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

9107 Wilshire Blvd., Suite 450
Beverly Hills, California		90210
(Address of principal executive offices)		(zip code)

 

(310) 272-7988

(Registrant’s telephone number, including area code)

 

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

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

Large accelerated filer   ¨		Accelerated filer   ¨
Non-accelerated filer   ¨		Smaller reporting company   x
(Do not check if smaller reporting company)

 

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

 

The number of shares of the registrant’s common stock issued and outstanding as of May 12, 2016, was 2,779,957,340

 

 

WOWIO, INC.

Form 10-Q

For the Fiscal Quarter Ended March 31, 2016

 

TABLE OF CONTENTS

 

				Page No.
PART I. - FINANCIAL INFORMATION
Item 1.		Financial Statements.		F-1
		Condensed Consolidated Balance Sheets at March 31, 2016 (unaudited) and December 31, 2015		F-1
		Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015		F-2
		Unaudited Condensed Consolidated Statement of Stockholders’ Deficit for the Three Months Ended March 31, 2016		F-3
		Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015		F-4
		Notes to Unaudited Condensed Consolidated Financial Statements		F-5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.		3
Item 3.		Quantitative and Qualitative Disclosures About Market Risk.		7
Item 4		Controls and Procedures.		7
PART II - OTHER INFORMATION
Item 1.		Legal Proceedings.		9
Item 1A.		Risk Factors.		9
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.		9
Item 3.		Defaults Upon Senior Securities.		9
Item 4.		Mine Safety Disclosures.		9
Item 5.		Other Information.		9
Item 6.		Exhibits.		9

 

 

PART I. - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

WOWIO, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31,				December 31,
		2016				2015
Assets
Current Assets
Cash		$	6,573			$	13,633
Prepaid consulting and other current assets			119,605				169,878
Total Current Assets		$	126,178			$	183,511
Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable and accrued expenses		$	1,325,669			$	1,390,268
Acquisition related liabilities			232,853				232,853
Related party payables			614,677				100,677
Accrued compensation and related costs			789,498				768,248
Revolving loan			50,000				50,000
Notes payable – related parties			100,902				100,902
Notes payable			565,000				865,000
Derivative liabilities			1,716,000				1,191,000
Convertible notes payable, net of debt discount of $5,662 and $12,474, respectively			553,932				540,286
Total Current Liabilities			5,948,531				5,239,234
Long-term portion of accounts payable and accrued expenses			63,530				63,530
Total Liabilities			6,012,061				5,302,764
Commitments and contingencies			-				-
Stockholders’ Deficit:
Series A preferred stock, $0.0001 par value; 5,000,000 shares authorized; 4,750,000 and 500,000 shares issued and outstanding, respectively			475				475
Series B preferred stock, $0.0001 par value; 2,000,000 shares authorized; 0 shares issued and outstanding			-				-
Series D preferred stock, $0.00001 par value; 4 shares authorized; 4 and 0 shares issued and outstanding, respectively			-				-
Common stock, $0.00001 par value; 20,000,000,000 and 20,000,000,000 shares authorized; 1,609,780,777 and 484,670,610 shares issued and outstanding, respectively			16,098				4,847
Additional paid in capital			25,663,428				25,631,763
Accumulated deficit			(31,565,884	)			(30,756,338	)
Total stockholders’ deficit			(5,885,883	)			(5,119,253	)
Total Liabilities and Stockholders’ Deficit		$	126,178			$	183,511

 

See accompanying notes to these condensed consolidated financial statements

 

  

WOWIO, INC.

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  

  

		Three Months Ended				Three Months Ended
		March 31,				March 31,
		2016				2015
Net sales		$	-			$	25,407
Cost of sales			-				3,598
Gross profit			-				21,809
Operating expenses:
General and administrative			211,780				436,315
Total operating expenses			211,780				436,315
Operating loss			(211,780	)			(414,506	)
Other income (expense):
Interest expense, net			(53,766	)			(316,317	)
Change in fair value of derivatives liabilities			(544,000	)			898,000
Loss on extinguishment of debt			-				(458,000	)
Other expense, net			(597,766	)			123,683
Loss before provision for income tax			(809,546	)			(290,823	)
Provision for income tax			-				-
Net loss		$	(809,546	)		$	(290,823	)
Basic and diluted net loss per common share		$	(0.00	)		$	(3.51	)
Weighted-average number of common shares outstanding - basic and diluted			1,379,973,506				82,943

 

See accompanying notes to these condensed consolidated financial statements

 

  

WOWIO, INC.

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

 

For The Three Months Ended March 31, 2016

 

		Preferred Series A								Preferred Series B								Preferred Series D								Common stock								Additional Paid in				Accumulated				Total Stockholders'
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Deficit
Balance as of December 31, 2015			4,750,000			$	475				-			$	-				4			$	-				484,670,610			$	4,847			$	25,631,763			$	(30,756,338	)		$	(5,119,253	)
Conversion of convertible notes payable and accrued interest into common stock			-				-												-				-				125,110,167				1,251				2,665								3,916
Common stock issued for service			-				-												-				-				1,000,000,000				10,000				10,000								20,000
Reclass of derivative liabilities for conversions of debt			-				-												-				-				-				-				19,000								19,000
Net loss			-				-												-				-				-				-				-				(809,546	)			(809,546	)
Balance as of March 31, 2016			4,750,000				475				-				-				4				-				1,609,780,777				16,098				25,663,428				(31,565,884	)			(5,885,883	)

 

See accompanying notes to these condensed consolidated financial statements

  

WOWIO, INC.

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Three Months Ended March 31,
		2016				2015
Cash Flows from Operating Activities
Net loss			(809,546	)			(290,823	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Estimated fair value of preferred stock and common issued for services			-				33,025
Change in fair value of derivative liabilities			544,000				(898,000	)
Excess interest expense of derivative instruments			-				138,500
Interest Expense added to debt principal			13,250				-
Amortization of prepaid consulting			50,273				149,264
Loss on extinguishment of debt			-				458,000
Amortization of debt discount and debt issuance costs			6,812				138,747
Changes in operating assets and liabilities:							-
Prepaid consulting and other assets			-				(1,200	)
Accounts payable and accrued expenses			(44,599	)			106,382
Accrued compensation and related costs			21,250				54,873
Net cash provided by (used in) operating activities			(218,560	)			(111,232	)
Cash Flows from Financing Activities
Principal payments on convertible debt			(2,500	)			-
Principal payments on notes payable			(300,000	)			(16,820	)
Proceeds from the issuance of convertible notes payable			-				127,500
Advances from related party			514,000				-
Net cash provided by financing activities			(211,500	)			110,680
Net change in cash			(7,060	)			(552	)
Cash at beginning of period			13,633				552
Cash, end of period		$	6,573			$	-
Supplemental disclosure of cash flow information:
Cash paid for interest		$	73,985			$	-
Supplemental disclosure of non-cash investing and financing activities:
Preferred stock issued for settlement of accrued wages		$	20,000			$	40,000
Reclass of derivative liabilities to equity for conversions of debt		$	19,000			$	240,000
Reassignment of amounts from note payable to convertible notes		$	-			$	66,300
Conversion of debt and accrued interest for shares of common stock		$	3,916			$	152,402
Debt issuance costs and debt discounts		$	-			$	159,130

 

See accompanying notes to these condensed consolidated financial statements

 

  

WOWIO, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For The Three Months Ended March 31, 2016

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

Organization

 

Wowio, LLC was formed on June 29, 2009 under the laws of Texas (“Wowio Texas”). On July 16, 2010, the Company converted to a C-corporation under the laws of Texas. Wowio, Inc. and its wholly owned subsidiary Carthay Circle Publishing (collectively, the “Company”, “we”, “our”, “Wowio”) is an emerging company in the creation, production, distribution and monetization of digital entertainment. We specialize in creating custom brand strategies to develop, produce, distribute and promote entertainment properties across multiple product lines and distribution channels, including our own websites, traditional media, social media and emerging technologies.

 

The Company operates in a rapidly changing technological and digital entertainment market and its activities are subject to significant risks and uncertainties, including failing to secure additional funding to further exploit the Company’s current technology and digital entertainment properties.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

This summary of significant accounting policies is presented to assist the reader in understanding and evaluating the Company’s consolidated financial statements. The consolidated financial statements and notes are the representations of the Company’s management, who are responsible for their integrity and objectivity. The accounting policies conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently applied in the preparation of the consolidated financial statements.

 

Basis of Presentation

 

The condensed consolidated balance sheet as of December 31, 2015, which has been derived from consolidated audited financial statements and the interim unaudited condensed consolidated financial statements as of March 31, 2016 and 2015 have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of SEC Regulation S-X. These condensed consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2015, included in the Company’s Form 10-K.

