11.
NOTES PAYABLE
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
Balance of non-converted notes outstanding. Attempts to locate the holder of this note, to settle this liability, have been unsuccessful.
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
From September 2008 through December 2016 six creditors loaned the Company funds under the terms of the convertible notes issued, as modified in March 2009 and July 2010 and April 2011 and August 2012 (see Note 13). On November 25, 2016, the Company issued a Class A Senior Convertible Revolving Promissory Note (“Class
A Note”) to Marcus Winkler in the amount of $638,320 consolidating the series of loans (and related accrued interest) made
to the company since February 2011 and including all advances made during the current year. Each of these promissory notes are
due on demand, and accrue interest at the rate of 10%, per annum. The conversion feature applicable to the other creditors’
notes do not apply to Mr. Winkler’s notes as his notes have a fixed conversion price of $0.001
|
|
|
14,017,019
|
|
|
|
12,353,700
|
|
|
In January 2011 and again in February 2011, a shareholder
loaned the Company $50,000 under a demand note at 10%. In 2010, this shareholder loaned the Company $240,000 under a demand
note at 10 %. On June 22, 2015 this shareholder assigned all of his right, title and interest in this note to Mr.
Marcus Winkler. Mr. Winkler has an investment and voting control over two of the company’s lenders.
As
of November 25, 2016 this $340,000 note is now part
of convertible notes
|
|
|
—
|
|
|
|
340,000
|
|
|
Total
|
|
$
|
14,042,019
|
|
|
$
|
12,718,700
|
|
12.
LONG-TERM DEBT
Long-term
debt as of December 31, 2016 and 2015 is comprised of the following:
|
Discounted
present value of a non-interest bearing $70,000 settlement with a former investor of
Magnitude, Inc. to be paid in 24 equal monthly payments commencing July 1, 1997. The
imputed interest rate used to discount the note is 8% per annum. This obligation is in
default.
|
|
$
|
33,529
|
|
|
Total
|
|
|
33,529
|
|
|
Less
current maturities
|
|
|
33,529
|
|
|
Long-term
debt, net of current maturities
|
|
$
|
—
|
|
13.
DERIVATIVE CONVERSION FEATURES
On
July 27, 2010, the Company issued two Class A Senior Convertible Revolving Promissory Notes (“Class A
Notes”), one to Cambridge Services, Inc., in the principal amount of $683,996, consolidating the series of loans (and
related accrued interest) made to the Company since June 26, 2009, and one to Discover Advisory Company, in the principal
amount of $1,160,984, consolidating the series of loans (and related accrued interest) made to the Company since September
19, 2008 and including advances through September 30, 2010. On November 25, 2016, the Company issued a Class A Senior
Convertible Revolving Promissory Note (“Class A Note”) to Marcus Winkler in the amount of $638,320 consolidating
the series of loans (and related accrued interest) made to the company since February 2011 and including all advances made
during the current year. Each of these promissory notes are due on demand, accrue interest at the rate of 10%, per annum. All
promissory notes contain conversion caps, limiting conversions under these notes to a maximum beneficial ownership position
of Company common stock to 9.99% for each lender. Each of these notes contains Company covenants, requiring the
lenders’ prior written consent in order for the Company to merge, issue any common or preferred stock or any
convertible debt instruments, declare a stock split or dividends, increase any compensation to its officers or directors by
more than five (5%) during any calendar year. During the years ended December 31, 2016 and 2015, there were no note
conversions.
The Company renegotiated
certain outstanding promissory notes with its four major creditors, Discover Advisory Company of the Bahamas
(“DAC”), Kreuzfeld Ltd. of Switzerland (“Kreuzfeld”), Cambridge Services, Inc. of Panama
(“CSI”) and Vermoegensverwaltungs-Gesellschaft Zurich LTD of Switzerland (“VGZ”). As of August 1,
2012, the Company authorized the issue of a new series of corporate notes, the Class AA Senior Secured Convertible Revolving
Promissory Notes, dated as of August 1, 2012 (the New Note(s)”) and issued New Notes: (1) to DAC, with a maximum credit
facility of $5,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note,
dated July 27, 2010, in the original principal amount of $1,080,984, now cancelled, which has an outstanding balance due
(including accrued interest) of $6,860,911 as of December 31, 2016; (2) to Kreuzfeld, with a maximum credit facility of
$5,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated
September 16, 2011, in the original principal amount of $2,000,000, now cancelled, which has an outstanding balance due
(including accrued interest) of $6,473,665 as of December 31, 2016; (3) to CSI, with a maximum credit facility of $2,000,000
which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated August 1, 2011, in
the original principal amount of $1,303,996, now cancelled, with an outstanding balance due (including accrued interest) of
$4,347,340 as of December 31, 2016, and; (4) to VGZ, with a maximum credit facility of $2,000,000 which replaced the
Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated September 30, 2010, in the original
principal amount of $2,000,000, now cancelled, with an outstanding balance due (including accrued interest) of $1,186,746 as
of December 31, 2016. The Company also converted a private loan and a demand note with Mr. Winkler into a Class AA Senior
Convertible Revolving Promissory, dated November 25, 2016 , with an outstanding balance due (including accrued interest) of
$854,557. All of the New Notes accrue interest at the rate of 10%, are convertible into common shares at the conversion rate
equal to 50% of the averaged ten closing prices for the Company's Common Stock for the ten (10) trading days immediately
preceding the Conversion Date but in no event less than $0.001, and are due on demand. The above conversation feature does
not apply to Mr. Winkler’s notes as his notes have a fixed conversion price of $0.001. Pursuant to an Equity and
Stock Pledge Agreement, also negotiated and executed as of August 1, 2012, the repayment of the outstanding indebtedness of
the New Notes is secured by all of the limited partnership interests of the Company’s partly-owned (now
deconsolidated) German subsidiary, KWICK! Community GmbH & Co. KG, a private German limited partnership
(“KG”), and all of its shares of the sole general partner of KG, KWICK! Community Beteiligungs GmbH.
The Company
accounted for the conversion features underlying these convertible debentures in accordance with ASC 815-40,
Contract in Entity’s
Own Equity
, as the conversion feature embedded in the convertible debentures could result in the note principal and related
accrued interest being converted to a variable number of the Company’s common shares. The Company determined the value of
the derivate conversion features of the new advances under these debentures under these terms at the relevant commitment dates
to be $2,419,744 and $2,392,694 for the years ending December 31, 2016 and 2015 respectively utilizing a Black-Scholes valuation
model. The fair value of the derivative conversion features was determined to be $18,889,495 and $16,596,381 at December 31, 2016
and 2015 respectively. The change in fair value of the liability for the conversion feature resulted in income of $126,630 and
$278,741 for the years ended December 31, 2016 and 2015 respectively, which is included in Other Income (Expense) in the accompanying
financial statements.
