Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended: March 31, 2017
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from N/A to N/A
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Commission file number: 000-27145
SPENDSMART NETWORKS, INC.
(Name of small business issuer in its charter)
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Delaware
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33-0756798
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(State or jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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805 Aerovista Pkwy, Suite 205
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San Luis Obispo California
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93401
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(Address and of principal
executive offices)
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(Zip Code)
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(877) 541-8398
(Issuer’s telephone number, including area code)
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 of
1934 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 whether registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act.
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated filer
(Do not check if a smaller reporting company)
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☐
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Smaller reporting company
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☒
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Emerging growth company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
No ☒
As of May 25, 2017 there were 45,075,571 shares outstanding of the
issuer’s common stock, par value $0.001 per
share.
TABLE OF
CONTENTS
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FORWARD LOOKING STATEMENTS
In
addition to historical information, this Quarterly Report on Form
10-Q 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, 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”,
“targets”, “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 our Company to be materially different from any
future results or achievements of our 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 including those contained in our most recent Form 10-K.
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.
Our Company cautions readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date
made. Our 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 our Company will be able to raise sufficient capital
to continue as a going concern. Forward-looking statements may also
include, but are not limited to, statements about our ability to
grow our revenues, our history of losses, the impact of our debt
obligations on our liquidity and financial condition, our need for
additional financing, and dilution to our stockholders and price
adjustments related to certain of our warrants including those with
an exercise price related to certain performance
metrics.
PART I:
Financial
Information
Item 1 – Financial Statements
SPENDSMART NETWORKS,
INC.
Condensed Consolidated Balance Sheets
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March 31,
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December 31,
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2017
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2016
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(unaudited)
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$185,320
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$74,523
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Accounts
receivable, net of allowance for doubtful accounts of $669,461 at
March 31, 2017 and $629,461 at December 31, 2016
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332,204
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292,368
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Customer short-term
notes receivable, net of allowance for doubtful accounts of
$749,638 at March 31, 2017, and $767,138
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17,037
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26,850
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at
December 31, 2016
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Other current
assets
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10,778
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24,901
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Total
current assets
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545,339
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418,642
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Long-term
assets:
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Customer long-term
notes receivable, net of allowance for doubtful accounts of
$400,901 at March 31, 2017, and $399,401
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5,987
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15,264
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at
December 31, 2016
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Property and
equipment, net of accumulated depreciation of $1,396,223 on March
31, 2017 and December 31, 2016
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-
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-
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Intangible assets,
net of accumulated amortization of $833,001 on March 31, 2017 and
$819,082 on December 31, 2016
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385,081
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399,000
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Other
assets
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18,273
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18,273
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TOTAL
ASSETS
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$954,680
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$851,179
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LIABILITIES
AND STOCKHOLDERS' DEFICIT
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Current
liabilities:
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Convertible
notes
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$1,829,963
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$1,494,174
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Note
payable, former CEO
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65,000
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65,000
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Accounts
payable and accrued liabilities
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1,994,691
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1,997,667
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Accrued
interest payable
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124,883
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66,242
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Deferred
revenue
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740,196
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748,774
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Derivative
liabilities - conversion option
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44,659
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88,242
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Derivative
liabilities - warrants
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1,433,181
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1,366,898
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Total
current liabilities
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6,232,573
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5,826,997
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Stockholders'
deficit:
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Series C Preferred;
$0.001 par value; 4,299,081 shares authorized; 3,443,061 and
3,443,061 shares issued and outstanding as of
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3,444
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3,444
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March 31, 2017 and
December 31, 2016, respectively
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Common stock;
$0.001 par value; 300,000,000 shares authorized; 42,075,571 and
41,975,571 shares issued and outstanding as of
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42,076
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41,976
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March 31, 2017 and
December 31, 2016, respectively
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Additional
paid-in capital
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94,721,131
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94,438,312
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Accumulated
deficit
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(100,044,544)
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(99,459,550)
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Total
stockholders' deficit
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(5,277,893)
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(4,975,818)
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TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
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$954,680
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$851,179
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See
accompanying notes to unaudited condensed consolidated financial
statements.
SPENDSMART
NETWORKS,
INC.
Condensed Consolidated Statements of Operations
(Unaudited)
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For the three months ended March 31,
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2017
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2016
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Revenues:
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Mobile Marketing /
Licensing
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$1,470,828
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$1,430,385
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Total
revenues
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1,470,828
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1,430,385
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Operating
expenses:
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Selling and
marketing
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123,475
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98,022
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Personnel
related
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1,233,204
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1,463,930
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Mobile Platform
Processing
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225,595
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308,914
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Amortization of
intangible assets
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13,919
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48,285
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General
and administrative
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314,600
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703,162
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Bad
debt
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35,211
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26,526
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Total
operating expenses
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1,946,004
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2,648,839
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Loss
from operations
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(475,176)
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(1,218,454)
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Non-operating
income (expense):
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Interest
income
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3,882
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14,319
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Interest
expense
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(74,211)
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(62,192)
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Amortization of
debt discount
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(16,789)
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(267,028)
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Loss on
extinguishment of debt
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(288,618)
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Inducement for
exercise of warrants
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(3,560,958)
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Change
in fair value of derivatives
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(22,700)
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503,284
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Total
non-operating income (loss)
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(109,818)
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(3,661,193)
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Net
loss
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$(584,994)
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$(4,879,647)
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Basic
and diluted net loss per share
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$(0.01)
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$(0.15)
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Basic
and diluted weighted average common shares outstanding used in
computing net income (loss) per share
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42,038,904
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31,725,292
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See accompanying notes to unaudited condensed consolidated
financial statements.