 

The condensed consolidated financial statements included herein as of and for the three months ended March 31, 2016 and 2015 are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of the Company’s management, are necessary to present fairly the condensed consolidated financial position of the Company as of March 31, 2016, the condensed consolidated results of its operations for the three months ended March 31, 2016 and 2015, the condensed consolidated statement of stockholder’s deficit for the three months ended March 31, 2016 and condensed consolidated statements of cash flows for the three months ended March 31, 2016 and 2015. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,  “Revenue from Contracts with Customers (Topic 606)”  (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB approved amendments deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date and permitting early adoption of the standard, but not before the original effective date or for reporting periods beginning after December 15, 2016. The Company has not yet selected a transition method and is currently assessing the impact the adoption of ASU 2014-09 will have on our consolidated financial statements and disclosures.

 

  

In August 2014, the FASB issued ASU No. 2014-15,  “Presentation of Financial Statements - Going Concern”. The amendments in this update provide guidance in U.S. GAAP about management’s responsibilities to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The main provision of the amendments are for an entity’s management, in connection with the preparation of financial statements, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known or reasonably knowable at the date the consolidated financial statements are issued. When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, the entity should disclose information that enables users of the consolidated financial statements to understand all of the following: (1) principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans); (2) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations; and (3) management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern or management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. The amendments in this update are effective for interim and annual reporting periods after December 15, 2016 and early application is permitted. The Company is currently assessing this guidance for future implementation.

 

In April 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs. This update requires capitalized debt issuance costs to be classified as a reduction to the carrying value of debt rather than a deferred charge, as is currently required. This update was effective for the Company for all annual and interim periods beginning after December 15, 2015 and is required to be adopted retroactively for all periods presented, and early adoption was permitted. Effective on January 1, 2016, the Company adopted ASU 2015-03 and determined there was no impact of this new accounting standard on its consolidated financial statements.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Wowio, Inc. and its wholly-owned subsidiary Carthay Circle Publishing. All intercompany balances and transactions have been eliminated in consolidation.

 

Revenue Recognition and Deferred Revenue

 

The Company recognizes revenues in accordance with FASB Accounting Standards Codification (“ASC”) Topic 605, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (4) will be based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments will be provided for in the same period the related sales are recorded. The Company will defer any revenue for which the product has not been delivered or for which services have not been rendered or are subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or services have been rendered or no refund will be required.

 

The Company’s primary revenues streams are as follows:

 

eBooks

 

For eBook downloads purchased by the customer directly through the Company’s website, the Company recognizes revenue when the right to download content is granted. The Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned. Generally, the Company records such revenues on a net basis due to a general lack of indicators that the Company is the primary obligor primarily due to the Company’s lack of ability to determine price. Typically for these sales, the Company’s net revenues consist of a credit card processing fee along with the majority of the advertising fee when there is an ad sponsor.

 

Occasionally, the Company sells download cards to retailers and directly to end customers, which are redeemable on its websites for content downloads over an established time frame. The Company records proceeds from the initial sale of the card to deferred revenue, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets, and is recognized as revenue over the related download period, which approximates the usage period.

 

Advertising

 

Visitor demographics and time spent on a website are the primary drivers behind advertising-based revenue models for internet properties. Website advertising revenue is primarily recognized on a flat-fee basis based on cost per thousand impressions (“CPM”). The Company earns CPM revenue from the display of graphical advertisements on its websites. Revenue from flat-fee services is based on a customer’s period of contractual service and is recognized on a straight-line basis over the term of the contract. Proceeds from such contracts are deferred and are included in revenue on a pro-rata basis over the term of the related agreements.

 

Patent Licensing

 

The Company owns Patent No. 7,848,951, issued by the USPTO on December 7, 2010, protecting the insertion of ads into eBooks. The Company intends to pursue patent licensing arrangements with eBook distribution outlets looking to create new revenue streams for eBook downloads. The Company will also pursue any violators who infringe on the patent’s claims, ultimately generating license revenues on a per-book or per-ad basis.

 

  

Revenue from patent licensing arrangements is recognized when earned, estimable and realizable. The timing of revenue recognition is dependent on the terms of each license agreement and on the timing of sales of licensed products. The Company generally recognizes royalty revenue when it is reported to the Company by its licensees, which is generally one quarter in arrears from the licensees’ sales. For licensing fees that are not determined by the number of licensed units sold, the Company recognizes license fee revenue on a straight-line basis over the life of the license.

 

Creative IP Licensing

 

Revenues are also generated by the exploitation of WOWIO’s own proprietary content of creative material such as comic books, graphic novels, screenplays, and other published and non-published content. The WOWIO-owned Spacedog library is available for sale on wowio.com and the Company retains 90% of all retail sales for that content library.

 

The Company’s content also generates revenues from licensing stories/characters/concepts to studios and other producing partners. Licensing deals that may generate revenue for the Company include film option/acquisition fees, television option/acquisition fees, video game licensing, content licensing for apps, apparel and merchandise licensing.

 

Concentrations of Credit Risk

 

A financial instrument which potentially subjects the Company to concentrations of credit risk is cash. The Company places its cash with financial institutions deemed by management to be of high credit quality. The Federal Deposit Insurance Corporation (“FDIC”) provides basic deposit coverage with limits up to $250,000 per owner. At March 31, 2016 and December 31, 2015, there were no uninsured amounts.

 

During the three months ended March 31, 2015, one customer accounted for approximately 98% of revenues. (see Note 8)

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods.

 

Significant estimates made by management include, among others, fair value of common stock and preferred stock issued, fair value of beneficial conversion features, fair value of derivative liabilities and realization of deferred tax assets. The Company bases its estimates on historical experience, knowledge of current conditions and belief of what could occur in the future considering available information. The Company reviews its estimates on an on-going basis. The actual results experienced by the Company may differ materially and adversely from its estimates. To the extent there are material differences between the estimates and actual results, future results of operations will be affected.

 

Fair Value Measurements

 

Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. U.S. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The established fair value hierarchy prioritizes the use of inputs used in valuation methodologies into the following three levels:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and must be used to measure fair value whenever available.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. For example, level 3 inputs would relate to forecasts of future earnings and cash flows used in a discounted future cash flows method.

 

The Company’s financial instruments consist of cash, accounts payable, accrued expenses, notes payable, convertible notes payable and related party notes payable. The Company cannot determine the estimated fair value of its convertible notes payable as instruments similar to the convertible notes payable could not be found. Other than for convertible notes payable, the carrying value for all such instruments approximates fair value due to the short-term nature of the instruments.

 

  

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

 

Beneficial Conversion Features

 

In certain instances, the Company has entered into convertible notes that provide for an effective or actual rate of conversion that is below market value, and the embedded beneficial conversion feature (“BCF”) does not qualify for derivative treatment. In these instances, the Company accounts for the value of the BCF as a debt discount, which is then amortized to interest expense over the life of the related debt using the straight-line method, which approximates the effective interest method.

 

Advertising Expense

 

The Company expenses marketing, promotions and advertising costs as incurred. For the three months ended March 31, 2016 and 2015, such costs totaled $0 and $540, respectively. Such costs are included in general and administrative expense in the accompanying consolidated statements of operations.

 

Stock-Based Compensation

 

All share-based payments, including grants of stock to employees, directors and consultants, are recognized in the consolidated financial statements based upon their estimated fair values.

 

The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows ASC Topic 505. As such, the value of the applicable stock-based compensation is periodically re-measured and income or expense is recognized during their vesting terms. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is primarily recognized over the term of the consulting agreement. In accordance with FASB guidance, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes.

 

Income Taxes

 

The Company accounts for income taxes under the provision of ASC 740. As of March 31, 2016 and December 31, 2015, there were no unrecognized tax benefits included in the consolidated balance sheets that would, if recognized, affect the effective tax rate. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on its consolidated balance sheets as of March 31, 2016 and December 31, 2015 and has not recognized interest and/or penalties in the consolidated statements of operations for the three months ended March 31, 2016 and 2015. The Company is subject to taxation in the United States, Texas and California.

 

Basic and Diluted Loss per Common Share

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders for the period by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted-average number of common and common equivalent shares, such as warrants outstanding during the period. Common stock equivalents from warrants, preferred stock and convertible notes payable were 17,243,698,091 and 1,895,235 for the three months ended March 31, 2016 and 2015, respectively, and are excluded from the calculation of diluted net loss per share for all periods presented because the effect is anti-dilutive.

 

Derivative Liabilities

 

The Company evaluates debt instruments, preferred stock, stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40,  Derivative Instruments and Hedging: Contracts in Entity’s Own Equity . The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

 

Certain of the Company’s embedded conversion features on debt, preferred stock and warrants with potentially insufficient authorized shares to settle outstanding contracts in the future are treated as derivatives for accounting purposes. The Company estimates the fair value of these embedded conversion features and warrants with potentially insufficient authorized shares to settle outstanding contracts in the future using the Black-Scholes Merton option pricing model (“Black-Scholes”) (see Note 6). Based on these provisions, the Company has classified all conversion features and warrants as derivative liabilities at March 31, 2016 and December 31, 2015.

