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EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - SPENDSMART NETWORKS, INC.ex31-1.htm
EX-32.2 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - SPENDSMART NETWORKS, INC.ex32-2.htm
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - SPENDSMART NETWORKS, INC.ex32-1.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - SPENDSMART NETWORKS, INC.ex31-2.htm
EX-21.1 - SUBSIDIARIES OF THE REGISTRANT - SPENDSMART NETWORKS, INC.ex21-1.htm
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
(Mark One)
            
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
 
            
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________to _______________.
 
Commission file number: 000-27145
 
SPENDSMART NETWORKS, INC.
(f/k/a The SpendSmart Payments Company)
(Exact Name of Registrant as Specified in its Charter)
  
Delaware
 
 
33-0756798
(State or jurisdiction of incorporation or organization)
 
 
(I.R.S. Employer Identification No.)
 
805 Aerovista Pkwy, Suite 205
 
 
 
San Luis Obispo California
 
 
93401
(Address and of principal executive offices)
 
 
(Zip Code)
  
Registrant’s telephone number, including area code: (877) 541-8398
 
Common Stock, par value $0.001 per share
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐ No    ☒
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes  ☐ No    ☒
 
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    ☒ No    ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    ☒ No    ☐
 
Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K or any amendment to this Form 10-K.    ☐
 
 
 
 
 
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b(2) of the Exchange Act. (Check one).
 
 Large accelerated filer  ☐
 Accelerated filer  ☐
 Non-accelerated filer  ☐(1)
 Smaller reporting company  ☒
 
(1) Do not check if a smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐ No  ☒
 
The aggregate market value of the voting and non-voting common equity on June 30, 2016 held by non-affiliates of the registrant (based on the average bid and asked price of such stock on such date of $0.09) was approximately $3,244,891. Shares of common stock held by each officer of the Company (or of its wholly-owned subsidiary) and director and by each person who owns 10% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Without acknowledging that any individual director of registrant is an affiliate, all directors have been included as affiliates with respect to shares owned by them.
 
At May 11, 2017, there were 42,575,571 shares outstanding of the issuer’s common stock, par value $0.001 per share.
 
 
 

 
 
 
SPENDSMART NETWORKS, INC.
 
TABLE OF CONTENTS
 
PART I
 
 
Item 1.
Business
 1
Item 1A.
Risk Factors
 5
Item 1B.
Unresolved Staff Comments
 18
Item 2.
Properties
 18
Item 3.
Legal Proceedings
 18
Item 4.
Mine Safety Disclosures
 18
 
 
 
PART II
 
 
Item 5.
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 19
Item 6.
Selected Financial Data
 20
Item 7.
Management's Discussion and Analysis of Financial Condition And Results of Operations
 20
Item 7A.
Qualitive and Quantitative Disclosures About Market Risk
 24
Item 8.
Financial Statements and Supplementary Data
 26
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
 58
Item 9A.
Controls and Procedures
58
Item 9B.
Other Information
58
 
 
 
PART III
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
 59
Item 11.
Executive Compensation
 64
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 70
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 72
Item 14.
Principal Accounting Fees and Services
 74
 
 
 
PART IV
 
 
Item 15.
Exhibits and Financial Statement Schedules
 
 
 
 75
SIGNATURES
 78
 
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
 
In addition to historical information, this Annual Report on Form 10-K may contain statements relating to future results of SpendSmart Networks, Inc. (including certain projections and business trends) that are “forward-looking statements.” Our actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, without limitation, statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Company to be materially different from any future results or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, those set forth herein and those detailed from time to time in our other Securities and Exchange Commission (“SEC”) filings. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Also, there can be no assurance that the Company will be able to raise sufficient capital to continue as a going concern.
 
 
PART I
 
Item 1 - Business
 
As used in this Annual Report on Form 10-K, the terms "we", "us", "our", “SpendSmart”, “SpendSmart Networks, Inc.”, and the "Company" means SpendSmart Networks, Inc., a Delaware corporation, its wholly-owned subsidiary SpendSmart Networks, Inc., a California corporation or their management.
 
Current Business & Strategy
 
We are a national full-service mobile and loyalty marketing agency that offers a means for small and large business owners alike to better connect with their consumers and generate sales. We do business under the name “SMS Masterminds.” The core of our business involves two licenses which include, among other things, a proprietary SaaS (software as a service) system, proprietary marketing and sales training materials and mobile-responsive website building software.
 
With our mobile and loyalty marketing programs and proprietary responsive website building software, we provide proprietary loyalty systems and a suite of digital engagement and marketing services that help local merchants build relationships with consumers and drive revenues. These services are sold, implemented and supported both internally and by a vast network of certified digital marketing specialists, aka “Certified Masterminds,” who drive revenue and consumer relationships for merchants via loyalty programs, custom mobile-responsive websites, review generation and management, social media engagement, mobile marketing, mobile commerce and financial tools, such as reward systems. We enter into licensing agreements for our proprietary loyalty and mobile marketing solutions and custom mobile-responsive website building tools with “Certified Masterminds” which sell and support the technology in their respective exclusive markets. We provide extensive training materials, best practice guides and other resources to our licensees, including access to a “Mentor,” who is an existing successful “Mastermind.” In addition to our introductory training program, our licensees have access to an online forum and knowledge base, and the ability to interface with various in house resources for needs related to merchant account management and support, as well as sales and business development.
 
The licensees also utilize digital loyalty tablets provided to their merchants. The loyalty tablets are proprietary tablet devices set up in physical retail locations where consumers can enter their mobile phone number to “opt-in” to receive notifications from the merchant and participate in the merchant’s loyalty program.
 
Our business strategy consists of delivering and managing:
 
(i)
Loyalty platforms
a.
Merchant funded rewards
b.
Loyalty rewards tablet/kiosk
c.
Proprietary rewards management system
 
(ii)
Mobile marketing technology
a.
Text and email messaging
b.
Customer analytics and propensity marketing
c.
Patent pending ‘automated engagement’ engine
d.
Text2Win sweepstakes features
 
(iii)
Enterprise level loyalty and mobile marketing consulting
a.
Monthly hands on reviews by our “Certified Masterminds”
b.
Campaign creation and optimization
c.
Localized support
 
(iv)        Proprietary mobile-responsive website building platform
a.
 Software allowing licensees and merchants to create and administer their websites
b. Audits of existing merchant websites
c. Integration of social media streams and consumer reviews into websites
 
 
 
 
We plan to pursue these strategies across a broad range of consumer, business, for-profit and non-profit organization, and government/municipal sectors. In addition, we have partnered with various groups to develop strategic affinity/co-brand opportunities. We expect to continue such partnership programs with various global for-profit and non-profit organizations.
 
Advertising and Marketing Strategies
 
SpendSmart develops the loyalty and mobile marketing license through the acquisition of interested ‘prospects’ or leads generated through various advertisements placed on web portals throughout the internet, as well as through referrals from existing licensees. These lead sources have proven to be a consistent and reliable channel for interested potential licensees. We intend to continue to look for new sources of licensee leads, as well as increase our budget to increase our volume of leads generated. All other aspects of the business will be promoted through our network of licensees in North America.
 
Financial Model
 
Our Mobile and Loyalty Marketing and website development programs provide for multiple revenue components including set up fees and recurring license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services.
 
We generate revenues primarily in the form of set up fees, recurring license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services. License fees are charged monthly for our support services. Business development and set-up fees primarily consist of fees for website development services (including support and unspecified upgrades and enhancements when and if they are available), training and professional services that are not essential to functionality.
 
We employ outside consultants to handle overflow development work on our proprietary software platforms, marketing services, legal and other specific business functions when needed.  While we intend to restrict the number of new employees we add to our Company’s workforce, we believe that new personnel will be necessary in the future in the areas of project management, software programming, operations, accounting, sales and administration.
 
Barriers to Entry
 
Our Company has applied for patents in connection with our Mobile and Loyalty Marketing program and its related uses and planned future features. We believe that the business processes in connection with our Mobile and Loyalty Marketing program are original to our Company; however we may discover that others have patent claims of which we are currently unaware. Should we be successful in obtaining the grant of the patents under application and should we be successful in countering any challenges to their validity that might emerge, the lifetime of the granted patents would be twenty years. Should the patent applications in question be approved, it could give us a cost advantage from the license fees that future potential competitors would be required to pay as well as revenues from said license fees. There can be no assurance however that we will be successful in receiving such a patent or successful in countering any challenges thereto.
 
Competitive Business Conditions
 
The market for loyalty and mobile marketing services is large, growing and highly competitive. We have identified a few providers of loyalty and mobile marketing related products and services.
 
 
 
Spot On is a provider of a loyalty rewards platform that utilizes a touchscreen tablet to digitize a punch card type loyalty program. At this time Spot appears to be privately held, but well financed. They are based in California. They do not appear at this time to have any kind of text based marketing component to their offering, but instead focus on digitizing the punch card experience and delivering messaging to consumers via email. Spot On does not at this time have any localized representation or support, instead they rely on selling and supporting nationally over the phone and via their website.
 
BellyCard is a provider of loyalty rewards platforms directly to merchants utilizing a touchscreen tablet to digitize the punch card type loyalty program. They claim to have a total of ten thousand merchants located in the US. They utilize an iPad device as their touchscreen interface and have robust customer analytics engine that the merchant can utilize to understand trends in their business. They do not at this time provide any texting capability and do not have localized support or sales teams. They instead rely on national support and an outsourced phone sales team.
 
In summary, while we face potential future competition in our target market for our products, we currently believe our products offer distinct features that respond to market needs not well served by the identified competitors mentioned above. However, many of these firms have longer operating histories, greater name recognition and greater financial, technical, and marketing resources than us. Increased competition from any of these sources could result in our failure to achieve and maintain an adequate level of customer demand and market share to support the cost of our operations.
 
Pre-Paid Credit Card
 
On November 26, 2014, in an effort to reduce expenses as well as focus its resources on its mobile and loyalty marketing solutions, the Company decided to begin a wind down of the operations of its pre-paid credit card product. All credit card related operations ceased on or about January 26, 2015. The Company will maintain certain card customer data for five (5) years. The pre-paid card program included our general-purpose card and our SpendSmart MasterCard Teen Prepaid Card.
 
Corporate History
 
Our Company was originally incorporated in the State of Colorado on May 14, 1990 as “Snow Eagle Investments, Inc.” and was inactive from 1990 until 1997. In April 1997, the Company acquired the assets of 1st Net Technologies, LLC, a California limited liability company, and the Company changed its name to “1st Net Technologies, Inc.” and operated as an Internet commerce and services business. In August 2001, the Company suspended its operations. In September of 2005, the Company acquired VOS Systems, Inc. (the “VOS Subsidiary”) as its wholly owned subsidiary and the Company changed its name to “VOS International, Inc.” and traded under the symbol “VOSI.OB”. The VOS Subsidiary operated as a technology company involved in the design, development, manufacturing, and marketing of consumer electronic products.
 
On October 16, 2007, we sold the VOS Subsidiary and acquired BillMyParents-CA (at the time both our Colorado parent and California subsidiary were named IdeaEdge, Inc.). On May 1, 2009, our Company changed our name from IdeaEdge, Inc. to Socialwise, Inc., and our stock traded under the symbol “SCLW.OB”. On May 25, 2011, we changed our name to BillMyParents, Inc. and beginning June 13, 2011, our stock traded under the symbol “BMPI.OB.” On February, 15, 2013, we changed our name to The SpendSmart Payments Company and beginning February 28, 2013, our stock traded under the symbol “SSPC.OB.” Effective as of June 20, 2014, the Company was re-domiciled from Colorado to Delaware. Effective as of June 20, 2014, we filed an amendment to our Certificate of Incorporation changing our name to “SpendSmart Networks, Inc.”
 
 
 
Cautionary Note Regarding Forward-Looking Statements
 
This annual report on Form 10-K contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections.  In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in news releases or reports, on its Internet web site or otherwise.  All statements other than statements of historical facts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our business, operating results and financial condition.  We have identified some of these forward-looking statements with words like “believe,” “may,” “could,” “would,” “might,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate,” “contemplate” and “continue,” the negative of these words, other words and terms of similar meaning and the use of future dates.  These forward-looking statements may be contained in this section, the notes to our financial statements and elsewhere in this report, including under the heading “Part II.  Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  Our forward-looking statements generally relate to:
 
the status of our development of product and services;
 
our future operating expenses, anticipated burn rate and whether and how long our existing cash and cash equivalents will be sufficient to fund our operations;
 
the market size and market acceptance of our products and services;
 
the effect of new accounting pronouncements and other legislation; and
 
our continuing losses.
 
Forward-looking statements involve risks and uncertainties.  These uncertainties include factors that affect all businesses as well as matters specific to us.  Some of the factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements are described under the heading “Part I.  Item 1A. Risk Factors” below.  We caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated.  Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described under the heading “Part I.  Item 1A. Risk Factors” below, as well as others that we may consider immaterial or do not anticipate at this time.  Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct.  Our expectations reflected in our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including those described below under the heading “Part I. Item 1A. Risk Factors.”  The risks and uncertainties described under the heading “Item 1A. Risk Factors” below are not exclusive and further information concerning us and our business, including factors that potentially could materially affect our operating results or financial condition, may emerge from time to time.  We assume no obligation to update our forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.  We advise you, however, to consult any further disclosures we make on related subjects in our quarterly reports on Form 10-Q and current reports on Form 8-K that we file with or furnish to the Securities and Exchange Commission
 
 
 
Item 1A – Risk Factors
 
Investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this herein before making an investment decision.  If any of the following risks actually occur, our business, financial condition or results of operations could suffer. In that case, the market price of our common stock could decline, and you may lose all or part of your investment.
 
Risks Related to Our Business
 
OUR FAILURE TO OBTAIN ADDITIONAL ADEQUATE FINANCING WOULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
 
We cannot be certain that we will ever generate sufficient revenues and gross margin to achieve profitability in the future.  Our failure to significantly increase revenues or to raise additional adequate and necessary financing would seriously harm our business and operating results.  We have incurred significant costs in building, launching and marketing our Products as well as in our acquisition of substantially all of the assets of SMS Masterminds. We anticipate incurring additional expenses relating to customer account acquisitions, marketing, and building our infrastructure. If we fail to achieve sufficient revenues and gross margin with our Products, or our revenues grow more slowly than anticipated, or if our operating or capital expenses increased more than is expected or cannot be reduced in the event of lower revenues, our business will be materially and adversely affected and an investor could suffer the loss of a significant portion or all of his investment in our Company.
  
WE FACE COMPETITION FROM OTHER MOBILE AND LOYALTY SYSTEMS.
 
We will face competition from other companies with similar product offerings.  Many of these companies have longer operating histories, greater name recognition and substantially greater financial, technical and marketing resources than us.  Many of these companies also have more extensive customer bases, broader customer relationships and broader industry alliances than us, including relationships with many of our potential customers. Increased competition from any of these sources could result in our failure to achieve and maintain an adequate level of customers and market share to support the cost of our operations.
 
WE HAVE LIMITED RESOURCES TO DEVELOP OUR PRODUCT OFFERINGS.
 
Our ability to successfully access the capital markets at the same time that our Company has required funding for the development and marketing of our product offerings is challenging.  This has caused and will likely continue to cause us to restrict funding of the development of our products and to favor the development of one product offering over the other based on their relative estimated potentials for commercial success as evaluated by our management.  We may require additional debt and/or equity financing to pursue our growth strategy. Given our limited operating history and existing losses, there can be no assurance that we will be successful in obtaining additional financing. Furthermore, the issuance by us of any additional securities pursuant to any future fundraising activities undertaken by us would dilute the ownership of existing shareholders and may reduce the price of our common stock.  Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. Our current focus is our Mobile and Loyalty Marketing program.  The failure of this program to be commercially successful would substantially harm our business and results of operations.  Our failure to successfully obtain additional future funding may jeopardize our ability to continue our business and operations.  Furthermore, in the future we may determine that it is in the best interest of our Company to severely curtail, license, jointly develop with a third party or sell one of our product offerings, which may be on terms which limit the revenue potential of the product offering to our Company.
 