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Condensed Consolidated Statement of Changes in Stockholders'
Deficit
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For the three months ended March 31, 2017
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(unaudited)
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Series
C
Preferred Stock |
Series
A
Preferred
Stock
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Common
Stock
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Shares
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Par Value
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Shares
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Par Value
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Shares
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Par Value
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Paid-In Capital
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Accumulated Deficit
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Stockholders' Deficit
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Balance as of December 31, 2016
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3,443,061
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$3,444
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-
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$-
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41,975,571
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$41,976
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$94,438,312
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$(99,459,550)
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$(4,975,818)
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Issuance
of common stock for interest
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-
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-
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100,000
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100
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1,900
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-
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2,000
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Stock
based compensation from stock options and warrants
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-
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-
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-
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-
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-
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-
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280,919
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-
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280,919
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Net
loss
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-
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-
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-
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(584,994)
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(584,994)
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Balance as of March 31, 2017
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3,443,061
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$3,444
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-
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$-
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42,075,571
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$42,076
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$94,721,131
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$(100,044,544)
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$(5,277,893)
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See accompanying notes to unaudited condensed consolidated
financial statements.
SPENDSMART NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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For
the three months ended
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March 31,
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2017
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2016
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Cash
flows from operating activities:
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Net
loss
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$(584,994)
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$(4,879,647)
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Adjustments
to reconcile net loss to net cash used in operating
activities
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Depreciation
expense
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-
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110,365
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Amortization
of intangible asset
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13,919
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48,285
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Amortization of
debt discount
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16,789
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269,028
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Stock-based
compensation
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280,919
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433,180
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Issuance of common
stock for services
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2,000
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132,247
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Change in fair
value of derivatives
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22,700
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(503,284)
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Accrued interest
expenses on notes payable
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58,641
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71,739
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Inducement
for exercise of warrants
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-
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3,560,958
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Extinguishment
of convertible debt
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-
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288,618
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Provision
for bad debt
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35,211
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26,526
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Changes
in operating assets and liabilities:
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Accounts
receivable
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(83,925)
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(144,426)
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Customer
short-term notes receivable
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20,191
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47,231
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Customer
long-term notes receivable
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7,777
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77,258
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Deferred
revenue
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(8,578)
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(90,133)
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Prepaid
insurance
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14,123
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3,675
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Accounts
payable and accrued liabilities
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(2,976)
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(411,127)
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Net
cash used in operating activities
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(208,203)
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(959,507)
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Cash
flows from investing activities:
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Software
development costs
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-
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(179,647)
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Payment
of deferred acquisition payable-Intellectual Capital Mgmt,
LLC
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-
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(10,000)
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Net
cash used in investing activities
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-
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(189,647)
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Cash
flows from financing activities:
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Net
proceeds from warrant exercises related to tender
offer
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-
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1,179,252
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Repayment
of notes payable
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-
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(70,262)
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Repayment
of notes to former CEO
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-
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(35,000)
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Repayment
of convertible notes
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-
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(200,000)
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Proceeds
from issuance of convertible debt
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319,000
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-
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Net
cash provided by financing activities
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319,000
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873,990
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Net increase (decrease) in cash and cash equivalents
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110,797
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(275,164)
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Cash and cash equivalents at beginning of the period
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74,523
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470,341
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Cash and cash equivalents at end of the period
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$185,320
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$195,177
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Non-cash Investing and Financing Activities:
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The Company issued
26,479,217 warrants in connection with the exercise of tender offer
warrants during the three months ended March 31,
2016.
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The Company had a
debt discount of $30,470 in connection with convertible debt during
the three months ended March 31, 2016.
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The Company issued
17,895,859 shares of Common Stock in connection with the exercise
of tender offer warrants during the three months ended March 31,
2016.
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See accompanying notes to unaudited condensed consolidated
financial statements.
-5-
SPENDSMART NETWORKS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of
Presentation
SpendSmart Networks, Inc. is a Delaware corporation (“the
Company”). The Company brings value added products
and mobile marketing solutions to consumers, merchants, businesses
and government organizations. The Company is a publicly
traded company trading on the OTCQB under the symbol
“SSPC.” The accompanying unaudited condensed
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary SpendSmart Networks, Inc.,
a California corporation (SpendSmart-CA). All material intercompany
balances and transactions have been eliminated. The
accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the financial statements
included in our Annual Report on Form 10-K for the year ended
December 31, 2016. The year-end balance sheet data was
derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in
the United States of America (“GAAP”). All
normal recurring adjustments which are necessary for the fair
presentation of the results for the interim periods are reflected
herein. Operating results for the three-month periods
ended March 31, 2017 and 2016 are not necessarily indicative of
results to be expected for a full year.
