SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.

 

FORM 10-Q

 

☑	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the quarter 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 No. 000-33053

 

FASTFUNDS FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada	87-0425514
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

 

319 Clematis Street, Suite 400

West Palm Beach, Florida 33401

(Address of principal executive offices) (Zip code)

 

(561) 514-9042

(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, and (2) has been subject to such filing requirements for the past 90 days. ☐ Yes ☑ No

 

Indicate by check mark whether the Registrant has submitted electronically and posted on it corporate web site, if any, every Interactive data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). ☑ Yes ☐ No

 

Indicate by a check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

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

 

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

 

Number of shares of outstanding of the Registrant’s $0.0001 par value common stock as of June 15, 2016 was 4,764,481,179 shares.

 

FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES

THREE MONTHS ENDED MARCH 31, 2016 and 2015

 

	Page
Part I.  Financial Information
Item 1.  Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2016 (Unaudited) and December 31, 2015	2
Condensed Consolidated Statements of Operations for the three months ended March  31, 2016 and 2015 (Unaudited)	3
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (Unaudited)	4
Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.  Management’s Discussion and Analysis	26
Item 3.  Quantitative and Qualitative Disclosures about Market Risks	29
Item 4.  Controls and Procedures	29
Part II.  Other Information
Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3. Defaults Upon Senior Securities	30
Item 4. Mine Safety Disclosure	30
Item 5. Other Information	30
Item 6. Exhibits	30
Item 7.  Signatures	31

 

FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
		March 31,				December 31,
		2016				2015
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	33,440			$	9,221
Accounts receivable			96,306				105,712
Deferred financing costs			8,343				11,322
Other current assets			200				200
Total current assets			138,289				126,455
Fixed assets, net			1,891				2,095
Investment in unconsolidated investee (Note 5)			159,437				166,910
Other assets			28,123				28,123
Goodwill			85,362				85,362
Long term investments (Note 4)			—				89,575
Total other assets			274,813				372,065
Total assets		$	413,102			$	498,520
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable		$	726,481			$	724,909
License fee payable			250,000				250,000
Due to related party			75,000				75,000
Accrued expenses, including related parties $47,393 (2016) and $43,522 (2015) (Note 5)			4,446,745				4,303,883
Notes Payable			60,000				60,000
Subsidiary notes payable			58,367				66,028
Convertible promissory notes (Note 6), including related parties of $25,867 (2016) and $23,267 (2015)			2,161,761				2,204,561
Litigation contingency (Note 8)			2,484,922				2,484,922
Convertible debentures payable, net			1,077,018				1,050,135
Derivative liabilities (Note 6)			1,336,644				1,359,843
Total current liabilities			12,676,938				12,579,281
Commitments and contingencies (Note 9)
Stockholders' deficiency (Note 11):
Preferred stock, $.001 par value; 5,000,000 shares authorized;
Class A preferred stock, $0.001 par value; 1,000,000 shares authorized; 819,000 shares issued and outstanding			819				819
Class B preferred stock, $0.001 par value; 2,000,000 shares authorized; 1,791,667 shares issued and outstanding			1,792				1,792
Class C preferred stock, $0.001 par value; 1,000 shares authorized; 1,000 shares shares issued and outstanding (2014)			1				1
Common stock, $.001 par value; 9,000,000,000 shares authorized; 4,577,362,929 (2016) and 2,824,852,274 (2015) shares issued and outstanding			4,577,363				2,824,853
Additional paid-in capital			13,395,375				14,876,506
Treasury stock, 50,000 shares of common stock			—				—
Accumulated deficit			(30,271,947	)			(29,813,617	)
Total stockholders' deficiency			(12,296,597	)			(12,109,646	)
Less noncontrolling interests			32,761				28,885
Total deficit			(12,263,836	)			(12,080,761	)
Total liabilities and stockholders' deficit		$	413,102			$	498,520

 

 

See notes to condensed consolidated financial statements. 

 

FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
		Three months ended March 31,
		2016				2015
Revenue, net		$	175,086			$	207,975
Operating expenses:
Cost of Sales			92,574				138,905
Processing fees			5,449				5,944
Other			—				348
Total operating expenses			98,023				145,197
Gross profit			77,063				62,778
Selling, general and administrative			137,771				227,470
Loss from operations			(60,708	)			(164,692	)
Other expense:
Interest expense			(392,697	)			(191,214	)
Derivative liability expense			(179,001	)			(12,150	)
Loss on equity method investment			(7,473	)			—
Gain from sale of long-term asset			185,425				—
Total other expense			(393,746	)			(203,364	)
Net loss		$	(454,454	)		$	(368,056	)
(Plus) less net (gain) loss attributable to non controlling interest			(3,876	)			7,293
Net loss attributable to common stockholders		$	(458,330	)		$	(360,763	)
Net loss per share		$	(0.00	)		$	(0.02	)
Weighted average number of common shares outstanding
Basic and diluted			3,947,953,908				18,578,837

 

 

See notes to condensed consolidated financial statements.

 

FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
		Three months ended March 31,
		2016				2015
Cash flows from operating activities:
Net loss		$	(454,454	)		$	(368,056	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization on fixed assets			204				—
Amortization of discount on convertible notes			158,091				60,859
Loss attributable to equity method investment			7,473				—
Initial derivative liability expense on convertible debentures			—				12,150
Change in fair value of derivative liability			179,001				—
Amortization of deferred financing costs			5,979				5,358
Common stock warrants issued for services			—				45,000
Gain from sale of long-term asset			(185,425	)			—
Decrease (increase) in assets:
Accounts receivable			9,407				69,328
Other current assets			—				892
Increase in liabilities
Accounts payable and accrued expenses			158,782				55,007
Net cash used in operating activities			(120,942	)			(119,461	)
Cash flows from financing activities:
Borrowings on convertible notes, net			15,000				50,000
Borrowings on notes and loans payable, related			4,300				112,800
Borrowings on notes and loans payable, other			121,600				3,000
Repayments on notes and loans payable, related			(1,700	)			(28,100	)
Repayments on notes and loans payable, other			(71,402	)			(8,190	)
Net cash provided by financing activities			67,798				129,510
Net increase in cash and cash equivalents			(53,144	)			10,049
Cash and cash equivalents, beginning			9,221				3,367
Cash and cash equivalents, ending		$	(43,923	)		$	13,416
Supplemental disclosure of cash flow information:
Cash paid for interest		$	1,157			$	—
Cash paid for income taxes		$	—			$	—
Schedule of Non-Cash Investing and Financing Activites
Reclass of derivative liability to equity upon conversion of convertible debt		$	211,663			$	47,560
Conversion of convertible debentures and accrued interest to common stock		$	59,716			$	37,564

 

 

See notes to condensed consolidated financial statements.

 

FASTFUNDS FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. Business and organization, asset sale, and going concern and management’s plans:

 

Business and organization:

 

FastFunds Financial Corporation (the “Company” or “FFFC”) is a holding company, and through January 31, 2006, operated primarily through its wholly-owned subsidiary Chex Services, Inc. (“Chex”). FFFC was previously organized as Seven Ventures, Inc. (“SVI”). Effective June 7, 2004, Chex merged with SVI (the “Merger”), a Nevada corporation formed in 1985. At the date of the Merger, SVI was a public shell with no significant operations. The acquisition of Chex by SVI was recorded as a reverse acquisition based on factors demonstrating that Chex represented the accounting acquirer. The historical stockholders’ equity of Chex prior to the exchange was retroactively restated (a recapitalization) for the equivalent number of shares received in the exchange after giving effect to any differences in the par value of the SVI and Chex common stock, with an offset to additional paid-in capital. The restated consolidated accumulated deficit of the accounting acquirer (Chex) has been carried forward after the exchange. On June 29, 2004, SVI changed its name to FFFC.

 

Effective January 21, 2014, the Board of Directors of the Company approved the issuance of 1,000 shares of Class C Preferred Stock (as defined and described below) (the “Class C Preferred Stock Shares”) to Mr. Henry Fong, the Company’s sole officer and Director, or his assigns in consideration for services rendered to the Company and continuing to work for the Company without receiving significant payment for services and without the Company having the ability to issue shares of common stock as the Company does not have sufficient authorized but unissued shares of common stock to allow for any such issuances.

 

As a result of the issuance of the Class C Preferred Stock Shares to Mr. Fong, or his assigns and the Super Majority Voting Rights (described below), Mr. Fong obtained voting rights over the Company’s outstanding voting stock which provides him the right to vote up to 51% of the total voting shares able to vote on any and all shareholder matters.  As a result, Mr. Fong will exercise majority control in determining the outcome of all corporate transactions or other matters, including the election of Directors, mergers, consolidations, the sale of all or substantially all of the Company’s assets, and also the power to prevent or cause a change in control. The interests of Mr. Fong may differ from the interests of the other stockholders and thus result in corporate decisions that are adverse to other shareholders.  Additionally, it may be impossible for shareholders to remove Mr. Fong as an officer or Director of the Company due to the Super Majority Voting Rights.

 

On January 21, 2014, the Company formed Cannabis Angel, Inc. (“CA”) as a wholly-owned subsidiary. CA was formed to assist and provide angel funding, business development and consulting services to Cannabis related projects and ancillary ventures. CA has entered into the following agreements:

 

On January 28, 2014, CA entered into a one year Consulting Agreement with Singlepoint, Inc. (“Singlepoint”) (the “Singlepoint Agreement”). The Singlepoint Agreement automatically renews for succeeding one year periods, provided, that the CA can terminate the Singlepoint Agreement at any time during the initial one year term or thereafter by giving Singlepoint not less than five (5) days’ notice to terminate. CA is to provide consulting services including strategic and business planning, marketing and sales support, define and support for product offerings, acquisition strategy and funding strategy. As of March 31, 2016, this agreement is still active but no services have been provided and no further activity related to this agreement has occurred.

 

On February 7, 2014, CA entered into a one year consulting agreement with Colorado Cannabis Business Solutions, Inc (“CCBS”). CA is to provide consulting services to CCBS relating to business opportunities, corporate finance activities and general business development, in exchange for 9.9% ownership in CCBS. As of March 31, 2016, this agreement is still active but no services have been provided and no further activity related to this agreement has occurred.

 

On March 5, 2014, CA entered into a five (5) year Strategic Alliance Agreement (“SAA”) with Worldwide Marijuana Investments, Inc. (“Worldwide”). Pursuant to the SAA, Worldwide and CA have agreed to market and perform certain complementary business consulting services. The SAA automatically renews for successive one year terms, unless either party gives written notice of termination at least thirty (30) days prior to any expiration. The SAA can also be terminated by mutual agreement, or at any time by sixty (60) day written notice from either party. As of March 31, 2016, this agreement is still active but no services have been provided and no further activity related to this agreement has occurred.