 
 
WE RELY ON THIRD-PARTY SUPPLIERS AND DISTRIBUTORS THAT ARE SPECIFIC TO OUR BUSINESS SUCH AS CELLULAR SERVICE PROVIDERS, INTERNET SERVICE PROVIDERS, PROGRAMMERS, AND SOCIAL NETWORKS.
 
We will be dependent on other companies to provide necessary products and services in connection with key elements of our business. Any interruption in our ability to utilize these services, or comparable quality replacements would severely harm our business and results of operations.  Should any of these adverse contingencies result, they could substantially harm our business and results of operations and an investor could suffer the loss of a significant portion or all of his investment in our Company.
 
CHANGES IN LAWS AND REGULATIONS TO WHICH WE ARE SUBJECT, OR TO WHICH WE MAY BECOME SUBJECT, MAY INCREASE OUR COSTS OF OPERATION, DECREASE OUR OPERATING REVENUES AND DISRUPT OUR BUSINESS.
 
Changes in laws and regulations or the interpretation or enforcement thereof may occur that could increase our compliance and other costs of doing business, require significant systems redevelopment, or render our products or services less profitable or obsolete, any of which could have an adverse effect on our results of operations. We could face more stringent Telephone Consumer Protection Act regulations, as well as more stringent compliance with which could be expensive and time consuming. Changes in laws and regulations governing the way our products and services are sold or in the way those laws and regulations are interpreted or enforced could adversely affect our ability to distribute our products and the cost of providing those products and services. If onerous regulatory requirements were imposed on the sale of our products and services, the requirements could lead to a loss of merchants and subscribers, which in turn could materially and adversely impact our operations. We also face the risk that our text messaging system will be found to be in violation of or used in a manner that is a violation of the Telephone Consumer Protection Act.
 
THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT MAY HAVE A SIGNIFICANT ADVERSE IMPACT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
 
In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”). The DFA, as well as regulations promulgated thereunder, could have a significant adverse impact on the Company’s business, results of operations and financial condition.
 
The DFA has resulted in increased scrutiny and oversight of consumer financial services and products, primarily through the establishment of the Consumer Financial Protection Bureau (“CFPB”) within the Federal Reserve. The CFPB has broad rulemaking and enforcement authority over providers of pre-paid cards, among other credit providers. The CFPB has the authority to write regulations under federal consumer financial protection laws, and to enforce those laws. The CFPB regulations have yet to be fully promulgated and depending on how the CFPB functions, it could have a material adverse impact on our business. The impact this new regulatory regime will have on the Company’s business is uncertain at this time.
 
Many provisions of the DFA require the adoption of rules to implement. In addition, the DFA mandates multiple studies, which could result in additional legislative or regulatory action. Therefore, the ultimate consequences of the DFA and its impact on our Company’s business, results of operations and financial condition remain uncertain.
 
 
 
WE ARE SUBJECT TO VARIOUS PRIVACY RELATED REGULATIONS, INCLUDING THE GRAMM-LEACH-BLILEY ACT WHICH MAY INCLUDE AN INCREASED COST OF COMPLIANCE.
 
We are subject to various laws, rules and regulations related to privacy, information security and data protection, including the Gramm-Leach-Bliley Act, and we could be negatively impacted by these laws, rules and regulations. The Gramm-Leach-Bliley Act guidelines require, among other things, that each financial institution develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities and the sensitivity of any customer information at issue. Our management believes that we are currently operating in compliance with these regulations. However, continued compliance with these laws, rules and regulations regarding the privacy, security and protection of customer and employee data, or the implementation of any additional privacy rules and regulations, could result in higher compliance and technology costs for our Company.
 
OUR BUSINESS COULD SUFFER IF THERE IS A DECLINE IN THE USE OF SMS SERVICES OR THERE ARE ADVERSE DEVELOPMENTS WITH RESPECT TO THE SMS SERVICES INDUSTRY IN GENERAL.
 
As the mobile services industry evolves, consumers may find SMS services to be less attractive than other mobile messaging and communication services. Consumers might not use SMS services if less expensive services and technologies are offered. If consumer acceptance of SMS services as a form of communication does not continue to develop or develops more slowly than expected or if there is a shift form of mobile communications it could have a material adverse effect on our financial position and results of operations.
 
A DATA SECURITY BREACH COULD EXPOSE US TO LIABILITY AND PROTRACTED AND COSTLY LITIGATION, AND COULD ADVERSELY AFFECT OUR REPUTATION AND OPERATING REVENUES.
 
We, the banks that issue our cards, network acceptance members and/or third-party processors receive, transmit and store confidential customer information in connection with the sale and use of our prepaid cards. Encryption software and the other technologies used to provide security for storage, processing and transmission of confidential customer and other information may not be effective to protect against data security breaches by third parties. The risk of unauthorized circumvention of such security measures has been heightened by advances in computer capabilities and the increasing sophistication of hackers. Improper access to our or these third parties’ systems or databases could result in the theft, publication, deletion or modification of confidential customer and other information. A data security breach of the systems on which sensitive cardholder data and account information are stored could lead to fraudulent activity involving our products and services, reputational damage and claims or regulatory actions against us. If we are sued in connection with any data security breach, we could be involved in protracted and costly litigation. If unsuccessful in defending that litigation, we might be forced to pay damages and/or change our business practices or pricing structure, any of which could have a material adverse effect on our operating revenues and profitability. We would also likely have to pay (or indemnify the banks that issue our cards for) fines, penalties and/or other assessments imposed as a result of any data security breach. Further, a significant data security breach could lead to additional regulation, which could impose new and costly compliance obligations. In addition, a data security breach at the bank that issues our cards, network acceptance members or third-party processors could result in significant reputational harm to us and cause the use and acceptance of our cards to decline, either of which could have a significant adverse impact on our operating revenues and future growth prospects.
 
 
 
OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY SURROUNDING OUR SMS MESSAGING, WEB TOOLS, WEBSITE BUILDING TOOLS AND PREPAID CARDS IS UNCERTAIN.
 
Our future success may depend significantly on our ability to protect our proprietary rights to the intellectual property upon which our products and services will be based.  Any patents we obtain in the future may be challenged by re-examination or otherwise invalidated or eventually be found unenforceable. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Competitors may attempt to challenge or invalidate our patents, or may be able to design alternative techniques or devices that avoid infringement of our patents, or develop products with functionalities that are comparable to ours. In the event a competitor infringes upon our patent or other intellectual property rights, litigation to enforce our intellectual property rights or to defend our patents against challenge, even if successful, could be expensive and time consuming and could require significant time and attention from our management. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against challenges from others.
 
WE ARE DEPENDENT UPON CONSUMER TASTES WITH RESPECT TO PREFERRED METHODS OF MOBILE COMMUNICATION FOR THE SUCCESS OF OUR PRODUCTS AND SERVICES.
 
Our product offerings’ acceptance by consumers and their consequent generation of revenues will depend upon a variety of unpredictable factors, including
 
Public taste, which is always subject to change;
 
The quantity and popularity of other communication platforms; and
 
The fact that the sales methods chosen for the products and services we market may be ineffective.
 
For any of these reasons, our programs may be commercially unsuccessful.  If we are unable to market products which are commercially successful, we may not be able to recoup our expenses and/or generate sufficient revenues. In the event that we are unable to generate sufficient revenues, we may not be able to continue operating as a viable business and an investor could suffer the loss of a significant portion or all of his investment in our Company.
 
THE MOBILE ADVERTISING MARKET MAY DETERIORATE OR DEVELOP MORE SLOWLY THAN EXPECTED, WHICH COULD HARM OUR BUSINESS.
 
Advertising on mobile connected devices is an emerging industry sector. Advertisers have historically spent a smaller portion of their advertising budgets on mobile media as compared to traditional advertising methods, such as television, newspapers, radio and billboards, or internet advertising such banner ads.  Future demand and market acceptance for mobile advertising is uncertain. Many advertisers still have limited experience with mobile advertising and may continue to devote larger portions of their advertising budgets to more traditional offline or online personal computer-based advertising, instead of shifting additional advertising resources to mobile advertising. In addition, our current and potential advertiser clients may ultimately find mobile advertising to be less effective than traditional advertising media or marketing methods or other technologies for promoting their products and services, and they may even reduce their spending on mobile advertising from current levels as a result. If the market for mobile advertising deteriorates, or develops more slowly than expected, we may not be able to increase our revenue.
 
 
 
SMS MASTERMINDS IS ONE OF THE DEFENDANTS NAMED IN A POTENTIAL CLASS-ACTION LAWSUIT FILED IN THE UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK RELATING TO ALLEGED VIOLATIONS OF THE TELEPHONE CONSUMER PROTECTION ACT.
 
From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief. The amount of any ultimate liability from such claims cannot be determined.   On July 8, 2015, Intellectual Capital Management, LLC d/b/a SMS Masterminds and SpendSmart Networks, Inc. were named in a potential class-action lawsuit entitled Peter Marchelos, et al v. Intellectual Capital Management, et al, filed in the United States District Court Eastern District of New York relating to alleged violations of the Telephone Consumer Protection Act of 1991. This litigation involves the same licensee and merchant as the now resolved and previously disclosed Telford lawsuit and the same attorneys represent the plaintiffs in this action. The complaint alleges that SMS Masterminds sent unsolicited text messages to the plaintiff and other recipients without the prior express invitation or permission of the recipients and such plaintiff is now seeking unspecified monetary damages, injunctive relief, costs and attorneys’ fees.  The case is currently stayed. We believe Plaintiff’s allegations have no merit and will vigorously defend against Plaintiff’s claims.  Litigation is subject to numerous uncertainties and we are unable to predict the ultimate outcome of this or any other matter. Moreover, the amount of any potential liability in connection with this lawsuit will depend, to a large extent, on whether a class in a class action lawsuit is certified and, if one is certified, on the scope of the class, neither of which we can predict at this time. These and any future lawsuits that we may face regarding these issues could materially and adversely affect our results of operations, cash flows and financial condition, cause us to incur significant expenses and divert the attention of our management and key personnel from our business operations.
 
IF MOBILE CONNECTED DEVICES, THEIR OPERATING SYSTEMS OR CONTENT DISTRIBUTION CHANNELS, INCLUDING THOSE CONTROLLED BY OUR PRIMARY COMPETITORS, DEVELOP IN WAYS THAT PREVENT OUR ADVERTISING FROM BEING DELIVERED TO OUR USERS, OUR ABILITY TO GROW OUR BUSINESS WILL BE IMPAIRED.
 
Our mobile marketing business model depends upon the continued compatibility of our mobile advertising platform with most mobile connected devices, as well as the major operating systems that run on them. The design of mobile devices and operating systems is controlled by third parties with whom we do not have any formal relationships. These parties frequently introduce new devices, and from time to time they may introduce new operating systems or modify existing ones.
 
OUR MOBILE MARKETING SERVICES ARE PROVIDED ON MOBILE COMMUNICATIONS NETWORKS THAT ARE OWNED AND OPERATED BY THIRD PARTIES WHO WE DO NOT CONTROL AND THE FAILURE OF ANY OF THESE NETWORKS WOULD ADVERSELY AFFECT OUR ABILITY TO DELIVER OUR SERVICES TO OUR CUSTOMERS.
 
Our mobile marketing and advertising platform is dependent on the reliability of mobile operators who maintain sophisticated and complex mobile networks. Such mobile networks have historically, and particularly in recent years, been subject to both rapid growth and technological change. If the network of a mobile operator with which we are integrated should fail, including because of new technology incompatibility, the degradation of network performance under the strain of too many mobile consumers using it, or a general failure from natural disaster or political or regulatory shut-down, we will not be able provide our services to customers through such mobile network. This in turn, would impair our reputation and business, potentially resulting in a material, adverse effect on our financial results.
 
 
 
THE SUCCESS OF OUR MOBILE MARKETING BUSINESS DEPENDS, IN PART, ON WIRELESS CARRIERS CONTINUING TO ACCEPT OUR CUSTOMERS' MESSAGES FOR DELIVERY TO THEIR SUBSCRIBER BASE.
 
We depend on wireless carriers to deliver our customers' messages to their subscriber base. Wireless carriers often impose standards of conduct or practice that significantly exceed current legal requirements and potentially classify our messages as "spam," even where we do not agree with that conclusion. In addition, the wireless carriers use technical and other measures to attempt to block non-compliant senders from transmitting messages to their customers; for example, wireless carriers block short codes or Internet Protocol addresses associated with those senders. There can be no guarantee that our, or short codes registered to us, will not be blocked or blacklisted or that we will be able to successfully remove ourselves from those lists. Although our services typically require customers to opt-in to a campaign, minimizing the risk that its customers' messages will be characterized as spam, blocking of this type could interfere with its ability to market products and services of its customers and communicate with end users and could undermine the effectiveness of our customers' marketing campaigns. To date we have not experienced any material blocking of our messages by wireless carriers, but any such blocking could have an adverse effect on our business and results of operations.
 
MOBILE CONNECTED DEVICE USERS MAY CHOOSE NOT TO ALLOW ADVERTISING ON THEIR DEVICES.
 
The success of our mobile marketing business model depends on our ability to deliver targeted, highly relevant ads to consumers on their mobile connected devices. Targeted advertising is done primarily through analysis of data, much of which is collected on the basis of user-provided permissions. This data might include a device's location or data collected when device users view an advertisement or video or when they click on or otherwise engage with an advertisement. Users may elect not to allow data sharing for targeted advertising for a number of reasons, such as privacy concerns, or pricing mechanisms that may charge the user based upon the amount or types of data consumed on the device. Users may also elect to opt out of receiving targeted advertising from our platform. In addition, the designers of mobile device operating systems are increasingly promoting features that allow device users to disable some of the functionality, which may impair or disable the delivery of ads on their devices, and device manufacturers may include these features as part of their standard device specifications. Although we are not aware of any such products that are widely used in the market today, as has occurred in the online advertising industry, companies may develop products that enable users to prevent ads from appearing on their mobile device screens. If any of these developments were to occur, our ability to deliver effective advertising campaigns on behalf of our advertiser clients would suffer, which could hurt our ability to generate revenue.
 
WE MAY NOT BE ABLE TO ENHANCE OUR MOBILE MARKETING AND ADVERTISING PLATFORM TO KEEP PACE WITH TECHNOLOGICAL AND MARKET DEVELOPMENTS, OR TO REMAIN COMPETITIVE AGAINST POTENTIAL NEW ENTRANTS IN OUR MARKETS.
 
The market for mobile marketing and advertising services is emerging and is characterized by rapid technological change, evolving industry standards, frequent new product introductions and short product life cycles. Our current platform or platforms we may offer in the future may not be acceptable to marketers and advertisers. To keep pace with technological developments, satisfy increasing customer requirements and achieve acceptance of our marketing and advertising campaigns, we will need to enhance our current mobile marketing solutions and continue to develop and introduce on a timely basis new, innovative mobile marketing services offering compatibility, enhanced features and functionality on a timely basis at competitive prices. Our inability, for technological or other reasons, to enhance, develop, introduce and deliver compelling mobile marketing services in a timely manner, or at all, in response to changing market conditions, technologies or customer expectations could have a material adverse effect on our operating results or could result in our mobile marketing services platform becoming obsolete. Our ability to compete successfully will depend in large measure on our ability to maintain a technically skilled development and engineering staff and to adapt to technological changes and advances in the industry, including providing for the continued compatibility of our mobile marketing services platform with evolving industry standards and protocols. In addition, as we believe the mobile marketing market is likely to grow substantially, other companies which are larger and have significantly more capital to invest than us may emerge as competitors.  New entrants could seek to gain market share by introducing new technology or reducing pricing. This may make it more difficult for us to sell our products and services, and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share or expected market share, any of which may significantly harm our business, operating results and financial condition.
 
 
 
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OUR SALES EFFORTS WITH LICENSEES REQUIRES SIGNIFICANT TIME AND EXPENSE.
 
Attracting new licensees requires substantial time and expense, and we may not be successful in establishing new relationships or in maintaining or advancing current relationships. Further, it may be difficult for our licensees to identify, engage and market to potential merchant clients who do not currently spend on mobile advertising or are unfamiliar with our current services or platform. Furthermore, many merchant’s purchasing and design decisions typically require input from multiple internal constituencies.
 