2. Liquidity and Going Concern
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 March 31, 2017 and have yet to establish profitable
operations. These factors among others create a substantial doubt
about the Company’s ability to continue as a going concern.
The Company’s unaudited consolidated financial statements as
of and for the period ended March 31, 2017 does not contain any
adjustments for this uncertainty.
The Company is currently exploring other financing means to raise
additional required capital which may include 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 additional financing. This description
of our future plans for financing does not constitute an offer to
sell or the solicitation of an offer to buy
securities.
3. Reclassification
Certain
reclassifications were made to the 2016 financial statement
presentation to conform to the 2017 financial statement
presentation.
4. Summary of Significant Accounting Policies
Loans Receivable and Accounts Receivable
The Company extended credit to its licensees in the normal course
of business and performs 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 financial statements in conformity with GAAP
requires 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, the fair value of stock options and warrants granted to
employees, consultants, directors, investors and placement agents,
and notes and warrant tender offer.
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”).
The Company recognizes revenues when all of the following
conditions are met:
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there is persuasive evidence of an arrangement;
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the products or services have been delivered to the
customer;
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the amount of fees to be paid by the customer is fixed or
determinable; and
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The collection of the related fees is probable.
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Signed agreements are used as evidence of an arrangement.
Electronic delivery occurs when we provide the customer with access
to the software. The Company assesses 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
assesses collectability of the set-up fee based on a number of
factors such as collection history and creditworthiness of the
licensee. If the Company determines 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 for 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.
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 condensed 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. 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 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 three months ended March 31,
2017 and 2016 was $0. Property and equipment has been fully
depreciated as of March 31, 2017.
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 $0 and $179,646, respectively,
in software development related to programming and coding for new
product development for the three months ended March 31, 2017 and
2016, respectively. Software amortization expense for
the three months ended March 31, 2017 and 2016 was $0 and $110,365,
respectively. As of March 31, 2017 all software costs have been
fully amortized.
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. There has not been
any impairment recorded during the quarters ended March 31, 2017 or
2016.
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 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 condensed 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.
The Company recognizes the benefit of an uncertain tax position
taken or expected to be taken on the Company’s income tax
returns if it is “more likely than not” that such tax
position will be sustained based on its technical merits. The
Company does not have any unrecognized tax benefits or accrued
penalties and interest. If such matters were to arise, the Company
would recognize interest and penalties related to income tax
matters in income tax expense.
Stock-Based Compensation
The Company accounts for stock based compensation arrangements
through the measurement and recognition of compensation expense for
all stock based payment awards to employees and directors based on
estimated fair values. The Company uses the Black-Scholes option
valuation model to estimate the fair value of the Company’s
stock options and warrants at the date of grant. The Black-Scholes
option valuation model requires the input of subjective assumptions
to calculate the value of options and warrants. The Company uses
historical company data among other information to estimate the
expected price volatility and the expected forfeiture rate and not
comparable company information.
Net Loss per Share
The Company calculates basic earnings per share (“EPS”)
by dividing the Company’s net loss and comprehensive 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 and comprehensive 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.
Derivatives - Warrant Liability
The Company accounts for the common stock warrants granted and
still outstanding as of March 31, 2017 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 gains of $0
and $0 in the fair value of derivatives for the three months ended
March 31, 2017 and 2016, respectively. These derivative liabilities
which arose from the issuance of these warrants resulted in an
ending balance of derivative liabilities of $0 as of March 31, 2017
and December 31, 2016, 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 loss of $66,283 and a
gain of $503,105 in the fair value of these derivatives for the
three months ended March 31, 2017 and 2016, respectively. These
derivative liabilities which arose from the issuance of the 2016
Warrants resulted in an ending balance of derivative liabilities of
$1,433,181 and $1,366,898 as of March 31, 2017 and December 31,
2016, respectively.
Derivatives – Bifurcated Conversion Option in Convertible
Notes
The
Company does not use derivative financial instruments to hedge
exposures to cash-flow, market or foreign-currency risks. However,
the Company has issued Convertible Notes with features that are
either (i) not afforded equity classification, (ii) embody risks
not clearly and closely related to host contracts, or (iii) may be
net-cash settled by the counterparty. As required by ASC 815,
Accounting for Derivative
Financial Instruments and Hedging Activities, in certain
instances, these instruments are required to be carried as
derivative liabilities, at fair value, in our financial
statements.
The
Convertible Notes issued during the year ended December 31, 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.
