Notes to the Consolidated Financial Statements
Note 1 - History and Organization
Organization
The Company was organized March 29, 2006 (Date of Inception) under the laws of the State of Nevada, as White Dental Supply, Inc. On December 27, 2012, the Company formed two wholly owned subsidiaries, Choice One Mobile, Inc. and PITOOEY! Mobile, Inc., under the laws of the State of Nevada. On January 7, 2013, the Board of Directors of the Company authorized and a majority of the stockholders of the Company ratified, by written consent, resolutions to change the name of the Company to PITOOEY!, Inc. The name change was effective with the State of Nevada February 7, 2013. On February 6, 2013, the Company formed a wholly owned subsidiary, Rockstar Digital, Inc., under the laws of the State of Nevada. On October 31, 2013, the Company, as part of its settlement agreement with the employees of Rockstar Digital (See Note 5), ceased operations of its wholly owned subsidiary, Rockstar Digital, Inc. On July 29, 2015, the Company changed their name to Raadr, Inc. The name change was effective with the State of Nevada on July 29, 2015.
Business
The Company offers a unique software tool in www.raadr.com that allows individuals to monitor social media activity online .As the digital world of the 21st Century continues to evolve, parents, guardians, and children are faced with challenges and threats not just in the real world, but in the omnipresent realm of Social Media as well. PITOOEY! INC., makers of the proprietary technology application RAADR© have developed a web based tool that provides families with peace of mind when it comes to knowing that children are safe from bullying and predatory behavior unfortunately so prevalent today.
By customizing their own unique monitoring and alert settings, parents and guardians can be alerted when their childrens Facebook, Twitter, Instagram and other pertinent social media platforms under scrutiny become posted with inappropriate language. By utilizing customized keywords chosen by the user that are added to an already existing database, parents and guardians can carry a sense of assuredness that the youth they love and are responsible for are safe and acting in a fun, yet appropriate manner.
Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company has an accumulated deficit of $14,931,763 as of December 31, 2015, a net loss of $9,180,226 and cash used from operations of $392,689 during the year ended December 31, 2015.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Subsequent to December 31, 2015 the Company received approximately $148,450 in capital from sales of common stock and issuances of convertible notes payable. The Company is significantly dependent upon its ability, and will continue to attempt, to secure equity and/or additional debt financing. The Company is attempting to conduct private placements of its preferred and common stock to raise proceeds to finance its plan of operation. There are no assurances that the Company will be successful and without sufficient financing it would be unlikely for the Company to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. These conditions raise substantial doubt about the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might arise from this uncertainty.
F-6
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Raadr, Inc., Choice One Mobile, Inc., PITOOEY! Mobile, Inc. and Rockstar Digital, Inc. All significant intercompany balances and transactions have been eliminated. Raadr, Inc., Choice One Mobile, Inc., PITOOEY! Mobile, Inc. and Rockstar Digital, Inc. will be collectively referred herein to as the Company.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.
Risks and Uncertainties
The Company has a limited operating history and has not generated revenues from our planned principal operations.
The Company's business and operations are sensitive to general business and economic conditions in the U.S. and worldwide. These conditions include short-term and long-term interest rates, inflation, fluctuations in debt and equity capital markets and the general condition of the U.S. and world economy. A host of factors beyond the Company's control could cause fluctuations in these conditions, including the political environment and acts or threats of war or terrorism. Adverse developments in these general business and economic conditions, including through recession, downturn or otherwise, could have a material adverse effect on the Company's consolidated financial condition and the results of its operations.
The Company currently has no sales and limited marketing and/or distribution capabilities. The Company has limited experience in developing, training or managing a sales force and will incur substantial additional expenses if we decide to market any of our current and future products. Developing a marketing and sales force is also time consuming and could delay launch of our future products. In addition, the Company will compete with many companies that currently have extensive and well-funded marketing and sales operations. Our marketing and sales efforts may be unable to compete successfully against these companies. In addition, the Company has limited capital to devote sales and marketing.
The Company's industry is characterized by rapid changes in technology and customer demands. As a result, the Company's products may quickly become obsolete and unmarketable. The Company's future success will depend on its ability to adapt to technological advances, anticipate customer demands, develop new products and enhance our current products on a timely and cost-effective basis. Further, the Company's products must remain competitive with those of other companies with substantially greater resources. The Company may experience technical or other difficulties that could delay or prevent the development, introduction or marketing of new products or enhanced versions of existing products. Also, the Company may not be able to adapt new or enhanced products to emerging industry standards, and the Company's new products may not be favorably received. Nor may we have the capital resources to further the development of existing and/or new ones.