14.
COMMITMENTS AND CONTINGENCIES
We
maintain offices for our operations at 330 W. 42th Street, New York, New York 10036, for approximately 990 square feet. This lease
requires initial minimum monthly rentals of $3,833 plus tenants’ share of utility/cam/property tax charges which average
approximately $291 per month. During 2013 the Company successfully negotiated a 5-year lease, with future minimum rentals as follows:
In May 2010, the Company negotiated a lease
of an apartment in New York City for the CEO in order to reduce travel costs. In December 2013 the lease was extended through May
31, 2015 at a monthly rate of $2,943. In March of 2015 the lease was again extended to May 31, 2016 at the same terms. In April
2016 the lease was extended through May 31, 2017 at a monthly rate of $3,154.
Our total rent expenses were $86,131 and $88,679
during the year ended December 31, 2016 and 2015, respectively.
The Company is party to a consulting agreement
with its Chief Executive Officer for monthly cash compensation of $18,333, or $220,000 per year. This agreement
was extended thru December 31, 2017. Payment for the period January 1, 2016 through December 31, 2016 was made on December 1, 2015
in accordance with the terms of the agreement. During 2016, the officer received $220,000 fees towards 2017 under terms
of a consulting agreement; the agreement calls for the total payment of $220,000 to be payable in advance and as soon as practicable.
There were no changes to the stock compensation portion of any earlier agreement.
In the years ended December 31, 2016 and December
31, 2015 this officer was granted 1,200,000 shares. The value of these shares are $1,200 and $1,320 for December 31, 2016 and December 31, 2015 respectively
15.
FAIR VALUE
Some
of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that
approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents, receivables and payables.
Effective
July 1 2009, the Company adopted ASC 820,
Fair Value Measurements and Disclosures
. This topic defines fair value for certain
financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This guidance supersedes all other accounting pronouncements that
require or permit fair value measurements. The Company accounted for the conversion features underlying certain convertible debentures
in accordance with ASC 815-40,
Contracts in Entity’s Own Equity
, as the conversion feature embedded in the convertible
debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s
common shares.
Effective
July 1 2009, the Company adopted ASC 820-10-55-23A,
Scope Application to Certain Non-Financial Assets and Certain Non-Financial
Liabilities
, delaying application for non-financial assets and non-financial liabilities as permitted. ASC 820 establishes
a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level
1 — quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange- traded
securities and exchange-based derivatives.
Level
2 — inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges.
Level
3 — unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset
or liability at the measurement date. Financial assets and liabilities utilizing Level 3
inputs
include infrequently- traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value
pricing models. The company values the conversion liabilities using the Black-Scholes model and the assumptions are updated using
independent data such as the risk free rate, volatility and expected life for each valuation date based on changes over time.
For
2015, the fair value of the embedded conversion liabilities was determined using the Black-Scholes model calculating fair value
based on the conversion discount as well as the term and short-term bond rate. During the year ended December 31, 2015 the following
assumptions were used: (1) conversion discounts of 50%; (2) a look back period of 10 days (3) bond rates of 0.01% to 0.23% and
(4) volatility range of 0% to 351%.
For
2016, the fair value of the embedded conversion liabilities was determined using the Black-Scholes model calculating fair value
based on the conversion discount as well as the term and short-term bond rate. During the year ended December 31, 2015 the following
assumptions were used: (1) conversion discounts of 50%; (2) a look back period of 10 days (3) bond rates of 0.16% to 0.50% and
(4) volatility range of 55% to 441%.
Fluctuation
in value is largely based on the change in the daily share price accompanied by the conversion discount. The change in volatility
has the greater affect on the conversion liability during each reporting period, as higher volatility levels will yield larger
values.
The
following table reconciles, for the years ended December 31, 2015 and 2016, the beginning and ending balances for financial instruments
that are recognized at fair value in the consolidated financial statements:
|
Conversion Liability at January
1, 2015
|
|
$
|
14,482,427
|
|
|
Value of beneficial
conversion features of new debentures
|
|
|
2,392,694
|
|
|
Change
in value of beneficial conversion features during period
|
|
|
(278,741
|
)
|
|
|
|
|
|
|
|
Conversion Liability at December 31, 2015
|
|
|
16,596,380
|
|
|
Value of beneficial
conversion features of new debentures
|
|
|
2,419,744
|
|
|
Change
in value of beneficial conversion features during period
|
|
|
(126,630
|
)
|
|
|
|
|
|
|
|
Conversion Liability at December 31, 2016
|
|
$
|
18,889,495
|
|
The
fair value of the conversion features are calculated at the time of issuance and the Company records a conversion liability for
the calculated value. The Company recognizes interest expense for the recognition of the conversion liability.
16.
PREFERRED STOCK
Preferred
stock is non-voting, $.001 par value per share with 3,000,000 shares authorized.
Cumulative
Preferred Stock has 2,500 shares designated of which 1 share is issued and outstanding. The total Cumulative Preferred Stock at
December 31, 2006 is $0 with a liquidation price of $100,000. As of December 31, 2016, there was $9,000 of cumulative preferred
dividends in arrears representing $9,000 per cumulative preferred share.
Series
A of the Senior Convertible Preferred Stock series which was issued in 2000 has 300,000 shares designated, 22,000 shares issued
and outstanding. The total outstanding Series A Senior Convertible Preferred Stock at December 31, 2016 is $22 with a liquidation
price of $120,000. The following is a description of the Series A convertible preferred stock:
|
|
(1)
|
The
holders of said shares of Series A Senior Preferred shall be entitled to receive cumulative
dividends at the rate of seven percent (7%) per annum during the first annual period
after issuance, increasing by increments of one half of one percent for every year thereafter
until the rate reaches ten percent (10%) per annum at which time it will remain at 10%
payable semi-annually when declared by the Board of Directors, before any dividend shall
be declared, set apart for, or paid upon the Common Stock of the Company. The Dividend
Rate shall accrue on the Liquidation Price of each share of the Series A Senior Preferred.