The novelty of our services and our business model often requires us to spend substantial time and effort educating potential licensees about our offerings, including providing demonstrations and comparisons against other available services. This process can be costly and time-consuming. If we are not successful in streamlining our sales processes with licensees or successfully assisting licensees in selling to merchants, our ability to grow our business may be adversely affected.
 
IF WE CANNOT INCREASE THE CAPACITY OF OUR MOBILE ADVERTISING TECHNOLOGY PLATFORM TO MEET MERCHANT OR DEVICE USER DEMAND, OUR BUSINESS WILL BE HARMED.
 
We must be able to continue to increase the capacity of our technology platform in order to support substantial increases in the number of merchants and device users, to support an increasing variety of advertising formats and to maintain a stable service infrastructure and reliable service delivery for our mobile advertising campaigns. If we are unable to efficiently and effectively increase the scale of our mobile advertising platform to support and manage a substantial increase in the number of merchants and mobile device users, while also maintaining a high level of performance, the quality of our services could decline and our reputation and business could be seriously harmed. In addition, if we are not able to support emerging mobile advertising formats or services preferred by advertisers, we may be unable to obtain new advertising clients or may lose existing advertising clients, and in either case our revenue could decline.
 
SYSTEM FAILURES COULD SIGNIFICANTLY DISRUPT OUR OPERATIONS AND CAUSE US TO LOSE ADVERTISER CLIENTS OR ADVERTISING INVENTORY.
 
Our success depends on the continuing and uninterrupted performance of our own internal systems, which are utilized to send messages, and monitor the performance of advertising campaigns. Our revenue depends on the technological ability of our platform to deliver ads. Sustained or repeated system failures that interrupt our ability to provide services to clients, including technological failures affecting our ability to deliver ads quickly and accurately and to process mobile device users' responses to ads, could significantly reduce the attractiveness of our services to advertisers and reduce our revenue. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious human acts and natural disasters. In addition, any steps we take to increase the reliability and redundancy of our systems may be expensive and may not be successful in preventing system failures.
 
ACTIVITIES OF LICENSEES OR MERCHANTS COULD DAMAGE OUR REPUTATION OR GIVE RISE TO LEGAL CLAIMS AGAINST US.
 
A merchant’s promotion of their products and services may not comply with federal, state and local laws, including, but not limited to, laws and regulations relating to mobile communications. Failure of a licensee or merchant to comply with federal, state or local laws or our policies could damage our reputation and expose us to liability under these laws. We may also be liable to third parties for content in the ads it delivers if the artwork, text or other content involved violates copyrights, trademarks or other intellectual property rights of third parties or if the content is defamatory, unfair and deceptive, or otherwise in violation of applicable laws. Although we generally receive assurance from licensees that ads are lawful and that they have the right to use any copyrights, trademarks or other intellectual property included in a communication, and although we are normally indemnified by the licensees, a third party or regulatory authority may still file a claim against us. Any such claims could be costly and time-consuming to defend and could also hurt our reputation within the mobile advertising industry. Further, if we are exposed to legal liability, we could be required to pay substantial fines or penalties, redesign our business methods, discontinue some of its services or otherwise expend significant resources.
 
 
 
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SOFTWARE AND COMPONENTS THAT WE INCORPORATE INTO OUR MOBILE ADVERTISING PLATFORM MAY CONTAIN ERRORS OR DEFECTS, WHICH COULD HARM OUR REPUTATION AND HURT ITS BUSINESS.
 
We use a combination of custom and third-party software, including open source software, in building our mobile advertising platform. Although we test software before incorporating it into our platform, we cannot guarantee that all of the third-party technology that we incorporate will not contain errors, bugs or other defects. We continue to launch enhancements to our mobile advertising platform, and cannot guarantee any such enhancements will be free from these kinds of defects. If errors or other defects occur in technology that we utilize in our mobile advertising platform, it could result in damage to our reputation and losses in revenue, and we could be required to spend significant amounts of additional resources to fix any problems.
 
OUR INABILITY TO USE SOFTWARE LICENSED FROM THIRD PARTIES, OR OUR USE OF OPEN SOURCE SOFTWARE UNDER LICENSE TERMS THAT INTERFERE WITH OUR PROPRIETARY RIGHTS, COULD DISRUPT OUR BUSINESS.
 
Our technology platform incorporates software licensed from third parties, including some software, known as open source software, which we use without charge. Although we monitor our use of open source software, U.S. or foreign courts have not interpreted the terms of many open source licenses to which we are subject, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our platform to our clients. In the future, we could be required to seek licenses from third parties in order to continue offering our platform, which licenses may not be available on terms that are acceptable to us, or at all. Alternatively, we may need to re-engineer our platform or discontinue use of portions of the functionality provided by our platform. In addition, the terms of open source software licenses may require us to provide software that we develop to others on unfavorable license terms. Our inability to use third-party software could result in disruptions to our business, or delays in the development of future offerings or enhancements of existing offerings, which could impair our business.
 
IF OUR MOBILE MARKETING AND ADVERTISING SERVICES PLATFORM DOES NOT SCALE AS ANTICIPATED, OUR BUSINESS WILL BE HARMED.
 
We must be able to continue to scale to support potential ongoing substantial increases in the number of users in our actual commercial environment, and maintain a stable service infrastructure and reliable service delivery for our mobile marketing and advertising campaigns. In addition, we must continue to expand our service infrastructure to handle growth in customers and usage. If our mobile marketing services platform does not efficiently and effectively scale to support and manage a substantial increase in the number of users while maintaining a high level of performance, the quality of our services could decline and our business will be seriously harmed. In addition, if we are unable to secure data center space with appropriate power, cooling and bandwidth capacity, we may not be able to efficiently and effectively scale our business to manage the addition of new customers and overall mobile marketing campaigns.
 
IF A PORTION OF OUR BUSINESS MODEL IS DEEMED TO BE A FRANCHISE OUR BUSINESS COULD BE INTERUPTED.
 
Although our business model related to the Mobile and Loyalty Program is based upon a license, we cannot guarantee that any state’s franchise department will not find our model to be a franchise and require a transition to said model with possible associated penalties, fees, costs, and business delays and interruptions.
 
 
 
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OUR BUSINESS PRACTICES WITH RESPECT TO DATA MAY GIVE RISE TO LIABILITIES OR REPUTATIONAL HARM AS A RESULT OF GOVERNMENTAL REGULATION, LEGAL REQUIREMENTS OR INDUSTRY STANDARDS RELATING TO CONSUMER PRIVACY AND DATA PROTECTION.
 
In the course of providing services, we transmit and store information related to mobile devices and the ads we place with that user's consent. Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we collect across our mobile marketing platform. We strive to comply with all applicable laws, regulations, policies and legal obligations relating to privacy and data protection. However, it is possible that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure, or perceived failure, by us to comply with U.S. federal, state, or international laws, including laws and regulations regulating privacy or consumer protection, could result in proceedings or actions against us by governmental entities or others. From time to time, there are several ongoing lawsuits filed against companies in our industry alleging various violations of privacy-related laws. These proceedings could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, adversely affect the demand for our services and ultimately result in the imposition of monetary liability.
 
The regulatory framework for privacy issues worldwide is evolving, and various government and consumer agencies and public advocacy groups have called for new regulation and changes in industry practices, including some directed at the mobile industry in particular. It is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that would affect our business, particularly with regard to location-based services, collection or use of data to target ads and communication with consumers via mobile devices.
 
The U.S. government, including the Federal Trade Commission, or FTC, and the Department of Commerce, has announced that it is reviewing the need for greater regulation of the collection of consumer information, including regulation aimed at restricting some targeted advertising practices. The FTC has also proposed revisions to the Children's Online Privacy Protection Act, or COPPA, that could, if adopted, create greater compliance burdens on us. COPPA imposes a number of obligations, such as obtaining parental permission on website operators to the extent they collect certain information from children who are under 13 years old. The proposed changes would broaden the applicability of COPPA, including the types of information that would be subject to these regulations, and could apply to information that we or our clients collect through mobile devices or apps that is not currently subject to COPPA.
 
If we expand our operations globally, compliance with regulations that differ from country to country may also impose substantial burdens on its business. In particular, the European Union has traditionally taken a broader view as to what is considered personal information and has imposed greater obligations under data privacy regulations. In addition, individual EU member countries have had discretion with respect to their interpretation and implementation of the regulations, which has resulted in variation of privacy standards from country to country. In January 2012, the European Commission announced significant proposed reforms to its existing data protection legal framework, including changes in obligations of data controllers and processors, the rights of data subjects and data security and breach notification requirements. The EU proposals, if implemented, may result in a greater compliance burden if SMS Masterminds delivers ads to mobile device users in Europe. Complying with any new regulatory requirements could force us to incur substantial costs or require us to change our business practices in a manner that could compromise our ability to effectively pursue its growth strategy.
 
In addition to compliance with government regulations, we voluntarily participate in several trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct addressing the provision of location-based services, delivery of promotional content to mobile devices, and tracking of device users or devices for the purpose of delivering targeted advertising. We could be adversely affected by changes to these guidelines and codes in ways that are inconsistent with our practices or in conflict with the laws and regulations of U.S. or international regulatory authorities. If we are perceived as not operating in accordance with industry best practices or any such guidelines or codes with regard to privacy, our reputation may suffer and we could lose relationships with advertiser or developer partners.
 
 
 
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WE DEPEND ON THIRD PARTY PROVIDERS FOR A RELIABLE INTERNET INFRASTRUCTURE AND THE FAILURE OF THESE THIRD PARTIES, OR THE INTERNET IN GENERAL, FOR ANY REASON WOULD SIGNIFICANTLY IMPAIR OUR ABILITY TO CONDUCT OUR BUSINESS.
 
We outsource all of our data center facility management to third parties who host the actual servers and provide power and security in multiple data centers in each geographic location. These third party facilities require uninterrupted access to the Internet.  If the operation of our servers are interrupted for any reason, including natural disaster, financial insolvency of a third party provider, or malicious electronic intrusion into the data center, our business would be significantly damaged.  As has occurred with many Internet-based businesses, on occasion in the past, we have been subject to "denial-of-service" attacks in which unknown individuals bombarded its computer servers with requests for data, thereby degrading the servers' performance. While we have historically been successful in relatively quickly identifying and neutralizing these attacks, we cannot be certain that we will be able to do so in the future. If either a third party facility failed, or our ability to access the Internet was interfered with because of the failure of Internet equipment in general or we become subject to malicious attacks of computer intruders, our business and operating results will be materially adversely affected.
 
Financial Risks
 
OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING THAT OUR COMPANY WILL CONTINUE AS A GOING CONCERN.
 
The factors described herein raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. The report of our independent registered public accounting firm included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern in their audit report for the years ended December 31, 2016 and 2015.   If we cannot generate the required revenues and gross margin to achieve profitability or obtain additional capital on acceptable terms, we will need to substantially revise our business plan or cease operations and an investor could suffer the loss of a significant portion or all of his investment in our Company.
 
CURRENT MACRO-ECONOMIC CONDITIONS COULD ADVERSELY AFFECT THE FINANCIAL VIABILITY OF OUR COMPANY.
 
Continuing recessionary conditions in the global economy threaten to cause further tightening of the credit and equity markets and more stringent lending and investing standards. The persistence of these conditions could have a material adverse effect on our access to further needed capital. In addition, further deterioration in the economy could adversely affect our corporate results, which could adversely affect our financial condition and operations.
 
WE DO NOT EXPECT TO PAY DIVIDENDS FOR THE FORESEEABLE FUTURE, AND WE MAY NEVER PAY DIVIDENDS AND, CONSEQUENTLY, THE ONLY OPPORTUNITY FOR INVESTORS TO ACHIEVE A RETURN ON THEIR INVESTMENT IS IF A TRADING MARKET DEVELOPS AND INVESTORS ARE ABLE TO SELL THEIR SHARES FOR A PROFIT OR IF OUR BUSINESS IS SOLD AT A PRICE THAT ENABLES INVESTORS TO RECOGNIZE A PROFIT.
 
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends for the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, we cannot assure investors any return on their investment, other than in connection with a sale of their shares or a sale of our business. At the present time there is a limited trading market for our shares. Therefore, holders of our securities may be unable to sell them. We cannot assure investors that an active trading market will develop or that any third party will offer to purchase our business on acceptable terms and at a price that would enable our investors to recognize a profit.
 
 
 
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OUR NET OPERATING LOSS (“NOL”) CARRY-FORWARD MAY BE LIMITED.
 
We have recorded a valuation allowance amounting to our entire net deferred tax asset balance due to our lack of a history of earnings, possible statutory limitations on the use of tax loss carry-forwards generated in the past and the future expiration of our NOL.  This gives rise to uncertainty as to whether the net deferred tax asset is realizable.  Internal Revenue Code Section 382, and similar California rules, place a limitation on the amount of taxable income that can be offset by carry-forwards after a change in control (generally greater than a 50% change in ownership).  As a result of these provisions, it is likely that given our acquisition of The SpendSmart Payments Company-CA, future utilization of the NOL will be severely limited.  Our inability to use our Company’s historical NOL, or the full amount of the NOL, would limit our ability to offset any future tax liabilities with our NOL.
 
Corporate and Other Risks
 
LIMITATIONS ON DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION OF OUR COMPANY’S OFFICERS AND DIRECTORS BY US MAY DISCOURAGE STOCKHOLDERS FROM BRINGING SUIT AGAINST AN OFFICER OR DIRECTOR.
 
Our Company’s articles of incorporation and bylaws provide, with certain exceptions as permitted by governing state law, that a director or officer shall not be personally liable to us or our stockholders for breach of fiduciary duty as a director, except for acts or omissions which involve intentional misconduct, fraud or knowing violation of law, or unlawful payments of dividends. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director.
 
WE ARE RESPONSIBLE FOR THE INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS.
 
Should our officers and/or directors require us to contribute to their defense, we may be required to spend significant amounts of our capital. Our articles of incorporation and bylaws as well as an indemnification agreement also provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of our Company. This indemnification policy could result in substantial expenditures, which we may be unable to recoup. If these expenditures are significant, or involve issues which result in significant liability for our key personnel, we may be unable to continue operating as a going concern.
 
OUR EMPLOYEES, EXECUTIVE OFFICERS, DIRECTORS AND INSIDER STOCKHOLDERS BENEFICIALLY OWN OR CONTROL A SUBSTANTIAL PORTION OF OUR OUTSTANDING COMMON STOCK, WHICH MAY LIMIT YOUR ABILITY AND THE ABILITY OF OUR OTHER STOCKHOLDERS, WHETHER ACTING ALONE OR TOGETHER, TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION OF OUR COMPANY.
 
Additionally, this concentration of ownership could discourage or prevent a potential takeover of our Company that might otherwise result in an investor receiving a premium over the market price for his shares. A substantial number of our outstanding shares of common stock is beneficially owned and controlled by a group of insiders, including our employees, directors and executive officers. Accordingly, our employees, directors, executive officers and insider shareholders may have the power to control the election of our directors and the approval of actions for which the approval of our stockholders is required. If you acquire shares of our common stock, you may have no effective voice in the management of our Company.  Such concentrated control of our Company may adversely affect the price of our common stock. Our principal stockholders may be able to control matters requiring approval by our stockholders, including the election of directors, mergers or other business combinations. Such concentrated control may also make it difficult for our stockholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into different transactions which require stockholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.
 
 
 
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WE ARE DEPENDENT FOR OUR SUCCESS ON A FEW KEY EMPLOYEES.
 
Our inability to retain those employees would impede our business plan and growth strategies, which would have a negative impact on our business and the value of your investment. Our success depends on the skills, experience and performance of key members of our Company.  Each of those individuals may voluntarily terminate his employment with our Company at any time. Were we to lose one or more of these key employees, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital. We do not maintain a key man insurance policy on any of our key employees.
 