Cash and Cash Equivalents
For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. The carrying value of these investments approximates fair value.
F-7
Accounts Receivable
Accounts receivable are stated at the amount the Company expects to collect from outstanding balances and do not bear interest. The Company provides for probable uncollectible amounts through an allowance for doubtful accounts, if an allowance is deemed necessary. The allowance for doubtful accounts is the Companys best estimate of the amount of probable credit losses in the Companys existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. On a periodic basis, Management evaluates its accounts receivable and determines the requirement for an allowance for doubtful accounts based on its assessment of the current and collectible status of individual accounts with past due balances over 90 days. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.
Subscriptions Receivable
Once the Company receives a firm commitment from an investor to provide either a loan or an equity investment the Company records that commitment as a subscription receivable and a credit to the related liability or equity account. Subscription receivables for stock purchases are carried in the equity section. Subscription for Debentures are carried as Notes Receivable - current. Commitments are evidenced by signed Note or Stock Subscription agreements.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
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Computer equipment
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3 years
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Furniture and Equipment
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5 years
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The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment there was no impairment as December 31, 2015 and 2014. During the years ended December 31, 2015 and 2014, the Company recorded losses on assets disposed of $0 and $8,598 related to assets either sold or disposed of.
Revenue Recognition
The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.
Sales related to long-term contracts for services (such as programming, website development and maintenance) extending over several years are accounted for under the percentage-of-completion method of accounting. Sales and earnings under these contracts are recorded based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method based budgeted milestones or tasks as designated per each contract. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable.
F-8
For all other sales of product or services the Company recognizes revenues based on the terms of the customer agreement. The customer agreement takes the form of either a contract or a customer purchase order and each provides information with respect to the product or service being sold and the sales price. If the customer agreement does not have specific delivery or customer acceptance terms, revenue is recognized on the date of the customer agreement, invoice or purchase order.
Cost of Revenue
The Companys cost of revenue primarily consists of credit card processing fees, direct labor installation costs and client-specific dedicated Internet service costs.
Stock-based Compensation
The Company records stock-based compensation in accordance with the guidance in Accounting Standards Codification ("ASC") Topic 505 and 718 which requires the Company to recognize expenses related to the fair value of its employee stock option awards. This eliminates accounting for share-based compensation transactions using the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 718-10 and the conclusions reached by the ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by ASC 505-50.
Advertising and Marketing Costs
The Company expenses all costs of advertising as incurred. During the years ended December 31, 2015 and 2014, advertising and marketing costs were $321 and $52,168, respectively.
Application Development Costs
The Company continues to evaluate the treatment of costs related to the development of apps not yet publicly launched and are in the pre-revenue stage. Such costs will be capitalized to comply with GAAP and ASC 985-10, which addresses the capitalization of the costs of computer software to be sold, leased, or otherwise marketed as a separate product or a part of a product or process, whether internally developed and produced or purchased. ASC 985-10 calls for the capitalization of costs for creating, researching, and developing any such product.
Loss per Common Share
Net loss per share is provided in accordance with ASC Subtopic 260-10. The Company presents basic loss per share (EPS) and diluted EPS on the face of statements of operations. Basic EPS is computed by dividing reported losses by the weighted average shares outstanding. Except where the result would be anti-dilutive to income from continuing operations, diluted earnings per share has been computed assuming the conversion of the convertible long-term debt and the elimination of the related interest expense, and the exercise of stock warrants. Loss per common share has been computed using the weighted average number of common shares outstanding during the years ended December 31, 2015 and 2014. Dilutive loss per share for the years ended December 31, 2015 and 2014 excludes all potential dilutive common shares as their effect is anti-dilutive.
F-9
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Companys assumptions about the factors that market participants would use in valuing the asset or liability.
The three levels of the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
As of December 31, 2015 the derivative liability is considered a level 2 item; see Note 4. The Company did not have any level 3 instruments as of December 31, 2015 and 2014.
The carrying amounts reflected in the balance sheets for cash, accounts payable and accrued expenses approximate the respective fair values due to the short maturities of these items.
Income Taxes
The Company follows ASC 740-10-25 for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
Recent Pronouncements
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ("ASU") No. 2014-15, "Presentation of Financial Statements-Going Concern", which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early application is permitted. Management is still in the process of assessing the impact of ASU 2014-15 on the Companys consolidated financial statements.
F-10
Note 3 - Financial Statement Elements
Note Receivable
Notes receivable consist of receivables for commitments to invest. The Company had one Debenture purchase in the amount of $75,000 which had been committed to but not paid for as of December 31, 2013. This note was non-interest bearing, and was received in full during the year ended December 31, 2014.