 

On February 17, 2014, the Company and CA entered into a consulting agreement with Merchant Business Solutions, Inc. (“MBS”). CA will provide consulting services to MBS regarding seeking potential business opportunities, financial opportunities, and general business development in exchange for 49% of Cannabis Angel. As of March 31, 2016, this agreement is still active but no services have been provided and no further activity related to this agreement has occurred.

 

Merchant Financial Solutions, Inc. (“CMFS”) a new subsidiary of MBS. CMFS has had no activity through the date of this report. 

  

On April 3, 2014, the Company and its wholly-owned subsidiary CA announced the launch of GreenEnergyMedia.TV.  GreenEnergyMedia.TV caters to broadcasting real-time news and social media feeds relating exclusively to the medical and recreational marijuana communities. GreenEnergyMedia.TV broadcasts stock quotations and intraday charts on over 40 leading companies competing within the medical marijuana industry. Operations related to GreenEnergyMedia.TV have been deferred pending the recruitment and placement of personnel for this project, which has not occurred as of March 31, 2016.  

 

On April 29, 2014, Cannabis Live was launched, which will focus exclusively on hosting and broadcasting video of on-demand events. As this area of GreenEnergyMedia.TV’s website progresses, the Company plans to include the development of an exclusive interactive online channel. This future development will allow for several sources of revenue to be derived for the Company; including premium access membership fees, sponsorship and endorsement fees, and advertising revenue. Operations related to Cannabis Live have been deferred pending the recruitment and placement of personnel for this project, which has not occurred as of March 31, 2016.  

 

On April 17, 2014, the Company and its wholly-owned subsidiary CA announced a Merchant Payment Processing Agreement to offer a debit card payment solution for retail cannabis dispensaries. This program will be offered through CMFS, the Company's 49% owned subsidiary. This payment solution allows dispensaries to accept debit and credit cards by using the PIN number associated with the card being used. . As of March 31, 2016, the company has not yet offered this program to customers and there has been no activity related to this program.

 

On July 8, 2014, The Company announced the formation of The 420 Development Corporation, a newly formed wholly owned subsidiary of the Company that will focus exclusively on the acquisition of operational companies that support the development of the ever-expanding cannabis industry.  The 420 Development Corporation will seek to identify acquisition candidates within the industry that have the potential to add significant shareholder value once completed.

 

On July 24, 2014, the Company and its wholly-owned subsidiary, The 420 Development Corporation, announced the closing of a purchase agreement with Ohio-based Brawnstone Security, LLC (“Brawnstone”). Brawnstone is a licensed armed security, private investigation, security technology solution provider and tactical training company servicing active accounts with several Government affiliated HUD housing establishments, schools, and industrial facilities across the Ohio region. Under the terms of the purchase agreement, the Company, through its subsidiaries, now owns a 70% interest in Brawnstone. The purchase price, disclosed in the Membership Interest Purchase Agreement and Assignment of Membership Interest Agreement dated July 23, 2014, was $160,000. The Company remitted $100,000 in cash and issued a $60,000 note payable bearing 8% interest to complete the purchase. The Company also assumed accrued expenses of $181,083. The total purchase price of $341,083 was allocated to cash of $133,806, accounts receivable of $120,965, prepaid expenses of $950, and goodwill of $85,312.

 

On November 14, 2014, FastFunds Financial Corporation entered into a definitive licensing agreement with Nevada-based Chongson, Inc. pertaining to the production, promotion and sale of the Tommy Chong branded Cannabis GreenCard product. Per the terms of the agreement, the Company is required to pay Chongson Inc. a minimum of $5,000 per month in royalty fees in exchange for the the card branding. During the year ended December 31, 2015, the Company paid $15,000 in cash against the $15,000 in accrued royalty expenses.

 

On May 15, 2015, FastFunds Financial Corporation (“FFFC”) acquired a 49% Limited Liability Company interest in Pure Grow Systems, LLC (“Pure Grow”) for $250,000. Financing for this transaction was provided through a $128,000 convertible note issued to Carebourn Capital, LP on May 15, 2015 and a $125,000 convertible note issued to Pure Energy Inc. on May 29, 2015. As of December 31, 2015, $222,000 has been remitted by the company in acquisition of a minority stake of Pure Grow. Pure Grow Systems, LLC will be dedicated to the healthy production of raw materials used for medicinal or other health-related purposes. The Company is developing a line of environmentally friendly products using ingredients that have a strong track record of sanitation and disinfection in buildings, on furniture, and other items found in medical, manufacturing and warehouse settings. Pure Grow has displayed its products at several trade shows and has contacted interested distributors. No revenues have been generated from Pure Grow’s product lines through March 31, 2016

 

The Company currently has thirty-six full and part time employees at Brawnstone Security. None of our employees are currently covered by collective bargaining agreements.

 

Going concern and management’s plans:

 

In the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, the Report of the Independent Registered Public Accounting Firm includes an explanatory paragraph that describes substantial doubt about the Company’s ability to continue as a going concern. The Company’s interim financial statements for the three and ended March 31, 2016 and 2015 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

 

The Company reported a net loss of $458,330 for the three months ended March 31, 2016, and has a working capital deficit of $12,538,649 and an accumulated deficit of $30,271,947 as of March 31, 2016.

 

These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not contain any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

There can be no assurance that the Company will have adequate resources to fund future operations, if any, or that funds will be available to the Company when needed, or if available, will be available on favorable terms or in amounts required by the Company. Currently, the Company does not have a revolving loan agreement with any financial institutions, nor can the Company provide any assurance it will be able to enter into any such agreement in the future. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

The Company evaluates, on an ongoing basis, potential business acquisition/restructuring opportunities that become available from time to time, which management considers in relation to its corporate plans and strategies.

 

2. Summary of significant accounting policies:

 

Basis of presentation and principles of consolidation:

 

The accompanying condensed consolidated financial statements have been prepared by the Company without audit and include the consolidated accounts of Fastfunds Financial Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments necessary to present the financial position, results of operations and cash flows for the stated periods have been made. Except as described below, these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed financial statements should be read in conjunction with a reading of the Company’s consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report filed with the Securities and Exchange Commission (SEC) on May 24, 2016. Interim results of operations for the three months ended March 31, 2016 are not necessarily indicative of future results for the full year. Certain amounts from the 2015 period have been reclassified to conform to the presentation used in the current period.

 

Cash and cash equivalents:

 

For the purpose of the financial statements, the Company considers all highly-liquid investments with an original maturity three-months or less to be cash equivalents. 

 

Fixed assets:

 

Fixed Assets are stated at historical cost less depreciation. Cost of acquisition is inclusive of taxes, duties, freight, installation and allocated incidental expenditure during construction/ acquisition.

 

Accounts receivables and revenue recognition:

 

Accounts receivables are stated at cost plus refundable and earned fees (the balance reported to customers), reduced by allowances for refundable fees and losses. Fees (revenues) are accrued monthly on active credit card accounts and included in accounts receivables, net of estimated uncollectible amounts. Accrual of income is discontinued on credit card accounts that have been closed or charged off. Accrued fees on credit card loans are charged off with the card balance, generally when the account becomes 90 days past due. The allowance for losses is established through a provision for losses charged to expenses. Credit card receivables are charged against the allowance for losses when management believes that collectability of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. This evaluation also takes into consideration such factors as changes in the volume of the loan portfolio, overall portfolio quality and current economic conditions that may affect the borrowers’ ability to pay. While management uses the best information available to make its evaluations, this estimate is susceptible to significant change in the near term.

 

The Company recognizes sale and service revenue when there is persuasive evidence of an arrangement with the customer which states a fixed or determinable price and terms, delivery of the product has occurred or the service performed in accordance with the terms of the sale, and collectability of the sale is reasonably assured. The Company has entered into agreements calling for services to be available to the customer for a period of time. In these cases, revenue is recognized over the life of the agreement. Prepaid services are shown as deferred revenues until services are performed.

 

Long-lived assets:

 

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the three months ended March 31, 2016, impairments totaling $7,473 were recognized. The impairment is related to a loss from an unconsolidated investee, Pure Grow Systems, LLC.

 

Goodwill:

 

Goodwill represents the excess of the purchase price over the fair value of the identifiable tangible and intangible assets acquired and the fair value of liabilities assumed in an acquisition. Accounting Standards Codification (“ASC”)-350-30-50 “Goodwill and Other Intangible Assets” requires the testing of goodwill and indefinite-lived intangible assets for impairment at least annually. The Company tests goodwill for impairment in the fourth quarter of the fiscal year.

 

Investment in Unconsolidated Investee

 

The Company accounts for investments in which the Company owns more than 20% of the investee, using the equity method in accordance with ASC Topic 323, Investments—Equity Method and Joint Ventures. Under the equity method, an investor initially records an investment in the stock of an investee at cost, and adjusts the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of acquisition. The amount of the adjustment is included in the determination of net income by the investor, and such amount reflects adjustments similar to those made in preparing consolidated statements including adjustments to eliminate intercompany gains and losses, and to amortize, if appropriate, any difference between investor cost and underlying equity in net assets of the investee at the date of investment. The investment of an investor is also adjusted to reflect the investor's share of changes in the investee's capital. Dividends received from an investee reduce the carrying amount of the investment. A series of operating losses of an investee or other factors may indicate that a decrease in value of the investment has occurred which is other than temporary and which should be recognized even though the decrease in value is in excess of what would otherwise be recognized by application of the equity method.

 

Non-controlling interest:

 

On January 1, 2012, the Company adopted authoritative accounting guidance that requires the ownership interests in subsidiaries held by parties other than the parent, and income attributable to those parties, be clearly identified and distinguished in the parent’s consolidated financial statements. The Company’s non-controlling interest is now disclosed as a separate component of the Company’s consolidated deficiency on the balance sheets. Earnings and other comprehensive income are separately attributed to both the controlling and non-controlling interests.  Earnings per share are calculated based on net income attributable to the Company’s controlling interest.

 

Loss per share:

 

Loss per share of common stock is computed based on the weighted average number of common shares outstanding during the period. Stock options, warrants, and common stock underlying convertible promissory notes are not considered in the calculations for the three month periods ended March 31, 2016 and 2015, as the impact of the potential common shares, which total 22,881,875,400 and 1,167,187,184, respectively, would be anti-dilutive.

 

Use of estimates:

 

Preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the balance sheets and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company’s significant estimates include the valuation of derivative liabilities on stock based compensation and impairment analysis.