 

  

NOTE 3 - GOING CONCERN

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s revenues since inception have been nominal. Additionally, since inception, the Company has had recurring operating losses and negative cash from operations and at March 31, 2016 and December 31, 2015, had negative working capital. These factors raise substantial doubt about the Company’s ability to continue as a going concern. 

 

The Company’s continuation as a going concern is dependent on its ability to obtain additional financing to fund operations, implement its business model, and ultimately, to attain profitable operations. The Company will need to secure additional funds through various means, including equity and debt financing, funding from a licensing arrangement or any similar financing. There can be no assurance that the Company will be able to obtain additional debt or equity financing, if and when needed, on terms acceptable to the Company, or at all. Any additional equity or debt financing may involve substantial dilution to the Company’s stockholders, restrictive covenants or high interest costs. The Company’s long-term liquidity also depends upon its ability to generate revenues from the sale of its products and achieve profitability. The failure to achieve these goals could have a material adverse effect on the execution of the Company’s business plan, operating results and financial condition. The Company intends to raise additional financing.

 

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

NOTE 4 - ACQUISITIONS

 

Wowio, LLC

 

On June 29, 2009, Wowio Texas entered into a securities purchase agreement (the “Agreement”) with Platinum Studios, Inc. (“Platinum”) pursuant to which Platinum agreed to transfer to the Company, all of the membership interests of Wowio, LLC (a Pennsylvania Limited Liability Company and wholly owned subsidiary of Platinum) (“Wowio Penn”) in exchange for total consideration of $3,150,000, comprised of assumed liabilities of approximately $1,636,000 (of which $82,853 was still outstanding as of March 31, 2016 and December 31, 2015), including $794,518 of amounts owed to Brian Altounian (which was fully paid or settled as of March 31, 2015) the Company’s former CEO, and an additional $1,514,000 to be paid via royalty at a rate of 20% of gross revenues generated from acquired assets. Subsequent to the $1,514,000 being satisfied, such royalty rate shall reduce to 10% of net revenues generated in perpetuity.

 

Drunk Duck

 

On May 5, 2010, Wowio Texas entered into an asset purchase agreement with Platinum pursuant to which Platinum agreed to transfer to the Company, all of the ownership interests in the assets, including related websites, of Drunk Duck (the “Duck”) in exchange for total consideration of $1,000,000 in cash of which $350,000 of such amount had been previously paid, $150,000 was due from July 2010 – October 2010 and $500,000 is to be paid in quarterly installments equal to a minimum of 10% of net revenue derived from the purchased assets. As a security interest, Platinum retained a 10% ownership position in the assets, which is being reduced proportionately, as payments are made to Platinum. As of March 31, 2016, Platinum retained ownership of 6.5% of the assets, as a result of amounts owed to Platinum under the purchase agreement. The $150,000 initially due from July 2010 to October 2010 remains outstanding as of March 31, 2016 and December 31, 2015.

 

Spacedog Entertainment, Inc.

 

Effective May 15, 2010, Wowio Texas entered into a securities purchase agreement with Spacedog Entertainment, Inc. (a New York corporation) (“SDE”) pursuant to which SDE agreed to transfer to Wowio, Inc., all of the common stock of SDE in exchange for total consideration of $1,650,000, comprised of $107,000 in cash, 1,187 shares of common stock (valued at $1,543,000 - based on the estimated fair value on the measurement date) and an additional $1,000,000 to be paid via royalty at a rate of 100% of gross revenues generated from SDE assets. Subsequent to the $1,000,000 being satisfied, the seller shall no longer be entitled to receive any further royalties. In accordance with the agreement, the Company neither assumed nor became responsible, in any way, for any liabilities, debts or other obligations of SDE.

 

NOTE 5 - DEBT

 

Revolving Loan

 

In connection with a credit agreement (“Revolving Loan”) with TCA Global Credit Master Fund, LP (“TCA”), the Company issued a series of three warrants to TCA (“TCA Warrants”), each to purchase 184,157 shares of common stock, or 1% of the issued and outstanding common stock of the Company at September 21, 2012. Each warrant had an exercise price of $0.01 per share. Each of the TCA Warrants was immediately exercisable upon issuance and had terms of six months, nine months and twelve months, respectively. Each of the TCA Warrants had a mandatory redemption clause, which obligated the Company to redeem the warrant in full by payment of $30,000 each if not exercised by the respective redemption dates through September 21, 2013. The Company recorded $90,000 in accounts payable and accrued expenses with a corresponding reduction to additional paid-in capital related to TCA Warrants in connection with its mandatory redemption clause, with $60,000 still outstanding as of March 31, 2016 and December 31, 2015.

 

The Revolving Loan contains various covenants, certain of which the Company was not in compliance with at March 31, 2016. The amount of principal due as of March 31, 2016 and December 31, 2015 was $50,000, and $60,000 in warrant liabilities. Accrued interest and fees related to the Revolving Loan of $30,041 and $27,797 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of March 31, 2016 and December 31, 2015, respectively.

 

  

Notes Payable – Related Parties

 

During 2011, the Company issued an aggregate of $157,355 of notes payable to employees in lieu of compensation due. The notes matured in December 2012, are now due on demand and accrue interest at a rate of 2.25% per year. The amount of principal due at March 31, 2016 and December 31, 2015 was $100,902. Accrued interest of $18,823 and $18,257 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of March 31, 2016 and December 31, 2015, respectively.

 

Notes Payable

 

Notes payable consist of the following at:

 

		March 31, 2016				December 31, 2015
Secured note payable to an individual, 15% interest rate, entered into in December 2011, due on demand, as amended			15,000				15,000
Secured note payable to an individual, 12% interest rate, entered into in September 2013, due on demand with default interest of 17%, 50% satisfied by a third party in 2014			25,000				25,000
Note payable to an individual, 12% interest rate, entered into in November 2013, due on demand with default interest of 17%, due on demand			50,000				50,000
Note payable to an individual, flat interest of $20,000, entered into in April 2014, due on demand			450,000				450,000
Note payable to an individual, non-interest bearing, entered into in August 2014, was paid off in January 2016			-				35,000
Notes payable to various individuals, 12% interest rate, entered into from August 2013 to January 2014, due on demand			5,000				5,000
Secured note payable to an individual, 12% interest rate, entered into in January 2014, was paid off in January 2016			-				260,000
Note payable to an individual, 8% interest rate, entered into in November 2014, due on demand			20,000				20,000
Note payable to an individual, 8% interest rate, entered into in October 2014, was paid off in January 2016			-				5,000
		$	565,000			$	865,000
Less current portion			(565,000	)			(865,000	)

 

  

Accrued interest related to notes payable of $98,524 and $153,786 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of March 31, 2016 and December 31, 2015, respectively.

 

Convertible Notes Payable

 

Convertible notes payable consist of the following at:

 

		March 31, 2016				December 31, 2015
Secured convertible note, 10% interest rate, entered into on August 26, 2014, due on demand, 20% default interest rate			57,973				57,973
Secured convertible note, 12% interest rate, entered into on August 29, 2014, due on demand, 24% default interest rate			25,807				26,728
Convertible notes, interest rates of 8% to 12%, entered into in September 2014, due on demand			31,500				31,500
Secured convertible note, 8% interest rate, entered into on November 18, 2014, due on demand, 20% default interest rate			3,135				3,135
Secured convertible note, 8% interest rate, entered into on November 18, 2014, due on demand, 24% default interest rate			23,650				23,650
Secured convertible note, 8% interest rate, entered into on December 15, 2014, due on demand, 24% default interest rate			37,758				37,758
Secured convertible note, 8% interest rate, entered into on December 15, 2014, due on demand, 24% default interest rate			44,000				44,000
Secured convertible note, 12% interest rate, entered into on January 7, 2015, due on demand, 22% default interest rate			66,913				69,908
Secured convertible note, 0% interest rate, entered into on February 19, 2015, due on demand, net of debt discount of $0, paid off in January 2016			-				2,500
Secured convertible note, 8% interest rate, entered into on February 4, 2015, due in February 2017, net of debt discount of $ 5,662 and $8,134			10,979				8,507
Secured convertible note, 12% interest rate, entered into on February 20, 2015, due on demand			45,750				45,750
Secured convertible note, 12% interest rate, entered into on March 16, 2015, due on demand			45,750				45,750
Secured convertible note, 12% interest rate, entered into on March 16, 2015, due on demand			376				376
Secured convertible note, 10% interest rate, entered into on April 20, 2015, due on demand			43,591				43,591
Secured convertible note, 12% interest rate, entered into on April 20, 2015, due on demand			70,500				70,500
Secured convertible note, 12% interest rate, entered into on May 1, 2015, due on demand, net of debt discount of $0 and $2,778			39,750				23,722
Secured convertible note, 8% interest rate, entered into on May 16, 2015, due on demand, net of debt discount of $0 and $1,563			6,500				4,938
		$	553,932			$	540,286
Less current portion			(553,932	)			(540,286	)
		$	-			$	-

 

During the three months ended March 31, 2016, various holders of convertible notes payable converted $3,916 in principal into 125,110,167 shares of the Company’s common stock.