The
Company’s derivative liability has been measured at fair
value at March 31, 2017 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 gains of $43,583 and $179 in the fair value
of derivatives for the three months ended March 31, 2017 and 2016,
respectively. These derivative liabilities which arose from the
issuance of the convertible notes resulted in an ending balance of
derivative liabilities of $44,659 and $88,242 as of March 31, 2017
and December 31, 2016, respectively. Subsequent changes to the fair
value of the derivative liabilities will continue to require
adjustments to their carrying value that will be recorded as other
income (in the event that their value decreases) or as other
expense (in the event that their value increases). The fair value
of these liabilities is estimated using Monte Carlo pricing models
that are based on the individual characteristics of the
Company’s warrants, preferred and common stock, as well as
assumptions for volatility, remaining expected life, risk-free
interest rate and, in some cases, credit
spread.
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 receivable, notes receivable, notes payable,
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 and earn-out 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 March 31, 2017 and
December 31, 2016 is as follows:
|
Date
of Valuation
|
March
31,
2017
|
December
31,
2016
|
|
Stock
Price
|
0.02
|
0.02
|
|
Volatility
(Annual)
|
142%
|
140%
|
|
Number
of assumed financings
|
1
|
1
|
|
Total
shares outstanding
|
42,475,571
|
41,975,571
|
|
Strike
Price
|
0.01
|
0.01
|
|
Risk-free
Rate
|
1.34%
|
1.34%
|
|
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 March 31, 2017 and
December 31, 2016 is as follows:
|
Date
of Valuation
|
March
31,
2017
|
December
31,
2016
|
|
Stock
Price
|
0.02
|
0.02
|
|
Volatility
(Annual)
|
48%
|
140%
|
|
Strike
Price
|
N/A
|
N/A
|
|
Risk-free
Rate
|
1.33%
|
1.40%
|
|
Maturity
Date
|
7/7/2017
|
5/5/2017
|
At March 31, 2017 and December 31, 2016, the estimated Level 3 fair
values of the liabilities measured on a recurring basis are as
follows:
|
|
|
Fair
Value Measurements at March 31, 2017:
|
||
|
|
|
|
|
|
|
|
Carrying Value
|
Level
1
|
Level
2
|
Level
3
|
|
|
|
|
|
|
|
Earn
out liability
|
$-
|
$-
|
$-
|
$-
|
|
Warrant
derivative liability
|
1,433,181
|
-
|
-
|
1,433,181
|
|
Conversion
option derivative liability
|
44,659
|
-
|
-
|
44,659
|
|
Total
|
$1,477,840
|
$-
|
$-
|
$1,477,840
|
|
|
|
Fair
Value Measurements at December 31, 2016:
|
||
|
|
|
|
|
|
|
|
Carrying Value
|
Level
1
|
Level
2
|
Level
3
|
|
|
|
|
|
|
|
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
|
The following tables present the activity for Level 3 liabilities
for the three months ended March 31, 2017:
|
Fair Value Measurements Using Level 3 Inputs
|
|
|
|
Conversion
|
|
|
|
|
Warrant
|
Option
|
|
|
|
|
Derivative
Liability
|
Derivative
Liability
|
Earn-out
Liability
|
Total
|
|
Balance
- December 31, 2016
|
$1,366,898
|
88,242
|
-
|
$1,455,140
|
|
Additions
during the period
|
-
|
-
|
-
|
-
|
|
Total
(gains) or losses include in net loss
|
66,283
|
(43,583)
|
-
|
22,700
|
|
Settlements
during the period
|
-
|
-
|
-
|
-
|
|
Transfers
in and/or out of Level 3
|
-
|
-
|
-
|
-
|
|
Balance
- March 31, 2017
|
$1,433,181
|
44,659
|
-
|
$1,477,840
|
Advertising
The Company expenses advertising costs as incurred. The Company has
no existing arrangements under which the Company provides or
receives advertising services from others for any consideration
other than cash. Advertising expenses (primarily in the form of
Internet direct marketing) totaled $67,421 and $31,809 for the
three months ended March 31, 2017 and 2016,
respectively.
Litigation
From time to time, the Company may become involved in litigation
and other legal actions. The Company estimates the range of
liability related to any pending litigation where the amount and
range of loss can be estimated. The Company records its best
estimate of a loss when the loss is considered probable. Where a
liability is probable and there is a range of estimated losses with
no best estimate in the range, the Company records a charge equal
to at least the minimum estimated liability for a loss contingency
when both of the following conditions are met: (i) information
available prior to issuance of the financial statements indicates
that it is probable that an asset had been impaired or a liability
had been incurred at the date of the financial statements and (ii)
the range of loss can be reasonably estimated.
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.
The
company was served with a lawsuit in February 2017 alleging breach
of contract by Bryan Sarlitt. The action relates to the acquisition
of TechXpress in 2014 and additional compensation that Mr. Sarlitt
is claiming. 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.
Intangible assets
Intangible assets currently consist of intellectual
property/technology 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 of 10 years.
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. Amortization of
intangible assets was $13,919 and $48,285 for the three months
ended March 31, 2017 and 2016, respectively.
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 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 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.
5. 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. We recorded a bad debt expense of $35,211 during
the three months ended March 31, 2017 and wrote off uncollectable
accounts during the three months ended March 31, 2017 in the amount
of $11,211. As of March 31, 2017, the Company has recorded an
allowance for doubtful accounts of $1,820,000.