Fixed Assets
Fixed assets as of December 31, 2015 and 2014 consisted of:
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December 31,
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2015
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2014
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Computer equipment
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$
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12,525
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$
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12,525
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Furniture and equipment
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2,000
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|
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2,000
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Fixed assets, total
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14,525
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14,525
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Less: accumulated depreciation
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(13,104)
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(9,154)
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Fixed assets, net
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$
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1,421
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$
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5,371
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Depreciation expenses for the years ended December 31, 2015 and 2014 was $3,950 and $11,955, respectively.
Accrued Liabilities
Accrued liabilities as of December 31, 2015 and 2014 consisted of:
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|
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|
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December 31
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December 31,
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2015
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2014
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Accrued payroll and taxes
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$
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190,614
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$
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121,061
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Executive compensation
|
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175,422
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|
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94,167
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Accrued interest
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206,784
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|
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116,822
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Other
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93,416
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19,252
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$
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666,236
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$
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351,302
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In 2015, the Company entered into a settlement agreement with their former shareholder. In connection with the agreement the Company has the obligation to issue 703,550 shares of common stock in settlement of accounts payable to the CEO for accrued salaries and an investment in Series B preferred stock. The Company has yet to issue the required shares and thus as of December 31, 2015, the liability remained.
F-11
Note 4 - Notes Payable
Notes payable consisted of the following at:
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December 31,
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December 31,
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2015
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2014
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Third Party Notes:
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Convertible promissory notes
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$
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405,877
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$
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55,000
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Debentures with warrants
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347,664
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387,664
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Notes under Investment Agreement
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581,764
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581,764
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Promissory notes
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38,606
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18,606
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Less: unamortized discount
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(293,096)
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(73,238)
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Subtotal - third party notes
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1,080,815
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969,796
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Related Party Notes:
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|
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Debentures with warrants
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87,445
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|
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87,445
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Demand notes
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111,759
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111,759
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Less: unamortized discount
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-
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-
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Subtotal - related party notes
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199,204
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199,204
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Total
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1,280,019
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1,169,000
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Current portion
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(1,280,019)
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(1,169,000)
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Long-term portion
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$
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-
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$
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-
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Convertible Promissory Notes
At various time during the year ended December 31, 2013, the Company issued convertible promissory notes to third parties which bear interest rates of 8% per annum. These notes along with their accrued interest are due and payable in full on their respective maturity dates, which range from May 2014 through July 2014. The notes are convertible into shares of the Companys par value common stock after six months at a variable conversion price calculated as 58% of the average of the lowest three trading prices during the ten trading days prior to the conversion date. As a result, a discount of 42% of the face value of the note was attributed to the beneficial conversion feature of the note, which was amortized over the expected life of the note. During the year ended December 31, 2014, $28,720 of the original discount was amortized and recorded as interest expense. The note was repaid during the year ended December 31, 2014.
2014
In December 2014, the Company issued a convertible promissory note to a third party in the principal amount of $55,000. The note bears interest at 10%, is due in December 2015, and is convertible any time after issuance at a variable conversion price calculated as the lower of $0.30 or 55% of the lowest trading price in the 20 days prior to conversion. Based on the requirements of ASC 815, we determined that a derivative liability was triggered upon issuance due to the variable conversion price. Using the Black-Scholes pricing model, we calculated the derivative liability upon issuance and recorded the fair market value of the derivative liability as a discount to the convertible promissory note. When a derivative liability associated with a convertible note is in excess of the face value of the convertible note, the excess of fair value of derivative is charged to the statement of operations. The derivative liability is required to be revalued at each conversion event and at each reporting period. The derivative liability is required to be revalued at each conversion event and at each reporting period. As of September 30, 2015, this note was convertible into approximately 7.4 million shares of common stock. As of April 16, 2015, the note was in default as the Company was previously not current in their SEC filings. In connection with this default, the Company recorded $13,750 in additional principal, a 25% increase. The amount is reflected as interest expense on the statement of operations during the year ended December 31, 2015.
F-12
Based on these valuations, the derivative was recorded at its initial value of $68,802. The note was fully discounted at issuance due to the associated derivative liability, and the excess of $18,802 was immediately expensed as a loss on the fair value of the derivative liability. During the years ended December 31, 2015 and 2014, interest expense from accretion of the discount was $52,137 and $2,863, respectively. At December 31, 2015, the derivative liabilities were re-valued at $172,741. During the years ended December 31, 2015 and 2014, the loss on the fair value of the derivative liability, including the day one charge noted above, was $105,656 and $17,105, respectively.
During the year ended December 31, 2015, the holder converted principal of $19,998 resulting in the issuance of 1,871,330 shares of common stock.