 

Fair value of financial instruments:

 

The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate methodologies; however, considerable judgment is required in interpreting information necessary to develop these estimates. Accordingly, the Company’s estimates of fair values are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

 

The fair values of cash and cash equivalents, current non-related party accounts receivable, and accounts payable approximate their carrying amounts because of the short maturities of these instruments.

 

The fair values of notes and advances receivable from non-related parties approximate their net carrying values because of the allowances recorded as well as the short maturities of these instruments.

 

The fair values of notes and loans payable to non-related parties approximate their carrying values because of the short maturities of these instruments. The fair value of long-term debt to non-related parties approximates carrying values, net of discounts applied, based on market rates currently available to the Company.

 

Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).

 

Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.

 

The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

The three hierarchy levels are defined as follows:

 

Level 1 – Quoted prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;

 

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in the credit default swap market.

 

Accounting for obligations and instruments potentially settled in the Company’s common stock:

 

The Company accounts for obligations and instruments potentially to be settled in the Company's stock in accordance with ASC Topic 815, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock. This issue addresses the initial balance sheet classification and measurement of contracts that are indexed to, and potentially settled in, the Company's stock.

 

Under ASC Topic 815, contracts are initially classified as equity or as either assets or liabilities, depending on the situation. All contracts are initially measured at fair value and subsequently accounted for based on the then current classification. Contracts initially classified as equity do not recognize subsequent changes in fair value as long as the contracts continue to be classified as equity. For contracts classified as assets or liabilities, the Company reports changes in fair value in earnings and discloses these changes in the financial statements as long as the contracts remain classified as assets or liabilities. If contracts classified as assets or liabilities are ultimately settled in shares, any previously reported gains or losses on those contracts continue to be included in earnings. The classification of a contract is reassessed at each balance sheet date.

 

Stock-based compensation:

 

The Company has one stock option plan approved by FFFC’s Board of Directors in 2004, and also grants options and warrants to consultants outside of its stock option plan pursuant to individual agreements. The Company accounts for its stock based compensation under ASC 718 “Compensation- Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. We use the Black Scholes model for measuring the fair value of options. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.

 

There were no options granted during the three months ended March 31, 2016 and 2015.

 

The Company’s stock option plan is more fully described in Note 9.

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.

 

The Company accounts for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, “Accounting for Income Taxes.  It prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  As a result, the Company has applied a more-likely-than-not recognition threshold for all tax uncertainties.  The guidance only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the various taxing authorities.

 

The Company classifies penalties and interest related to unrecognized tax benefits as income tax expense in the Statements of Operations.

 

Reclassifications

 

Certain prior period balances have been reclassified to conform to the current period's financial statement presentation. These reclassifications had no impact on previously reported results of operations or stockholders' deficiency.

 

Recent Accounting Pronouncements Not Yet Adopted:

 

As of the date of this report, there are no recent accounting pronouncements that have not yet been adopted that we believe would have a material impact on our financial statements.

 

3. Concentration of revenue:

 

A significant portion of the Company's revenues for the three months ended March 31, 2016 were generated from five customers as follows:

 

						Accounts Receivable
		% of Total Revenues				as of March 31, 2016
Customer A		13.39	%		$	11,349
Customer B		12.75	%		$	19,558
Customer C		9.95	%		$	—
Customer D		9.72	%		$	—
Customer E		8.72	%		$	2,410

 

4. Long term investments:

 

On March 30, 2011, the Company and Paymaster Limited (“Paymaster”) agreed to restructure a note receivable (the “Note”). Pursuant to the agreement, the parties agreed to convert the remaining balance of $339,575 of the Note receivable into Cumulative Convertible Redeemable Preference Shares (the Preference Shares”) with a value of $400,000, and an annual dividend of 7.5% over thirty-six (36) months. Paymaster, at any time prior to maturity, may elect to redeem some or all of the Preference Shares at an effective dividend rate of 10% per annum. The Company, upon maturity and with not less than ninety (90) days prior notice, may elect to convert some or all of Preference Shares into the pro rata equivalent of 11,100 ordinary shares of Paymaster (equal to 10% of the issued and outstanding capital of the Company based on the conversion of all Preference Shares on a fully diluted basis). The Company has recorded the investment at $89,575, net of a valuation allowance of $250,000, the same historical carrying value on the Company’s balance sheet as the note. The last dividend the Company has received was the quarterly dividend for the quarter ended June 30, 2012.

 

On March 21, 2016, the Company and Paymaster Limited reached a settlement for the transfer of Paymaster’s Cumulative Convertible Redeemable Preference Shares (the “Preferred Shares”) initially acquired by the Company on March 30, 2011. In the March 21, 2016 agreement, the Company agreed to return the Preferred Shares to Paymaster in exchange for a one-time payment of $275,000. The company received this cash payment during the first quarter of 2016 and recognized a gain of $185,425 on the sale of the long-term asset.

 

5.     Equity-method investment:

 

On May 15, 2015, the Company acquired a 49% Limited Liability Company interest in Pure Grow Systems, LLC (“Pure Grow”) for $250,000 in cash. Financing for this transaction was provided through a $128,000 convertible note issued to Carebourn Capital, LP on May 15, 2015 and a $125,000 convertible note issued to Pure Energy Inc. on May 29, 2015. As of March 31, 2016, $222,000 has been remitted by the Company in acquisition of a minority stake of Pure Grow. The Company has accounted for its 49% interest in Pure Grow utilizing the equity method of accounting. As of March 31, 2016, the carrying value in Pure Grow was $159,437. During the three months ended March 31, 2016, $7,473 was recognized as an equity method loss. Financial information for Pure Grow as of, and for the three months ended March 31, 2016 is as follows:

 

		March 31,
		2016
ASSETS
Cash and cash equivalents		$	16,514
Accounts Payable			32,489
Inventory			23,202
Prepaid Assets			3,000
Total assets		$	75,205
LIABILITIES AND MEMBERS' EQUITY
Accounts payable and accrued expenses		$	15,685
Members' equity			74,772
Net Loss			(15,252	)
Total liabilities and members' equity		$	75,205

 

 

		For the Period from December 31, 2015 Through March 31,
		2016
STATEMENT OF OPERATIONS
Revenues		$	2,000
Cost of sales			75
Gross profit			1,925
Operating expenses			17,177
Operating loss			(15,252	)
Other expense			—
Net loss		$	(15,252	)
Ownership interest (rounded)			49	%
Share of net loss		$	(7,473	)
Investment		$	159,437

 

 

6. Accrued liabilities:

 

Accrued liabilities at March 31, 2016 and December 31, 2015 were $4,446,745 and $4,303,883, respectively, and were comprised of:

		2016				2015
Legal fees		$	23,594			$	23,594
Interest			3,989,655				3,850,583
Consultants and advisors			189,548				186,198
Registration rights			98,013				98,013
Other			145,935				145,495
		$	4,446,745			$	4,303,883

 

7. Promissory notes, including related parties and debenture payable:

 

Promissory notes, including related parties at March 31, 2016 and December 31, 2015, consist of the following:

 

		2016				2015
Promissory notes payable:
Various, including related parties of $25,867 (2016) and $50,767 (2015); interest rate ranging from 8% to 10% [A]		$	71,042			$	113,842
Notes payable; interest rates ranging from 9% to 15%; interest payable quarterly; the notes are unsecured, matured on February 28, 2008; currently in default and past due  [B]			2,090,719				2,090,719
		$	2,161,761			$	2,204,561

 

	[A]	Pursuant to a November 4, 2011 Board of director resolution, these notes are convertible at conversion rates, determined at the discretion of the board of directors. During the three months ended March 31, 2016 the Company issued notes of $53,400 (including $4,300 to related parties) and made payments of $96,200 (including $1,700 to related parties). These notes are due on demand.
	[B]	These notes payable (the “Promissory Notes”) originally became due on February 28, 2007. The Company renewed $283,000 of the Promissory Notes on the same terms and conditions as previously existed. In April 2007 the Company, through a financial advisor, restructured $1,825,000 of the Promissory Notes (the “Restructured Notes”). The Company has accrued an expense of $36,500 to compensate the financial advisor 2% of the Restructured Notes as well as having issued 150,000 shares of common stock to the financial advisor. The Restructured Notes carry a stated interest rate of 15% (a default rate of 20%) and matured on February 28, 2008. The Company has not paid the interest due since June 2007, and no principal payments on the Promissory Notes have been made since 2008 and accordingly, they are in default. Accrued interest on these notes total $3,749,686 and $3,644,686 as of March 31, 2016 and December 31, 2015, respectively is included in accrued expenses on the consolidated balance sheets.

 

The chairman of the board of the Company has personally guaranteed up to $1 million of the Restructured Notes and two other non-related individuals each guaranteed $500,000 of the Restructured Notes. In consideration of their guarantees the Company granted warrants to purchase a total of 1,600,000 shares of common stock of the Company at an exercise price of $0.50 per share. The warrants were valued at $715,200 using the Black-Scholes option pricing model and were amortized over the one-year term of the Restructured Notes. The warrants expired in March 2010.

 

In January 2008, the Company and the three guarantors received a complaint filed by the financial advisor (acting as agent for the holders of the Restructured Notes) and the holders of the Restructured Notes. The claim is seeking $1,946,250 plus per diem interest beginning January 22, 2008 at the rate of twenty percent (20%) per annum plus $37,000 due the financial advisor for unpaid fees. The court has ruled in favor of a motion for summary judgment filed by certain of the plaintiffs and a judgment was entered on August 18, 2009 in the total amount of $2,484,922 in principal and interest on the notes, $40,920 in related claims and $124,972 in attorney’s fees and expenses. The Company is not aware of any payments being made by any of the guarantors and accordingly, the Company includes these liabilities on the March 31, 2016 and December 31, 2015 balance sheets promissory notes payable and accrued expenses.

 

Subsidiary notes payable:

 

On August 24, 2015, the Company’s 70%-owned subsidiary, Brawnstone Security (“Brawnstone”), issued a $50,000 note payable to an unrelated lender. The note bears interest at 63% and is due on February 24, 2016. Brawnstone received $49,005 after loan origination fees of $995, which will be expensed over the period of the loan. The total payback amount for this note was $67,500. The company paid $31,349 in principal and $10,972 in interest related to note during the year ended December 31, 2015. During the three months ended March 31, 2016, the Company paid $25,179 in principal and interest. As of March 31, 2016, the principal balance of the note has been satisfied.