Notes receivable aged over 30 days past due are considered
delinquent and notes receivable aged over 60 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. The
Company charges interest rates on notes receivable averaging
13%. The Company recorded $3,882 in interest income for
the three months ended March 31, 2017.
The allowance for doubtful accounts on long-term receivables is the
Company's best estimate of the amount of probable credit losses
related to the Company's existing note receivables. The
allowance for doubtful accounts is the Company's best estimate of
probable credit losses related to trade receivables and notes
receivable based upon the aging of the receivables, historical
collection data, internal assessments of credit quality and the
economic conditions in the business subprime industry, as well as
in the economy as a whole. The Company charges off uncollectable
amounts against the reserve in the period in which it determines
they are uncollectable. Unearned income on notes receivable is
amortized using the effective interest method. The
Company determines the allowance for doubtful accounts related to
notes receivable based upon a reserve for known collection issues,
as well as a reserve based upon aging, both of which are based upon
history of such losses and current economic conditions. Based upon
the Company's methodology, the notes receivable balances with
reserves and the reserves associated with those balances are as
follows:
|
|
March 31, 2017
|
|||||
|
|
|
|
|
|
|
|
|
|
Gross
|
Reserve
|
Net
|
|||
|
|
Current
|
Long-Term
|
Current
|
Long-Term
|
Current
|
Long-Term
|
|
Customer
Notes Receivable
|
766,675
|
406,888
|
749,638
|
400,901
|
17,037
|
5,987
|
|
Accounts
Receivable
|
1,001,665
|
-
|
669,461
|
-
|
332,204
|
-
|
|
|
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
|
-
|
629,461
|
-
|
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 Receivable Reserve
|
|
|
|
Current
|
Long-Term
|
Current
|
|
Balance
at December 31, 2016
|
$767,138
|
$399,401
|
$629,461
|
|
Incremental
(Reduction in) Provision
|
(10,378)
|
1,500
|
44,089
|
|
Recoveries
|
-
|
-
|
-
|
|
Charge
offs
|
(7,122)
|
-
|
(4,089)
|
|
Balance
at March 31, 2017
|
$749,638
|
$400,901
|
$669,461
|
The allowance for doubtful accounts as a percentage of total
receivables was approximately 84% as of March 31, 2017 and
approximately 84% as of December 31, 2016.
6. Common Stock and Warrants
Common stock
During the three months ended March 31, 2017, the Company issued
100,000 shares of common stock and recognized $2,000 expense for
services rendered.
During the three months ended March 31, 2016, the company issued
1,669,205 shares of common stock and recognized expense of $132,247
for services rendered.
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.
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.
7. Convertible Promissory Notes
During the three months ended March 31, 2017, the Company issued
five Convertible Promissory Notes aggregating $319,000 to related
parties. The Convertible Promissory Notes bear an interest at the
rate of 9%, have 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 $3,815 in interest expense for the three
months ended March 31, 2017.
During the year ended December 31, 2016, the Company issued two
Convertible Promissory Notes to the Daniel Jonathan Blech Trust DTD
9/01/2005 in the amount of $100,000 each. Mr. Blech, a member of
the Company’s board of directors, is the trustee. The
Convertible Promissory Notes bear 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 $5,817 in interest expense for the three months ended
March 31, 2017.
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 $4,050 in interest expense for
the three months ended March 31, 2017.
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.
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.
8. Convertible Preferred Stock
Series A Preferred Stock
At March 31, 2017 and December 31, 2016, the Company had 0 shares
of Series A Cumulative Convertible Preferred Stock (the
“Series A Stock”) outstanding.
Series B Preferred Stock
At March 31, 2017 and December 31, 2016, the Company had 0 shares
of Series B convertible preferred stock (“Series B
Stock”) outstanding.
Series C Convertible Preferred Stock
At March 31, 2017 and December 31, 2016, the Company had 3,443,061
shares of Series C convertible preferred stock (“Series C
Stock”) outstanding that were issued to investors for $3.00
per share. No shares of Series C Stock converted to
common shares during the three months ended March 31,
2017.
9. Net Loss per Share Applicable to Common
Stockholders
Options, warrants, and convertible debt outstanding were all
considered anti-dilutive for the three months ended March 31, 2017
and 2016 due to net losses.