The dividends on the Series A Senior Preferred, payable in cash, shall be cumulative,
so that if the Company fails in any fiscal year to pay such dividends on all the issued
and outstanding Series A Senior Preferred, such deficiency in the dividends shall be
fully paid, but without interest, before any dividends shall be paid on or set apart
for the Cumulative Preferred Stock or the Common Stock.
|
|
|
(2)
|
The
Series A Senior Preferred shall with respect to dividend rights and liquidation rights
rank prior to all classes and series of Common Stock and the Cumulative Preferred Stock,
and on a par with the Series B, C and D Senior Convertible Preferred Stock.
|
|
|
(3)
|
In
the event of any liquidation, of the Company, whether voluntary or otherwise, after payment
or provision for payment of the debts and other liabilities of the Company, the holders
of the Series A Senior Preferred shall be entitled to receive, out of the remaining net
assets of the Company, the amount of Five ($5.00) dollars for each share of Series A
Senior Preferred (the "Liquidation Price") held of record by such holder, payable
in cash or in shares of stock, securities or other consideration, the value of which
stock, securities or other consideration shall be fixed by the Board of Directors, plus
the amount of all dividends in arrears on each such share up to the date fixed for distribution,
provided, however, that such remaining net assets are sufficient to cover all the before
mentioned payments and also like payments to holders of Series B and C Senior Preferred,
before any distribution shall be made to the holders of Common Stock or Cumulative Preferred
Stock of the Company. In case such remaining net assets are insufficient to cover all
such payments to holders of Series A, B, C and D Senior Preferred, the holders of these
series shall receive payments on a pro rata basis.
|
|
|
|
|
(4)
|
The
Company shall have the right to redeem pro rata any or all of its Series A Senior Preferred
issued and outstanding at any time, with the Board of Directors of the Company in its
sole discretion deciding how many shares to redeem, provided, however, that any such
shares called for redemption have been issued and outstanding for a minimum of three
(3) years at the time of notice of redemption to the holders of such shares, by paying
to the holders thereof the Liquidation Price for each share of Series A Senior Preferred
held by such holder plus a "call premium" of 15% of the Liquidation Price,
together with the amount of any accrued and unpaid dividends as may have accumulated
thereon at the time of redemption (the "Redemption Price").
|
|
|
|
|
|
|
(5)
|
Each
share of Series A Senior Preferred shall be convertible at any time prior to the Redemption
Date, at the holder’s option, into such number (the "Conversion Ratio")
of shares of the Common Stock of the Company as arrived at by dividing the Liquidation
Price by one hundred fifty (150) percent of the market price of the Common Stock of the
Corporation ("Market Price") on the earlier of the dates such share of Series
A Senior Preferred is subscribed for or issued (the "Effective Date").
|
As
of December 31, 2016, there were $176,664 Series A Senior Convertible Preferred share dividends accrued and unpaid representing
$7.53 per share.
Series
B of the Senior Convertible Preferred Stock series which was issued in 2000 has 350,000 shares designated, no shares issued and
outstanding. The total outstanding Series B Senior Convertible Preferred Stock at December 31, 2016 is $0. The following is a
description of the Series B Senior Convertible Stock:
|
|
(1)
|
The
holders of said shares of Series B Senior Preferred shall be entitled to receive cumulative
dividends thereon at the rate of seven percent (7%) per annum, payable semi-annually
when declared by the Board of Directors, before any dividend shall be declared, set apart
for, or paid upon the Common Stock of the Company. The Dividend Rate shall accrue on
the Liquidation Price of each share of the Series B Senior Preferred. The dividends on
the Series B Senior Preferred, payable in cash, shall be cumulative, so that if the Company
fails in any fiscal year to pay such dividends on all the issued and outstanding Series
B Senior Preferred, such deficiency in the dividends shall be fully paid, but without
interest, before any dividends shall be paid on or set apart for the Cumulative Preferred
Stock or the Common Stock.
|
|
|
(2)
|
The
Series B Senior Preferred shall, with respect to dividend rights and liquidation rights,
rank prior to all classes and series of Common Stock and the Cumulative Preferred Stock,
and on a par with the Series A, C and D Senior Convertible Preferred Stock.
|
|
|
(3)
|
In
the event of any liquidation of the Company, whether voluntary or otherwise, after payment
or providing for payment of the debts and other liabilities of the Company, the holders
of the Series B Senior Preferred shall be entitled to receive, out of the remaining net
assets of the Company, the amount of nine ($9.00) dollars for each share of Series B
Senior Preferred (the "Liquidation Price") held of record by such holder, payable
in cash or in shares of stock, securities or other consideration, the value of which
stock, securities or other consideration shall be fixed by the Board of Directors, plus
the amount of all dividends in arrears on each such share up to the date fixed for distribution,
provided however, that such remaining net assets are sufficient to cover all the before
mentioned payments and also like payments to holders of Series A and C Senior Preferred,
before any distribution shall be made to the holders of Common Stock or Cumulative Preferred
Stock of the Company. In case such remaining net assets are insufficient to cover all
such payments to holders of Series A, B, C and D Senior Preferred, the holders of these
series shall receive payments on a pro rata basis.
|
|
|
|
|
|
|
(4)
|
The
Company shall have the right to redeem pro rata any or all of its Series B Senior Preferred
issued and outstanding at any time, with the Board of Directors of the Company in its
sole discretion deciding how many shares to redeem, provided, however, that any such
shares called for redemption have been issued and outstanding for a minimum of three
(3) years at the time of notice of redemption of the holders of such shares, by paying
to the holders thereof the Liquidation Price for each share of Series B Senior Preferred
held by such holder plus a "call premium" of 10% of the Liquidation Price,
together with the amount of any accrued and unpaid dividends as may have accumulated
thereon at the time of redemption (the "Redemption Price").
|
|
|
(5)
|
Each
share of Series B Senior Preferred shall be convertible at any time prior to the Redemption
Date, at the holder’s option, into shares of Common Stock of the Company on the
basis of ten (10) shares of Common Stock for 1 share of Series B Senior Preferred.
|
As
of December 31, 2016, there were no Series B Senior Convertible Preferred share dividends accrued and unpaid.
Series
C of the Senior Convertible Preferred Stock series which was issued in 2000 has 120,000 shares designated. There were no shares
of Series C Senior Convertible Preferred Stock outstanding at December 31, 2016. The following is a description of the Series
C Senior Convertible Stock:
|
|
(1)
|
The
holders of said shares of Series C Senior Preferred shall be entitled to receive cumulative
dividends thereon at the rate of seven percent (7%) per annum, payable monthly, before
any dividend shall be declared, set apart for, or paid upon the Common Stock of the Company.