 

During the three months ended March 31, 2016, the Company was in default on certain convertible notes. Pursuant to the default provisions contained in the respective note agreements, the Company recorded an aggregate of additional interest expense of $13,250, which was added to the outstanding principal balance.

 

Accrued interest related to convertible notes payable of $92,506 and $62,985 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of March 31, 2016 and December 31, 2015, respectively.

 

As of March 31, 2016, the Revolving Loan and a number of the outstanding related party notes payable, notes payable and convertible notes payable balances are delinquent. The Company is in negotiations with the note holders to amend the terms of the notes.

 

 

NOTE 6 - DERIVATIVE LIABILITIES

 

The Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.

 

From time to time, the Company has issued notes and preferred stock with embedded conversion features and warrants to purchase common stock. Certain of the embedded conversion features and warrants contain price protection or anti-dilution features that result in these instruments being treated as derivatives. In addition, potentially in the future, the Company may have an insufficient number of available shares of common stock to settle outstanding contracts. Accordingly, the Company has estimated the fair value of these embedded conversion features, warrants, and derivatives related to the insufficient number of authorized shares to settle outstanding contracts using Black-Scholes with the following assumptions:

 

Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants and embedded conversion features.

 

We currently have no reason to believe that future volatility over the expected remaining life of these warrants and embedded conversion features is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants and embedded conversion features. The risk-free interest rate is based on U.S. Treasury securities consistent with the remaining term of the warrants and embedded conversion features.

 

During the three months ended March 31, 2016, the Company reclassified $19,000 of derivative liability to additional paid in capital related to debt conversions and pay off during the period.

 

During three months ended March 31, 2016 and 2015, the Company recorded gain (loss) of $(544,000) and $898,000 related to the change in fair value of the warrants and embedded conversion features which is included in change in fair value of derivative liabilities in the accompanying consolidated statements of operations.

 

The following table presents our warrants and embedded conversion features which have no observable market data and are derived using Black-Scholes measured at fair value on a recurring basis, using Level 3 inputs, as of March 31, 2016 and 2015:

 

		For the Three months ended March 31, 2016				For the Three months ended March 31, 2015
Annual dividend yield			0-8	%			0	%
Expected life (years)			0.12 – 3.30				0.07 – 4.05
Risk-free interest rate			0.16% – 1.31	%			0.02% – 1.42	%
Expected volatility			365.83%-633.99	%			139.52%-446.40	%

 

The level 3 carrying value as of March 31, 2016 and December 31, 2015:

 

		March 31, 2016				December 31, 2015
Embedded Conversion Features		$	1,716,000			$	1,191,000
Warrants			—				—
		$	1,716,000			$	1,191,000
Change in fair value		$	(544,000	)		$	(987,000	)

 

The following table presents the changes in fair value of our warrants and embedded conversion features measured at fair value on a recurring basis for three months ended March 31, 2016:

 

Balance as of December 31, 2015			1,191,000
Issuance of warrants and embedded conversion features			-
Extinguishment of derivatives			(19,000	)
Change in fair value			544,000
Balance as of March 31, 2016		$	1,716,000

 

  

NOTE 7 - STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

On March 9, 2012 and amended on September 10, 2012, the Company designated and determined the rights and preferences of 5,000,000 shares of Series A preferred stock (“Series A”) with a par value of $0.0001. The Company is authorized to issue 5,000,000 shares of Series A. The holders of Series A are entitled to receive dividends in preference to dividends on common stock and are entitled to vote together with the holders of common stock with a voting right equivalent to 50 votes of common stock for each share of Series A held. In the event of liquidation, the holders of Series A shall be issued one share of common stock for every 50 shares of Series A.

 

On June 19, 2012, the Company issued 85,000 shares of Series A in connection with a consulting agreement entered into with a director. The value of the shares was $255,000 (based on the fair value of the Series A on the measurement date) and was recorded as prepaid consulting to be amortized over the service period of twelve months in accordance with the terms of the contract. On October 31, 2012, the Company modified the terms of the consulting agreement to extend the service period for an additional four years or a total of fifty-five months. During the three months ended March 31, 2016 and 2015, the Company amortized $7,304 in general and administrative expense in the accompanying consolidated statements of operations.

 

On April 2, 2012, the Company designated and determined the rights and preferences of 2,000,000 shares of Series B preferred stock (“Series B”) with a par value of $0.0001. The Company is authorized to issue 2,000,000 shares of Series B. The holders of Series B are entitled to receive dividends in preference to any dividends on common stock and are entitled to vote together with the holders of common stock with a voting right equivalent to 300 votes of common stock for each share of Series B held. In the event that two or more shareholders who combined own more than 20% of the outstanding common stock enter into an agreement for the purpose of acquiring, holding, voting or disposing of any voting securities of the Company, then the holders of Series B, as a class, shall be issued three shares of common stock for every share of common stock outstanding. In the event of liquidation, the holders of Series B shall be issued one share of common stock for every 300 shares of Series B.

 

On January 27, 2015, the Company issued the former CEO 4,000,000 shares of Series A Preferred Stock of the Company as settlement for $40,000 of accrued wages, which were valued based on the market price of the equivalent number of common shares on the date of issuance of $0.0026 per share, which resulted in a gain on settlement of accrued wages of $39,792, which was recorded as contributed capital in the three months ended March 31, 2015.

 

On February 6, 2015, the Company issued a consultant 250,000 shares of Series A Preferred Stock of the Company for service provided. The shares were valued based on the market price of the equivalent number of common shares on date of issuance of $0.0045 per share or $1,125.

 

On May 11, 2015, the Board of Directors of the Company approved the creation of Series C, D, E and F shares of Preferred Stock.

 

The Company is authorized to issue 5,300 shares of Series C Preferred Stock (“Series C”) par value of $0.0001 per share. The Series C will, with respect to dividends and liquidation, winding up or dissolution, rank: (a) senior with respect to dividends and pari passu in right of liquidation with the common stock, par value $0.0001 per share; (b) junior to the Series A and B Preferred Stock; (c) senior to any future designation of preferred stock; (d) junior to all existing and future indebtedness of the Company. Commencing on date of issuance, holders of Series C will be entitled to receive dividends on each outstanding share of Series C, which will accrue in shares of Series C at a rate equal to 8% per annum from the issuance date. The Conversion price of the Series C shall mean the lower of (i) $0.004 per share of common stock, or (ii) 70% of the lowest VWAP in the 10 trading days prior to the date of the conversion notice. The Series C PS may be converted at any time after the earlier to occur of the (i) six-month anniversary of the issuance date or (ii) an effective registration statement covering the shares of common stock to be issued pursuant to the conversion notice. In the event of conversion, the Company shall issue to the holder of such series C Preferred Stock a number of shares of common stock equal to the $1,000 (liquidation value) divided by the conversion price.

 

On May 11, 2015, the Company issued a consultant an aggregate of 300 shares of Series C of the Company for service provided. Due to the embedded conversion feature of the Series C, the Company computed the estimated fair value of the derivative instrument and recorded the initial fair value of $28,000 as a derivative liability on date of issuance. The value of the Series C, E, F shares is included in derivative liabilities in the accompanying balance sheets.

 

The Company is authorized to issue 4 shares of Series D Preferred Stock (“Series D”) par value of $0.00001 per share. If at least one share of Series D Preferred Stock is issued and outstanding, then the total aggregate issued shares of Series D Preferred Stock at any given time, regardless of their number, shall have voting rights equal to four times the sum of: (i) the total number of shares of Common Stock which are issued and outstanding at the time of voting, plus (ii) the total number of shares of Series A, Series, B, Series C, Series E, and Series F Preferred Stock which are issued and outstanding at the time of voting divided by (iii) the number of shares of Series D Preferred Stock issued and outstanding at the time of voting.

 

On May 11, 2015, the Company issued 4 shares of Series D as settlement for $73,167 of accrued wages to Brian Altounian, the Company’s former Chief Executive Officer and Chairman and a beneficial shareholder. No solicitation was made in connection with these transactions and no underwriting discounts were made or given. The Company believes that the issuance of the Series D was a transaction not involving a public offering and was exempt from registration with the Securities and Exchange Commission pursuant to Rule 4(2) of the Securities Act of 1933. Mr. Altounian effectively controls the Company by virtue of the voting rights associated with the Series D Preferred Stock. The valuation of the 4 shares of Series D was $73,167 and was obtained from a valuation specialist, which applied a control premium percentage to the market capitalization value of the Company on the valuation date.