The following securities were not included in the diluted net
income (loss) per share calculation because their effect was
anti-dilutive as of the periods presented:
|
|
For the three months ended
March 31,
|
|
|
|
2017
|
2016
|
|
Convertible
notes
|
91,498,100
|
4,645,054
|
|
Common
stock options
|
30,846,946
|
17,088,129
|
|
Investor
warrants
|
37,806,931
|
37,960,774
|
|
Compensation
warrants
|
1,285,000
|
2,098,333
|
|
Excluded
potentially dilutive securities
|
161,436,977
|
61,792,290
|
10. Stockholders’ Equity
Stock Options and Warrants
Warrant activity (including warrants issued to investors and for
consulting and advisory services) for the three months ended March
31, 2017 and 2016 was as follows:
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2017
|
2016
|
|
Beginning
balance outstanding
|
39,818,347
|
26,397,410
|
|
Warrants
issued during the period:
|
|
|
|
Expired
during the period
|
(726,416)
|
(546,667)
|
|
Exercised during
the period
|
-
|
(12,270,853)
|
|
In
connection with tender offer exercise
|
-
|
26,479,217
|
|
Ending
balance outstanding
|
39,091,931
|
40,059,107
|
Stock option activity during the following periods was as
follows:
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2017
|
2016
|
|
Beginning
balance outstanding
|
26,865,017
|
10,337,113
|
|
Options
issued during the period
|
4,698,759
|
6,836,016
|
|
Options
expired during the period
|
(716,830)
|
(85,000)
|
|
Ending
balance outstanding
|
30,846,946
|
17,088,129
|
The numbers and exercise prices of all options and warrants
outstanding at March 31, 2017 are as follows:
|
Shares
Issuable
|
Weighted
Average
Exercise
Price
|
Expiration
Fiscal
Period
|
|
652,516
|
7.85
|
2nd Qtr,
2017
|
|
536,500
|
1.14
|
3rd Qtr,
2017
|
|
1,162,088
|
6.45
|
4th Qtr,
2017
|
|
10,000
|
6.60
|
1st Qtr,
2018
|
|
755,000
|
0.26
|
4th Qtr,
2018
|
|
36,973,317
|
0.31
|
1st Qtr,
2019
|
|
1,850,007
|
0.44
|
2nd Qtr,
2019
|
|
1,309,002
|
0.92
|
3rd Qtr,
2019
|
|
2,603,000
|
1.15
|
4th Qtr,
2019
|
|
8,273,172
|
0.15
|
1st Qtr,
2020
|
|
1,475,789
|
0.18
|
4th Qtr,
2020
|
|
3,288,713
|
0.12
|
1st Qtr,
2021
|
|
1,427,605
|
0.09
|
2nd Qtr,
2021
|
|
1,189,668
|
0.06
|
3rd Qtr,
2021
|
|
3,600,407
|
0.02
|
4th Qtr,
2021
|
|
4,698,759
|
0.02
|
1st Qtr,
2022
|
|
133,334
|
7.05
|
4th Qtr,
2022
|
|
69,938,877
|
0.47
|
|
Stock-based Compensation
Results of operations for the three months ended March 31, 2017 and
2016 include stock based compensation costs totaling $280,919 and
$433,180, respectively, all of which was charged to personnel
related expenses.
For purposes of accounting for stock based compensation, the fair
value of each option and warrant award is estimated on the date of
grant using the Black-Scholes-Merton option pricing formula.
Compensation expense is recognized over the service period. The
following weighted average assumptions were utilized for the
calculations during the three months ended March 31, 2017 and
2016:
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2017
|
2016
|
|
Expected
life (in years)
|
2.50
years
|
2.874
years
|
|
Weighted
average volatility
|
202.30%
|
108.81%
|
|
Forfeiture
rate
|
26.07%
|
13.58%
|
|
Risk-free
interest rate
|
1.38%
|
.96%
|
|
Expected
dividend rate
|
0.00%
|
0.00%
|
The weighted average expected option and warrant term for employee
stock options granted reflects the application of the simplified
method set out in SEC Staff Accounting Bulletin No. 107,
Share-Based
Payment (SAB 107). The
simplified method defines the life as the average of the
contractual term of the options and the weighted average vesting
period for all options. The Company utilized this approach as its
historical share option exercise experience does not provide a
reasonable basis upon which to estimate an expected term. Expected
volatilities are based on the historical volatility of the
Company’s stock. The Company estimated the forfeiture rate
based on our expectation for future forfeitures and (for the
purpose of computing stock based compensation given the contractual
vesting of the Company’s options and warrants outstanding)
the Company assumes that all options and warrants will vest. The
risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield in effect at or near the
time of grant. The Company has never declared or paid dividends and
has no plans to do so in the foreseeable
future.
In February 2017, the Company modified 7,888,172 in outstanding
stock options to our former CEO upon his resignation. The new terms
extended the exercise date to February 10, 2020 and accelerated
vesting on any unvested options. 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 $128,807 during the three months ended March
31, 2017.
As of March 31, 2017, $231,130 of total unrecognized compensation
cost related to unvested stock based compensation arrangements is
expected to be recognized over a weighted-average period of 15.5
months.
11. 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
total repayment amount including interest and principal was
$244,637 to be paid pro-rata weekly ending February 22, 2016. For
the three months ended March 31, 2016, we recorded interest expense
related to the note of $4,947 and we paid approximately
$70,262 in principal repayments related to the Note. As of February 25, 2016, the note had been fully
repaid.