SHOULD WE BE SUCCESSFUL IN TRANSITIONING TO A COMPANY GENERATING SIGNIFICANT REVENUES, WE MAY NOT BE ABLE TO MANAGE OUR GROWTH EFFECTIVELY, WHICH COULD ADVERSELY AFFECT OUR OPERATIONS AND FINANCIAL PERFORMANCE.
 
The ability to manage and operate our business as we execute our growth strategy will require effective planning. Significant rapid growth could strain our internal resources, leading to a lower quality of customer service, reporting problems and delays in meeting important deadlines resulting in loss of market share and other problems that could adversely affect our financial performance. Our efforts to grow could place a significant strain on our personnel, management systems, infrastructure and other resources. If we do not manage our growth effectively, our operations could be adversely affected, resulting in slower growth and a failure to achieve or sustain profitability.
 
Capital Market Risks
 
OUR COMMON STOCK IS THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT OR NEAR ASK PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OR OTHERWISE DESIRE TO LIQUIDATE YOUR SHARES.
 
There is limited market activity in our stock and we may be too small to attract the interest of many brokerage firms and analysts. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained. While we are trading on OTCQB, the trading volume we will develop may be limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in over-the-counter stocks and certain major brokerage firms restrict their brokers from recommending over-the-counter stocks because they are considered speculative, volatile, thinly traded and the market price of the common stock may not accurately reflect the underlying value of our Company.  The market price of our common stock could be subject to wide fluctuations in response to quarterly variations in our revenues and operating expenses, announcements of new products or services by us, significant sales of our common stock, including “short” sales, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.
 
 
 
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THE APPLICATION OF THE “PENNY STOCK” RULES TO OUR COMMON STOCK COULD LIMIT THE TRADING AND LIQUIDITY OF THE COMMON STOCK, ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND INCREASE YOUR TRANSACTION COSTS TO SELL THOSE SHARES.
 
As long as the trading price of our common stock is below $5 per share, our common stock will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder's ability to buy and sell our stock. In addition to the "penny stock" rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. These regulations may have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing the transaction costs for sales and purchases of our common stock as compared to other securities. The stock market in general and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance.  Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include 1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; 2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; 3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; 4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and 5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices as well as the regulatory disclosure requirements set forth above could increase the volatility of our share price, may limit investors’ ability to buy and sell our securities and have an adverse effect on the market price for our shares of common stock.
 
WE MAY NOT BE ABLE TO ATTRACT THE ATTENTION OF MAJOR BROKERAGE FIRMS, WHICH COULD HAVE A MATERIAL ADVERSE IMPACT ON THE MARKET VALUE OF OUR COMMON STOCK.
 
Security analysts of major brokerage firms may not provide coverage of our common stock since there is no incentive to brokerage firms to recommend the purchase of our common stock. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It will also likely make it more difficult to attract new investors at times when we require additional capital.
 
 
 
-17-
 
WE MAY BE UNABLE TO LIST OUR COMMON STOCK ON NASDAQ OR ON ANY SECURITIES EXCHANGE.
 
Although we intend to apply to list our common stock on NASDAQ in the future, we cannot assure you that we will be able to meet the initial listing standards, including the minimum per share price and minimum capitalization requirements, or that we will be able to maintain a listing of our common stock on this trading. Until such time as we qualify for listing on NASDAQ or another national securities exchange, our common stock will continue to trade on OTCQB or another over-the-counter quotation system where an investor may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock. In addition, rules promulgated by the SEC impose various practice requirements on broker-dealers who sell securities that fail to meet certain criteria set forth in those rules to persons other than established customers and accredited investors.  Consequently, these rules may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. It would also make it more difficult for us to raise additional capital.
 
FUTURE SALES OF OUR EQUITY SECURITIES COULD PUT DOWNWARD SELLING PRESSURE ON OUR SECURITIES, AND ADVERSELY AFFECT THE STOCK PRICE.
 
There is a risk that this downward pressure may make it impossible for an investor to sell his or her securities at any reasonable price, if at all. Future sales of substantial amounts of our equity securities in the public market, or the perception that such sales could occur, could put downward selling pressure on our securities, and adversely affect the market price of our common stock.
 
Item 1B.Unresolved Staff Comments.
 
Not applicable.
 
Item 2 –Properties
 
Our corporate offices are located in San Luis Obispo, CA, where we lease approximately 7,500 square feet of office space in two locations. The building that we lease at 805 Aerovista Parkway is owned by Alexander P Minicucci Trust, which was a related party transaction due to the trust being controlled by the Company's former chief executive officer. The total monthly payment for both locations is approximately, $15,678 including association and common area maintenance charges.
 
Item 3 – Legal Proceedings
 
On July 8, 2015, Intellectual Capital Management, LLC dba SMS Masterminds and SpendSmart Networks, Inc. were named in a potential class-action lawsuit entitled Peter Marchelos, et al v. Intellectual Capital Management, et al, filed in the United States District Court Eastern District of New York relating to alleged violations of the Telephone Consumer Protection Act of 1991. This litigation involves the same licensee and merchant as a previous lawsuit and the same attorneys represent the plaintiffs in this action. The claim of one of the two plaintiffs was resolved for $1,701. The Company believes the Plaintiff’s allegations have no merit.  There are no other legal claims currently pending or threatened against us that in the opinion of our management would be likely to have a material adverse effect on our financial position, results of operations or cash flows. 
 
Item 4 – Mine Safety Disclosures
 
Not applicable.
 
 
 
-18-
 
Part II
 
Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock trades publicly on the OTCQB under the symbol "SSPC.OB" The OTCQB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities. The OTCQB securities are traded by a community of market makers that enter quotes and trade reports. This market is extremely limited and any prices quoted may not be a reliable indication of the value of our common stock. The following table sets forth the high and low bid prices per share of our common stock by the OTCQB for the periods indicated as reported on the OTCQB.
 
 
 
 High
 
 
Low
 
 
 
 
 
 
 
 
Year ended December 31, 2016
 
 
 
 
 
 
First Quarter
 $0.16
 $0.10 
Second Quarter
 $0.20 
 $0.07
Third Quarter
 $0.11
 $0.04 
Fourth Quarter
 $0.06
 $0.01
 
    
    
Year ended December 31, 2015
    
    
First Quarter
 $1.17 
 $0.71 
Second Quarter
 $0.80 
 $0.55 
Third Quarter
 $0.70 
 $0.43 
Fourth Quarter
 $0.50 
 $0.14 
 
On July 23, 2012 our stock was moved from the OTC Bulletin Board to the OTCQB. The quotes represent inter-dealer prices, without adjustment for retail mark-up, markdown or commission and may not represent actual transactions. The trading volume of our securities fluctuates and may be limited during certain periods. As a result of these volume fluctuations, the liquidity of an investment in our securities may be adversely affected.
 
Holders of Record
 
As of May 5, 2017, 42,075,571 shares of our common stock were issued and outstanding, and held by approximately 2,000 stockholders.
 
Transfer Agent
 
Our transfer agent is TranShare Corporation, 4626 South Broadway, Englewood, CO 80113, Telephone (303) 662-1112.
 
Dividends
 
We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our Board of Directors.
 
 
 
-19-
 
Securities Authorized for Issuance under Equity Compensation Plans
 
The table below sets forth information as of December 31, 2016 with respect to compensation plans under which our common stock is authorized for issuance.
 
On January 8, 2013, our Board of Directors approved the adoption of our 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan was approved by our shareholders on February 15, 2013. The 2013 Plan provides for granting of stock-based awards including: incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock. The total number of shares of common stock that may be issued pursuant to stock awards under the 2013 Plan shall not exceed in the aggregate 10,000,000 shares of the common stock of our Company. On August 4, 2011, our Board of Directors approved the adoption of the SpendSmart Networks, Inc. 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan has been approved by our shareholders. The 2011 Plan provides for granting of stock-based awards including: incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock. The total number of shares of common stock that may be issued pursuant to stock awards under the 2011 Plan shall not exceed in the aggregate 1,666,667 shares of the common stock of our Company. We also have a stockholder-approved Plan (the IdeaEdge, Inc. 2007 Equity Incentive Plan - the “2007 Plan”, previously approved by our shareholders). The 2007 Plan has similar provisions and purposes as the 2011 Plan. The total number of shares of common stock that may be issued pursuant to stock awards under the 2007 Plan shall not exceed in the aggregate 266,666 shares of the common stock of our Company. The table below sets forth information as of December 31, 2016 with respect to our 2007 Plan, 2011 Plan, and 2013 Plan:
 
Equity compensation plans approved by shareholders (2007 Plan)
  - 
  - 
  266,666 
Equity compensation plans subject to approval by shareholders (2011 Plan)
  333,333 
  7.35
  1,333,334 
Equity compensation plan approved by shareholders (2013 Plan)
  1,557,750 
  1.16 
  8,442,250 
Total
  1,891,083 
  2.25 
  10,042,250 
 
Item 6 – Selected Consolidated Financial Data
 
Disclosure not required as a result of our Company’s status as a smaller reporting company.
 
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this report. See “FORWARD LOOKING STATEMENTS” paragraph above and Part I. Item 1. Business-Cautionary Note Regarding Forward-Looking Statements.
 
Overview and Financial Condition
 
Discussions with respect to our Company’s operations included herein refer to our operating subsidiary, SpendSmart Networks, Inc.-CA and the consolidated results of the company. The Company purchased SpendSmart Networks, Inc.-CA on October 16, 2007. On February 11, 2014, we acquired substantially all of the assets of Intellectual Capital Management, LC, dba “SMS Masterminds”. As a result of the SMS Masterminds asset acquisition, the company is a national full-service mobile and loyalty marketing agency that offers a means for small and large business owners alike to better connect with their consumers. Through our mobile and loyalty marketing programs and proprietary website building software, the company provides proprietary loyalty systems and a suite of digital engagement and marketing services that help local merchants build relationships with consumers and drive revenues. These services are sold, implemented and supported both internally and by a vast network of certified digital marketing specialists, aka “Certified Masterminds,” who drive revenue and consumer relationships for merchants via loyalty programs, custom websites, social media engagement, mobile marketing, mobile commerce and financial tools, such as reward systems. We enter into licensing agreements for our proprietary loyalty and mobile marketing solutions and custom website building tools with “Certified Masterminds” which sell and support the technology in their respective markets. We provide training materials, best practice guides and other resources to our licensees. The licensees also utilize loyalty kiosks provided to their merchants. The loyalty kiosks are tablet devices set up in physical retail locations where Consumers can enter their mobile phone number to “opt-in” to receive notifications from the merchant.
 
 
-20-
 
We generate revenues primarily in the form of set up fees, recurring license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services. License fees are charged monthly for our support services. Set-up fees primarily consist of fees for website development services (including support and unspecified upgrades and enhancements when and if they are available), training and professional services that are not essential to functionality.
 
In November 2014, we began winding down our prepaid card product offerings and completed that process in January 2015.
 
Comparison of Results of Operations for the Years Ended December 31, 2016 and December 31, 2015
 
The Company had total revenues of $5,795,604 for the year ended December 31, 2016 and $5,588,002 for the year ended December 31, 2015.
 
Our revenues increased $207,602 or 3.7% over the prior year due to a slight increase in licensing sales.
 
Comparison of Operating Expenses for the Years Ended December 31, 2016 and December 31, 2015
 
In order to better represent our financial results and to make them comparable to leading companies in the mobile marketing industry, we have classified our operating expenses into four major categories: (1) selling and marketing; (2) personnel related; (3) operations; and (4) general and administrative expenses. We do not allocate common expenses to any of these expense categories.
 
Selling and marketing expenses
  
Selling and marketing expenses for the year ended December 31, 2016 totaled $595,031 and $582,042 for the year ended December 31, 2015. This was an increase of $12,989 from 2015 to 2016. Our increased costs were the result of increasing our market presence in new territories as well as increasing marketing spend to bring more brand awareness to our products.
 
Personnel related expenses
 
Personnel related expenses totaled $4,729,399 during the year ended December 31, 2016 and $6,426,273 for the year ended December 31, 2015. This amounted to a decrease of $1,696,874 or a 26.4% decrease from 2015 to 2016. Overall decreases in personnel related expenses reflected the 10% decrease in salaries along with lower stock based compensation expense (lower option and warrant grants made to directors and executive officers). Other personnel related expenses include employer taxes, employee benefits and other employee related costs.
 
Processing expenses
 
Processing expenses totaled $1,140,068 for the year ended December 31, 2016 and $1,465,576 for the year ended December 31, 2015. This resulted in a decrease of $325,508 or a 22.2% decrease compared to 2015. Decreases in processing expenses were the result of our lower subscription server costs.
 
 
-21-
 
Amortization of intangible assets
 
Amortization of intangible assets totaled $192,503 for the year ended December 31, 2016 and $337,879 for the year ended December 31, 2015, respectively. This resulted in a decrease of $145,376 from 2015 to 2016.
 
General and administrative expenses
 
General and administrative expenses totaled $2,126,631 for the year ended December 31, 2016 and $3,463,405 for the year ended December 31, 2015. This resulted in a decrease of $1,336,774 or 38.6% from 2015 to 2016. We had decreases in investor relations consulting, depreciation, legal and travel expense during the year offset by increases in insurance expenses.
 
Bad debt expense
 
Bad debt expenses totaled $552,725 for the year ended December 31, 2016 and $1,417,952 for the year ended December 31, 2015. We recorded bad debt write offs due to non-performing accounts in our receivables as well as our notes receivable. The Company is no longer entering into notes with its customers.
 
Impairment on intangible assets and software development costs
 
Impairment expenses totaled $1,697,188 for the year ended December 31, 2016 and $1,189,246 for the year ended December 31, 2015. We recorded impairment expense on our intangible assets of $922,688 related to our SMS technology assets, $718,116 related to our SMS software development, $38,853 related to trademarks, and $17,531 related to our TechXpress technology assets for the year ended December 31, 2016. We recorded impairment expense on our intangible assets of $1,083,875 related to our SMS customer base and $105,371 related to our TechXpress customer base for the year ended December 31, 2015.
 
Impairment on goodwill
 
Impairment expenses related to our goodwill totaled $3,202,276 for the year ended December 31, 2015. We recorded impairment expense due to the goodwill impairment analysis that was done at December 31, 2015.  As of December 31, 2015, goodwill was $0.
 
Earn-out liability expense
 
The change in fair value of Earn-out liability expenses totaled $0 for the year ended December 31, 2016 and $594,216 for the year ended December 31, 2015. We recorded the change in earn-out liability due to our updated operating assumptions in the underlying valuation related to the SMS acquisition.
 
Comparison of Non-operating Income and Expense for the Years Ended December 31, 2016 and December 31, 2015
 
For the years ended December 31, 2016 and 2015, net interest income totaled $38,782 and $140,276, respectively. This was due to the lowered remaining balances on our financed accounts.
 
For the years ended December 31, 2016 and 2015, interest expense totaled $180,704 and $143,663, respectively. This related to our convertible notes and our notes payable financings during 2016.
 
For the years ended December 31, 2016 and 2015, amortization of debt discount totaled $399,367 and $456,475, respectively. The decrease was due to the convertible notes financings during the year ended December 31, 2016.
 
 
 
-22-
 
For the years ended December 31, 2016 and 2015, we recognized a loss on extinguishment of debt of $473,721 and $0, respectively. This increase was due to the convertible notes modifications completed in 2016.
 
For the year ended December 31, 2016 and 2015, tender offer expense totaled $3,560,958 and $0, respectively. This increase was due to the inducement given to exercise warrants in 2016.
 
During the year ended December 31, 2016, we recognized a gain from the change in the fair value of derivative liabilities of $2,975,316 and a gain of $457,811 in 2015. These derivative liabilities are the fair value of warrants issued in fiscal 2010 with anti-dilution privileges, warrants issued in fiscal 2012 with certain registration privileges, warrants issued in 2016 with provisions that adjust conversion or exercise price, and the fair value of the bifurcated conversion options in convertible notes issued in 2015.
 