 

On October 27, 2015, Brawnstone issued a $40,000 note payable to an unrelated lender. The note bears interest at 63% and is due on June 27, 2016. Brawnstone received $39,205 after loan origination fees of $795, which will be expensed over the period of the loan. The total payback amount for this note was $53,200. The company paid $9,286 in principal and $3,064 in interest related to note during the year ended December 31, 2015. The company paid $14,762 in principal and $4,871 in interest related to note during the three months ended March 31, 2016. As of March 31, 2016, the remaining payback balance of the note is $21,216.

 

On January 13, 2016, Brawnstone issued a $60,000 note payable to an unrelated lender. The note bears interest at 63% and is due on September 13, 2016. Brawnstone received $58,800 after loan origination fees of $1,200, which will be expensed over the period of the loan. The total payback amount for this note was $81,000. The company paid $19,286 in principal and $6,750 in interest related to note during the three months ended March 31, 2016. As of March 31, 2016, the remaining payback balance of the note is $54,482.

 

Debenture payable:

 

2012 Notes

 

On November 1, 2012, the Company issued a convertible promissory note to David Schaper (“Schaper”) in the amount of $269,858 in exchange for previously accrued legal fees. The note bears interest at 8% per annum, is due on demand and is convertible at a conversion price for each share of common stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements) per share of the Company’s common stock for the ten trading days immediately preceding the date of conversion. During the year ended December 31, 2013, the Company issued 6,986,723 shares of common stock upon the conversion of $103,188 of the note. During the year ended December 31, 2014, the note was sold to unrelated third party accredited investors, and Company issued 2,240,336 shares of common stock upon the conversion of $163,670 of the Note. As of March 31, 2016 and December 31, 2015, the balance of the note is $3,000.

 

2013 Notes

 

The following notes issued in 2013, bear interest at 8% per annum and other than as described below are convertible at a conversion price for each share of common stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements) per share of the Company’s common stock for the ten trading days immediately preceding the date of conversion. The notes issued in 2013 are referred to as the 2013 Notes.

 

On March 14, 2013 the Company issued a convertible promissory note for $46,000 to an accredited investor (the “March 2013 Note”). The March 2013 Note, was due eight months from issuance and bears an interest rate of 8% per annum, and in the case of an event of default increases to 12% per annum (“the Default Rate”). The March 2013 Note matured November 14, 2013, is in default, and the Default Rate was effective at that date. During the year ended December 31, 2014, the Company issued 516,194 shares of common stock upon conversion of $19,425 of the note. The balance of the March 2013 Note is $26,575 as of March 31, 2016 and December 31, 2015.

 

On August 22, 2013, the Company issued a $6,000 convertible promissory note to Schaper. During the year ended December 31, 2014, the Company issued 66,667 shares of common stock upon conversion of $4,000 of this note. The outstanding principal balance on this note is $2,000 as of March 31, 2016 and December 31, 2015.

 

On October 1, 2013, the Company issued a $3,000 convertible promissory note to an accredited investor. The outstanding principal on this note is $3,000 as of March 31, 2016 and December 31, 2015.

 

On October 18, 2013, the Company issued four (4) convertible notes each in the amount of $25,625 to Gel (the “2013 Gel Notes”), with each note due on demand. The conversion price for the 2013 Gel Notes is equal to 50% of the lowest closing bid price of the Common Stock as reported on the exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future with a floor of $0.0001 per share, for any of the five trading days including the day upon which a Notice of Conversion is received by the Company. If the shares have not been delivered within 3 business days, the Notice of Conversion may be rescinded. Accrued but unpaid interest shall be subject to conversion. No fractional shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share. Also on October 18, 2013, Gel issued the Company two secured promissory notes, each in the amount of $25,000, due April 21, 2014. The Company received the $50,000 on March 6, 2014. During the year ended December 31, 2014, the Company issued 944,260 shares upon conversion of $83,295 of the notes. During the year ended December 31, 2015, the Company issued 213,479,349 shares upon conversion of $26,705 in note principal and $2,863 of accrued interest. As of December 31, 2015, the four initial convertible notes have been fully satisfied, while the two subsequent convertible promissory notes in the aggregate of $38,900 of principal are outstanding. Additionally, during the year ended December 31, 2015, the notes have been sold to a third party accredited investor. During the three months ended March 31, 2016 the Company issued 925,000,000 shares of common stock upon conversion of $37,000 of note principal. As of March 31, 2016, the outstanding principal balance of this note is $1,900.

  

On November 22, 2013, the Company issued a $35,000 (the Fong Note) and $30,000 (the Hollander Note) convertible note to Mr. Fong and Mr. Hollander, respectively, for the cancellation of accrued and unpaid fees. These notes are due on demand. During the year ended December 31, 2014, the Company issued 383,333 shares of common stock in satisfaction of $22,000 of the Hollander note. As of December 31, 2014, the outstanding principal on these notes totaled $43,000. During the year ended December 31, 2015, the Company issued 93,361,463 shares of common stock in satisfaction of $8,000 in principal and $1,767 in accrued interest of the Hollander note. The outstanding principal balance of the Fong note is $45,500, while the Hollander note has been fully satisfied as of March 31, 2016 and December 31, 2015.

 

2014 Notes

 

The following notes issued in 2014, bear interest at 8% per annum and other than as described below are convertible at a conversion price for each share of common stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements) per share of the Company’s common stock for the ten trading days immediately preceding the date of conversion. The notes issued in 2014 are referred to as the 2014 Notes.

 

On January 28, 2014, the Company issued a convertible promissory note to Mr. Fong for $25,500 in satisfaction of accrued and unpaid fees due Mr. Fong. Also on January 28, 2014, the Company entered into a Debt Settlement and Release Agreement (the “DSR”) with Mr. Fong, Mary Virginia Knight (“Knight”) or Knight assigns. Pursuant to the DSR, the Company has issued 500,000 shares of common stock to the Knight assign, in cancellation and satisfaction of $45,500 of the convertible note due Mr. Fong. As of March 31, 2016 and December 31, 2015, the outstanding principal balance of this note is $10,500.

 

On February 10, 2014, the Company issued two (2) convertible promissory notes in the amounts of $95,814 and $95,813 in exchange for previously accrued legal fees. The notes bear interest at 8% per annum. The notes matured February 10, 2015 and are in default. During the year ended December 31, 2014, the company issued 416,667 shares of common stock in settlement of $12,500 of the notes. As of December 31, 2014, the balances of the notes totaled $179,127. During the year ended December 31, 2014, the company issued 416,667 shares of common stock in settlement of $12,500 of the notes. During the year ended December 31, 2015, $35,000 in note principal was assigned to a third party in the form of a new convertible promissory note, with the same terms as the prior note. During the year ended December 31, 2015, the Company issued 314,318,871 shares of common stock in satisfaction of $23,808 in principal and $277 of accrued and unpaid interest of the third-party portion of the note. During the three months ended March 31, 2016, the Company issued 39,534,773 shares of common stock in satisfaction of $1,876 in principal and $100 of accrued and unpaid interest of the third party portion of the note. As of March 31, 2016, the balances of the notes are $144,127 to the original note holder and $10,396 to the third party purchaser, totaling $154,523.

 

On March 27, 2014, the Company issued an $831,000 secured convertible promissory note (the “Note”). The Note carries an original issuer discount of $75,000. In addition, the Company agreed to pay $6,000 to cover the Lender’s legal and other fees. At the option of the Lender, the note converts at $0.0025 per share. The conversion by the Lender of any portion of the Outstanding Balance shall only be exercisable in ten (10) tranches (each, a “Tranche”), consisting of an initial Tranche in an amount equal to $88,500 and nine (9) additional Tranches, each in the amount of $82,500, plus any interest, costs, fees or charges accrued thereon or added thereto under the terms of this Note. The Note carries a ten (10) percent interest rate and matures on the seventeenth month after funding. The lender funded $75,000 on April 1, 2014 and also delivered nine (9) secured promissory notes to the Company, each in the amount of $75,000. Each payment received will constitute an “Issue Date”. The Company also granted the lender the right to purchase at any time on or after each Issue Date until the date which is the last calendar day of the month in which the fifth anniversary of the Issue Date occurs (the “Expiration Date”), a number of fully paid and non-assessable shares (the “Warrant Shares”) of the Company’s common stock, par value $0.001 per share equal to $41,250 divided by the Market Price (as defined in the Note). . The Company recorded an initial derivative liability of 559,687, debt discount of $477,187 and derivative expense of $41,890.This note matured April 1, 2015 and is in default. During the year ended December 31, 2014, the company issued 558,333 shares of common stock upon conversion of $16,500 of the note. During the year ended December 30, 2015, the note was sold to an unrelated third party accredited investor for $75,029, which included outstanding principal of $54,672 and accrued interest of $20,357. During the year ended December 31, 2015, the company issued 4,405,110 shares of common stock upon conversion of $17,078 of note principal and 130,531,699 shares upon conversion of $16,500 in warrants shares outstanding. During the three months ended March 31, 2016, the Company issued 282,227,379 shares of common stock upon conversion of $11,502 in warrant shares outstanding. As of March 31, 2016 and December 31, 2015, the outstanding principal balance of this note is $75,029.

 

On April 1, 2014 ($15,000) and April 23, 2014 ($12,500), the Company issued convertible promissory notes to Carebourn Capital. ). The notes bear interest of 8% per annum and matured six months after issuance. The Company recorded an initial derivative liability for these notes of $28,600, debt discount of $27,500 and derivative expense of $1,100. The debt discount of $27,500 was amortized into interest expense over the term of the note. As of December 31, 2014, the entire principal balance of the notes, $27,500 was outstanding. During the year ended December 31, 2015 the Company issued 322,840,228 shares in satisfaction of $21,830 in convertible note principal. In addition, $5,000 in note principal was sold to an unrelated investor. As of December 31, 2015, the principal balance of these notes was $5,670. During the three months ended March 31, 2016, the Company issued 131,077,775 shares of common stock upon conversion of $3,170 in note principal and $2,096 in accrued and unpaid interest. As of March 31, 2016, the principal balance of these notes is $2,500.