The Dividend Rate shall accrue on the Liquidation Price (as hereinafter defined) of each
share of the Series C Senior Preferred. The dividends on the Series C Senior Preferred,
payable in cash, shall be cumulative, so that if the Company fails in any fiscal year
to pay such dividends on all the issued and outstanding Series C Senior Preferred, such
deficiency in the dividends shall be fully paid, but without interest, before any dividends
shall be paid on or set apart for the Cumulative Preferred Stock or the Common Stock.
|
|
|
(2)
|
The
Series C Senior Preferred shall with respect to dividend rights and liquidation rights
rank prior to all classes and series of Common Stock and the Cumulative Preferred Stock,
and on a par with the Series A, B and D Senior Convertible Preferred Stock.
|
|
|
|
|
|
|
(3)
|
In
the event of any liquidation of the Company, whether voluntary or otherwise, after payment
or provision for payment of the debts and other liabilities of the Company, the holders
of the Series C Senior Preferred shall be entitled to receive, out of the remaining net
assets of the Company, the amount of nine ($9.00) dollars for each share of Series C
Senior Preferred (the "Liquidation Price") held of record by such holder, payable
in cash or in shares of stock, securities or other consideration, the value of which
stock, securities or other consideration shall be fixed by the Board of Directors, plus
the amount of all dividends in arrears on each such share up to the date fixed for distribution,
provided, however, that such remaining net assets are sufficient to cover all the before
mentioned payments and also like payments to holders of Series A and B Senior Preferred,
before any distribution shall be made to the holders of Common Stock or Cumulative Preferred
Stock of the Company. In case such remaining net assets are insufficient to cover all
such payments to holders of Series A, B, C and D Senior Preferred, the holders of these
series shall receive payments on a pro rata basis.
|
|
|
(4)
|
The
Company shall have the right to redeem pro rata any or all of its Series C Senior Preferred
issued and outstanding at any time, with the Board of Directors of the Company in its
sole discretion deciding how many shares to redeem, provided, however, that any such
shares called for redemption have been issued and outstanding for a minimum of three
(3) years at the time of notice of redemption to the holders of such shares, by paying
to the holders thereof the Liquidation Price for each share of Series C Senior Preferred
held by such holder plus a "call premium" of 10% of the Liquidation Price together
with the amount of any accrued and unpaid dividends as may have accumulated thereon at
the time of redemption (the "Redemption Price").
|
|
|
(5)
|
Each
share of Series C Senior Preferred shall be convertible at any time prior to the Redemption
Date, at the holder’s option, into shares of Common Stock of the Company on the
basis of ten (10) shares of Common Stock for 1 share of Series C Senior Preferred.
|
As
of December 31, 2016, there were no Series C Senior Convertible Preferred share dividends accrued and unpaid.
Series
D of the Senior Convertible Preferred Stock series which was issued in 2000 has 500,000 shares designated, 63,890 shares issued
and outstanding. The total outstanding Series D Senior Convertible Preferred Stock at December 31, 2016 is $64 with a liquidation
price of $575,010. The following is a description of the Series D Senior Convertible Stock:
|
|
(1)
|
The
holders of said shares of Series D Senior Preferred shall be entitled to receive cumulative
dividends thereon at the rate of seven percent (7%) per annum, payable semi-annually
when declared by the Board of Directors before any dividend shall be declared, set apart
for, or paid upon the Common Stock of the Company. The Dividend Rate shall accrue on
the Stated Value (the "Stated Value"), which Stated Value shall be noted on
the certificate issued to the holder, of each share of the Series D Senior Preferred.
The dividends on the Series D Senior Preferred, payable in cash, shall be cumulative,
so that if the Company fails in any fiscal year to pay such dividends on all the issued
and outstanding Series D Senior Preferred, such deficiency in the dividends shall be
fully paid, but without interest, before any dividends shall be paid on or set apart
for the Cumulative Preferred Stock or the Common Stock.
|
|
|
(2)
|
The
Series D Senior Preferred shall with respect to dividend rights and liquidation rights
rank prior to all classes and series of Common Stock and the Cumulative Preferred Stock,
and on a par with the Series A, B and C Senior Convertible Preferred Stock.
|
|
|
(3)
|
In
the event of any liquidation of the Company, whether voluntary or otherwise, after payment
or provision for payment of the debts and other liabilities of the Company, the holders
of the Series D Senior Preferred shall be entitled to receive, out of the remaining net
assets of the Company, an amount equal to the Stated Value of each share of Series D
Senior Preferred held of record by such holder, payable in cash or in shares of stock,
securities or other consideration, the value of which stock, securities or other consideration
shall be fixed by the Board of Directors, plus the amount of all dividends in arrears
on each such share up to the date fixed for distribution, provided, however, that such
remaining net assets are sufficient to cover all the before mentioned payments and also
like payments to holders of Series A, B and C Senior Preferred, before any distribution
shall be made to the holders of Common Stock or Cumulative Preferred Stock of the Company.
In case such remaining net assets are insufficient to cover all such payments to holders
of Series A, B, C and D Senior Preferred, the holders of these series shall receive payments
on a pro rata basis.
|
|
|
(4)
|
The
Company shall have the right to redeem pro rata any or all of its Series D Senior Preferred
issued and outstanding at anytime, with the Board of Directors of the Company in its
sole discretion deciding how many shares to redeem, provided, however, that any such
shares called for redemption have been outstanding for a minimum of three (3) years at
the time of notice of redemption to the holders of such shares, by paying to the holders
thereof the Stated Value for each share of Series D Senior Preferred held by such holder
plus a "call premium" of 10% of the Stated Value, together with the amount
of any accrued and unpaid dividends as may have accumulated thereon at the time of redemption
(the "Redemption Price").
|
|
|
(5)
|
Each
share of Series D Senior Preferred shall be convertible at any time prior to the Redemption
Date, at the holder’s option, into shares of Common Stock of the corporation on
the basis of ten (10) shares of Common Stock for 1 share of Series D Senior Preferred.
|
As
of December 31, 2016, there were $652,519 Series D Senior Convertible Preferred share dividends accrued and unpaid representing
$9.58 per share.
Series
E of the Senior Convertible Preferred Stock series which was issued in 2005 has 500,000 shares designated, with no shares issued
and outstanding.
|
|
(1)
|
The
holders of said shares of Series E Senior Preferred shall be entitled to receive cumulative
dividends at the rate of six percent (6%) per annum, payable at the time said shares
are converted into shares of common stock of the Company and when declared by the board
of Directors, before any dividend shall be declared, set apart for, or paid upon the
Common Stock and any other Preferred Stock of the Company. The Dividend Rate shall accrue
on the Stated Value, which Stated Value shall be noted on the certificate issued to the
holder of each share of the Series E Senior Preferred. The dividends on the Series E
Senior Preferred, payable in cash, shall be cumulative, so that if the company fails
in any fiscal year to pay such dividends on all the issued and outstanding Series E Senior
Preferred, such deficiency in the dividends shall be fully paid, but without interest,
before any dividends shall be paid on or set apart for any other class of Preferred Stock
or the Common Stock. The holders of the currently outstanding shares of Series E Senior
Convertible Stock have waived their right for dividends, consequently, no dividends have
been accrued on this stock.