 

  

The Company is authorized to issue 10,000,000 shares of Series E Preferred Stock (“Series E”) par value of $0.00001 per share. The holders of Series E are entitled to receive dividends in preference to dividends on common stock. Each share of Series E shall be convertible at par value $0.00001 per share (the “Series E Preferred”), at any time, and/or from time to time, into the number of shares of the Company’s common stock, par value $0.00001 per share equal to the fixed price of the Series E of $2.50 per share, divided by the par value of the Series E, subject to adjustment as may be determined by the Board of Directors from time to time (the “Conversion Rate”). Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any stock ranking junior to the Series E, the holders of the Series E shall be entitled to be paid out of the assets of the Company an amount equal to $1.00 per share or, in the event of an aggregate subscription by a single subscriber for Series E in excess of $100,000, $0.997 per share (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) (the “Preference Value”), plus all declared but unpaid dividends, for each share of Series E held by them. After the payment of the full applicable Preference Value of each share of the Series E as set forth herein, the remaining assets of the Company legally available for distribution, if any, shall be distributed ratably to the holders of the Company’s Common Stock. Each share of Series E shall have ten votes for any election or other vote placed before the shareholders of the Company. Shares of Series E are anti-dilutive to reverse splits. The conversion rate of shares of Series E, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. The value of the Series C, E, F shares is included in derivative liabilities in the accompanying balance sheets.

 

On May 11, 2015, the Company issued a consultant 40,000 shares of Series E of the Company for service provided. Each share of Series E preferred stock can be converted into approximately 6.4   shares of common stock. Due to the embedded conversion feature of the Series E, the Company computed the estimated fair value of the derivative instrument and recorded the initial fair value of $88,000 as a derivative liability on date of issuance (see Note 6).

 

The Company is authorized to issue 10,000,000 shares of Series F Preferred Stock (“Series F”) par value of $0.00001 per share. The holders of Series F are entitled to receive dividends in preference to dividends on common stock. Each share of Series F shall be convertible, at any time, and/or from time to time, into 500 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”). Such conversion shall be deemed to be effective on the business day (the “Conversion Date”) following the receipt by the Corporation of written notice from the holder of the Series C Preferred Stock of the holder’s intention to convert the shares of Series C Stock, together with the holder’s stock certificate or certificates evidencing the Series C Preferred Stock to be converted. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any stock ranking junior to the Series F, the holders of the Series F shall be entitled to be paid out of the assets of the Company an amount equal to $1.00 per share or, in the event of an aggregate subscription by a single subscriber for Series F in excess of $100,000, $0.997 per share (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) (the “Preference Value”), plus all declared but unpaid dividends, for each share of Series F held by them. After the payment of the full applicable Preference Value of each share of the Series F as set forth herein, the remaining assets of the Company legally available for distribution, if any, shall be distributed ratably to the holders of the Company’s Common Stock. Each share of Series F shall have one vote for any election or other vote placed before the shareholders of the Company. Shares of Series F are anti-dilutive to reverse splits. The conversion rate of shares of Series F, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split.

 

On June 29, 2015, the Company issued 1,600 shares of Series F of the Company for cash proceeds of $4,000. Due to the embedded conversion feature of the Series F, the Company computed the estimated fair value of the derivative instrument and recorded the initial fair value of $103,000 as a derivative liability on date of issuance (see Note 6). The value of the Series C, E, F shares is included in derivative liabilities in the accompanying balance sheets.

 

In July, 2015, the Company issued two individuals an aggregate of 8,000 shares of Series F of the Company for cash proceeds of $20,000. Due to the embedded conversion feature of the Series F, the Company computed the estimated fair value of the derivative instrument and recorded the initial fair value of $44,000 as a derivative liability on date of issuance (see Note 6). The value of the Series C, E, F shares is included in derivative liabilities in the accompanying balance sheets.

 

Common Stock

 

On August 20, 2015, the Board of Directors of the Company amended its Certificate of Foundation to increase the authorized common stock from 5 billion to 20 billion shares.

 

On June 19, 2012, the Company issued an aggregate of 385 shares of common stock at $3,900.00 per share in connection with a consulting agreement entered into with a director. The value of the shares was $1,500,000 (based on the fair value of the common stock on the measurement date) and was recorded as prepaid consulting to be amortized over the service period of twelve months in accordance with the terms of the contract. On October 31, 2012, the Company modified the terms of the consulting agreement to extend the service period for an additional four years or a total of fifty-five months. During the three months ended March 31, 2016 and 2015, the Company amortized $42,969, in general and administrative expense in the accompanying consolidated statements of operations.

   

 

During the three months ended March 31, 2016, various holders of convertible notes payable converted $3,916 in principal into 125,110,167 shares of the Company’s common stock. (see Note 5).

 

During the three months ended March 31, 2016, the Company issued an aggregate of 1,000,000,000 shares of its common stock to the CEO (250,000,000) and chairman of the board (750,000,000) for reduction of accrued wages in the aggregate amount of $20,000.

 

Reverse Stock Splits

 

In January 2014, the Company effected a one-for-ten reverse stock split of the Company’s outstanding shares of common stock (effective January 21, 2014) and of the Company’s outstanding shares of Series A Preferred Stock (effective January 22, 2014). The accompanying consolidated financial statements have been updated to reflect the effect of these reverse stock splits.

 

On June 3, 2015, the board of directors of the Company approved a 1,300 to 1 reverse stock split of shares of common stock. The reverse stock split was approved by the Financial Industry Regulatory Authority on July 7, 2015. All fractional shares were rounded up, shares of common stock and per share data issued prior to July 2015, have been retroactively restated to reflect the impact of the reverse stock split for all periods presented.

 

Warrants

 

The following represents a summary of all common stock warrant activity:

  

		Outstanding Common Stock Warrants
		Number of  Shares				Weighted Average  Exercise Price				Aggregate  Intrinsic  Value (1)
Outstanding at December 31, 2015			821			$	208			$	-
Grants			—				—
Exercised			—				—
Cancelled/Expired			(36	)			—
Outstanding and exercisable at March 31, 2016 (2)			785			$	208			$	-

 

	(1)	Represents the difference between the exercise price and the estimated fair value of the Company’s common stock at the end of the reporting period.
	(2)	The common stock warrants outstanding and exercisable as of March 31, 2016 and December 31, 2015 have a weighted-average contractual remaining life of 2.6 years and 2.9 years, respectively.

 

In January 2014, the Company issued a Secured Promissory Note to an individual in the amount of $300,000 (See Note 5). In connection with this note, the Company issued a warrant to purchase 25,000 shares of the Company’s Series A Preferred Stock at a price of $1.50 per share with an expiration date of January 2017. As of March 31, 2016 and December 31, 2015, all of these preferred stock warrants are outstanding.

 

 

NOTE 8 - RELATED PARTY TRANSACTIONS

 

Alliance and Altounian have ownership interests in Akyumen Technologies, Corp. (“Akyumen”). At March 31, 2016 and December 31, 2015, Alliance and Altounian owned less than 1% of Akyumen individually and collectively. During the three months ended March 31, 2015, Akyumen provided certain software development and technology related services to the Company for $250,000. Such costs were expensed to general and administrative expense in the accompanying consolidated statement of operations. In addition, Akyumen engaged the Company for an advertising campaign on the Company’s websites. The advertising campaign was for $150,000 for the period April 1, 2014 through June 30, 2015. The Company recorded $25,000 in advertising revenue for the three months ended March 31, 2015, in the accompanying consolidated statement of operations.

 

In December 2015, the Company received $100,000 from Akyumen as an advance on a potential future investment into the Company. During the three months ended March 31, 2016, the Company received another $514,000 from Akyumen as an advance on a potential future investment into the Company. Such amounts are due on demand and are non-interest bearing, if the potential investment is not consummated. During the period from April 1, 2016 through May 16, 2016, Akyumen advanced on additional $62,500. Such amounts have been included in related party payables in the accompanying consolidated balance sheets at March 31, 2016 and December 31, 2015.

 

On January 27, 2015, the Company issued the former CEO 4,000,000 shares of Series A Preferred Stock of the Company as settlement for $40,000 of accrued wages, which were valued based on the market price of the equivalent number of common shares on the date of issuance of $0.0026 per share, which resulted in a gain on settlement of accrued wages of $39,792, which was recorded as contributed capital for the three months ended March 31, 2015.

 

On May 11, 2015, the Company issued 4 shares of Series D as settlement for $73,167 of accrued wages to Former CEO (see Note 7).

 

In January 2016, the Company issued 750,000,000 shares of its common stock to Mr. Altounian for reduction of accrued payroll in amount of $15,000. In January 2015, the Company issued 250,000,000 shares of its common stock to the CEO for reduction of accrued payroll in amount of $5,000.