12. Due to Related Party
On August 14, 2015 and September 28, 2015, the Company entered into
Loan Agreements with Alex Minicucci, our former CEO, for the
principal sum of $65,000 and $35,000, respectively. The Loans
include an interest rate of 7%. The $35,000 Loan was repaid in
February 2016. For the year three months ended March 31, 2017 and
2016, we recorded interest expense related to the loans of $1,132
and $1,343, respectively. The Company extended the terms related to
the $65,000 loan to May 10, 2017.
13. Subsequent Events
On April 18, 2017, the Company issued a Convertible Promissory Note
to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of
$45,000. 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.
On May
3, 2017, the Company amended one May 5, 2015 9% Convertible
Promissory Note with a principal amount of $275,000 as follows: the
maturity date was extended to July 7, 2017 and in the event the
borrower completes an asset sale or capital raise of more than
$275,000, then the Notes shall automatically immediately become due
and payable.
On May
15, 2017, the Company amended one May 5, 2015 9% Convertible
Promissory Note with a principal amount of $262,500 as follows: the
maturity date was extended to July 7, 2017 and in the event the
borrower completes an asset sale or capital raise of more than
$275,000, then the Notes shall automatically immediately become due
and payable.
Item
2 – Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis is intended as a review of
significant factors affecting our financial condition and results
of operations for the periods indicated. 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 Quarterly Report and our other
periodic reports filed with the Securities and Exchange
Commission.
Business Overview
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 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 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”.
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
b.
Loyalty rewards tablet/kiosk
c.
Proprietary rewards management system
(ii)
Mobile
marketing technology
a.
Text and email promotion 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
Corporate History
On February 11, 2014, we acquired substantially all of the assets
of Intellectual Capital Management, LLC, dba “SMS
Masterminds.” On September 18, 2014, we acquired
substantially all of the web related assets of TechXpress, Inc., a
California corporation. TechXpress provides personalized website,
eCommerce and mobile app development services as well as marketing
tools and analytics.
Results of Operations
Comparison of Results of Operations for the Three Months Ended
March 31, 2017 and 2016
Revenue
The Company had total revenues of $1,470,828 and $1,430,385 for the
three months ended March 31, 2017 and 2016,
respectively.
Our revenues increased $40,443 over the prior year due to increased
licensee onboarding compared to the first quarter of
2016.
Selling and marketing expenses
Selling and marketing expenses were $123,475 and $98,022 for the
three months ended March 31, 2017 and 2016, respectively. The
increase of $25,453 was mostly due to our continued focus on
marketing efforts on those territories where we had a better
opportunity to expand into immediately.
Personnel related expenses
Personnel related expenses were $1,233,204 and $1,463,930 for the
three months ended March 31, 2017 and 2016, respectively. This
amounted to a decrease of $230,726 or a 15.8%
decrease. Overall decreases in personnel related
expenses were due to lower stock compensation expense of
approximately $215,000 together with lower payroll costs. Other
personnel related expenses include employer taxes, employee
benefits and other employee related
costs.
Processing expenses
Processing expenses were $225,595 and $308,914 for the three months
ended March 31, 2017 and 2016, respectively. This resulted in a
decrease of $83,319 or a 27.0% decrease. Decreases in processing
expenses were the result of our lower subscription server
costs.
Amortization of intangible assets
Amortization of intangible assets was $13,919 and $48,285 for the
three months ended March 31, 2017 and 2016,
respectively. This resulted in a decrease of $34,366,
due to the majority of our intangible assets being fully amortized
as of December 31, 2016.
General and administrative expenses
General and administrative expenses totaled $314,600 and $703,162
for the three months ended March 31, 2017 and 2016, respectively.
This resulted in a decrease of $388,562 or a 55.3% decrease. We had
increases in insurance expense during the quarter offset by
decreases in investor relations consulting, software amortization,
and travel.
Bad debt expense
Bad debt expenses totaled $35,211 and $26,526 for the three months
ended March 31, 2017 and 2016, respectively. We recorded
bad debt write-offs due to non-performing accounts.
Comparison of Non-operating Income and Expense for the Three Months
Ended March 31, 2017 and 2016
For the three months ended March 31, 2017 and 2016, net interest
income totaled $3,882 and $14,319, respectively. This was due to
the lowered remaining balances on our financed
accounts.
For the three months ended March 31, 2017 and 2016, interest
expense totaled $74,211 and $62,192, respectively. This related to
our convertible notes and our notes payable financings
outstanding.
For the three months ended March 31, 2017 and 2016, amortization of
debt discount totaled $16,789 and $267,028, respectively. This
decrease was due to the convertible notes financings in
2017.
For the three months ended March 31, 2017 and 2016, we recognized a
loss on extinguishment of debt of $0 and $288,618, respectively.
This decrease was due to the convertible notes modifications in
2016 compared to no modifications in 2017.
For the three months ended March 31, 2017 and 2016, inducement for
exercise of warrants expense totaled $0 and $3,650,958,
respectively. This decrease was due to the inducement given to
exercise warrants in 2016.