|
|
|
(2)
|
The
Series E Senior Preferred shall with respect to dividend rights rank prior to all classes
and series of Common Stock, Cumulative Preferred Stock, and the Series A, B, C, and D
Senior Convertible Preferred Stock and, with respect to liquidation rights rank prior
to all classes and series of Common Stock, the Cumulative Preferred Stock, and be on
a par with the Series A, B, C and D Senior Convertible Preferred Stock.
|
In
the event of any liquidation, dissolution, or winding up of the affairs of the Company, whether voluntary or otherwise, after
payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series E Senior Preferred
shall be entitled to receive, out of the remaining net assets of the Company, an amount equal to the Stated Value of each share
of Series E Senior Preferred held of record by such holder, payable in cash or in shares of stock, securities or other consideration,
the value of which stock, securities or other consideration shall be fixed by the Board of Directors, plus the amount of all dividends
in arrears on each such share up to the date fixed for distribution, provided, however, that such remaining net assets are
|
|
(3)
|
sufficient
to cover all the before mentioned payments and also like payments to holders of Series
A, B, C and D Senior Preferred, before any distribution shall be made to the holders
of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining
net assets are insufficient to cover all such payments to holders of Series A, B, C,
D and E Senior Preferred, the holders of these series shall receive payments on a pro
rata basis.
|
|
|
(4)
|
The
holders of said shares of Series E Senior Preferred shall not be entitled to any voting
rights.
|
|
|
(5)
|
Shares
of Series E Senior Preferred which have been issued and reacquired in any manner, including
shares purchased or converted into Common Stock exchanged or redeemed, shall be canceled
on the books of the Company and shall not be considered outstanding for any purpose.
|
|
|
(6)
|
During
such time as there exist unpaid cumulative dividends due on the Series E Senior Preferred,
no reclassification of the shares of the Company or capital reorganization of the Company
in any manner provided by law shall be valid unless (a) the holders of a majority of
all the Series E Senior Preferred approve, and (b) provision is made for the payment
of the aggregate unpaid cumulative dividends then in arrears.
|
|
|
(7)
|
Each
share of Series E Senior Preferred shall automatically convert, on the date six months
after the date of issuance (the “Conversion Date”) which Conversion Date
shall be noted on the certificate issued to the holder of each share of the Series E
Senior Preferred, into shares of Common Stock of the Company on the basis of one hundred
(100) shares of Common Stock for 1 share of Series E Senior Preferred. The holder of
any shares of Series E Senior Preferred shall surrender, as soon as practicable on or
after the Conversion Date, at the principal office of the Company or at such other office
or agency maintained by the Company for that purpose, the certificate or certificates
representing the shares of Series E Senior Preferred due for conversion. As promptly
as practicable, and in any event within ten business days after surrender of such certificates,
the Company shall deliver or cause to be delivered certificates representing the number
of validly issued, fully paid and non-assessable shares of Common Stock of the Company
to which such holder of Series E Senior Preferred so converted shall be entitled. Such
conversion shall be deemed to have been made at the close of business on the Conversion
Date, so that the rights of the holders of the Series E Senior Preferred shall thereafter
cease except for the right to receive Common Stock of the Company in accordance herewith,
and such converting holder of Series E Senior Preferred shall be treated for all purposes
as having become the record holder of such Common Stock of the Company at such time.
|
|
|
(8)
|
In
the event that, prior to the conversion of the Series E Senior Preferred Stock by the
holder thereof into Common Stock of the company, there shall occur any change in the
outstanding shares of Common Stock of the Company by reason of the declaration of stock
dividends, or through a re-capitalization resulting from stock splits or combinations,
without the receipt by the Company of fair consideration therefore in the form of cash,
services or property, the conversion ratio of the Series E Senior Preferred Stock into
Common Stock of the Company shall be adjusted such that any holder of Series E Senior
Preferred Stock converting such stock into Common Stock subsequent to such change in
the outstanding shares of Common Stock of the Company be entitled to receive, upon such
conversion, a number of shares of Common Stock of the Company representing the same percentage
of common shares outstanding as presented by the shares that he would have received had
he converted his Series E Senior Preferred Stock to Common Stock prior to such change
in the outstanding shares of Common Stock of the Company.
|
As
of December 31, 2016, there were no Series E Senior Convertible Preferred share dividends accrued.
Series
G of the Senior Convertible Preferred Stock series which was issued in 2007 has 43,610 shares designated. All such shares were
issued and outstanding at December 31, 2008. In February 2009, these shares automatically converted into 17,857,142 common shares,
leaving no Series G preferred shares outstanding at December 31, 2016.
|
|
(1)
|
The
holders of said shares of Series G Senior Convertible Preferred shall not be entitled
to receive dividends.
|
|
|
(2)
|
The
Series G Senior Preferred shall with respect to dividend rights rank junior to all classes
and series of Common Stock, Cumulative Preferred Stock, and the Series A, B, C, D, E
and F Senior Convertible Preferred Stock and, with respect to liquidation rights rank
prior to all classes and series of Common Stock, the Cumulative Preferred Stock, and
be on a par with the Series A, B, C, D, E and F Senior Convertible Preferred Stock.
|
|
|
(3)
|
In
the event of any liquidation, dissolution, or winding up of the affairs of the Company,
whether voluntary or otherwise, after payment or provision for payment of the debts and
other liabilities of the Company, the holders of the Series E Senior Preferred shall
be entitled to receive, out of the remaining net assets of the Company, an amount equal
to the Stated Value of $11.46526 for each share of Series G Senior Preferred held of
record by such holder, payable in cash or in shares of stock, securities or other consideration,
the value of which stock, securities or other consideration shall be fixed by the Board
of Directors, plus the amount of all dividends in arrears on each such share up to the
date fixed for distribution, provided, however, that such remaining net assets are sufficient
to cover all the before mentioned payments and also like payments to holders of Series
A, B, C, D, E and F Senior Preferred, before any distribution shall be made to the holders
of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining
net assets are insufficient to cover all such payments to holders of Series A, B, C,
D, E and F Senior Preferred, the holders of these series shall receive payments on a
pro rata basis.
|
|
|
(4)
|
The
holders of said shares of Series G Senior Preferred shall not be entitled to any voting
rights.
|
|
|
(5)
|
Shares
of Series G Senior Preferred which have been issued and reacquired in any manner, including
shares purchased or converted into Common Stock exchanged or redeemed, shall be canceled
on the books of the Company and shall not be considered outstanding for any purpose.
|
|
|
(6)
|
No
cumulative dividends shall be payable on Series G Senior Preferred.