  

NOTE 9 - COMMITMENTS AND CONTINGENCIES

 

Royalties

 

In connection with certain of the Company’s acquisitions, the Company has entered into various royalty agreements (see Note 4). Royalty payments related to acquisitions range from 10% to 100% of related revenue, as summarized below:

 

·

Wowio, LLC - 20% of related revenue until all purchase price consideration has been satisfied, then 10% of related revenue through perpetuity.

 

·

Duck - 10% of related revenue until all purchase price consideration has been satisfied, with no subsequent royalty amounts due.

 

·

SDE - 100% of related revenue until all purchase price consideration has been satisfied, with no subsequent royalty amounts due.

 

Additionally, the Company enters into royalty agreements with the authors of the eBooks included on its websites, which call for royalty payments based on various percentages of revenues earned, less processing fees and in the case of Sponsored Downloads, a fixed price per download.

 

Employment Agreements

 

On September 15, 2015, the Company entered into an employment agreement with Mr. Robert Estareja as Chief Executive Officer, which expires in September 2017, with an automatic renewal period of two years unless otherwise terminated. The employment agreement requires annual base salary payments of $300,000 per year. In addition, the executive is entitled to bonuses in amounts based on various factors, including but not limited to the Company’s financial performance, amount of financing received and producer fee credits. Pursuant to the agreement, if the executive is terminated without cause, he is entitled to receive an amount equal to six months of his annual base salary.

 

On September 15, 2015, the Company entered into an employment agreement with Mr. Brian Altounian as Executive, which expires in September 2017, with an automatic renewal period of two years unless otherwise terminated. Mr. Altounian will serve as the chairman of the Board of Directors of the Company and provide advisory services to the CEO. The employment agreement requires annual base salary payments of $180,000 per year. In addition, the executive is entitled to bonuses solely at the discretion of the Board of Directors. Pursuant to the agreement, if the executive is terminated without cause, he is entitled to receive an amount equal to six months of his annual base salary.

 

Indemnities and Guarantees

 

During the normal course of business, the Company has made certain indemnities and guarantees under which the Company may be required to make payments in relation to certain transactions. These indemnities include certain agreements with its officers under which the Company may be required to indemnify such person for liabilities arising out of their employment relationship. In connection with the Company’s acquisitions, the parties have agreed to indemnify each other from claims relating to the acquisition agreements. In connection with the Company’s publisher agreements, the parties have agreed to indemnify each other from certain claims relating to the agreements. The duration of these indemnities and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments we may be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations and no liability has been recorded for these indemnities and guarantees in the accompanying consolidated balance sheets.

 

 

Legal

 

In October 2013, a former employee filed a complaint against the Company and its CEO, seeking past due wages of $57,096, damages and attorney’s fees. The Company has accrued the amount of past due wages in its consolidated financial statements. A judgment was entered into on March 18, 2016 for an amount of $162,475, which includes interest of $14,005. The Company accrued the remaining amount of $91,374 and related interest of $8,529 in accounts payable and accrued expenses as of March 31, 2016 and December 31, 2015.

 

On March 18, 2016, CBK Consultants, Inc. (“CBK”) filed a Notice of Motion for Summary Judgment in Lieu of Compliant against us (CBK Consultants, Inc. a/k/a CBK, Inc. v. Wowio, Inc., Supreme Court of the State of New York, County of Nassau), seeking the repayment of $450,000 of principal from a promissory note we given CBK along with $20,000 of interest along with costs and attorney fees. We were scheduled to appear in court on April 22, 2016. An order granting or denying the motion for Summary Judgement has not been filed as of the date of this filing. The Company has accrued such costs and they are included in notes payable and accrued expenses.

 

In the normal course of business, the Company may become involved in various legal proceedings. The Company knows of no pending or threatened legal proceeding to which the Company is or will be a party that, if successful, might result in material adverse change in the Company’s business, properties or financial condition.

 

NOTE 10 – WITHHELD PAYROLL TAXES

 

Since its inception, the Company made several payments to employees for wages that were net of state and federal income taxes. Due to cash constraints, the Company has not yet remitted all of these withheld amounts to the appropriate government agency. Accordingly, the Company has recorded $358,477, related to this obligation in accrued compensation and related costs in the accompanying consolidated balance sheets as of March 31, 2016 and December 31, 2015, including estimated penalties and interest.

 

NOTE 11 - SUBSEQUENT EVENTS

 

In April and May 2016, various holders of convertible notes payable converted approximately $43,000 in principal and $1,600 in unpaid accrued interest into 1,093,533,706 shares of the Company’s common stock.

 

In April, a Preferred Stock holder converted 5 shares of Series C Preferred Stock plus its dividend into 76,642,857.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This Quarterly Report contains forward-looking statements. Statements that are not purely historical may be forward-looking. You can identify some forward-looking statements by the use of words such as “believes,” “anticipates,” “expects,” “intends” and similar expressions. Forward looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to risks relating to the uncertainty of growth in market acceptance for our technology, a history of losses since inception, our ability to remain competitive in response to new technologies, the costs to defend, as well as risks of losing, patents and intellectual property rights, a reliance on our future customers’ ability to develop and sell products that incorporate our technology, our customer concentration and dependence on a limited number of customers, the uncertainty of demand for our technology in certain markets, the length of a product development and release cycle, our ability to manage growth effectively, our dependence on key members of our management and development team, uncertainty regarding expansion or other corporate transactions and our ability to obtain adequate capital to fund future operations. Forward-looking statements reflect our analysis only as of the filing date of this quarterly report. Actual events or results may differ materially from the results discussed in or implied by the forward-looking statements. We do not undertake any responsibility to update or revise any of these factors or to announce publicly any revisions to forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

The following Management’s Discussion and Analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and consolidated financial statements for the year ended December 31, 2015 included in our Annual Report on Form 10-K.

 

Overview

 

WOWIO, Inc. (“WOWIO”, “we”, “us”, “our” or the “Company”) is a Los Angeles-based digital media company with an eBook distribution platform. The Company owns a proprietary patent that provides for the specific process for inserting ads into eBooks while adding both personalization and an anti-theft identifier, positioning WOWIO as a participant in the growing eBook distribution arena. In addition to its ownership of this patent, the Company has completed the development of a mobile application (“mobile app”) that will allow for the insertion of mobile ads in eBooks read on a mobile device. During the 2nd quarter of 2014, the Company began to focus its efforts primarily in the area of technology development in order to take advantage of the opportunity to exploit its proprietary patent and build additional proprietary technologies in the eBook and mobile ad space. As such, the Company is currently in the early stages of development of a mobile advertising network that will provide WOWIO additional proprietary technology and a unique vertically integrated technology solution that will generate revenues for the company through ad-subsidized eBooks. Management believes that the Company can generate additional revenues by creating an enterprise-level mobile ad delivery platform, utilizing the unique position represented by the patent and other technologies currently being developed.

 

Using our eBook distribution platform as the anchor, the digital media side of our business includes the creation, distribution, marketing, and monetization of “published” material, such as books, comic books, illustrated novels and graphic novels, as well as other digital media productions, including web series, eBooks, eComics, graphic novels and branded entertainment which we provide to digital and traditional media channels, such as film and television. Management believes that its enterprise-level mobile ad delivery platform will offer new revenue opportunities by delivering ads to these digital media products. Our operations are conducted through four main divisions: 1) wowio.com, the eBook distribution platform with a unique pricing model, that takes advantage of our proprietary patent, 2) StudioW digital media, the production entity that creates online and off-line brand-expansion entertainment properties and programs for our content, 3) Carthay Circle Publishing, Inc. which was created to develop our catalog of new and original content to exploit across our various consumer-facing properties, and 4) the technology development group, focused on new revenue-generating technologies.

 

Our business began as a web-based eBook store in 2005, and was re-launched in early 2010 with a new design and new business model that included advertising revenue-generating opportunities. In 2010, as part of our initial focus on digital media content development, we acquired a library of comic books, novels, graphic novels, and screenplays to distribute on our eBook platform as well as to market and promote across other web properties that we also acquired and built in 2010. That same year, we were granted a broad patent that allows for the insertion of advertising into eBooks delivering a new revenue stream for eBook publishers and authors. We believe this patent could provide us with a competitive advantage in the highly competitive eBook distribution market. Since 2010, we have broadened our operational focus to include the services of a digital media studio, which operates as StudioW, and in September 2012, we formed Carthay, a digital publishing entity, for the purpose of identifying and acquiring unpublished content for exploitation and “brand-building” across the digital and traditional media landscape. In the 2nd quarter of 2014, the Company learned that the digital advertising market in general and the mobile advertising market specifically is projected to grow more than any other advertising segment in the United States, per a study conducted and published by eMarketer, dated June, 2014. According to this study, mobile advertising is projected to grow from 6% of overall advertising in 2013 to 26% by 2018, with mobile advertising projected to exceed $58.33 Billion in 2018. Based on these projections, the Company is focusing its efforts on technology development in order to use its proprietary patent and take advantage of projected growth of mobile advertising over the next 5 years.