Comparison of Net Loss and Net Loss per Share for the Years Ended December 31, 2016 and December 31, 2015
 
For the years ended December 31, 2016 and 2015, our net loss was $6,838,593 and $11,904,482, respectively. Our basic and diluted net loss per share was $0.18 and $0.63 for the twelve months ended December 31, 2016 and December 31, 2015, respectively. Common stock equivalents and outstanding options and warrants were not included in the calculations due to their effect being anti-dilutive.
 
Comparison of Liquidity and Capital Resources for the Years Ended December 31, 2016 and December 31, 2015
 
We have primarily financed our operations to date through the sale of unregistered equity. At December 31, 2016, our total current assets were $418,642. Total current liabilities were $5,826,997, long-term liabilities were $0, and our stockholders’ deficit totaled $4,975,818.
 
We may raise additional funding through the sale of unregistered common stock and warrants although there can be no assurance that we will be successful in raising such funds. This description of our recent financing and our future plans does not constitute an offer to sell or the solicitation of an offer to buy our securities, nor shall such securities be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same.
 
We had a decrease in cash for the year of $395,818.  During the year, we raised approximately $380,000 from our convertible notes financings and raised an additional $1,179,000 in 2016 related to our Tender Offer financing. We had significant cash outlays relating to repayment of debt, costs to handle our increased licensee base, and increased software development costs to improve our technology related to new product offerings.  Our cash and cash equivalents balance at December 31, 2016 totaled $74,523.
 
Going Concern
 
As noted above (and by our independent registered public accounting firm in their report on our consolidated financial statements as of and for the two-year period ended December 31, 2016), there exists substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not contain any adjustments related to the outcome of this uncertainty.
 
As of December 31, 2016, the Company’s audited consolidated financial statements included an opinion containing an explanatory paragraph as to the uncertainty of the Company’s ability to continue as a going concern. The Company has continued to incur net losses through December 31, 2016 and have yet to establish profitable operations. These factors among others create a substantial doubt about our ability to continue as a going concern. The Company’s audited consolidated financial statements as of and for the periods ended December 31, 2016 do not contain any adjustments for this uncertainty.
 
The Company currently plans to raise additional required capital through the sale of shares of the Company’s preferred or common stock. All additional amounts raised will be used for our future investing and operating cash flow needs. However, there can be no assurance that we will be successful in consummating such financing. This description of our future plans for financing does not constitute an offer to sell or the solicitation of an offer to buy our securities.
  
Contractual Obligations
 
With the exception of employment agreements, lease agreements, and the endorsement agreement described elsewhere herein, we have no outstanding contractual obligations through the date of this report that are not cancellable at our Company’s option.
 
 
 
-23-
 
Critical Accounting Policies Involving Management Estimates and Assumptions
 
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments and we base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.
  
In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we must make a variety of estimates that affect the reported amounts and related disclosures. We have identified the following accounting policies that we believe require application of management’s most subjective judgments, often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our significant accounting policies are described in more detail in the notes to consolidated financial statements included elsewhere in this filing. If actual results differ significantly from our estimates and projections, there could be a material effect on our financial statements.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
 
Revenue Recognition
 
The Company generates revenues primarily in the form of set up fees, license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services.  License fees are charged monthly for support services.  Set-up fees primarily consist of fees for website development services (including support and unspecified upgrades and enhancements when and if they are available), training and professional services that are not essential to functionality. The Company offers two licenses consisting of our Engage license and our Thrive license.  The Company now offers both licenses in a combined package known as the Customer Loyalty System License (“CLS”).
 
We recognize revenues when all of the following conditions are met:
 
there is persuasive evidence of an arrangement;
the products or services have been delivered to the customer;
the amount of fees to be paid by the customer is fixed or determinable; and
the collection of the related fees is probable.
 
Signed agreements are used as evidence of an arrangement. Electronic delivery occurs when we provide the customer with access to the software via a username and password. We assess whether a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction. The Company offered extended payment terms in 2014 and 2015 with regards to the setup fee with typical terms of payment due between one and three years from delivery of license. The Company no longer offers extended payment terms. We assess collectability of the set-up fee based on a number of factors such as collection history and creditworthiness of the customer. If we determine that collectability is not probable, revenue is deferred until collectability becomes probable, generally upon receipt of cash.
 
 
 
-24-
 
 
License arrangements may also include set-up fees such as website development, delivery of tablets, professional services and training services, which are typically delivered within 30-60 days of the contract term. In determining whether set-up fee revenues should be accounted for separately from license revenues, we evaluate whether the set-up fees are considered essential to the functionality of the license using factors such as the nature of our products; whether they are ready for use by the customer upon receipt; the nature of our implementation services, which typically do not involve significant customization to or development of the underlying software code; the availability of services from other vendors; whether the timing of payments for license revenues is coincident with performance of services; and whether milestones or acceptance criteria exist that affect the realizability of the license fee. Substantially all of our set-up fee arrangements are recognized as the services are performed. Payments received in advance of services performed are deferred and recognized when the related services are performed.
 
We do not offer refunds and therefore have not recorded any sales return allowance for any of the periods presented. Upon a periodic review of outstanding accounts receivable under the extended payment terms, amounts that are not being paid timely are deemed to be uncollectible and are written off against the allowance for doubtful accounts.
 
Deferred revenue consists substantially of amounts invoiced in advance of revenue recognition for our products and services described above. We recognize deferred revenue as revenue only when the revenue recognition criteria are met.
 
Stock Based Compensation
 
We account for stock based compensation arrangements through the measurement and recognition of compensation expense for all stock based payment awards to employees and directors based on estimated fair values. We use the Black-Scholes option valuation model to estimate the fair value of our stock options and warrants at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of options and warrants. We use historical company data among other information to estimate the expected price volatility and the expected forfeiture rate and not comparable company information, due to the lack of comparable publicly traded companies that exist in our industry.
 
Derivatives
 
We account for certain of our outstanding warrants as derivative liabilities. These derivative liabilities are ineligible for equity classification due to provisions of the instruments that may result in an adjustment to their conversion or exercise prices. The fair value of these liabilities is estimated using option pricing models that are based on the individual characteristics of our warrants, preferred and common stock, the derivative liability on the valuation date as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread.
 
 
 
-25-
 
Recent Accounting Pronouncements
 
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as amended, (Topic 606), with an effective date for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016. The Company is evaluating the impact, if any, the pronouncement will have on both historical and future financial positions and results of operations, with an expected completion date of June 30, 2017.
 
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (“ASU 2014-15), which states management should evaluate whether there are conditions or events, considered in the aggregate, that raise a substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known and likely to occur at the date that the financial statements are issued. ASU 2014-15 as required was adopted in the fourth quarter of 2016.
 
In February 2016, the FASB issued ASU 2016-02, Leases which amended guidance for lease arrangements in order to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. The guidance, which is required to be adopted in the first quarter of 2019, will be applied on a modified retrospective basis beginning with the earliest period presented. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
 
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 - Compensation - Stock Compensation, which simplifies the accounting for the tax effects related to stock based compensation, including adjustments to how excess tax benefits and a company’s payments for tax withholdings should be classified, amongst other items. ASU 2016-09 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We do not expect this to have a material effect on our consolidated financial statements.
 
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASU 2016-13), that requires entities to use a new impairment model based on expected losses. Under this new model an entity would recognize an impairment allowance equal to its current estimate of credit losses on financial assets measured at amortized cost. ASU 2016-13 is effective for us beginning January 1, 2020 with early adoption permitted January 1, 2019. Credit losses under the new model will consider relevant information about past events, current conditions and reasonable and supportable forecasts, resulting in recognition of lifetime expected credit losses. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
 
Off-Balance Sheet Arrangements
 
We did not have any off-balance sheet arrangements as of December 31, 2016.
 
 
-26-
 
SPENDSMART NETWORKS, INC.
 
Index
 
Item 8 – Financial Statements
 
 
Page
 
 
Report of Independent Registered Public Accounting Firm
 28
 
 
Consolidated Balance Sheets at December 31, 2016 and 2015
 29
 
 
Consolidated Statements of Operations for the years ended December 31, 2016 and 2015
 30
 
 
Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2016 and 2015
 31
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015
 32
 
 
Notes to Consolidated Financial Statements
 33
 
 
 
-27-
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders of
SpendSmart Networks, Inc.
 
 
We have audited the accompanying consolidated balance sheets of SpendSmart Networks, Inc. (the “Company") as of December 31, 2016 and 2015 and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for each of the years then ended. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SpendSmart Networks, Inc. as of December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has recurring net losses since inception and has yet to establish a profitable operation. These factors among others raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
/s/ EisnerAmper LLP
 
Iselin, New Jersey
May 16, 2017
 
 
-28-
 
SPENDSMART NETWORKS, INC.
Consolidated Balance Sheets
 
 
 
December 31,
 
 
December 31,
 
 
 
2016
 
 
2015
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $74,523 
 $470,341 
Accounts receivable, net of allowance for doubtful accounts of $629,461 at December 31, 2016 and $295,759 at December 31, 2015
 292,368 
  141,830 
Customer short-term notes receivable, net of allowance for doubtful accounts of $767,138 at December 31, 2016, and $632,422 at December 31, 2015
  26,850 
  276,168 
Other current assets
  24,901 
  11,100 
    Total current assets
 418,642 
  899,439 
 
    
    
Long-term assets: 
    
    
Customer long-term notes receivable, net of allowance for doubtful accounts of $399,401 at December 31, 2016, and $461,702 at December 31, 2015
  15,264 
  199,669 
Property and equipment, net of accumulated depreciation of $1,396,223 on December 31, 2016 and $1,035,960 on December 31, 2015
  - 
  896,146 
Intangible assets, net of accumulated amortization of $819,082 on December 31, 2016 and $626,579 on December 31, 2015
  399,000 
  1,570,575 
Other assets
 18,273
  18,274 
 
    
    
TOTAL ASSETS
 $851,179
 $3,584,103 
 
    
    
LIABILITIES AND STOCKHOLDERS' DEFICIT
    
    
Current liabilities:
    
    
Convertible notes
 $1,494,174 
 $1,817,320 
Notes payable
  - 
  70,262 
Notes payable, former CEO
  65,000 
  100,000 
Accounts payable and accrued liabilities
 1,997,667
  1,867,233 
Accrued interest payable
  66,242 
  23,090 
Deferred revenue
 748,774
  751,912 
Deferred acquisition related payable
  - 
  10,000 
Cash received in connection with tender offer
  - 
  661,424 
Derivative liabilities - conversion option
  88,242 
  179 
Derivative liabilities - warrants
  1,366,898 
  - 
Total current liabilities
 5,826,997
  5,301,420 
 
    
    
Stockholders' deficit:
    
    
Series C Preferred; $0.001 par value; 4,299,081 shares authorized; 3,443,061 and 3,700,729 shares issued and outstanding as of December 31, 2016 and December 31, 2015, respectively
  3,444 
  3,701 
Common stock; $0.001 par value; 300,000,000 shares authorized; 41,975,571 and 20,458,761 shares issued and outstanding as of December 31, 2016 and December 31, 2015, respectively
  41,976 
  20,459 
Additional paid-in capital
  94,438,312 
  90,879,480 
Accumulated deficit
  (99,459,550)
  (92,620,957)
Total stockholders' deficit
  (4,975,818)
  (1,717,317)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 $851,179
 $3,584,103 
 
See accompanying notes to consolidated financial statements.
 
 
-29-
 
 
 
Consolidated Statements of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
For the years ended December 31,
 
 
 
2016
 
 
2015
 
Revenues:
 
 
 
 
 
 
Mobile Marketing / Licensing
 $5,795,604 
 $5,588,002 
Total revenues
  5,795,604 
  5,588,002 
 
    
    
Operating expenses:
    
    
Selling and marketing
  595,031 
  582,042 
Personnel related
 1,140,068
  6,426,273 
Mobile Platform Processing
  1,211,284 
  1,465,576 
Amortization of intangible assets
  192,503 
  337,879 
General and administrative
  2,126,631
  3,463,405
Bad debt
 552,725
  1,417,952 
Impairment on software development assets
  718,116 
  - 
Impairment on intangible assets
  979,072 
  1,189,246 
Impairment on goodwill
  - 
  3,202,276 
Change in fair value of earn-out liability
  - 
  (594,216)
Total operating expenses
 11,033,545
  17,490,433
 
    
    
Loss from operations
  (5,237,941)
  (11,902,431)
 
    
    
Non-operating income (expense):
    
    
Interest income
  38,782 
  140,276 
Interest expense
  (180,704)
  (143,663)
Amortization of debt discount
  (399,367)
  (456,475)
Loss on extinguishment of debt
  (473,721)
  - 
Inducement for exercise of warrants
  (3,560,958)
  - 
Change in fair value of derivatives
  2,975,316 
  457,811 
Total non-operating income (loss)
  (1,600,652)
 (2,051)
 
    
    
Net loss
 $(6,838,593)
 $(11,904,482)
 
    
    
Basic and diluted net loss per share
 $(0.18)
 $(0.63)
 
    
    
Basic and diluted weighted average common shares outstanding used in computing net loss per share
  37,765,036 
  18,972,053 
 
 See accompanying notes to consolidated financial statements.
 
 
-30-
 
SPENDSMART NETWORKS, INC.
 
Statements of Changes in Stockholders' Deficit
For the years ended December 31, 2016 and 2015
 
  
  
  
  
 
 
 
 Series C
Preferred Stock
 
 
 Series A
 Preferred Stock
 
 
 Common Stock
 
 
Additional
 Paid-In
 
 
 Accumulated
 
 
Total
 Stockholders'
 
 
 
 Shares
 
 
 Par Value
 
 
 Shares
 
 
 Par Value
 
 
 Shares
 
 
 Par Value
 
 
 Capital
 
 
 Deficit
 
 
 Deficit
 
Balance as of December 31, 2014
  3,757,229 
 $3,757 
  - 
 $- 
  18,435,239 
 $18,435 
 $88,064,205 
 $(80,716,475)
 $7,369,922 
Conversions of preferred stock to common stock
  (56,500)
  (56)
  - 
  - 
  226,000 
  226 
  (170)
  - 
  - 
Warrant conversions
  - 
  - 
  - 
  - 
  750,000 
  750 
  126,750 
  - 
  127,500 
Warrants issued in conjunction with convertible notes
  - 
  - 
    
    
  - 
  - 
  386,118 
  - 
  386,118 
Issuance of common stock for services
  - 
  - 
  - 
  - 
  1,047,522 
  1,048 
  495,240 
  - 
  496,288 
Stock based compensation from stock options and warrants
  - 
  - 
  - 
  - 
  - 
  - 
  1,807,337 
  - 
  1,807,337 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (11,904,482)
  (11,904,482)
Balance as of December 31, 2015
  3,700,729 
 $3,701 
  - 
 $- 
  20,458,761 
 $20,459 
 $90,879,480 
 $(92,620,957)
 $(1,717,317)
Conversions of preferred stock to common stock
  (257,668)
  (257)
  - 
  - 
  1,546,008 
  1,546 
  (1,289)
  - 
  - 
Warrant exercises
  - 
  - 
  - 
  - 
  17,895,859 
  17,896 
  2,308,566 
    
  2,326,462 
Notes converted
  - 
  - 
  - 
  - 
  1,563,677 
  1,564 
  102,346 
  - 
  103,910 
Issuance of common stock for interest
  - 
  - 
  - 
  - 
  511,266 
  511 
  20,989 
    
  21,500 
Warrant modification
  - 
  - 
  - 
  - 
  - 
  - 
  43,897 
  - 
  43,897 
Stock based compensation from stock options and warrants
  - 
  - 
  - 
  - 
  - 
  - 
  1,084,323 
  - 
  1,084,323 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (6,838,593)
  (6,838,593)
Balance as of December 31, 2016
  3,443,061 
 $3,444 
  - 
 $- 
  41,975,571 
 $41,976 
 $94,438,312 
 $(99,459,550)
 $(4,975,818)
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
 
-31-
 
SPENDSMART NETWORKS, INC.
Consolidated Statements of Cash Flows
 
 
 
 
For the years ended
 
 
 
 December 31,
 
 
 
2016
 
 
2015
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 $(6,838,593)
 $(11,904,482)
Adjustments to reconcile net loss to net cash used in operating activities
    