|
|
|
(7)
|
Upon
the second anniversary of the Agreement and Plan of Reorganization, dated February 19,
2007, all the issued and outstanding shares of Series G Senior Preferred automatically
converted into shares of common stock based on the “Market Price”, which
was determined by dividing the conversion value of $500,000 by the average sales price
of a common share for the twenty successive trading days preceding the second anniversary
date of the agreement, subject to a minimum of 10 million common shares. The outstanding
43,610 preferred shares converted into 17,857,142 common shares on February 19, 2009:
based on the average sales price for our common shares during the twenty trading days
period immediately preceding February 19, 2009, of $.028. Stock certificates for the
new common shares would have been issued upon surrender of the original preferred stock
certificates.
|
|
|
(8)
|
In
the event that, prior to the conversion of the Series G Senior Preferred Stock by the
holder thereof into Common Stock of the company, there shall occur any change in the
outstanding shares of Common Stock of the Company by reason of the declaration of stock
dividends, or through a re-capitalization resulting from stock splits or combinations,
without the receipt by the Company of fair consideration therefore in the form of cash,
services or property, the conversion ratio of the Series G Senior Preferred Stock into
Common Stock of the Company shall be adjusted such that any holder of Series G Senior
Preferred Stock converting such stock into Common Stock subsequent to such change in
the outstanding shares of Common Stock of the Company be entitled to receive, upon such
conversion, a number of shares of Common Stock of the Company representing the same percentage
of common shares outstanding as presented by the shares that he would have received had
he converted his Series G Senior Preferred Stock to Common Stock prior to such change
in the outstanding shares of Common Stock of the Company.
|
17.
INCOME TAXES
The
income tax provision (benefit) is comprised of the following:
|
|
|
Year
Ended December 31,
|
|
|
|
2016
|
|
2015
|
|
State
current provision (benefit)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The
Company’s total deferred tax asset and valuation allowance are as follows:
|
|
|
December
31,
|
|
|
|
2016
|
|
2015
|
|
Total
deferred tax asset, noncurrent
|
|
$
|
19,000,000
|
|
|
$
|
18,000,000
|
|
|
Less
valuation allowance
|
|
|
(19,000,000
|
)
|
|
|
(18,000,000
|
)
|
|
Net
deferred tax asset, noncurrent
|
|
$
|
0
|
|
|
$
|
0
|
|
The
differences between income tax benefits in the financial statements and the tax benefit computed at the combined state and U.S.
Federal statutory rate of 40% are as follows:
|
|
|
Year
Ended December 31,
|
|
|
|
2016
|
|
2015
|
|
Tax
benefit
|
|
|
40
|
%
|
|
|
40
|
%
|
|
Valuation
allowance
|
|
|
(40
|
%)
|
|
|
(40
|
%)
|
|
Effective
tax rate
|
|
|
—
|
|
|
|
—
|
|
At
December 31, 2016, the Company has available approximately $47,800,000 of net operating losses to carry-forward and which may
be used to reduce future federal taxable income and expire between December 31, 2016 and 2036.
At
December 31, 2016, the Company has available approximately $17,000,000 of net operating losses to carry-forward and which may
be used to reduce future state taxable income which expire between December 31, 2016 and 2036.
The
Company believes that all of its positions taken in tax filings are more likely than not to be sustained upon examination by tax
authorities. The Company is subject to examination by the tax authorities for the period January 1, 2013 and forward.
18.
STOCK BASED COMPENSATION
During
2016 and 2015 the Company issued the following securities to officers, directors, and non-employees as part of their compensation.
Andre
Scholz (president and Chief Executive Officer and Chief Financial Officer): During 2016 and 2015 earned 1,200,000 restricted shares
(100,000 per month) valued at $1,200 and $1,320, respectively, based on the commitment date fair value of the shares granted.
0 and 1,200,000 of these shares were issued in 2017 and 2016, respectively.
Joseph
J. Tomasek (Former Director): In each of the years ended December 31, 2016 and 2015 Mr. Tomasek received 100,000 common stock
options per month, ending in May 2016, as this outside director is no longer a director of the company effective July 31, 2016
and, as part of his resignation as director, he cancelled his rights to continue to receive options effective June 1, 2016. Therefore,
in each of the years ended December 31, 2016 and 2015 Mr. Tomasek earned options for 500,000 restricted shares, valued at $4,950
and, 1,200,000 restricted shares valued at $11,880, respectively. This resignation was not prompted by any disagreement with the
company with regard to any of its policies, operations or practices.
At
January 1, 2015, we granted 1,200,000 of restricted common stock to five individuals (employees and consultants) valued at $0.0142
per restricted common share, the public market price of the Company’s common shares traded in the over-the-counter market
on January 1, 2015. These shares were issued in October 2015.
19.
STOCK OPTION PLANS
In
April 1996, Magnitude, Inc. adopted its 1996 Stock Incentive Plan (“the 1996 Plan”). The 1996 Plan provides that certain
options granted thereunder are intended to qualify as “incentive stock options” (ISO) within the meaning of Section
422A of the United States Internal Revenue Code of 1986, while non-qualified options may also be granted under the Plan. The initial
plan and subsequent amendments provided for authorization of up to 480,000 shares. Pursuant to the above described stock exchange
offer on July 2, 1997, all options under the 1996 Plan were converted into shares of the Company at a rate of 3.4676 shares of
Magnitude, Inc. to 1 share of the Company.
In
September 1997, the Company adopted its 1997 Stock Incentive Plan (“the 1997 Plan”). The 1997 Plan provides that certain
options granted thereunder are intended to qualify as “incentive stock options” (ISO) within the meaning of Section
422A of the United States Internal Revenue Code of 1986, while non-qualified options may also be granted under the Plan. The initial
plan and subsequent amendments provided for the grant of options for up to 1,000,000 shares. The purchase price per share of common
stock deliverable upon exercise of each ISO shall not be less than 100% of the fair market value of the common stock on the date
such option is granted. If an ISO is issued to an individual who owns, at the time of grant, more than 10% of the total combined
voting power of all classes of the Company’s common stock, the exercise price of such option shall be at least 110% of the
fair market value of the common stock on the date of grant and the term of the option shall not exceed five years from the date
of grant. The purchase price of shares subject to non-qualified stock options shall be determined by a committee established by
the Board of Directors with the condition that such prices shall not be less than 85% of the fair market value of the common stock
at the time of grant.
In
May 2000 the Company adopted its 2000 Stock Incentive Plan (“the 2000 Plan”). The 2000 Plan provides that certain
options granted thereunder are intended to qualify as “incentive stock options” (ISO) within the meaning of Section
422A of the United States Internal Revenue Code of 1986, while nonqualified options may also be granted under the Plan. The initial
Plan provides for the grant of options for up to 5,000,000 shares. The purchase price per share of common stock deliverable upon
exercise of each ISO shall not be less than 100% of the fair market value of the common stock on the date such option is granted.