 

  

On the digital media side of the business, through wowio.com, we currently distribute both company-owned and 3^rd-party-owned eBooks and eComics, generating revenues through eBook and eComics sales transactions. Approximately 87% of the content we distribute through wowio.com is owned by third parties. We currently generate revenues through the insertion of advertising in eBooks. To date, such advertising campaigns have not utilized our proprietary patented technology, but we anticipate such use in the future as we release our mobile app and further develop the enterprise-level ad platform. We currently generate revenues through online advertising on the wowio.com website and we anticipate generating revenues through advertising on our mobile app as well. Through StudioW, we create and produce our own content such as online videos, generating revenues through pre-roll video ads and additional online advertising on our content-oriented websites TheDuck Webcomics, PopGalaxy and our branded YouTube channels. Through Carthay, we intend to publish our own library of material as eBooks and eComics, which we will distribute on our own wowio.com site as well as distribute through other eBook distribution platforms, generating revenues through eBook sales transactions. We intend for approximately 50% of the content from Carthay to be original material created by the Company and approximately 50% to be from third parties. In addition to generating revenues through eBook/eComics sales, we intend to license our content library for exploitation across traditional media outlets such as film and television. We intend to license our patent to other eBook distribution platforms, though we have not yet begun to do so.

 

WOWIO owns a library of books and generates income from the retail sales thereof. We typically sell WOWIO-branded eBooks for $0.99 each. We also offer digital content and eBooks provided by third party publishers to consumers for free when advertising campaigns are available. If the eBook or digital content does not contain an advertising campaign, then we offer the eBook to the consumer at a retail price selected by the publisher and the Company receives an allowance for administration and credit card processing charges, for which we hold back approximately 10% - 30% of the retail price. When there has been a sponsorship advertising campaign, we have charged the sponsor between $1.00 and $3.00 a book and we have paid the publisher between $0.25 - $0.50 per book depending on the length of the book and we keep the remaining portion. We anticipate altering these sponsorship fees and publisher royalty fees to be more in line with mobile ad offerings once we release a final version of the mobile app. EBook sales not tied to advertising campaigns are intended to draw traffic to our websites, so that we can profitably sell advertising on our websites, and are also intended to draw publishers, so that we can seek to enter into additional advertising campaigns for the eBooks sold on our websites.

 

EBook sponsorship ad campaigns are ads inserted into eBooks. To date, such ad campaigns have not utilized our patented technology, but we anticipate such use in the future. Currently, advertising campaigns are represented as book “sponsorships” where the ad is presented in the eBook as a digital book cover. These ads are the first two pages of the book and the last page in the file. The digital book covers are personalized with the reader’s name (which the reader has provided to the Company by registering with us to use the site) and include hyperlink connections to the advertiser’s website as well as static copy. This personalization makes every eBook downloaded a unique and original file. The full use of the patent will include this personalization but the selection of the advertisement will be dependent on and matched to the specific user profile of the reader such that all ads will be unique to the reader, will be placed at various locations within the eBook in addition to the front and back eBook cover and will match the reader’s preferences, profile, online behavior, or other unique identifying characteristics.

 

Advertisements that appear on the website and mobile app are separate revenue streams and are not related to the insertion of ads into eBooks. There have been occasions where an advertiser has requested category-specific ads to appear on the website as well as within the eBooks in a particular category. For example, Adam & Eve received one month of advertising placement on the “Romance” category on the website as part of a larger eBook sponsorship campaign in addition to ads within the eBooks in that category as sponsorships as described above. Generally, however, website advertising revenues are generated from more traditional web advertising networks such as Gorilla Nation, Burst Media and other network ad providers placing ads on webpages independent of the content.

 

The revenues we earn have not been adequate to support our operations. We have supplemented our revenue with the proceeds from offerings of our debt and equity securities. Where possible, we have also paid expenses by issuing shares of our common stock to conserve our cash. We expect that our operating expenses will continue to exceed our revenues for at least the next 9 to 12 months, and possibly longer. If we cannot raise the funds necessary to pay our operating expenses, we may be required to severely curtail, or even to cease our operations.

 

The Company owes certain contingency royalty payments, which will affect its enjoyment of revenue and its ability to become profitable. In particular, the Company has outstanding obligations remaining from the initial acquisition agreements of certain properties and owes contingency royalty payments to the sellers. The Company will be required to pay these obligations out of revenues, ranging from 10% to 100% until the acquisition costs are completed. For Wowio.com, we owe a total of approximately $1.5 million to the seller Platinum Studios, payable as a royalty of 20% of related revenue until all purchase price consideration has been satisfied. After we have completed paying the acquisition balance, we will pay Platinum Studios a royalty of 10% of related revenue in perpetuity. For The Duck Webcomics site, we owe a total of approximately $650,000, including a current payable of $150,000, with the remaining $500,000 payable as a royalty of 10% of related revenue until all purchase price consideration has been satisfied. After we have completed paying the acquisition balance, there will be no further obligation owed on this asset. For the Spacedog library, we will pay a royalty of 100% of related revenue, net of direct expenses, for all Spacedog assets acquired until the entire purchase price consideration of $500,000 has been satisfied. After we have paid such contingency royalty in full, there will be no further obligation owed on this asset.

 

As set forth above, all of the Company’s royalty payment obligations, except with respect to the 10% royalty payment which we will owe in perpetuity to Platinum Studios, are finite. The Company did not make any royalty payments during the three months ended March 31, 2016 and 2015.

 

WOWIO’s principal place of business is located at 9107 Wilshire Blvd., Suite 450, Beverly Hills, California, 90210.

 

 

Plan of Operations

 

Our business goals are to increase audience size and procure greater market share in the eBook distribution industry as well as create additional technologies that enhance our Company’s position within that space. On the digital media side of our business, we anticipate possible acquisition opportunities that will enable us to increase our capabilities in the creation, distribution and monetization of traditional content including films, television shows, and books, and digital content such as eBooks, eComics, graphic novels, online video content, casual games, apps and enhanced and blended media formats, utilizing our own proprietary distribution platforms and proprietary ad delivery platforms to generate revenues.

 

Traditional media creators have generally focused on a primary distribution window with subsequent distribution in secondary outlets. Our strategy allows us to work around the limitations of this model’s short time frames and high marketing costs. StudioW utilizes a multi-window, day/date release strategy, giving the consumer repeated, overlapping opportunities to discover the content, thus building a “relationship” with the story, the characters, the universe or the brand.

 

We intend to expand our business through the acquisition of creative properties, the acquisition of synergistic technology platforms and capabilities, the establishment of business-to-business partnerships, the development of our consumer-facing brands, and further technology development that will provide enhanced distribution platforms for creators, target monetization pathways for advertisers, and provide a unique user experience for our audience.

 

We have access to creators, content libraries, and various distribution avenues, providing a unique opportunity and monetization path for us to become an entertainment studio that will focus on digital media across platforms and business units within the organization. We intend to generate revenues through original and branded content development, licensing deals, strategic partnerships, app and eBook sales, and online and mobile advertising revenues.

  

The chief initiatives we intend to undertake within the next year in order to accomplish these near-term business goals include: 1) increase our sales staff by 2-4 people to increase the ad-insertion campaigns on the site, which will increase revenues, traffic and transactions; 2) increase our technical staff by 2-4 people and launch the new wowio.com site, the mobile app and other planned technology development by creating apps and other new technology initiatives in the eBook and digital media areas; 3) increase our content development team by 1 or 2 people to develop and create original content to be published through our Carthay label, increasing our library of content by at least 10 to 15 new titles for exploitation; 4) increase our social media team by 1 or 2 to help build brand awareness across all of the WOWIO-owned sites and to support the marketing/sales efforts of Carthay; and 5) increase our marketing and promotional team by 1 or 2 people to support sales efforts across all platforms. We anticipate overhead expenses to support these efforts to increase to approximately $1.2 million to $2.5 million over the next 12 - 18 months.

 

We expect to generate future revenue by licensing both our patent rights and our creative intellectual property. We expect to re-launch a multi-channel eBook delivery platform in a newly-designed wowio.com site during the second quarter of 2016. We also anticipate launching our mobile app across various platforms, including the release of our app on the Android operating system at the same time, and the Apple operating system (iOS) and the Microsoft Windows Mobile platforms during the second half of 2016. We also anticipate releasing an enterprise-level mobile ad delivery platform during the second half of 2016. With this new platform, we expect to increase online visibility by connecting to other related sites through Application Programming Interfaces (APIs) that will allow us to engage with the audience of partner sites. With a broader audience reach and more attractive product offering, our goal is to increase our revenues through increased sales of eBooks and ad revenues generated from the expected higher traffic. Through our Carthay subsidiary, we expect to generate increased revenues as we anticipate higher revenue participation as a publisher, earning 30-50% of revenues as opposed to merely a distributor, earning 10-20% of revenues. Finally, we also anticipate increasing revenues through the licensing of our patent, a process we are beginning to undertake as the advertising community has just started to see the eBook distribution channel as a viable alternative to other content distribution outlets.