 

On July 16, 2014, the Company issued a convertible promissory note for $50,000 to an unaffiliated accredited investor. The note is due on demand and bears interest at 8%. The Company recorded an initial derivative liability of $52,000, debt discount of $50,000 and derivative expense of $2,000. The debt discount of $50,000 was amortized into interest expense over the term of the note. The note matured on April 16, 2015 and is in default. During the year ended December 31, 2015, the company issued 112,049,963 shares of common stock upon conversion of $12,786 of note principal. Amortization for the year ended December 31, 2014, totaled $45,833 and the carrying value of the note as of December 31, 2014, was $45,833, net of unamortized discount of $4,167. Amortization for the year ended December 31, 2015, totaled $4,167 and the carrying value of the note as of December 31, 2015, is $37,214, net of unamortized discount of $0. During the year ended December 31, 2015, the note was sold at its full value of $50,000, before conversion, to an unrelated third party investor. During the three months ended March 31, 2016, the company issued 138,415,000 shares of common stock upon conversion of $6,921 of note principal. As of March 31, 2016 a principal balance of $30,293 remains outstanding

 

On July 22, 2014 ($52,500), August 28, 2014 ($27,500), September 19, 2014 ($27,500), and November 3, 2014 ($27,500) the Company issued convertible promissory notes to Carebourn Capital. The notes are due on demand, bear interest at 12%. The Company received $125,000 after debt issuance costs of $10,000, which was amortized over the earlier of the term of the Notes or any redemptions. The July note matured on April 22, 2015 and is in default. The rest of the notes matured on May 28, 2015 and are in default. The Company recorded an initial derivative liability of $143,100, debt discount of $125,000 and derivative expense of $18,100. The debt discount of $125,000 was amortized into interest expense over the term of the notes. Amortization for the year ended December 31, 2014, totaled $80,292 and the carrying value of the notes as of December 31, 2014, was $80,292, net of unamortized discount of $27,208. Amortization for the year ended December 31, 2015, totaled $27,208 and the carrying value of the notes as of December 31, 2015, is $135,000, net of unamortized discount of $0. As of March 31, 2016 and December 31, 2015, the entire principal balance of $135,000 remains.

 

On December 2, 2014, the Company issued a convertible promissory note for $25,000 to an unaffiliated accredited investor. The note bears interest at 8%. Company recorded an initial derivative liability of $26,000, debt discount of $25,000 and derivative expense of $1,000. The debt discount of $25,000 is being amortized into interest expense over the term of the note. The note matured on September 2, 2015 and is in default. Amortization for the year ended December 31, 2014, totaled $3,889 and the carrying value of the notes as of December 31, 2014, was $3,889, net of unamortized discount of $21,111. Amortization for the year ended December 31, 2015, totaled $21,111 and the carrying value of the notes as of December 31, 2015, is $25,000, net of unamortized discount of $0. As of March 31, 2016 and December 31, 2015, the full principal balance of $25,000 remains outstanding.

 

On December 4, 2014, the Company issued a $38,000 convertible promissory note to Carebourn Capital. The note is due on demand, bears interest at 12%. The Company recorded an initial derivative liability of $39,520, debt discount of $38,000 and derivative expense of $1,520. The debt discount of $40,500 is being amortized into interest expense over the term of the note. The note matured on December 4, 2015 and is in default. Amortization for the year ended December 31, 2015, totaled $38,000 and the carrying value of the notes as of December 31, 2015, is $38,000, net of unamortized discount of $0. As of March 31, 2016 and December 31, 2015, the full principal balance of $38,000 remains outstanding.

 

2015 Notes

 

On February 6, 2015, the Company issued a convertible promissory note for $26,500 to LG Capital (“LG”). The Company received $25,000 after debt issuance costs of $1,500. The debt issuance costs will be amortized over the earlier of the twelve month term of the Note or any redemptions and accordingly $1,500 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. The Company recorded an initial derivative liability of $28,620, debt discount of $26,500 and derivative expense of $2,120. The debt discount of $26,500 is being amortized into interest expense over the term of the note. The note bears interest at 8% and is convertible at a 50% discount of the lowest closing price for the ten (10) days preceding conversion and matures February 6, 2016. Amortization for the year ended December 31, 2015, totaled $24,574 and the carrying value of the notes as of December 31, 2015, is $24,574, net of unamortized discount of $1,926. Amortization for the three months ended March 31, 2016, totaled $1,926 and the carrying value of the notes as of December 31, 2015, is $26,500, net of unamortized discount of $0. The note was sold to an unrelated third party at the face value of the note during 2015. As of March 31, 2016 and December 31, 2015, the outstanding principal balance of this note is $26,500

 

On February 21 2015 ($5,000) and March 21, 2015 ($5,000), the Company issued convertible promissory notes for $10,000 in total to an unrelated third party per a service contract signed between the company and the unrelated service provider. The notes bear interest at 12% and are convertible at a 50% discount of the average of the three lowest day’s closing for the ten (10) days preceding conversion and each note matures 6 months after issuance. The debt issuance costs will be amortized over the earlier of the six month term of the Note or any redemptions and accordingly. The notes are currently in default. The Company recorded an initial derivative liability of $11,200, debt discount of $10,000 and derivative expense of $1,200. The debt discount of $10,000 is being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015, totaled $10,000 and the carrying value of the notes as of December 31, 2015, was $10,000, net of unamortized discount of $0. As of March 31, 2016 and December 31, 2015, the outstanding principal balance of these notes is $10,000.

 

On April 10, 2015, the Company issued a $43,500 convertible promissory note to Carebourn Capital. The April 10th Carebourn Note carries an original issuer discount of $3,000. The note bears interest at 12% and is convertible at a 50% discount of the average of the three lowest day’s closing prices for the ten (10) days preceding conversion. The Company recorded an initial derivative liability of $48,720, debt discount of $43,500 and derivative expense of $5,220. The debt discount of $43,500 is being amortized into interest expense over the term of the note. The note matures on January 10, 2016. Amortization for the year ended December 31, 2015, totaled $42,027, and the carrying value of the note as of December 31, 2015, was $42,027, net of unamortized discount of $1,473. Amortization for the three months ended March 31, 2016, totaled $1,473 and the carrying value of the note as of March 31, 2016, is $43,500, net of unamortized discount of $0. As of March 31, 2016 and December 31, 2015, the full principal balance of $43,500 remains outstanding.

 

On April 15, 2015, the Company issued a convertible promissory note for $26,500 to LG Capital (“LG”). The note bears interest at 8% and is convertible at a 50% discount of the lowest closing price for the ten (10) days preceding conversion. The Company recorded an initial derivative liability of $28,090, debt discount of $26,500 and derivative expense of $1,590. The debt discount of $26,500 is being amortized into interest expense over the term of the note. The Company received $25,000 after debt issuance costs of $1,500. The debt issuance costs will be amortized over the earlier of the twelve month term of the Note or any redemptions and accordingly $1,383 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. The note matured on October 9, 2015. Amortization for the year ended December 31, 2015, totaled $26,500 and the carrying value of the note as of December 31, 2015, is $5,000, net of unamortized discount of $0. During the year ended December 31, 2015, the company issued 317,819,240 shares of common stock upon conversion of $21,500 of note principal and $710 of accrued note interest. As of December 31, 2015, the outstanding principal balance of this note was $5,000. During the three months ended ended March 31, 2016, the company issued 106,115,000 shares of common stock upon conversion of $5,000 of note principal and $306 of accrued note interest. As of March 31, 2016 the principal balance of this note has been fully satisfied.

 

On May 6, 2015, the Company issued a $40,000 convertible promissory note to Pure Energy 714, a New Jersey LLC. The note bears interest at 12% and is convertible at a 50% discount of the average of the three lowest day’s closing prices for the ten (10) days preceding conversion and matures November 6, 2015. The Company received $37,500 after debt issuance costs of $2,500. The debt issuance costs will be amortized over the earlier of the five month term of the Note or any redemptions and accordingly $2,500 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. The Company recorded an initial derivative liability of $42,400, debt discount of $40,000 and derivative expense of $2,450. The debt discount of $40,000 is being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015, totaled $40,000 and the carrying value of the notes as of December 31, 2015, is $40,000, net of unamortized discount of $0. As of March 31, 2016 and December 31, 2015, the outstanding principal balance is $40,000.

 

On May 15, 2015, the Company issued a $128,000 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at a 50% discount of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures February 15, 2016. The Company received $125,000 after debt issuance costs of $3,000. The debt issuance costs will be amortized over the earlier of the nine month term of the Note or any redemptions and accordingly $2,500 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. The Company recorded an initial derivative liability of $143,360, debt discount of $128,000 and derivative expense of $15,360. The debt discount of $128,000 is being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015, totaled $106,667 and the carrying value of the notes as of December 31, 2015, was $106,667, net of unamortized discount of $21,333. Amortization for the three months ended March 31, 2016, totaled $21,333 and the carrying value of the notes as of December 31, 2015, was $128,000, net of unamortized discount of $0. As of March 31, 2016 and December 31, 2015, the outstanding principal balance of this note is $128,000.

 

On May 27, 2015, the Company issued a $28,000 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at a 50% discount of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures February 27, 2016. The Company received $25,000 after debt issuance costs of $3,000. The debt issuance costs will be amortized over the earlier of the nine month term of the Note or any redemptions and accordingly $2,370 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. The Company recorded an initial derivative liability of $31,360, debt discount of $28,000 and derivative expense of $3,360. The debt discount of $28,000 is being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015, totaled $22,116 and the carrying value of the notes as of December 31, 2015, was $22,116 net of unamortized discount of $5,884. Amortization for the three months ended March 31, 2016, totaled $5,884 and the carrying value of the notes as of March 31, 2016, is $28,000 net of unamortized discount of $0. As of March 31, 2016 and December 31, 2015, the outstanding principal balance of this note is $28,000.

 

On May 29, 2015, the Company issued a $125,000 convertible promissory note to Pure Energy 714, a New Jersey LLC. The note bears interest at 12%, is convertible at a 60% discount of the average of the three lowest day’s closing prices for the fifty (50) days preceding conversion and matured on November 29, 2015. The note has matured during the year ended December 31, 2015 and is currently in default. The Company recorded an initial derivative liability of $132,500, debt discount of $125,000 and derivative expense of $7,500. The debt discount of $125,000 is being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015, totaled $125,000 and the carrying value of the notes as of December 31, 2015, is $125,000, net of unamortized discount of $0. As of March 31, 2016 and December 31, 2015, the outstanding principal balance of this note is $125,000.

 

On June 9, 2015, the Company issued a $28,000 convertible promissory note to Pure Energy 714, a New Jersey LLC. The note bears interest at 12%, is convertible at a 50% discount of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures February 27, 2016. The Company received $25,000 after debt issuance costs of $3,000. The debt issuance costs will be amortized over the earlier of the seven month term of the Note or any redemptions and accordingly $2,338 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. The Company recorded an initial derivative liability of $29,680, debt discount of $28,000 and derivative expense of $1,680. The debt discount of $28,000 is being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015, totaled $21,825 and the carrying value of the notes as of December 31, 2015, was $21,825, net of unamortized discount of $6,175. Amortization for the three months ended March 31, 2016, totaled $6,175 and the carrying value of the notes as of December 31, 2015, is $28,000, net of unamortized discount of $0. As of March 31, 2016 and December 31, 2015, the outstanding principal balance of this note is $28,000.