During the three months ended March 31, 2017 and 2016, we
recognized a loss from the change in the fair value of derivative
liabilities of $22,700 and a gain of $503,284, respectively. These
derivative liabilities are the fair value of warrants issued in
fiscal 2010 with anti-dilution privileges, warrants issued in 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 Three Months
Ended March 31, 2017 and 2016
For the three months ended March 31, 2017 and 2016, our net loss
was $584,994 and $4,879,647, respectively. Our basic and diluted
net loss per share was $0.01 and $0.15 for the three months ended
March 31, 2017 and 2016, respectively. Common stock equivalents and
outstanding options and warrants were not included in the
calculations due to their effect being anti-dilutive.
Liquidity and Capital Resources
We have primarily financed our operations to date through the sale
of unregistered equity. At March 31, 2016, our total current assets
were $545,339. Total current liabilities were $6,232,573, long-term
liabilities were $0, and our stockholders’ deficit totaled
$5,277,893.
We need to raise additional funding through additional financing
means and 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 an increase in cash for the three month period ended March
31, 2017 of $110,797. We had cash outlays relating to
payments of operating expenses of approximately $208,203 offset by
cash provided by issuance of convertible debt of approximately
$319,000.
Our cash and cash equivalents balance at March 31, 2017 totaled
$185,320.
Going Concern
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 March 31, 2017 and have yet to establish profitable
operations. These factors among others create a substantial doubt
about our ability to continue as a going concern. Our condensed
consolidated financial statements at March 31, 2017 do not contain
any adjustments related to the outcome of this
uncertainty.
The Company is currently exploring other financing means to raise
additional required capital which may include 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 additional 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 and lease agreements
described elsewhere herein, we have no outstanding contractual
obligations through the date of this report that are not
cancellable at our Company’s option.
Critical Accounting Policies Involving Management Estimates and
Assumptions
There were no changes from our Annual Report on Form 10-K for the
year ended December 31, 2016.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31,
2017.
Item 3—Quantitative and
Qualitative Disclosures about Market Risk
Intentionally omitted pursuant to Item 305(e) of Regulation
S-K.
Item 4 – Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Securities
and Exchange Commission Act of 1934 reports is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and that
such information is accumulated and communicated to our management,
including our Chief Executive Officer, as appropriate, to allow for
timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. As required by
Securities and Exchange Commission Rule 13a-15(e) and 15d-15(e), we
carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period
covered by this report. Based on the foregoing, our Chief Executive
Officer concluded that our disclosure controls and procedures were
not operating effectively as of March 31, 2017. Our disclosure
controls and procedures were not effective because of the
“material weakness” described below.
Based on management's evaluation as of March 31, 2017, our
management identified the material weaknesses set forth below in
our internal control over financial reporting:
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(i)
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The Company's process for internally reporting material information
in a systematic manner to allow for timely filing of material
information is ineffective, due to its inherent limitations from
being a small company, and there exist material weaknesses in
internal control over financial reporting that contribute to the
weaknesses in our disclosure controls and
procedures. These weaknesses include:
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●
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insufficient segregation of duties and oversight of work performed
in our finance and accounting function due to limited personnel;
and
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●
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lack of controls in place to ensure that all material transactions
and developments impacting the financial statements are
reflected.
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To remediate these control weaknesses, we intend to implement
segregation of duties, a system of internal reviews and checks and
balances to strengthen our controls. We intend to develop and
implement a written set of policies and procedures for our
operations.
Our company's management concluded that in light of the material
weaknesses described above, our company did not maintain effective
internal control over financial reporting as of March 31, 2017
based on the criteria set forth in Internal
Control—Integrated Framework (2013) issued by the
COSO.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal control over financial
reporting that occurred since the year ended December 31, 2016 for
the three month period ended March 31, 2017 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
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Part
II: Other Information
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Item 1
– 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.
The company was served with a lawsuit in February 2017 alleging
breach of contract by Bryan Sarlitt. The action relates to the
acquisition of TechXpress in 2014 and additional compensation that
Mr. Sarlitt is claiming. 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 1A – Risk
Factors
See “Item
1A. Risk Factors” in our Annual Report on Form
10-K for the year ended December 31, 2016.
Item 2
–Unregistered Sales of
Equity Securities and Use of Proceeds
None
not previously disclosed.
Item 3
– Defaults upon Senior
Securities
Not
applicable.
Item 4
– Mine Safety
Disclosures
Not
applicable.
Item 5
– Other
Information
Not
applicable.
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Exhibit
No.
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Description
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31.1*
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Certification
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, by Chief Executive Officer
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32.1*
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Certification
pursuant to 18 U.S.C. §1350 by Chief Executive
Officer
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31.2*
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Certification
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, by Chief Financial Officer
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32.2*
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Certification
pursuant to 18 U.S.C. §1350 by Chief Financial
Officer
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*
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Filed
as an exhibit to this report
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SIGNATURES
In accordance with the requirements of the Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
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The
SpendSmart Networks, Inc., a Delaware corporation
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By: /s/ LUKE WALLACE
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Luke
Wallace, Chief Executive Officer
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June
2, 2017
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By: /s/ BRETT SCHNELL
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Brett
Schnell, Chief Financial Officer
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June
2, 2017
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-27-