If an ISO is issued to an individual who owns, at the time of grant, more than 10% of the total combined voting power of all classes
of the Company’s common stock, the exercise price of such option shall be at least 110% of the fair market value of the
common stock on the date of the grant, and the term of the option shall not exceed five years from the date of grant. The purchase
price of shares subject to non-qualified stock options shall be determined by a compensation committee established by the Board
of Directors.
|
|
|
|
Qualified
and Non-Qualified Shares Under Option Pursuant to the 1997 Plan
December
31,
|
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
Outstanding,
beginning of year
|
|
|
—
|
|
|
|
—
|
|
|
Granted
during the year
|
|
|
—
|
|
|
|
—
|
|
|
Expired
during the year
|
|
|
—
|
|
|
|
—
|
|
|
Surrendered
during the year
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding,
end of year
|
|
|
—
|
|
|
|
—
|
|
|
Eligible,
end of year for exercise
|
|
|
—
|
|
|
|
—
|
|
At
December 31, 2016 and 2015, no options were outstanding.
At
December 31, 2016, there were 1,000,000 shares reserved for future option grants.
|
|
|
Qualified
and Non-Qualified Shares Under Option Pursuant to the 2000 Plan
December
31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
Outstanding,
beginning of year
|
|
|
—
|
|
|
|
—
|
|
|
Granted
during the year
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
during the year
|
|
|
—
|
|
|
|
—
|
|
|
Surrendered
during the year
|
|
|
—
|
|
|
|
—
|
|
|
Expired
during the year
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding,
end of year
|
|
|
—
|
|
|
|
—
|
|
|
Eligible,
end of year for exercise
|
|
|
—
|
|
|
|
—
|
|
At
December 31, 2016 and 2015, no options were outstanding.
At
December 31, 2016, there were 5,000,000 shares reserved for future option grants.
At
December 31, 2016 the company has two stock-based employee compensation plans, which are described more fully above. The company
accounts for those plans under the recognition and measurement principles of the Financial Accounting Standards Board Accounting
Standards Codification (ASC) 718,
Compensation-Stock Compensation
. The Company has not granted any options under these
plans to employees during 2016 or 2015.
The
Company also issues options outside of the Stock Incentive Plans which are comprised as follows:
|
|
|
December
31,
|
|
|
|
2016
|
|
2015
|
|
Outstanding,
beginning of year
|
|
|
4,500,000
|
|
|
|
4,500,000
|
|
|
Granted
during the year
|
|
|
500,000
|
|
|
|
1,200,000
|
|
|
Exercised
during the year
|
|
|
—
|
|
|
|
—
|
|
|
Surrendered
or cancelled during the year
|
|
|
—
|
|
|
|
|
|
|
Expired
during the year
|
|
|
(1,200,000
|
)
|
|
|
(1,600,000
|
)
|
|
Outstanding,
end of year (at $0.05)
|
|
|
3,800,000
|
|
|
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Eligible
for exercise, end of year (at $0.05)
|
|
|
3,800,000
|
|
|
|
4,500,000
|
|
At
December 31, 2016 and 2015 the weighted average exercise price and weighted average remaining contractual life were $0.05 and
$0.05 per share, and 1 year 9 months and 2 years 10 months, respectively.
The
weighted average exercise price for options granted during the years ended December 31, 2016 and 2015 were $0.05 and $0.05, respectively.
The weighted average exercise price for options expired during the years ended December 31, 2016 and 2015 were $0.05 and $0.05,
respectively. The weighted average grant date fair value of options granted during the years ended December 31, 2016 and 2015
was $0.05 and $0.05, respectively.
20.
WARRANTS
The
Company’s warrant activity between January 1, 2015 and December 31, 2016 is as follows:
|
|
|
December
31,
|
|
|
|
2016
|
|
2015
|
|
Outstanding,
beginning of year
|
|
|
6,000,000
|
|
|
|
12,750,000
|
|
|
Granted
during the year
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
during the year
|
|
|
—
|
|
|
|
—
|
|
|
Surrendered
/cancelled during the year
|
|
|
—
|
|
|
|
—
|
|
|
Expired
during the year
|
|
|
(2,000,000
|
)
|
|
|
(6,750,000
|
)
|
|
Outstanding,
end of year (at prices ranging from $.075 to $.075)
|
|
|
4,000,000
|
|
|
|
6,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Eligible,
end of year (at prices ranging from $.050 to $.075)
|
|
|
4,000,000
|
|
|
|
6,000,000
|
|
At
December 31, 2016 and 2015, the weighted average exercise price and weighted average remaining contractual life is $0.08 and $0.06
per share and 9 months and 1 year 4 months, respectively.
21.
RELATED PARTY TRANSACTIONS
During
the twelve months ended December 31, 2016, the Company sold advertising space on its Kiwibox.com website to Kwick totaling $11,817.
The balance due from Kwick at December 31, 2016 for these transactions is $63,715. The Company also has outstanding loans due
to Kwick of $19,030 at December 31, 2016. Kwick is majority-owned by Mr. Winkler, who in turn is a related party of the Company
(see Note 7).
During
the year ended December 31, 2016 and 2015 one outside director of the Company who also serves as the Company’s general and
securities counsel, incurred an aggregate $18,000 and $36,000, respectively, for each period for legal services. The director
also received 100,000 common stock options per month, ending in May 2016, as this outside director is no longer a director of
the company effective July 31,2016 and, as part of his resignation as director, he cancelled his rights to continue to receive
options effective June 1, 2016. The director received 500,000 common stock options during the year ended December 31, 2016, valued
at $4,950. The director also received 100,000 common stock options per month during the year ended December 31, 2015, valued at
$11,880. This resignation was not prompted by any disagreement with the company with regard to any of its policies, operations
or practices.
For
the year ended December 31, 2016 and 2015 we incurred an aggregate $494,711 and $343,293, respectively, to companies controlled
by the Chief Executive Officer of the Company, for website hosting, website development and technical advisory services, server
farm installations and IT equipment purchases. The officer also earned 100,000 common shares per month during the year ended December
31, 2016 under a consulting agreement, valued at $1,200. The officer also received $220,000 in December 2015 for prepaid consulting
fees towards 2016 under the terms of a consulting agreement. The balance due to this officer and/or his affiliated companies at
December 31, 2016 and 2015 was $94,832 and $72,876, respectively .
The
balance due from Kwick at December 31, 2016 and 2015 was $63,715 and $51,898, respectively, and is shown on the balance sheet
as Accounts Receivable - affiliate. The balance due to Kwick at December 31, 2016 and 2015 was $19,030 and $21,524 and is included
in the balance sheet as Due To Related Parties (see Note 27).