    
Depreciation expense
  469,987 
  902,517 
Amortization of intangible asset
  192,503 
  337,879 
Amortization of debt discount
  399,367 
  456,475 
Stock-based compensation
  1,084,323 
  1,807,337 
Issuance of common stock for services and interest
  125,410 
  496,288 
Change in fair value of derivatives
  (2,975,316)
  (457,811)
Accrued interest income on notes receivable from third party
  - 
  (27,339)
Accrued interest expenses on notes payable
  50,087 
  23,090 
Impairment of software development assets
  718,116 
  - 
Impairment of goodwill
  - 
  3,202,276 
Impairment of intangible assets
  979,072 
  1,189,246 
Change in earn-out liability
  - 
  (594,216)
Inducement for exercise of warrants
  3,560,958 
  - 
Loss on extinguishment of debt
  473,721 
  - 
Provision for bad debt
 592,914
  2,111,418 
Changes in operating assets and liabilities:
    
    
Accounts receivable
  (565,735)
  (427,671)
Customer short-term notes receivable
  72,002 
  (598,385)
Customer long-term notes receivable
  184,004 
  (72,074)
Deferred revenue
 (3,138)
  (39,792)
Prepaid insurance
  (13,801)
  (5,010)
Other assets
  - 
  11,726 
Accounts payable and accrued liabilities
 (146,268)
  806,323 
Net cash used in operating activities
  (1,347,851)
  (2,782,205)
 
    
    
Cash flows from investing activities:
    
    
Proceeds from short-term notes receivable from third party
  - 
  121,000 
Software development costs
  (291,957)
  (912,212)
Purchase of property and equipment
  - 
  (305,326)
Net cash used in investing activities
  (291,957)
  (1,096,538)
 
    
    
Cash flows from financing activities:
    
    
Net proceeds from warrant exercises related to tender offer
  1,179,252 
  - 
Net proceeds from liabilities related to tender offer
  - 
  661,424 
Payment of deferred acquisition payable-Intellectual Capital Mgmt, LLC
 (10,000)
 (10,000)
Net proceeds from warrant conversions
  - 
  127,500 
Proceeds from issuance of notes
  - 
  200,000 
Proceeds from issuance of related party financing
  - 
  100,000 
Repayment of notes payable
  (70,262)
  (129,738)
Repayment of notes to former CFO
  (35,000)
  - 
Repayment of convertible notes
  (200,000)
  - 
Proceeds from issuance of convertible debt
  380,000 
  2,157,743 
Net cash provided by financing activities
  1,243,990
  3,106,929
 
    
    
Net decrease in cash and cash equivalents
  (395,818)
  (771,814)
 
    
    
Cash and cash equivalents at beginning of the period
  470,341 
  1,242,155 
Cash and cash equivalents at end of the period
 $74,523 
 $470,341 
 
    
    
Non-cash Investing and Financing Activities:
    
    
The Company had conversions of 56,500 shares of Series C preferred stock into 226,000 shares of common stock during the year ended December 31, 2015.
The Company issued 1,438,340 warrants in connection with convertible debt during the year ended December 31, 2015.
The Company issued 26,479,217 warrants in connection with the exercise of tender offer warrants during the year ended December 31, 2016. 
The Company had a debt discount of $730,520 in connection with convertible debt during the year ended December 31, 2015.
The Company had a debt discount of $81,527 in connection with convertible debt during the year ended December 31, 2016.
The Company issued 17,895,859 shares of Common Stock in connection with the exercise of tender offer warrants during the year ended December 31, 2016.
The Company had conversions of 257,668 shares of Series C preferred stock into 1,546,008 shares of common stock during the year ended December 31, 2016.
 
See accompanying notes to the consolidated financial statements.
 
 
-32-
 
SPENDSMART NETWORKS, INC.
 
Notes to Consolidated Financial Statements
 
1. Basis of Presentation and Going Concern
 
The Company is a Delaware corporation. Through the subsidiary incorporated in the state of California, SpendSmart Networks, Inc. (“SpendSmart-CA”), the Company provides proprietary loyalty systems and a suite of digital engagement and marketing servers through our Mobile and Loyalty Marketing programs and proprietary website building software that help local merchants build relationships with consumers and drive revenues. The Company is a publicly traded company trading on the OTC Bulletin Board under the symbol “SSPC.” The accompanying audited consolidated financial statements include the accounts of the Company and SpendSmart-CA as of December 31, 2016 and 2015 and for the years then ended, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  All intercompany balances and transactions have been eliminated.
 
As of December 31, 2016, the Company’s audited consolidated financial statements included an opinion containing an explanatory paragraph as to the uncertainty of the Company’s ability to continue as a going concern. The Company has continued to incur net losses through December 31, 2016 and have yet to establish profitable operations. These factors among others create a substantial doubt about our ability to continue as a going concern. The Company’s audited consolidated financial statements as of and for the periods ended December 31, 2016 do not contain any adjustments for this uncertainty.
 
The Company currently plans to raise additional required capital through the sale of shares of the Company’s preferred or common stock. All additional amounts raised will be used for our future investing and operating cash flow needs. However there can be no assurance that we will be successful in consummating such financing. This description of our future plans for financing does not constitute an offer to sell or the solicitation of an offer to buy our securities.
 
2. Reclassification
 
Certain reclassifications were made to the 2015 financial statement presentation to conform to the 2016 financial statement presentation. These reclassifications relate to balances from discontinued operations.

3. Summary of Significant Accounting Policies
  
Loans Receivable and Accounts Receivable
 
The Company extended credit to its customers in the normal course of business and performs ongoing credit evaluations of its customers. Loans and accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time loan and accounts receivable are past due and the customer's current ability to pay its obligation to the Company. The Company writes off loans and accounts receivable when they become uncollectible. The Company is no longer entering into notes with its customers.
 
Use of Estimates
 
The preparation of the consolidated financial statements in conformity with US GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, fair value of financial instruments, at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could materially differ from those estimates. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include recoverability and useful lives of intangible assets, the valuation allowance related to the Company's deferred tax assets, the allowance for doubtful accounts related and notes and accounts receivable and the fair value of stock options and warrants granted to employees, consultants, directors, investors and placement agents.
 
 
 
-33-
 
Revenue Recognition
 
The Company generates revenues primarily in the form of set up fees, license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services.  License fees are charged monthly for support services.  Set-up fees primarily consist of fees for website development services (including support and unspecified upgrades and enhancements when and if they are available), training and professional services that are not essential to functionality. The Company offers two licenses consisting of our Engage license and our Thrive license. The Company now offers both licenses in a combined package known as the Customer Loyalty System License (“CLS”).
 
We recognize revenues when all of the following conditions are met:
 
there is persuasive evidence of an arrangement;  
 
the products or services have been delivered to the customer;  
 
the amount of fees to be paid by the customer is fixed or determinable; and  
 
the collection of the related fees is probable.
 
Signed agreements are used as evidence of an arrangement. Electronic delivery occurs when we provide the customer with access to the software. We assess whether a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction. The Company offered extended payment terms in 2014 and 2015 with regards to the setup fee with typical terms of payment due between one and three years from delivery of license. The Company no longer offers extended payment terms. We assess collectability of the set-up fee based on a number of factors such as collection history and creditworthiness of the customer. If we determine that collectability is not probable, revenue is deferred until collectability becomes probable, generally upon receipt of cash.
 
License arrangements may also include set-up fees such as website development, delivery of tablets, professional services and training services, which are typically delivered within 30-60 days of the contract term. In determining whether set-up fee revenues should be accounted for separately from license revenues, we evaluate whether the set-up fees are considered essential to the functionality of the license using factors such as the nature of our products; whether they are ready for use by the customer upon receipt; the nature of our implementation services, which typically do not involve significant customization to or development of the underlying software code; the availability of services from other vendors; whether the timing of payments for license revenues is coincident with performance of services; and whether milestones or acceptance criteria exist that affect the realizability of the license fee. Substantially all of our set-up fee arrangements are recognized as the services are performed. Payments received in advance of services performed are deferred and recognized when the related services are performed.
 
We do not offer refunds and therefore have not recorded any sales return allowance for any of the periods presented. Upon a periodic review of outstanding accounts and notes receivable, amounts that are deemed to be uncollectible are written off against the allowance for doubtful accounts.
 
Deferred revenue consists substantially of amounts invoiced in advance of revenue recognition for our products and services described above. We recognize deferred revenue as revenue only when the revenue recognition criteria are met.  
 
 
 
-34-
 
Debt discount and issuance costs
 
Debt issuance costs, including the value of warrants issued in connection with debt financing and fees or costs paid to lender, are presented in the consolidated balance sheets as a direct deduction from the carrying amount of that debt. 
 
The Company amortizes the discount to interest expense over the term of the respective debt using the effective interest method.
 
Cash and cash equivalents
 
The Company considers all investments with an original maturity of three months or less to be cash equivalents. Cash equivalents primarily represent funds invested in money market funds, bank certificates of deposit and U.S. government debt securities whose cost equals fair market value.
 
From time to time, the Company has maintained bank balances in excess of insurance limits established by the Federal Deposit Insurance Corporation. The Company has not experienced any losses with respect to cash. Management believes the Company is not exposed to any significant credit risk with respect to its cash and cash equivalents.
 
Property and Equipment
 
Property and equipment (including kiosks) had been recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to five years). Costs incurred for maintenance and repairs are expensed as incurred and expenditures for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives. Depreciation expense for the years ended December 31, 2016 and2015 was $0 and $628,999, respectively. The Company accelerated the depreciation in the amount of approximately $496,000 on the kiosks, which have seven inch screens, to reduce their net book value to zero due to technological obsolescence in 2015. In the fourth quarter 2015, they were replaced by new ten inch screens and some new seven inch screens which will be able to run offline from wifi, have faster processors and ultra-sharp screens, and have licensee reporting tools.  Currently the Company sells the equipment to the customer. Therefore the cost of equipment is included in operating expenses and not capitalized as property and equipment.
 
Software Capitalization
 
The Company accounts for computer software used in the business in accordance with ASC 350 “Intangibles-Goodwill and Other”. ASC 350 requires computer software costs associated with internal use software to be charged to operations as incurred until certain capitalization criteria are met. Costs incurred during the preliminary project stage and the post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property, equipment and software. These costs generally consist of internal labor during configuration, coding, and testing activities. Capitalization begins when (i) the preliminary project stage is complete, (ii) management with the relevant authority authorizes and commits to the funding of the software project, and (iii) it is probable both that the project will be completed and that the software will be used to perform the function intended. We capitalized $291,957 and $912,212 in software for the years ended December 31, 2016 and 2015, respectively. Software depreciation expense for the years ended December 31, 2016 and 2015 was $469,987 and $273,517, respectively. We recorded impairment expense of $718,116 related to our SMS software for the year ended December 31, 2016.
  
Valuation of Long-Lived Assets
 
The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the estimated fair value of the assets. We recorded impairment expense on our intangible assets of $922,688 related to our SMS technology assets, $38,853 related to trademarks, and $17,531 related to our TechXpress technology assets for the year ended December 31, 2016. We conducted an impairment analysis on our intangible assets and goodwill and determined that we had an impairment related to our intangible assets of $1,189,246 and on our goodwill of $3,202,276 at December 31, 2015
 
 
 
-35-
 
Income Tax Expense Estimates and Policies
 
As part of the income tax provision process of preparing the Company’s financial statements, the Company is required to estimate the Company’s provision for income taxes. This process involves estimating our current tax liabilities together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Management then assesses the likelihood that the Company deferred tax assets will be recovered from future taxable income and to the extent believed that recovery is not likely, a valuation allowance is established. Further, to the extent a valuation allowance is established and changes occur to this allowance in a financial accounting period, such changes are recognized in the Company’s tax provision in the Company’s consolidated statement of operations. The Company’s use of judgment in making estimates to determine the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance is recorded against our net deferred tax assets.
 
There are various factors that may cause these tax assumptions to change in the near term, and the Company may have to record a future valuation allowance against our deferred tax assets. The Company recognizes the benefit of an uncertain tax position taken or expected to be taken on the Company’s income tax returns if it is “more likely than not” that such tax position will be sustained based on its technical merits.
 
Stock Based Compensation
 
The Company accounts for stock based compensation arrangements through the measurement and recognition of compensation expense for all stock based payment awards to employees and directors based on estimated fair values. The Company uses the Black-Scholes option valuation model to estimate the fair value of the Company’s stock options and warrants at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of options and warrants. The Company uses historical company data among other information to estimate the expected price volatility and the expected forfeiture rate.
 
Derivatives – Warrant Liability
 
The Company accounts for the common stock warrants granted and still outstanding as of December 31, 2016 in connection with certain financing transactions (“Transactions”) in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. The fair value of the warrants issued by the Company in connection with the transactions has been estimated using a Monte Carlo simulation.
 
The Company accounts for certain of its outstanding warrants issued in fiscal 2010, 2012 and 2013 (“2010 Warrants,” “2012 Warrants” and “2013 Warrants, respectively) as derivative liabilities. These warrants were determined to be ineligible for equity classification due to provisions of the respective instruments that may result in an adjustment to their conversion or exercise prices. The Company recognized a gain of $0 and $47,209 in the fair value of derivatives for the years ended December 31, 2016 and 2015, respectively. These derivative liabilities which arose from the issuance of these warrants resulted in an ending balance of derivative liabilities of $0 at December 31, 2015, and expired in 2016.  
 
The Company accounts for certain of its outstanding warrants issued in fiscal 2016 (“2016 Warrants”) as derivative liabilities. The 2016 Warrants were determined to be ineligible for equity classification due to provisions of the respective instruments that may result in an adjustment to their conversion or exercise prices. The Company recognized a gain of $2,732,444 in the fair value of these derivatives for the year ended December 31, 2016. These derivative liabilities which arose from the issuance of the 2016 Warrants resulted in an ending balance of derivative liabilities of $1,366,898 as of December 31, 2016.
 
Derivatives - Bifurcated Conversion Option in Convertible Notes
 
The Company issued Convertible Notes with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, Accounting for Derivative Financial Instruments and Hedging Activities, in certain instances, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.
  
 
 
-36-
 
The Convertible Notes issued during the years ended December 31, 2016 and 2015 are subject to anti-dilution adjustments that allow for the reduction in the Conversion Price, as defined in the agreement, in the event the Company subsequently issues equity securities including Common Stock or any security convertible or exchangeable for shares of Common Stock for a price less than the current conversion price. The Company bifurcated and accounted for the conversion option in accordance with ASC 815 as a derivative liability, since this conversion feature is not considered to be indexed to the Company’s own stock.
 
The Company’s derivative liability has been measured at fair value at December 31, 2016 using a Monte-Carlo Simulation. Inputs into the model require estimates, including such items as estimated volatility of the Company’s stock, estimated probabilities of additional financing, risk-free interest rate, and the estimated life of the financial instruments being fair valued. In addition, since the conversion price contains an anti-dilution adjustment, the probability that the Conversion Price of the Notes would decrease as the share price decreased was also incorporated into the valuation calculation.
 
The Company recognized a gain of $242,231 and a gain of $410,602 in the fair value of conversion option derivatives for the year ended December 31, 2016 and 2015, respectively. These derivative liabilities resulted in an ending balance of conversion option derivative liabilities of $88,242 and $179 as of December 31, 2016 and December 31, 2015, respectively.
 
Subsequent changes to the fair value of the derivative liabilities will continue to require adjustments to their carrying value that will be recorded as other income (in the event that their value decreases) or as other expense (in the event that their value increases). In general (all other factors being equal), the Company will record income when the market value of the Company’s common stock decreases and will record expense when the value of the Company’s stock increases. The fair value of these liabilities is estimated using Monte Carlo pricing models that are based on the individual characteristics of the Company’s warrants, preferred and common stock, as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread.
 
Net Loss per Share
 
The Company calculates basic earnings per share (“EPS”) by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss applicable to common shareholders by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive.
 