 

We are also exploring potential acquisitions of synergistic companies with related product lines or business strategies that could possibly support or enhance our current plan of operations. Our evaluation of these potential acquisition targets would include analysis of their financial information to determine that they would be accretive to our revenue streams and assets. We engaged in several discussions with acquisition candidates in 2015 although no deals were completed.

 

Critical Accounting Policies

 

General

 

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

There have been no material changes from the critical accounting polices as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

 

Results of Operations

 

Three months ended March 31, 2016 Compared to Three months ended March 31, 2015

 

The Company has been focusing on establishing a product, customer base and related marketplace. As a result, the Company has only generated minimal amounts of revenue, which, because of their size, can fluctuate without the influence of any specific economic trend. Due to a lack of sufficient operating capital, the Company does not currently have a sales force and does not generate significant revenues. Our net sales decreased by $25,407 or 100% from $25,407 during the three months ended March 31, 2015 to $0 for the three months ended March 31, 2016. Our revenue decreased during the three months ended March 31, 2016 mainly due to expiration of the insertion order contract entered into with Akyumen Technologies, Inc. Cost of sales decreased from $3,598 for the three months ended March 31, 2015, to $0 for the three months ended March 31, 2016 due to decline of revenue. Our overall gross profit decreased by $21,809 from a gross profit of $21,809 for the three months ended March 31, 2015 to a gross profit of $0 for the three months ended March 31, 2016.

 

Our total operating expenses were $211,780 during the three months ended March 31, 2016, a decrease of $224,535 or 51%, as compared to $436,315 for the three months ended March 31, 2015. The decrease in operating expenses for the three months ended March 31, 2016 resulted primarily from a decrease in consulting and professional fees.

 

Other expense was 597,766 for the three months ended March 31, 2016, as compared to other expense of $123,683 for the three months ended March 31, 2015. The decrease is the result of a loss from a change in fair value of derivative liabilities of $544,000 for the three months ended March 31, 2016, as compared to gain from a change in fair value of derivative liabilities of $898,000 for the three months ended March 31, 2015. Loss on extinguishment of debt of $0 for the three months ended March 31, 2016, as compared to $458,000 for the three months ended March 31, 2015. Interest expense of $53,766 for the three months ended March 31, 2016, as compared to $316,317 for the three months ended March 31, 2015.

 

  

There was no income tax benefit or provision during the three months ended March 31, 2016 and 2015.

 

Liquidity and Capital Resources

 

We had cash of $6,573 and $13,633 at March 31, 2016 and December 31, 2015, respectively.

 

We had cash used in operating activities of $(218,560) during the three months ended March 31, 2016. Non-cash adjustments included $50,273 related to amortization of prepaid consulting, $6,812 related to amortization of debt discount and debt issuance costs, the change in fair value of derivatives of $544,000, $13,250 interest expense added to debt principal. Changes in operating assets and liabilities consist of a decrease in accounts payable and accrued expenses of $(44,599) and increase in accrued compensation and related costs $21,250. We used cash of $111,232 in our operating activities during the three months ended March 31, 2015. Non-cash adjustments included $149,264 related to amortization of prepaid consulting, $138,747 related to the amortization of debt discount and debt issuance costs, excess interest expense of derivative instruments of $138,500, loss on debt extinguishment of $458,000 and estimated fair value of preferred and common stock issued for services offset by gain on change in fair value of derivatives of $898,000. Changes in operating assets and liabilities consist of an increase in accounts payable and accrued expenses of $106,382, a decrease in prepaid consulting and other current assets of $1,200 and increase in accrued compensation and related costs $54,873.

 

We had cash provided by investing activities of $0 during the three months ended March 31, 2016 and 2015

 

Our financing activities provided cash of $211,500 during the three months ended March 31, 2016 compared to cash provided of $110,680 during the same period in 2015. Cash used by financing activities during the three months ended March 31, 2016, reflect principal payments on convertible debt of $2,500, principal payments on notes payable of $300,000 offset by advances from related party (AKYUMEN) of $514,000. Cash provided by financing activities during the three months ended March 31, 2015, reflect net proceeds from the issuance of notes and convertible notes payable of $127,500, offset by principal payments on notes payable of $16,820.

 

As of March 31, 2016, we had an accumulated deficit of approximately $31,600,000. Management anticipates that future operating results will continue to be subject to many of the expenses, delays and risks inherent in the establishment of an early stage business enterprise, many of which we cannot control.

 

Going Concern

 

Our consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We cannot provide assurance that we will obtain sufficient funding from financing or operating activities to support continued operations or business deployment.

 

Since our inception we have reported net losses, including losses of $809,546 and $290,823 during the three months ended March 31, 2016 and 2015, respectively. We expect that we will report net losses into the near future, until we are able to generate meaningful revenues from operations. At March 31, 2016, our accumulated deficit was approximately $31.6 million. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company’s continuation as a going concern is dependent on its ability to obtain additional financing to fund operations, implement its business model, and ultimately, to attain profitable operations. The Company will need to secure additional funds through various means, including equity and debt financing, funding from a licensing arrangement or any similar financing. There can be no assurance that the Company will be able to obtain additional debt or equity financing, if and when needed, on terms acceptable to the Company. Any additional equity or debt financing may involve substantial dilution to the Company’s stockholders, restrictive covenants or high interest costs. The Company’s long-term liquidity also depends upon its ability to generate revenues from the sale of its products and achieve profitability. The failure to achieve these goals could have a material adverse effect on the execution of the Company’s business plan, operating results and financial condition. The Company intends to raise additional financing.

 

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not required for a smaller reporting company.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer who is also our principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our principal executive officer/principal financial officer has concluded that our disclosure controls and procedures are not effective, due to the deficiencies in our internal controls over financial reporting described below.

 

  

·

We had not effectively implemented comprehensive entity-level internal controls.

 

·

We did not have a sufficient complement of personnel with appropriate training and experience in accounting principles generally accepted in the United States of America, or GAAP.

 

·

We did not adequately segregate the duties of different personnel within our accounting group due to an insufficient complement of staff.

 

·

We did not implement financial controls that were properly designed to meet the control objectives or address all risks of the processes or the applicable assertions of the significant accounts.

 

Management believes that the aforementioned material weaknesses did not impact our financial reporting or result in a material misstatement of our consolidated financial statements.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the three months ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

  

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

On October 7, 2013, Steve Timmerman (“Timmerman”), a former employee, filed a complaint against us and Brian Altounian and his wife (Timmerman v. WOWIO, Brian Altounian and “Jane Doe” Altounian, Superior Court of the State of Washington), seeking past due wages of $57,096, damages and attorney’s fees. The Company has accrued the amount of past due wages in its financial statements. A judgment was entered into on March 18, 2016 for an amount of $162,475, which includes interest of $14,005. The Company accrued the remaining amount of $91,374 and related interest of $8,529 in accounts payable and accrued expenses as of March 31, 2016 and December 31, 2015.

 

On March 18, 2016, CBK Consultants, Inc. (“CBK”) filed a Notice of Motion for Summary Judgment in Lieu of Compliant against us (CBK Consultants, Inc. a/k/a CBK, Inc. v. Wowio, Inc., Supreme Court of the State of New York, County of Nassau), seeking the repayment of $450,000 of principal from a promissory note we given CBK along with $20,000 of interest along with costs and attorney fees. We were scheduled to appear in court on April 22, 2016. An order granting or denying the motion for Summary Judgement has not been filed as of the date of this filing.

 

Item 1A. Risk Factors.

 

Not required for a smaller reporting company.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

During three month ended March 31, 2016, various holders of convertible notes payable converted $3,916 in principal into 125,110,167 shares of the Company’s common stock. During three month ended March 31, 2016, the Company issued an aggregate of 1,000,000,000 shares of its common stock to the CEO (250,000,00) and chairman of the board (750,000,000) for reduction of accrued wages in the aggregate amount of $20,000.

 

Item 3. Defaults Upon Senior Securities.

 

As discussed above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as of filing date of the form 10-Q the Company is in default on the notes payable to former employees totaling $100,902, on 6 other notes payable totaling $565,000, on 13 convertible notes totaling $542,954 and on revolving loan $50,000 which are currently due. The Company has not reached agreement with the noteholders on due date extensions.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

No.		Description
31.1		Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer
32.1		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
EX-101.INS		XBRL INSTANCE DOCUMENT
EX-101.SCH		XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
EX-101.CAL		XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
EX-101.LAB		XBRL TAXONOMY EXTENSION LABELS LINKBASE
EX-101.PRE		XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 

 

SIGNATURES

 

Pursuant to the requirements 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.

 

	Wowio, Inc.
Date: May 17, 2016	By:	/s/ Robert Estareja
		Robert Estareja
		Chief Executive Officer (principal executive officer)