 

On June 19, 2015, the Company issued a convertible promissory note for $36,750 to LG Capital (“LG”). The note bears interest at 8%, is convertible at a 50% discount of the lowest closing price for the ten (10) days preceding conversion and matures on June 19, 2016. The Company recorded an initial derivative liability of $39,690, debt discount of $36,750 and derivative expense of $1,590. The debt discount of $26,500 is being amortized into interest expense over the term of the note. The Company received $25,000 after debt issuance costs of $1,500. The debt issuance costs will be amortized over the earlier of the twelve month term of the Note or any redemptions and accordingly $982 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. Amortization for the year ended December 31, 2015, totaled $19,580, and the carrying value of the notes as of December 31, 2015, was $19,580, net of unamortized discount of $17,170. As of December 31, 2015, the outstanding principal balance of this note was $36,750. Amortization for the three months ended March 31, 2016, totaled $9,738, and the carrying value of the notes as of December 31, 2015, was $26,569, net of unamortized discount of $7,431. During the three months ended March 31, 2016, the company issued 57,626,200 shares of common stock upon conversion of $2,750 of note principal and $133 of accrued note interest. As of March 31, 2016, the outstanding principal balance of this note is $34,000.

 

On June 24, 2015, the Company issued a convertible promissory note for $25,000 to Service Trading Company, LLC (“SVC”). The note is bears interest at 8%, is convertible at a 50% discount of the lowest closing price for the ten (10) days preceding conversion and matures on June 24, 2016. The Company received $23,500 after debt issuance costs of $1,500. The debt issuance costs will be amortized over the earlier of the twelve month term of the Note or any redemptions and accordingly $375 has been expensed as debt issuance costs (included in interest expense) for the three months ended March 31, 2016. The Company recorded an initial derivative liability of $27,000, debt discount of $25,000 and derivative expense of $2,000. The debt discount of $25,000 is being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015, totaled $12,978 and the carrying value of the notes as of December 31, 2015, was $12,978, net of unamortized discount of $12,022. Amortization for the three months ended March 31, 2016, totaled $6,216 and the carrying value of the notes as of March 31, 2016, was $19,194, net of unamortized discount of $5,806. As of March 31, 2016 and December 31, 2015, the outstanding principal balance of this note is $25,000.

 

On June 26, 2015, the Company issued a $15,500 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at a 50% discount of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures March 26, 2016. The Company received $12,500 after debt issuance costs of $3,000. The debt issuance costs will be amortized over the earlier of the nine month term of the Note or any redemptions and accordingly $1,000 has been expensed as debt issuance costs (included in interest expense) for the three months ended March 31, 2016. The Company recorded an initial derivative liability of $17,360, debt discount of $15,500 and derivative expense of $1,860. The debt discount of $15,500 is being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015, totaled $10,635 and the carrying value of the notes as of December 31, 2015, is $10,635, net of unamortized discount of $4,865. Amortization for the three months ended March 31, 2016, totaled $4,865 and the carrying value of the notes as of March 31, 2016, was $15,500, net of unamortized discount of $0. As of March 31, 2016 and December 31, 2015, the outstanding principal balance of this note is $15,500.

 

On July 20, 2015, the Company issued a $15,500 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at a 50% discount of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures April 20, 2016. The Company received $12,500 after debt issuance costs of $3,000. The debt issuance costs will be amortized over the earlier of the nine month term of the Note or any redemptions and accordingly $933 has been expensed as debt issuance costs (included in interest expense) for the three months ended March 31, 2016. The Company recorded an initial derivative liability of $17,360, debt discount of $15,500 and derivative expense of $1,860. The debt discount of $15,500 is being amortized into interest expense over the term of the note. Amortization for the year ended December 31, 2015, totaled $9,244 and the carrying value of the notes as of December 31, 2015, is $9,244, net of unamortized discount of $6,256. Amortization for the three months ended March 31, 2016, totaled $5,129 and the carrying value of the notes as of March 31, 2016, was $14,372, net of unamortized discount of $1,128. As of March 31, 2016 and December 31, 2015, the outstanding principal balance of this note is $15,500.

 

On December 3, 2015, the Company issued a convertible promissory note for $30,000 to SBI Investments, LLC. The note is due on demand, bears interest at 12% and is convertible at a 50% discount of the lowest trading price for the twenty (20) days preceding conversion and matures on August 1, 2016. The Company recorded an initial derivative liability of $32,400, debt discount of $30,000 and derivative expense of $2,400. The debt discount of $30,000 is being amortized into interest expense over the term of the note. The Company received $27,500 after debt issuance costs of $2,500. The debt issuance costs will be amortized over the earlier of the twelve month term of the Note or any redemptions and accordingly $833 has been expensed as debt issuance costs (included in interest expense) for the three months ended March 31, 2016. Amortization for the year ended December 31, 2015, totaled $3,471, and the carrying value of the notes as of December 31, 2015, was $3,471, net of unamortized discount of $26,529. Amortization for the three months ended March 31, 2016, totaled $11,465 and the carrying value of the notes as of March 31, 2016, was $14,701, net of unamortized discount of $14,936. As of December 31, 2015, the outstanding principal balance of this note was $30,000. During the three months ended March 31, 2016, the company issued 72,514,000 shares of common stock upon conversion of $362 of note principal. As of December 31, 2015, the outstanding principal balance of this note was $29,637.

 

On December 4, 2015, the Company issued a convertible promissory note for $35,200 to LG Capital (“LG”). The note bears interest at 8%, is convertible at a 50% discount of the lowest trading price for the twenty (20) days preceding conversion and matures on December 4, 2016. The Company recorded an initial derivative liability of $38,016, debt discount of $35,200 and derivative expense of $2,816. The debt discount of $35,200 is being amortized into interest expense over the term of the note. The Company received $30,000 after debt issuance costs of $2,000 and an original issuer discount of 10% ($3,520). The debt issuance costs will be amortized over the earlier of the twelve month term of the Note or any redemptions and accordingly $520 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. Amortization for the year ended December 31, 2015, totaled $2,597, and the carrying value of the notes as of December 31, 2015, was $2,597, net of unamortized discount of $32,603. Amortization for the three months ended March 31, 2016, totaled $8,752 and the carrying value of the notes as of March 31, 2016, was $11,349, net of unamortized discount of $23,851. As of March 31, 2016 and December 31, 2015, the outstanding principal balance of this note is $35,200.

 

On December 21, 2015, the Company issued a $20,000 convertible promissory note to More Capital. The note bears interest at 3% per month and matures April 20, 2016. The note is convertible at the market price of the Company’s common stock on the day of conversion. As of December 31, 2015, the outstanding principal balance of this note was $20,000. During the three months ended March 31, 2016, the Company paid $20,000 in complete settlement of the outstanding note principal.

 

On December 22, 2015, the Company issued a $50,000 convertible promissory note to Carebourn Capital. The note bears interest at 3% per month and matures February 22, 2016. The note is convertible at the market price of the company’s common stock on the day of conversion. As of December 31, 2015, the outstanding principal balance of this note is $50,000. During the three months ended March 31, 2016, the Company paid $50,000 in complete settlement of the outstanding note principal.

 

On December 30, 2015, the Company issued a $10,000 convertible promissory note to More Capital. The note is due on demand, bears interest at 3% per month and matures March 2, 2016. The note is convertible at the market price of the company’s common stock on the day of conversion. As of December 31, 2015, the outstanding principal balance of this note is $10,000. During the three months ended March 31, 2016, the Company paid $10,000 in complete settlement of the outstanding note principal

 

2016 Notes

 

On January 27, 2016, the Company issued a $18,000 convertible promissory note to Carebourn Capital. The note bears interest at 12%, is convertible at a 50% discount of the average of the three lowest day’s closing prices for the twenty (20) days preceding conversion and matures October 27, 2016. The Company received $15,000 after debt issuance costs of $3,000. The debt issuance costs will be amortized over the earlier of the nine month term of the Note or any redemptions and accordingly $667 has been expensed as debt issuance costs (included in interest expense) for the three months ended March 31, 2016. The Company recorded an initial derivative liability of $19,620, debt discount of $18,000 and derivative expense of $1,620. The debt discount of $18,000 is being amortized into interest expense over the term of the note. Amortization for the three months ended March 31, 2016, totaled $4,204 and the carrying value of the notes as of March 31, 2016, is $4,204, net of unamortized discount of $13,796. As of March 31, 2016 the outstanding principal balance of this note is $18,000.

 

The Company has determined that the conversion features of the 2012, 2013, 2014, 2015 and the 2016 Notes represent embedded derivatives since the Notes are convertible into a variable number of shares upon conversion. Accordingly, the Notes are not considered to be conventional debt under EITF 00-19 and the embedded conversion features must be bifurcated from the debt hosts and accounted for as derivative liabilities. Accordingly, the fair value of these derivative instruments have been recorded as liabilities on the consolidated balance sheet with the corresponding amounts recorded as a discounts to the Notes. Such discounts will be accreted from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liabilities for derivative contracts will be recorded to other income or expenses in the consolidated statement of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet.

 

The fair value of the conversion features embedded in the 2015 Notes as of their dates of issuance and in their entirety as of March 31, 2016 was determined to approximate their fair intrinsic value due to the terms of conversion.

 

The inputs used to estimate the fair value of the derivative liabilities are considered to be level 3 inputs within the fair value hierarchy.

 

A summary of the derivative liabilities related to convertible notes as of March 31, 2016 and December 31, 2015 is as follows:

 

Derivative Liability Balance 12/31/15		Initial Derivative Liability		Redeemed convertible notes		Fair value change- three months ended 3/31/15		Derivative Liability Balance 3/31/16
$      1,359,843		11,083		(211,663)		177,387		$      1,336,644

 

A summary of debentures payable as of March 31, 2015 and December 30, 2014 is as follows:

 

	2016 Face Value	2015 Face Value
2012 and 2013 Notes	$  80,075	$  80,075
2014 Notes	$ 462,182	$  507,619
2015 Notes	$ 583,837	$  599,597
2016 Notes	$ 18,000	—
Note discount	$(67,076)	$ (137,106)
Total	$1,077,019	$ 1,050,135

 

8. Commitments and contingencies:

 

Litigation:

 

The Forest County Potawatomi Community (“FCPC”) has initiated an action against Chex, an inactive subsidiary of the Company, in the FCPC tribal court asserting that Chex breached a contract with FCPC during the 2002 to 2006 time period. Chex is inactive and did not defend this action. On October 1, 2009 a judgment was entered against Chex in the FCPC Tribal Court in the amount of $2,484,922. The Company has included $2,484,922 in litigation contingency on the consolidated balance sheets as of March 31, 2016 and December 31, 2015.