 
 
-37-
 
Fair value of assets and liabilities
 
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value for applicable assets and liabilities, we consider the principal or most advantageous market in which we would transact and we consider assumptions market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:
 
 
Level 1: Observable inputs such as quoted prices in active markets;
 
 
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
 
 
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
The Company’s financial instruments are cash and cash equivalents, accounts payable, and derivative liabilities. The recorded values of cash equivalents and accounts payable approximate their fair values based on their short-term nature. The fair value of derivative liabilities is estimated using option pricing models that are based on the individual characteristics of our warrants, preferred and common stock, the derivative liability on the valuation date as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread. The derivative liabilities are the only Level 3 fair value measures.
 
A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s warrant derivative liabilities that are categorized within Level 3 of the fair value hierarchy as of December 31, 2016 and 2015 is as follows:
 
Date of Valuation
 
December 31,
2016
 
 
December 31,
2015
 
Stock Price
  0.02 
  0.15 
Volatility (Annual)
  140%
  66%
Number of assumed financings
  1 
  1 
Total shares outstanding
  41,975,571 
 20,458,761
Strike Price
  0.01 
  0.75 
Risk-free Rate
  1.34%
  0.96%
Maturity Date
  
7/15/2019
 
  
7/15/2019
 
Expected Life
  N/A 
  N/A 
 
A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s conversion option derivative that are categorized within Level 3 of the fair value hierarchy as of December 31, 2016 is as follows:
 
Date of Valuation
 
December 31,
2016
 
 
December 31,
2015
 
Stock Price
  0.02 
  0.15 
Volatility (Annual)
  140%
  66%
Strike Price
 N/A
  0.75 
Risk-free Rate
  1.40%
 1.40%
Maturity Date
  
5/5/2017
 
  
6/26/2016
 
 

 
-38-
 
At December 31, 2016 and 2015, the estimated fair values of the liabilities measured on a recurring basis are as follows:
 
 
 
 
 
 
Fair Value Measurements at
 
 
 Carrying 
 
December 31, 2016:
 
 
 
Value
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
Earn-out liability
 $- 
 $- 
 $- 
 $- 
Warrant derivative liability
  1,366,898 
  - 
  - 
  1,366,898 
Conversion option derivative liability
  88,242 
  - 
  - 
  88,242 
Total
 $1,455,140 
 $- 
 $- 
 $1,455,140 
 
    
    
    
    
 
 
 
 
 
 
Fair Value Measurements at
 
 
 Carrying 
 
December 31, 2015:
 
 
 
Value
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
Earn-out liability
 $- 
 $- 
 $- 
 $- 
Conversion option derivative liability
  179 
  - 
  - 
  179 
Total
 $179 
 $- 
 $- 
 $179 
 
The following tables present the activity for Level 3 liabilities for the years ended December 31, 2016 and 2015:
 
 
 
Fair Value Measurement Using
 
 
 
Significant Unobservable Inputs
 
 
 
(Level 3)
 
 
 
Warrant Derivative Liability
 
 
Conversion Option Derivative Liability
 
Beginning balance at December 31, 2015
 $- 
 $179 
     Additions during the year
  4,099,344 
  330,933 
     Total (gains) or losses included in net loss
  (2,732,446)
  (242,870)
     Transfers in and/or out of Level 3
  - 
  - 
Ending balance at December 31, 2016
 $1,366,898 
 $88,242 
 
 
 
Fair Value Measurement Using
 
 
 
Significant Unobservable Inputs
 
 
 
(Level 3)
 
 
 
Warrant Derivative Liability
 
 
Conversion Option Derivative Liability
 
Beginning balance at December 31, 2014
 $47,209 
 $- 
     Additions during the year
  - 
  410,781 
     Total (gains) or losses included in net loss
  (47,209)
  (410,602)
     Transfers in and/or out of Level 3
  - 
  - 
Ending balance at December 31, 2015
 $- 
 $179 
 
 
-39-
 
Changes in fair value of our Level 3 earn-out liability for the years ended December 31, 2016 and 2015 were as follows:
 
Fair Value Measurements Using Level 3 Inputs                   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrant
 
 
Conversion
 
 
Earn-out
 
 
 
 
 
 
Derivative Liability
 
 
Option Derivative Liability
 
 
Liability
 
 
Total
 
Balance - December 31, 2015
 $- 
  179 
  - 
 $179 
Additions during the period
  4,099,344 
  330,933 
  - 
  4,430,277 
Total (gains) or losses include in net loss
  (2,732,446)
  (242,870)
  - 
  (2,975,316)
Balance - December 31, 2016
 $1,366,898 
  88,242 
  - 
 $1,455,140 
 
Advertising
 
The Company expenses advertising costs as incurred. The Company has no existing arrangements under which we provide or receive advertising services from others for any consideration other than cash. Advertising expenses totaled $208,530 and $320,044 for the years ended December 31, 2016 and 2015, respectively.
 
Litigation
 
From time to time, the Company may become involved in litigation and other legal actions. The Company estimates the range of liability related to any pending litigation where the amount and range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.
 
On July 8, 2015, Intellectual Capital Management, LLC dba SMS Masterminds and SpendSmart Networks, Inc. were named in a potential class-action lawsuit entitled Peter Marchelos, et al v. Intellectual Capital Management, et al, filed in the United States District Court Eastern District of New York relating to alleged violations of the Telephone Consumer Protection Act of 1991. This litigation involves the same licensee and merchant as a previous lawsuit and the same attorneys represent the plaintiffs in this action. The claim of one of the two plaintiffs was resolved for $1,701. The Company believes the Plaintiff’s allegations have no merit.  There are no other legal claims currently pending or threatened against us that in the opinion of our management would be likely to have a material adverse effect on our financial position, results of operations or cash flows. 
 
Earn Out
 
The Company agreed to pay the sellers an earn-out payment relating to fifteen percent of the earnings generated by SMS Masterminds after the acquisition and an additional earn-out payment tied to the EBITDA of the Company after the acquisition of SMS Masterminds, of up to $2,000,000 in aggregate.  The Company paid $0 during the years ended December 31, 2016 and 2015 related to this earn-out agreement.
 
The change in fair value of Earn-out liability expenses totaled $0 for the year ended December 31, 2016 and $594,216 for the year ended December 31, 2015. We recorded the change in earn-out liability due to our updated operating assumptions in the underlying valuation related to the SMS acquisition.
 
The Company agreed to pay the sellers a guaranteed payment of $400,000 of which $390,000 had been paid as of December 31, 2015 and $10,000 was paid in January, 2016. As of December 31, 2016, the remaining balance was $0.
 
Goodwill
 
The Company accounted for goodwill under ASC 350 “Intangibles – Goodwill and Other” (“ASC 350”). ASC 350 requires an evaluation of impairment by assessing qualitative factors, and if necessary, applying a fair-value based test. The goodwill impairment test requires qualitative analysis to determine whether is it more likely than not that the fair value of a reporting unit is less than the carrying amount, including goodwill. An indication of impairment through analysis of these qualitative factors initiates a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of the Company’s reporting units based on discounted cash flow models using revenue and profit forecasts and comparing the estimated fair values with the carrying values of the Company’s reporting units which include the goodwill. If the estimated fair values are less than the carrying values, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of the Company’s “implied fair value” requires the Company to allocate the estimated fair value to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value.  The Company tested goodwill impairment at December 31, 2015 and concluded that goodwill was fully impaired. Goodwill was written down in the amount of $3,202,276 in 2015.
 
 
 
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Intangible assets
 
Intangible assets consist of intellectual property/technology, customer lists, and trade-name/marks acquired in business combinations under the purchase method of accounting are recorded at fair value net of accumulated amortization since the acquisition date. Amortization is calculated using the straight line method over the estimated useful lives at the following annual rates:
 
 
 
Useful Lives
 
IP/technology
  10 
Trade-name/marks
  10 
 
 
 
December 31,
2016
 
 
December 31,
2015
 
Intangible assets beginning balance
  1,570,575
 
  3,097,700 
Amortization
  (192,503)
  (337,879)
Impairment
  (979,072)
  (1,189,246)
Intangible assets ending balance
  399,000
 
 1,570,575
 
The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of finite-lived intangible asset may not be recoverable. Recoverability of a finite-lived intangible asset is measured by a comparison of its carrying amount to the undiscounted future cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is determined based on discounted cash flows.
 
The Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the year ended December 31, 2016, the Company recorded an impairment loss of $979,072 related to an intangible asset.
 
Recently Issued Accounting Pronouncements
 
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as amended, (Topic 606), with an effective date for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016. The Company is evaluating the impact, if any, the pronouncement will have on both historical and future financial positions and results of operations, with an expected completion date of June 30, 2017.
 
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (“ASU 2014-15), which states management should evaluate whether there are conditions or events, considered in the aggregate, that raise a substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known and likely to occur at the date that the financial statements are issued. ASU 2014-15 as required was adopted in the fourth quarter 2016.
 
In February 2016, the FASB issued ASU 2016-02, Leases which amended guidance for lease arrangements in order to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. The guidance, which is required to be adopted in the first quarter of 2019, will be applied on a modified retrospective basis beginning with the earliest period presented. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
 
 
 
-41-
 
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 - Compensation - Stock Compensation, which simplifies the accounting for the tax effects related to stock based compensation, including adjustments to how excess tax benefits and a company’s payments for tax withholdings should be classified, amongst other items. ASU 2016-09 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We do not expect this to have a material impact on our consolidated financial statements.
 
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASU 2016-13), that requires entities to use a new impairment model based on expected losses. Under this new model an entity would recognize an impairment allowance equal to its current estimate of credit losses on financial assets measured at amortized cost. ASU 2016-13 is effective for us beginning January 1, 2020 with early adoption permitted January 1, 2019. Credit losses under the new model will consider relevant information about past events, current conditions and reasonable and supportable forecasts, resulting in recognition of lifetime expected credit losses. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
 
Segments
 
The Company operates in one reportable segment. Accordingly, no segment disclosures have been presented herein.
  
4. Accounts Receivable, Short-Term and Long-Term Notes Receivable

Management reviews accounts receivable, short-term and long-term notes receivable on a monthly basis to determine if any receivables are potentially uncollectible. An allowance for doubtful accounts is determined based on a combination of historical experience, length of time outstanding, customer credit worthiness, and current economic trends. As of December 31, 2016, the Company had recorded an allowance for doubtful accounts of $1,796,000. We recorded a bad debt expense of $552,725 during the year ended December 31, 2016 and wrote off uncollectable accounts during the year ended December 31, 2016 in the amount of $147,408, all of which were fully reserved. As of December 31, 2015, the Company had recorded an allowance for doubtful accounts of $1,389,883.
 
Notes receivable aged over 60 days past due are considered delinquent and notes receivable aged over 90 days past due with known collection issues are placed on non-accrual status. Interest revenue is not recognized on notes receivable while on non-accrual status. Cash payments received on non-accrual receivables are applied towards the principal. When notes receivable on non-accrual status are again less than 60 days past due, recognition of interest revenue for notes receivable is resumed. We charge interest rates on our notes receivable averaging 13% which approximates a fair value. We recorded approximately $38,782 in interest income for the year ended December 31, 2016.
 
 
 
-42-
 
Based upon the Company's methodology, the notes receivable balances with reserves and the reserves associated with those balances are as follows:
 
 
 
 December 31, 2015                  
 
 
 
   Gross      
 
 
   Reserve      
 
 
   Net      
 
 
 
 Current
 
 
 Long-Term
 
 
 Current
 
 
 Long-Term
 
 
 Current
 
 
 Long-Term
 
 Customer Notes Receivable
  908,590 
  661,371 
  632,422 
  461,702 
  276,168 
  199,669 
 Accounts Receivable
  437,589 
  - 
  295,759 
  - 
  141,830 
  - 
 
 
 
December 31, 2016
 
 
 
Gross
 
 
Reserve
 
 
Net
 
 
 
Current
 
 
Long-Term
 
 
Current
 
 
Long-Term
 
 
Current
 
 
Long-Term
 
Customer Notes Receivable
  793,988 
  414,665 
  767,138 
  399,401 
  26,850 
  15,264 
Accounts Receivable
  921,829 
  - 
  529,461 
  - 
 292,368 
  - 
 
The roll forward of the allowance for doubtful accounts related to notes receivable and accounts receivable is as follows:
 
 
 
Notes Receivable Reserve
 
 
Accounts
 
 
 
Current
 
 
Long-Term
 
 Receivable  Reserve
Balance at December 31, 2014
  286,571 
  349,954 
  188,527 
     Incremental Provision
  796,063 
  551,256 
  441,627 
     Recoveries
  - 
  - 
  - 
     Charge offs
  (450,212)
  (439,508)
  (334,395)
Balance at December 31, 2015
  632,422 
  461,702 
  295,759 
 
 
 
Notes Receivable Reserve
 
 
Accounts
 
 
 
Current
 
 
Long-Term
 
 Receivable  Reserve
Balance at December 31, 2015
 $632,422 
 $461,702 
 $295,759 
     Incremental Provision
  177,316 
  401 
 415,197 
     Recoveries
  - 
  - 
  - 
     Charge offs
  (42,600)
  (62,702)
  (81,495)
Balance at December 31, 2016
 $767,138 
 $399,401 
 $629,461 
 
5. Short Term Note Receivable
 
The Company issued a Secured Convertible Promissory Note (the “Note”) in the principal amount of $410,000 to a third party in September 2014. The Note bears interest at the rate of 5.25% per annum and matured in four months. For the years ended December 31, 2016 and December 31, 2015, the Company has recorded $0 and $27,380 of interest income from this Note. $130,000 of the principal amount was paid in 2015. The remaining balance of $322,430 was written off during the year ended December 31, 2015, which was made up of $280,000 in principal and $42,430 in interest.
 
 
 
-43-
 
6. Convertible Promissory Notes
 
On November 30, 2016, the Company issued a Convertible Promissory Note to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of $100,000. Mr. Blech, a member of the Company’s board of directors, is the trustee. The Convertible Promissory Note bears interest at the rate of 9% has six-month maturity date, and a voluntary conversion into an upcoming financing in the event the Company closes the financing and receives gross proceeds totaling at least $200,000. The conversion rate will be at the same terms of the financing. We recorded $2,250 in interest expense for the year ended December 31, 2016.
 
On November 7, 2016, the Company issued a Convertible Promissory Note to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of $100,000. Mr. Blech, a member of the board of directors, is the trustee. The Convertible Promissory Note bears an interest at the rate of 9%, has a six month maturity date, and a voluntary conversion into an upcoming financing in the event the Company closes the financing and receives gross proceeds totaling at least $200,000. The conversion rate will be at the same terms of the financing. We recorded $2,817 in interest expense for the year ended December 31, 2016.
 
On July 19, 2016, the Company issued the following Convertible Promissory Notes: Joe Proto ($40,000), John Eyler ($40,000), Francis J. Liddy ($20,000), Isaac Blech ($40,000), and Transpac Investments Ltd. ($40,000). All of the individuals listed are members of the board of directors. The Convertible Promissory Notes bear interest at the rate of 9%, have a six month maturity date, and a mandatory conversion into an upcoming financing in the event the Company closes the financing and receives gross proceeds totaling at least $200,000. The conversion rate will be at the same terms of the financing. We recorded $7,283 in interest expense for the year ended December 31, 2016.
 
During the year ended December 31, 2015, the Company closed on a private offering and issued and six 9% Convertible Promissory Notes with principal amounts of $300,000, $262,500, $275,000, $75,000, 50,000, and $150,0000 (the “Notes”) and warrants to purchase 400,002, 350,002, 366,667, 66,667, 100,001, and 200,001 shares of the Company’s common stock (the “Warrant”), respectively. The Company also agreed to provide piggy-back registration rights to the holders of the Units. The Notes have a term of twelve (12) months, pay interest semi-annually at 9% per annum and can be voluntarily converted by the holder into shares of common stock at an exercise price of $0.75 per share, subject to adjustments for stock dividends, splits, combinations and similar events as described in the Notes. In addition, if the Company issues or sells common stock at a price below the conversion price then in effect, the conversion price of the Notes shall be adjusted downward to such price but in no event shall the conversion price be reduced to a price less than $0.50 per share. The Warrants have an exercise price of $0.75 per share and have a term of four years. The holders of the Warrants may exercise the Warrants on a cashless basis for as long as the shares of common stock underlying the Warrants are not registered on an effective registration statement. The relative fair value ascribed to the 1,483,340 warrants issued was approximately $337,118 and was recorded to additional paid-in capital.  The embedded conversion feature was bifurcated and accounted for as a derivative liability at approximately $393,000 on the day of issuance.  The remaining proceeds were allocated based on the relative fair value of the debt and the warrant, and accordingly, approximately $730,520 of debt discount was recorded and was amortized over the initial term of the debt using the effective interest method. These notes were modified in second quarter 2016 and again in fourth quarter 2016. See below for further discussion.
 