During
2016 and 2015, approximately 10% of the Company’s voting stock was beneficially held by Discovery Advisory Company, located
in the Bahamas, and Cambridge Services Inc., Kreuzfeld, Ltd. Vermoegensverwaltungs-Gesellschaft Zurich Ltd. (VGZ) of Switzerland
and Mr. Winkler. Discovery Advisory Company, Cambridge Services Inc., Kreuzfeld, Ltd., VGZ, and Mr. Winkler are major creditors,
having advanced operating capital against issuance by the Company of convertible promissory notes during 2015 and 2016. Mr. Winkler
advanced operating capital against issuance by the Company of convertible promissory notes during 2016.
During
the year ended December 31, 2016, Discovery Advisory Company advanced an additional $475,000, Kreuzfeld, Ltd advanced an additional
$550,000 and Mr. Winkler advanced $220,000; during the year ended December 31, 2015, Discovery Advisory Company advanced an additional
$745,000 and Kreuzfeld, Ltd advanced an additional $415,000. At December 31, 2016, $4,926,722 and $3,080,060 of such notes were
outstanding and owed to Discovery Advisory Company and Cambridge Services Inc, respectively and $4,599,959 , $771,958 and $638,320
owed to Kreuzfeld, Ltd., VGZ and Mr. Winkler, respectively.
22.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash,
accounts receivable, accounts payable, accrued expenses, notes payable, long-term debt and capitalized lease obligations: The
carrying amount approximates fair value because of the short term maturity of these instruments.
Limitations
Fair
value estimates are made at a specific point in time, based on relevant information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the estimates
23.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the
FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires
entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance
also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill
a contract. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year to the first quarter of 2018 to
provide companies sufficient time to implement the standards. Early adoption will be permitted, but not before the first quarter
of 2017. Adoption can occur using one of two prescribed transition methods. In March and April 2016, the FASB issued ASU 2016-08,
“Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”
and ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” which
provide supplemental adoption guidance and clarification to ASC 2014-09. ASU 2016-08 and ASU 2016-10 must be adopted concurrently
with the adoption of ASU 2014-09. The Company has evaluated the impact of these new standards and feel that this will not have
a material impact.
In June 2014, FASB
issued Accounting Standards Update (ASU) No. 2014-12 Compensation - Stock Compensation (Topic 718), Accounting for Share-Based
Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. A performance
target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted
for as a performance condition under Accounting Standards Codification (ASC) 718, Compensation - Stock Compensation. As a result,
the target is not reflected in the estimation of the award’s grant date fair value. Compensation cost would be recognized
over the required service period, if it is probable that the performance condition will be achieved. The guidance is effective
for annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted.
The Company adopted the provisions of this standard, but it did not have a material effect on its results of operations.
On August 2014, FASB issued Accounting
Standards Update No. 2014-15, Presentation of Financial Statements - Going Concerns (Subtopic 205-40): Disclosures of
Uncertainties about an Entity’s Ability to continue as a Going Concern. The amendments require management to assess an
entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are
currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt,
(2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the
mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a
result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial
doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements
are issued (or available to be issued). The amendments in this Update are effective for the annual period ending after
December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This was adopted by
the company for the current period of December 31,2016. The adoption of ASU 2014-15 does not have a material impact on our
financial position or results of operations. The accompanying financial statements do not include any adjustments that might
be necessary if the Company were unable to continue as a going concern.
In April 2015, the
Financial Accounting Standards Board (FASB) issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement.” This ASU provides clarification on whether a cloud computing arrangement includes a software license. If a
software license is included, the customer should account for the license consistent with its accounting of other software licenses.
If a software license is not included, the arrangement should be accounted for as a service contract. This ASU is effective for
annual reporting periods beginning after December 15, 2015, and interim periods within those years. The Company adopted the provisions
of this standard, but it did not have a material effect on its results of operations.
During February 2016,
the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). The standard requires lessees to recognize a
lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance
sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-02 is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently
evaluating the impact of the new standard.
In March 2016, FASB
issued ASU No. 2016-09, “Improvements to Employee Share-based Payment Accounting” (“ASU 2016-09”). ASU
2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic
entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification
in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017, and interim periods
within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the standard
and the impact on its consolidated financial statements and footnote disclosures .
In August 2016, the FASB issued
Accounting Standards Update 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
– a consensus of the FASB Emerging Issues Task Force
, (“ASU 2016-15”). The purpose of ASU 2016-15 is to reduce
the diversity in practice regarding how certain cash receipts and cash payments are presented and classified in the statement of
cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within
that year. A retrospective transition method should be used in the application of the amendments within ASU 2016-15. If retrospective
application is considered impracticable, retrospective application may be used as of the earliest date practicable. Early adoption
is permitted. The Company is currently evaluating the impact of ASU 2016-15 on its condensed consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest -
Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, or ASU No. 2015-03. The
amendments of ASU No. 2015-03 were issued to reduce complexity in the balance sheet presentation of debt issuance costs. ASU
No. 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying
amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt
issuance costs are not affected by the amendments in this standard. Additionally, in August 2015, the FASB issued ASU No.
2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs
Associated with Line-of-Credit Arrangements, or ASU No. 2015-15, as ASU No. 2015-03 did not specifically address presentation
or subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU No. 2015-15 allows an entity to
continue to defer and present debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of
whether there are any outstanding borrowings on the line-of-credit arrangement. The guidance in ASU No. 2015-03 and ASU No.
2015-15 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods
within those fiscal years. The Company adopted this standard for the year ended December 31, 2016, which did not have a
material effect on the Company’s consolidated financial statements.
We have reviewed all
FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness
dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter
previous generally accepted accounting principles and does not believe that any new or modified principles will have a material
impact on the corporation’s reported financial position or operations in the near term. The applicability of any standard
is subject to the formal review of our financial management and certain standards are under consideration.
Management does not
believe there would have been a material effect on the accompanying consolidated financial statements had any other recently issued,
but not yet effective, accounting standards been adopted in the current period.
24.
LITIGATION
At
the time of this report, the Company is not a party in any legal proceedings.
25.
BUSINESS SEGMENTS
The
Company operates in only one business segment - youth targeted online social networks - through its dedicated proprietary internet
website.
26.
SUBSEQUENT EVENTS
During
January through April 2017 we received an aggregate $195,000 working capital loans from two accredited investors, which are both
covered by convertible promissory notes carrying interest at 10% per year.
At
February 27, 2017, a Class AA Senior Secured Convertible Revolving Promissory Note from a loan dated July 31, 2012 from Cambridge
Services, Inc in the principal amount of $1,130,398 plus accrued interest of $168,425 was assigned to Tanja Greilinger.