 

The Company is involved in various claims and legal actions arising in the ordinary course of business. The ultimate disposition of these matters may have a material adverse impact either individually or in the aggregate on future consolidated results of operations, financial position or cash flows of the Company.

 

9. Income taxes:

 

The operations of the Company for periods subsequent to its acquisition by HPI and through August 2004, at which time HPI’s ownership interest fell below 80% are included in consolidated federal income tax returns filed by HPI. Subsequent to August 2004 and through January 29, 2006 the Company will file a separate income tax return. As of January 30, 2006, HPI’s ownership interest again exceeded 80% and the operations of the Company will be included in a consolidated federal income tax from that date through October 29, 2006 when the ownership fell below 80%. As of October 30, 2006, the Company will be filing separate income tax returns. For financial reporting purposes, the Company’s provision for income taxes has been computed, and current and deferred taxes have been allocated on a basis as if the Company has filed a separate income tax return for each year presented. Management assesses the realization of its deferred tax assets to determine if it is more likely than not that the Company's deferred tax assets will be realizable. The Company adjusts the valuation allowance based on this assessment.

 

As of March 31, 2016, the Company had a tax net operating loss carry forward of approximately $12,851,000. Any unused portion of this carry forward expires in 2031. Utilization of this loss may be limited in the event of an ownership change pursuant to IRS Section 382.

 

10. Stockholders’ deficiency:

 

Common stock:

 

During the three months ended March 31, 2016, the Company issued 1,752,572,976 shares of common stock upon the conversion of $71,218 of debentures payable, accrued and unpaid interest and the cashless exercise of warrants.

 

Preferred stock

 

There were no shares of Class A or B preferred stock issued during the three months ended March 31, 2016.

 

The COD for Class A Preferred stock states; each share of the Class A Preferred Stock shall be entitled to a number of votes determined at any time and from time to time determined as follows: any holder of Class A Preferred Stock can vote such shares as if converted based on the Conversion Rights in below. The Class A Preferred Stock shall have a right to vote on all matters presented or submitted to the Corporation’s stockholders for approval in pari passu with holders of the Corporation’s common stock, and not as a separate class. Each share of the Class A Preferred Stock shall automatically convert (the “Conversion”) into shares of the Corporation’s common stock at the moment there are sufficient authorized and unissued shares of common stock to allow for the Conversion. The number of shares of common stock to which a holder of Class A Preferred Stock shall be entitled upon a conversion shall equal the product obtained by (a) multiplying the number of fully diluted common shares by twenty five hundredths (0.25), then (b) multiplying the result by a fraction, the numerator of which will be the number of shares of Class A Preferred stock being converted and the denominator of which will be the number of authorized shares of Class A Preferred stock. As of March 31, 2015 there are 819,000 shares of Class A Preferred stock outstanding.

 

On December 14, 2012, Board of Directors approved the filing of a COD establishing the designations, preferences, limitations and relative rights of the Company’s Class B Preferred Stock. The COD allows the Board of Directors in its sole discretion to issue up to 2,000,000 shares of Class B Preferred Stock. The COD for Class B Preferred stock states; each share of the Class B Preferred Stock shall be entitled to a number of votes determined at any time and from time to time determined as follows: any holder of Class B Preferred Stock can vote such shares as if converted based on the Conversion Rights in below. The Class B Preferred Stock shall have a right to vote on all matters presented or submitted to the Corporation’s stockholders for approval in pari passu with holders of the Corporation’s common stock, and not as a separate class. Each share of the Class B Preferred Stock shall automatically convert (the “Conversion”) into shares of the Corporation’s common stock at the moment there are sufficient authorized and unissued shares of common stock to allow for the Conversion. The Class B Preferred Stock will convert in their entirety, simultaneously to equal the amount of shares of common stock resulting from the amount of series B Preferred Stock outstanding multiplied by sixty (60). The Conversion shares will be issued pro rata so that each holder of the Class B Preferred Stock will receive the appropriate number of shares of common stock equal to their percentage ownership of their Class B Preferred Stock. As of March 31, 2016 there are 1,791,667, shares of Class B Preferred stock outstanding.

 

Effective January 21, 2014, the Board of Directors of the Company approved the issuance of 1,000 shares of Class C Preferred Stock (as defined and described below) (the “Class C Preferred Stock Shares”) to Mr. Fong or his assigns in consideration for services rendered to the Company and continuing to work for the Company without receiving significant payment for services and without the Company having the ability to issue shares of common stock as the Company does not have sufficient authorized but unissued shares of common stock to allow for any such issuances.

 

As a result of the issuance of the Class C Preferred Stock Shares to Mr. Fong, or his assigns and the Super Majority Voting Rights (described below), Mr. Fong obtained voting rights over the Company’s outstanding voting stock which provides him the right to vote up to 51% of the total voting shares able to vote on any and all shareholder matters.  As a result, Mr. Fong will exercise majority control in determining the outcome of all corporate transactions or other matters, including the election of Directors, mergers, consolidations, the sale of all or substantially all of the Company’s assets, and also the power to prevent or cause a change in control. The interests of Mr. Fong may differ from the interests of the other stockholders and thus result in corporate decisions that are adverse to other shareholders.  Additionally, it may be impossible for shareholders to remove Mr. Fong as an officer or Director of the Company due to the Super Majority Voting Rights. The Class C preferred stock provides no other rights to their holder(s) other than voting rights.

 

The Company valued the 1,000 shares of Class B preferred stock at $106,673, based on an estimated control premium determined with reference to a third party study, that may be realized upon the sale of common stock, primarily similar to voting control as of the grant date.

 

Stock options:

 

The Company has a stock option plan (the “Plan”) which was approved by the Board of Directors in July 2004 and which permits the grant of shares to attract, retain and motivate employees, directors and consultants of up to 3,000 shares of common stock. Options are generally granted with an exercise price equal to the Company’s market price of its common stock on the date of the grant and vest immediately upon issuance.

 

There were no options granted during the three months ended March 31, 2016.

 

All options outstanding at March 31, 2016 are fully vested and exercisable. A summary of outstanding balances at March 31, 2016 and December 31, 2015 is as follows:

 

				Weighted-
		Weighted- Average		Average Remaining		Aggregate Intrinsic
Options		exercise price		contractual life		Value
1,650		$0.34		0.73		$0

Warrants:

 

A summary of warrant activity for the three months ended March 31, 2016 is shown in the table below:

 

		Number of Warrant Shares Outstanding
Balance at December 31, 2015			88,014
Cashless exercise of warrants			(11,502	)
Exercise price		$	0.00004
Remaining Term			3.03 years
Balance at March 31, 2016			76,512

 

 

11. Prior events:

 

Asset sale:

 

On December 22, 2005, FFFC and Chex entered into an Asset Purchase Agreement (the “APA”) with Game Financial Corporation (“Game”), pursuant to which FFFC and Chex agreed to sell all of its cash access contracts and certain related assets, which represented substantially all the assets of Chex. Such assets also represented substantially all of the operating assets of the Company on a consolidated basis. On January 31, 2006, FFFC and Chex completed the sale (the “Asset Sale”) for $14 million pursuant to the APA and received net cash proceeds of $12,642,784, after certain transaction related costs and realized a pre-tax book gain of $4,145,835. As a result of the Asset Sale, the Company has no substantial continuing operations. Therefore, the Company is not reporting and accounting for the sale of Chex’s assets as discussed in discontinued operations.

 

Additionally, FFFC and Chex entered into a Transition Services Agreement (the “TSA”) with Game pursuant to which FFFC and Chex agreed to provide certain services to Game to ensure a smooth transition of the sale of the cash-access financial services business.

 

Pursuant to the APA and the TSA, FFFC and Chex owed Game approximately $300,000. Game, FFFC and Chex agreed to settle the balance due for $275,000 (included in accounts payable on the balance sheet presented herein) with payment terms. FFFC and Chex have not made any of the payments stipulated in the settlement and subsequently Game filed a complaint against Chex, FFFC and Hydrogen Power Inc. (“HPI”) seeking approximately $318,000. The Company has agreed to a judgment of $329,146, comprised of the $275,000, attorney fees of $15,277 (included in accounts payable on the balance sheet presented herein, and attorney fees of $38,869 (included in accrued liabilities on the balance sheet presented herein). FFFC and Chex have agreed to indemnify HPI.

 

12. Related party transactions:

 

Management and director fees:

 

For the three months ended March 31, 2016 and March 31, 2015, the Company accrued expenses of $37,500 for Mr. Fong, the Company’s President and Chairman. Mr. Fong received $34,150 and $29,500 in cash payments for the three months ended March 31, 2016 and March 31, 2015, respectively. In November 2013, the Company issued a convertible promissory note to Mr. Fong in payment of $35,000 of accrued and unpaid fees. As of March 31, 2016, Mr. Fong is owed $25,500 for these services, included in accrued expenses on the balance sheet.

 

Acquisition of Carbon Capture:

 

On May 25, 2012, the Company’s newly formed subsidiary ATD acquired Carbon Capture USA (“Carbon”) from Carbon Capture Corporation, a Colorado corporation ("CCC"). CCC is privately held by Mr. Henry Fong, a director of the Company and is the control person of CCC. Pursuant to the Agreement, ATD acquired from CCC all of the issued and outstanding common stock of Carbon in exchange for one-hundred fifty thousand (150,000) newly issued unregistered shares of the Company’s common stock. As of December 31, 2013, Carbon has exchanged the 150,000 shares of common stock for 1,500,000 shares of Class B preferred stock. The Class B preferred stock automatically converts to 150,000 shares of common stock whenever there are sufficient shares of common stock to allow for the conversion. Pursuant to the terms and conditions of the preferred stock, the Company determined there were not any additional costs to be recognized.

 

Notes payable:

 

As disclosed in Note 7, the Company has issued notes payable to various related parties. The balances of December 31, 2015 and March 31, 2016, and the activity for the three months ended March 31, 2016 follows:

 

Noteholder		Balance 12/31/15		Additions		Payments		Sold		Balance 3/31/16
MV Knight (3)	$	8,900	$	—	$	—	$	—	$	8,900
HPI Partners (1)		395		—		—		—		395
Henry Fong (2)		3,000		—		—		—		3,000
HF Services (1)		300		4,300		1,700		—		2,900
SurgLine Int’l (1)		10,672		—		—		—		10,672
Total	$	23,267	$	4,300	$	1,700	$	—	$	25,867

 

All of the notes are due on demand and have interest rates of 8% to 10% per annum.

 

(1)

Mr. Henry Fong, an officer and director of the Company, is also an officer, director or control person of these entities.