 
 
-44-
 
During the second quarter 2016, the Company amended four of the outstanding 9% Convertible Promissory Notes with principal amounts of $275,000, $75,000, 50,000, and $150,000 as follows: the maturity dates were extended to November 5, 2016, September 2, 2016, November 22, 2016, and September 26, 2016, respectively; the conversion price was lowered to $0.15 per share, the provision limiting the conversion price adjustment to that of the Series C Preferred Stock was removed, and an option to be repaid prior to the maturity date in the event the Company raises capital in excess of three million dollars was added. The Company also amended the warrant issued in conjunction with the Convertible Promissory Note reducing the exercise price to $0.15 and issued new warrants to purchase 666,669 shares of the Company's common stock with a $0.15 exercise price and a three year expiration. According to FASB ASC 470-50, the modification is accounted for as a debt extinguishment, whereby the new debt instrument is initially recorded at fair value, and that amount is used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument. We recognized a loss on the extinguishment of debt of $415,689 for the year ended December 31, 2016.
 
During the fourth quarter 2016, the Company amended six of the outstanding 9% Convertible Promissory Notes with principal amounts of $300,000, $262,500, $275,000, $75,000, $50,000, and $150,000 as follows: the maturity dates were extended to May 5, 2017; the interest rate for the extension period was increased to 15%; the conversion price was changed to the per share price at the time of the next financing of $2,000,000 or greater. According to FASB ASC 470-50, the modification is accounted for as a debt extinguishment, whereby the new debt instrument is initially recorded at fair value, and that amount is used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument. We recognized a loss on the extinguishment of debt of $58,032 for the year ended December 31, 2016.
 
On July 15, 2015, the Company issued a Convertible Promissory Note in the principal amount of $400,000 inclusive of interest. The Note is for a term of six months. The Note bears interest at twelve percent per annum. The Note is secured by the assets of the Company. The Note may be converted into shares of the Company’s common stock at $0.75 per share. The Company also issued the holder warrants to purchase 500,000 shares of the Company’s common stock. The proceeds were allocated based on the relative fair value of the debt and the warrant. The warrants have an exercise price of $0.75 per share and have a term of two years. The relative fair value ascribed to the 500,000 warrants issued was approximately $49,000 and was recorded to additional paid-in capital. This amount will be amortized over the term of the debt using the effective interest rate method. As part of the closing of the Tender Offer, $200,000 of these notes converted into 1,333,334 shares of common stock and the investor received common stock and 1,333,333 warrants with a three year term at an exercise price of $0.15. The remaining $200,000 of notes was paid in February 2016.
 
During the year ended December 31, 2015, the Company issued Convertible Promissory Notes to investors in the principal amount of $150,000, $150,000, $287,333, and $48,000. The Notes feature a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Notes bear interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the note was bifurcated and accounted for as a derivative liability at approximately $17,379 on the day of issuance. As part of the closing of the Tender Offer, these notes converted into 4,291,679 shares of common stock and the investors received 12,875,037 warrants with a three year term at an exercise price of $0.15.
 
 
 
-45-
 
7. Notes Payable
 
On August 26, 2015, the Company entered into a Business Promissory Note and Security Agreement with Bank of Lake Mills for the principal sum of $200,000 and a daily interest rate of 0.22%. The Note is for a term of six months with a weekly repayment schedule ending February 22, 2016. The Note included standard representations and warranties. The Note was secured by certain assets of the Company as well as a personal guarantee by Alex Minicucci, our then CEO. The total repayment amount including interest and principal is $244,637 and was to be paid pro-rata weekly ending February 22, 2016. For the year ended December 31, 2015, we recorded interest expense related to the note of $39,585. For the year ended December 31, 2015, we have paid approximately $129,738 in principal repayments related to the Note. For the year ended December 31, 2016, we paid approximately $70,262 in principal repayments related to the Note. As of February 25, 2016, the note has been fully repaid.
 
8. Due to Related Party
 
On August 14, 2015 and September 28, 2015, the Company entered into Loan Agreements with Alex Minicucci for the principal sum of $65,000 and $35,000, respectively. The Loans were to be paid off by December 31, 2016 and include an interest rate of 7%. For the years ended December 31, 2016 and 2015, we recorded interest expense related to the loans of $4,756 and $3,034. The $35,000 loan has been repaid during 2016 and the Company extended the terms related to the $65,000 loan to May 10, 2017.
 
9. Common Stock and Warrants
 
Common stock
 
During the year ended December 31, 2016, the company issued 17,895,859 shares of common stock upon warrant exercises related to the tender offer. The Company issued 1,563,677 shares of common stock related to services rendered and recognized expense of $103,910 and issued 511,266 shares of common stock related to interest due and recognized expense of $21,500. 257,668 shares of Series C Stock converted to 1,546,008 shares of common shares during the year ended December 31, 2016.
 
 
 
-46-
 
During the year ended December 31, 2015, the company issued 1,047,522 shares of common stock and the Company recognized expense of $496,288 for services rendered and interest.
 
Tender Offer and Debt Conversion
 
Between December 11, 2015 and February 3, 2016, the Company entered into agreements with investors, pursuant to which on February 3, 2016, warrant holders exercised 12,270,846 Warrants to purchase an aggregate of 12,270,846 shares of our common stock for gross proceeds of $1.84 million. The Company issued new warrants to purchase an aggregate of 26,479,217 shares of common stock at an exercise price of $0.15 per share, in consideration for the immediate exercise of the warrants. In August, 2016, the exercise price on 13,209,609 of these warrants was reduced to $0.01, as the Company had not met its six-month targets related to these warrants. In January, 2017, the exercise price on 13,209,608 of these warrants was reduced to $.01, as the Company had not met its twelve-month target related to these warrants. The following paragraph discusses the accounting treatment related to this reduction.
 
The Warrants have a cash settlement feature; as a result, they were classified as a derivative liability and recorded at fair value. Fair value of the Warrants, in the total amount of $3,918,924 was calculated using the Monte-Carlo model, using the following assumptions: 68.7% expected volatility, a risk-free interest rate of 0.91%, estimated life of 3 years and no dividend yield. The fair value of the common stock was $0.148. The transaction was accounted for as an inducement. ASC 470-20-40 addresses the accounting for altered conversion privileges, including the issuance of warrants or other securities (not provided for in the original conversion terms) to induce conversion. As a result of this transaction, the Company recognized an inducement expense of $3,560,958 equal to the fair value of all securities and other consideration transferred in the transaction in excess of the fair value of securities issuable pursuant to the original conversion terms, as of the date of the conversion.
 
In connection with the tender offer, investors converted $843,751 in Convertible Notes at a conversion price of $0.15 per share into 5,625,013 shares of our common stock during 2016.
 
10. Convertible Preferred Stock
 
Series A Preferred Stock
 
At December 31, 2016 and 2015 we had 0 shares of Series A Cumulative Convertible Preferred Stock (the “Series A Stock”) outstanding.
 
Series B Preferred Stock
 
At December 31, 2016 and 2015 we had 0 shares of Series B convertible preferred stock (“Series B Stock”) outstanding.
 
Series C Convertible Preferred Stock
 
At December 31, 2016 and 2015, we had 3,443,061 and 3,700,729 shares, respectively, of Series C convertible preferred stock (“Series C Stock”) outstanding that were issued to investors for $3.00 per share. We issued 4,299,081 shares of Series C Stock and had conversions of 56,500 shares for the year ended December 31, 2015. For the year ended December 31, 2016, we had conversions of 257,668 shares.
 
 
 
-47-
 
Number of Shares: The number of shares of Series C Preferred Stock designated as Series C Preferred Stock is 4,299,081 (which shall not be subject to increase without the written consent of all of the holders of the Series C Preferred Stock or as otherwise set forth in the Certificate of Designation.
 
Stated Value: The initial Stated Value of each share of Series C Preferred Stock is $3.00 (as adjusted pursuant to the Certificate of Designation).
 
Voluntary Conversion: The Series C Preferred Stock shall be convertible at the option of the holder, into common stock at the applicable conversion price of $0.75 per share, subject to adjustments for stock dividends, splits, combinations and similar events as described in the form of Certificate of Designations. In addition, the Company has the right to require the holders to convert to common stock under certain enumerated circumstances.
 
Mandatory Conversion: At the Company’s sole option, each outstanding share of Series C Preferred Stock may be converted into shares of Common Stock at the applicable conversion price immediately prior to the close of business on the date that the volume weighted average price of the Common Stock, based on the closing price on the or any other market or exchange where the same is traded, shall exceed $4.00 per share for any 30 consecutive trading days anytime from the Original Issue Date with an average daily trading volume of 100,000 shares (such numbers shall be proportionally adjusted for dividends, stock splits, Common Stock combinations and recapitalizations involving the Common Stock).
 
Voting Rights: Except as described in the Certificate of Designations, holders of the Series C Preferred Stock will vote together with holders of the Company common stock on all matters, on an as-converted to common stock basis, and not as a separate class or series (subject to limited exceptions).
 
Liquidation Preferences: In the event of any liquidation or winding up of the Company prior to and in preference to any Junior Securities (including common stock), the holders of the Series C Preferred Stock will be entitled to receive in preference to the holders of the Company common stock a per share amount equal to the Stated Value (as adjusted pursuant to the Certificate of Designations).
 
11.  Net Loss per Share Applicable to Common Stockholders
 
Options, warrants, and convertible debt outstanding were all considered anti-dilutive for the year ended December 31, 2016 and 2015 due to net losses.
 
The following securities were not included in the diluted net loss per share calculation because their effect was anti-dilutive as of the periods presented:
 
 
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For the year ended
 
 
 
December 31,
 
 
 
2016
 
 
2015
 
Common stock options
  26,865,017 
  10,337,113 
Investor warrants
  37,836,680 
  23,752,410 
Compensation warrants
  1,981,667 
  2,645,000 
Excluded potentially dilutive securities
  66,683,364 
  36,734,523 
 
 
12. Stockholder’s equity
   
Stock options
 
In March 2016, our Company granted options to purchase up to 3,517,067 shares of our common stock to members of our Board of Directors. The options vest immediately; have an exercise price of $0.12 per share; and expire five years after the date of grant.  The fair value at grant date of these options was $246,141 and the entire amount was expensed in 2016.
 
In March 2016, our Company granted options to purchase up to 1,459,326 shares of our common stock to four employees. The options vest over four years; have an exercise price of $0.12 per share; and expire five years after the date of grant.  The fair value at grant date of these options was $112,147 and $48,145 was expensed in 2016.
 
In March 2016, our Company granted options to purchase up to 1,859,623 shares of our common stock to thirty-three employees. The options vest immediately; have an exercise price of $0.11 per share; and expire five years after the date of grant.  The fair value at grant date of these options was $142,006 and the entire amount was expensed in 2016.
 
In May 2016, our Company granted options to purchase up to 264,000 shares of our common stock to Frank Liddy. The options vest immediately; have an exercise price of $0.08 per share; and expire five years after the date of grant.  The fair value at grant date of these options was $20,256 and the entire amount was expensed in 2016.
 
In May 2016, our Company granted options to purchase up to 450,000 shares of our common stock to two employees. The options vest over two years; have an exercise price of $0.06 per share; and expire five years after the date of grant.  The fair value at grant date of these options was $17,979 and $8,088 was expensed in 2016.
 
In June 2016, our Company granted options to purchase up to 2,104,751 shares of our common stock to thirty-two employees. The options vest immediately; have an exercise price of $0.09 per share; and expire five years after the date of grant.  The fair value at grant date of these options was $151,431 and the entire amount was expensed in 2016.
 
Effective July 22, 2016, the Company cancelled the following stock and stock options granted to its board of directors on March 21, 2016: (a) Joseph Proto, 350,000 restricted shares of common stock; (b) John Eyler, options to purchase 464,331 shares of common stock; (c) Pat Kolenik 350,000 restricted shares of common stock; (d) Chris Leong, options to purchase 464,331 shares of common stock, and (e) Isaac Blech, options to purchase 663,330 shares of common stock.
 
In September 2016, our Company granted options to purchase up to 2,674,940 shares of our common stock to twenty-five employees. The options vest immediately; have an exercise price of $0.06 per share; and expire five years after the date of grant.  The fair value at grant date of these options was $139,316 and the entire amount was expensed in 2016.
 
In December 2016, our Company granted options to purchase up to 7,371,357 shares of our common stock to twenty-two employees. The options vest immediately; have an exercise price of $0.02 per share; and expire five years after the date of grant.  The fair value at grant date of these options was $131,947 and the entire amount was expensed in 2016.
 
 
 
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In 2016, we expensed $222,357, related to the issuance of options from 2014 and 2015, that continued to vest in 2016.
 
For the year ended December 31, 2015, we issued 3,666,476 options, as follows.  During first quarter, 2015, our Company granted options to purchase up to 165,000 shares of our common stock to five employees. The options vest over four years; have exercise prices of $.90 to $.95 per share; and expire five years after the date of grant.  The fair value at grant date of these options was $101,759. The amount expensed in 2015 was $21,564 and the amount expensed in 2016 was 16,142.
 
On March 5, 2015, our Company granted options to purchase up to 360,000 shares of our common stock to members of our Board of Directors. The options vest immediately; have an exercise price of $0.92 per share; and expire five years after the date of grant.  Each of the following Board members received 45,000 options each related to this issuance:  Joe Proto, Isaac Blech, Alex Minicucci, Cary Sucoff, Patrick Kolenik, Chris Leong, Jerold Rubinstein, and Mike McCoy.  The fair value at grant date of these options was $208,974 and the entire amount was expensed in 2015.
 
In May 2015, our Company granted options to purchase up to 75,000 shares of our common stock to Bruce Neuschwander. The options vest over four years; have an exercise price of $0.65; and expire five years after the date of grant.  The fair value at grant date of this option was $31,622. The amount expensed in 2015 was $10,794 and the amount expensed in 2016 was $3,763.
 
On October 1, 2015, our Company granted options to purchase up to 1,358,696 shares of our common stock to Jerold Rubinstein.  The options vest immediately; have an exercise price of $.46 per share; and expire five years after the date of grant.  The fair value at grant date of these options was $410,559 and the entire amount was expensed in 2015.
 
In November 2015, the Company repriced the 1,358,696 previously issued options to Jerold Rubinstein. The replacement stock options have an exercise price equal to $0.17 and a term of 4.8 years. The cancellation and reissuance of these stock options was treated as a modification under ASC 718 and, accordingly, total stock-based compensation expense related to these awards increased $35,713, which was recognized in 2015. 
 
In December, 2015, our Company granted options to purchase up to 278,500 shares of our common stock to four employees. The options vest immediately; have an exercise price of $.14 per share; and expire five years after the date of grant.  The fair value at grant date of these options was $26,792 and the entire amount was expensed in 2015.
 
In December, 2015, our Company granted options to purchase up to 70,584 shares of our common stock to five employees. The options vest immediately; have an exercise price of $.75 per share; and expire five years after the date of grant.  The fair value at grant date of these options was $3,876 and the entire amount was expensed in 2015.
 
Stock option activity during the following periods was as follows:
    
 
 
For the year ended
 
 
 
December 31,
 
 
 
2016
 
 
2015
 
Beginning balance outstanding
  10,337,113 
  8,807,667 
Options issued during the year
  19,701,064
 
  2,307,780 
Options forfeited during the year 
  (1,011,800)
  -
 
Options cancelled during the year 
  (1,591,992)
  -
 
Options expired during the year