(2)

An officer or director of the Company.

(3)

Related to an officer and director of the company

 

13. Segment reporting:

 

During the three months ended March 31, 2016 and the year ended December 31, 2015, the Company operated in two reportable segments: Brawnstone and Nova.

 

Brawnstone, in which the Company owns a 70% interest, is a licensed armed security, private investigation, security technology solution provider and tactical training company servicing active accounts with several Government affiliated HUD housing establishments, schools, and industrial facilities across the Ohio region.

 

Nova, a wholly owned subsidiary of the Company, was formed to design, market and service credit card products aimed at the sub-prime market consisting mainly of consumers who may not qualify for traditional credit card products. Nova charges a monthly fee on active cards and receives proceeds, if any, from Merrick Bank after their bank charges for servicing the credit cards. The accounting policies of the segments are the same as those described in the Note 1.  The Company’s reportable segments are strategic business units that offer products. 

 

For the three months ended March 31, 2016, segment results are as follows:

 

		Brawnstone				Nova				Corporate				Total
Net Revenues		$	169,753			$	5,333			$	—			$	175,086
Operating costs		$	92,574			$	5,449				—			$	98,023
Selling, general, and administrative		$	59,279				—			$	78,492			$	137,771
Other non-cash items:
Other expense		$	4,979				—			$	574,192			$	579,171
Other income			—				—			$	185,425			$	185,425
Segment income or (loss)		$	12,921			$	(116	)		$	(467,259	)		$	(454,454	)
Segment assets		$	65,306			$	35,403			$	312,393			$	413,102

 

14. Subsequent events:

 

From April 1, 2016, through June 28, 2016, the Company has issued 187,118,250 shares of common stock upon conversion of $7,485 of convertible promissory note principal.

 

Management has determined that there are no further events subsequent to the balance sheet date that should be disclosed in these financial statements.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE OPERATIONAL PLANS, FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS "MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE", "MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON THE VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY RELATED TO THE COMPANY'S OPERATIONS, MERGERS OR ACQUISITIONS, GOVERNMENTAL REGULATION, THE VALUE OF THE COMPANY'S ASSETS AND ANY OTHER FACTORS DISCUSSED IN THIS AND OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

GENERAL

 

FastFunds Financial Corporation (“FFFC”) is a holding company and through January 31, 2006 operated primarily through its wholly-owned subsidiary Chex Services, Inc. (“Chex”). As disclosed in the December 31, 2013 10-K, FFFC also has several other non-operating wholly-owned subsidiaries. FFFC and its subsidiaries are referred to as (the “Company”).

 

OVERVIEW

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto for the years ended December 31, 2015 and 2014. The financial statements presented for the three months ended March 31, 2016 and 2015 include FFFC and its subsidiaries.

 

In light of the foregoing, and the Company’s sale of substantially all of its assets in January 2006, the historical data presented below is not indicative of future results. You should read this information in conjunction with the audited consolidated financial statements of the Company, including the notes to those statements for the year ended December 31, 2015, filed with the SEC on May 24, 2016, and the following “Management’s Discussion and Analysis of Financial Conditions and Results of Operations”.

 

The Company’s financial statements for the three months ended March 31, 2016 and 2015 have been prepared on a going concern basis, which contemplates the realization of its remaining assets and the settlement of liabilities and commitments in the normal course of business. The Company has incurred significant losses since its inception and has a working capital deficit of approximately $12,538,649 and an accumulated deficit of approximately $30,271,947 as of March 31, 2016. Moreover, it presently has minimal ongoing business operations or sources of revenue, and little available resources with which to obtain or develop new operations.

 

These factors raise substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance that the Company will have adequate resources to fund future operations or that funds will be available to the Company when needed, or if available, will be available on favorable terms or in amounts required by the Company. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

LIQUIDITY AND CAPITAL RESOURCES

 

For the three months ended March 31, 2016, net cash used in operating activities was $43,579 compared to $119,461 for the three months ended March 31, 2015. Net loss was $454,454 and $368,056 for the three months ended March 31, 2016 and 2015, respectively.

 

Included in the net loss for the three months ended March 31, 2016 was $164,070 for the amortization of debt discounts and deferred financing costs related to convertible notes. The current period loss also included operating expenses of approximately $98,023, interest expense of $137,254 related to convertible promissory notes and convertible debenture, and derivative liability expense of $179,001 due to the change in fair value of derivative liabilities.

 

Included in the net loss for the three months ended March 31, 2015 was $66,217 for the amortization of debt discounts and deferred financing costs related to convertible notes. The current period loss also included operating expenses of approximately $145,197, interest expense of $191,214 related to convertible promissory notes and convertible debenture, and derivative liability expense of $12,150 due to the change in fair value of derivative liabilities.

 

Net cash used in investing activities was zero for the three months ended March 31, 2016 and March 31, 2015.

 

Net cash provided by financing activities for the three months ended March 31, 2016 was $67,798 compared to $129,510 for the three months ended March 31, 2015. During the three months ended March 31, 2016, the Company received $15,000 from the issuance of convertible notes and $4,300 from the issuance of notes payable related parties. The Company repaid $73,102 of notes payable ($20,791 related parties) and paid $9,500 of deferred financing fees. During the three months ended March 31, 2015, the Company received $50,000 from the issuance of convertible notes and 112,800 from the issuance of notes payable related parties.

 

For the three months ended March 31, 2016, cash and cash equivalents increased by $24,219 compared to an increase of $10,049 for the three months ended March 31, 2015. Ending cash and cash equivalents at March 31, 2016 was $33,440 compared to $13,415 at March 31, 2015.

 

We have limited cash and cash equivalents on hand and need to raise funds to continue to be able to support our operating expenses and to meet our other obligations as they become due.

 

REVENUES

 

Total revenues for the three months ended March 31, 2016 were $175,086 compared to $207,975 for the three months ended March 31, 2015. Revenues in the three month periods ended March 31, 2016 and March 31, 2015 consist of Brawnstone sales revenue and of credit card income on Nova’s remaining portfolio.

 

OPERATING EXPENSES

Operating expenses for the three months ended March 31, 2016, were $98,023 compared to $145,197 for the three months ended March 31, 2015. Expenses were primarily comprised of the Brawnstone subsidiary’s cost of sales as well as third party servicing fees of Nova’s remaining credit card portfolio.

 

SELLING GENERAL AND ADMINISTRATIVE EXPENSES

 

Corporate operating expenses for the three months ended March 31, 2016 were $227,470 compared to $227,470 for the three months ended March 31, 2015, respectively. The expenses were comprised of the following:

 

		Three months ended March 31,
		2016				2015
Accounting and legal		$	10,000			$	2,927
Stock compensation expense			—				—
Management and director fees			37,500				37,500
Consulting and other professional			14,230				27,434
Transfer agent and filing fees			1,348				3,980
Other			74,693				155,629
		$	137,771			$	227,470

 

Effective October 1, 2012, the Company has agreed to compensate Mr. Fong $5,000 each per month for services being provided. On June 1, 2014, the Company increased Mr. Fong’s monthly compensation to $12,500 (management and director fees). Included in three months ended March 31, 2016 were accounting and auditing fees of 10,000.

 

Consulting and other professional fees decreased for the three months period ended March 31, 2016 compared to the three months period ended March 31, 2015 due to a slowdown of activity related to financing activities generated by the corporate unit.

 

Consulting and other professional fees for the three months ended March 31, 2016 included $11,345 in outside consulting fees and $2,885 investor relations costs.

 

The March 31, 2015 expenses included $6,500 in consulting fees, $3,204 as part of a marketing agreement to increase the Company’s social media presence, $3,955 in investor relations costs and $13,775 in additional outside consulting fees.

 

The decrease in transfer agent and filing fees costs for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, were related to State of Nevada costs for increasing the authorized shares of common stock as well as transfer agent costs for the issuance of shares of common stock upon conversion of debentures.

 

General and other administrative costs for the three months ended March 31, 2016 were $137,771 compared to $227,470 for the three months ended March 31, 2015.

 

Included in the expenses for the three months ended March 31, 2016 were rent expense of $3,982, travel expense of $2,060, royalty fees of $15,000, office supplies of $3,310, and Brawnstone’s operating costs of $59,279.

 

Expenses for the three months ended March 31, 2015 include rent expense of $3,620, travel expense of $4,114, royalty fees of $15,000, office supplies of $2,718, and Brawnstone’s operating costs of $86,899 .

 

OTHER INCOME (EXPENSE)

 

Other expense, net for the three months ended March 31, 2016 was $393,746 compared to $203,364 for the three months ended March 31, 2015. The three months periods ended March 31, 2016 and March 31, 2015, included derivative liability expenses of $179,001 and $12,150, respectively. The March 31, 2016 expense amount is offset by a gain from the sale of a long-term asset totaling $185,425.

 

Interest expense for each of the periods is as follows:

 

		Three  months ended March 31,
		2016				2015
Interest on face value		$	228,627			$	125,097
Amortization of note and OID discounts			158,091				60,859
Amortization deferred financing costs			5,979				5,358
Total		$	392,697			$	191,214

 

 

CONTRACTUAL OBLIGATIONS

 

Not Applicable

 

CRITICAL ACCOUNTING POLICIES

 

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed 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.

 

Our significant accounting policies are described in more detail in our 2015 Annual Report on Form 10-K.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

As of the date of this report, there are no recent accounting pronouncements that have not yet been adopted that we believe would have a material impact on our financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK

 

Not applicable to smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures.

The Company maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company’s filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated to allow our management to make timely decisions regarding required disclosure. Our President, who serves as our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and he determined that our disclosure controls and procedures were not effective due to a control deficiency. During the period the Company did not have additional personnel to allow segregation of duties to ensure the completeness or accuracy of our information. Due to the size and operations of the Company, we are unable to remediate this deficiency until we acquire or merge with another company.

 

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2016, there were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter 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

 

Refer to Note 6 of the Condensed Consolidated Financial Statements

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended March 31, 2016, the Company issued 1,752,510,136 shares of common stock upon the conversion of $57,079 of debentures payable, $2,637 of accrued and unpaid interest and $11,502 of outstanding warrant shares. The shares were issued at approximately $0.00005 per share.

 

Item 3.

Defaults upon Senior Securities

 

None.

 

Item 4.

Mine Safety Disclosure

 

None.

 

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

Exhibit Number	Description
31.1	CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
32.1	CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith)

 

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.

 

	FastFunds Financial Corporation
	(Registrant)
Date: June 29, 2016	By: /s/ Henry Fong
	Henry Fong
	Chief Executive Officer

 

 

31