2015
In October to December 2015, the Company issued eight convertible promissory note to various third parties resulting proceeds of $312,000. The convertible notes included on issuance discounts of $45,125 which are included as part of the discount to the convertible notes disclosed below. Upon issuance total principal due on the convertible notes at maturity is $357,125. The convertible notes bears interest rates ranging from 4% to 10%, due at dates ranging from March 2016 to July 2017, and are convertible any time after issuance at a variable conversion prices calculated as the lower of prices ranging from $0.10 to $0.30 or discounts ranging from 50% to 55% of the lowest trading price in the 20 to 25 days prior to conversion. In addition, the principal balance of one of the convertible notes increases from $123,625 to $247,250 if not repaid by June 9, 2016. The increase will not be trigged until the repayment isn't made.
In connection with two of the convertible notes discussed above the Company issued a total of 500,000 shares of common stock and warrants to purchase 250,000 shares of common stock. The Company valued the common shares at $11,950 based upon the closing market price of the Company's common stock on the date of the agreement. The warrants were valued at $11,184 based upon the Black-Scholes inputs disclosed in Note 8. The Company recorded the value of these items as interest expense as the convertible notes had already been fully discounted due to the on issuance discounts and derivative liabilities, as discussed below.
Based on the requirements of ASC 815, we determined that a derivative liability was triggered upon issuance due to the variable conversion price. Using the Black-Scholes pricing model, we calculated the derivative liability upon issuance and recorded the fair market value of the derivative liability as a discount to the convertible promissory notes. When a derivative liability associated with a convertible note is in excess of the face value of the convertible note, the excess of fair value of derivative is charged to the statement of operations. The derivative liability is required to be revalued at each conversion event and at each reporting period. As of December 31, 2015, these convertible notes were convertible into approximately 50 million shares of common stock.
Based on these valuations, the derivatives were recorded at their initial value of $492,730. The convertible notes were fully discounted at issuance due to the associated derivative liabilities being in excess of the convertible notes payable. The excess fair value of $186,954 was immediately expensed as a loss on the fair value of the derivative liabilities. During the year ended December 31, 2015, interest expense from accretion of the discount was $57,805 with $293,906 of the discount remaining as of December 31, 2015. At December 31, 2015, the derivative liabilities were re-valued at $1,201,409. During the year ended December 31, 2015, the loss on the fair value of the derivative liability, including the day one charge noted above, was $895,633.
During the year ended December 31, 2015, the range of inputs used to calculate the derivative liabilities were as follows:
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As of
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As of
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As of
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As of
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March 31, 2015
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June 30, 2015
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September 30, 2015
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December 31, 2015
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Exercise price per share
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$0.121
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|
$0.110
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$0.110
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|
$0.028
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Expected life (years)
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0.70
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|
0.45
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|
0.20
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|
0.73
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Risk-free interest rate
|
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0.25%
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0.25%
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0.25%
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0.25%
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Expected volatility
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150.00%
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179.00%
|
|
119.00%
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|
227.00%
|
Interest expense related to these convertible promissory notes was $12,458 and $3,286, respectively, for the years ended December 31, 2015 and 2014.
F-13
Debentures with Warrants
At various times through the years ended December 31, 2014 and 2013, the Company has issued debentures with attached warrants. These debentures contain interest rates ranging from 8% to 20% and mature at various times from July 2014 through July 2015. Interest expense related to these debentures for the years ended December 31, 2015 and 2014 was $41,782 and $40,750, respectively.
The warrants issued with these debentures contain an exercise price of $0.50 per share and expire three years from the date of issuance. Based on a valuation of the warrants using the Black-Sholes method, discounts of $76,452 were attributed to the warrants during the year ended December 31, 2014. See Note 8 for inputs used in the valuation. These discounts are being amortized over the respective twelve month maturity periods of the debentures using the straight line method due to the limited amortization period. During the years ended December 31, 2015 and 2014, $68,990 and $221,410, respectively, was amortized and recorded as interest expense. As of December 31, 2015, all discounts related to the warrants had been amortized.
In addition, see Note 7 for discussion regarding common stock issued to one of the holders of these debentures for the extension of the debenture. In December 2015, the $20,000 debenture was transferred to a third party who converted into 7,863,203 shares of common stock. The Company valued the common stock at $217,337 based upon the closing market price on the date of the conversion. The additional value of $197,337 over the $20,000 converted was recorded as interest expense.
Notes Issued Under an Investment Agreement
On April 29, 2013, the Company entered into an Investment Agreement, in which an investor agreed to purchase debentures up to a total principal amount of $1,100,000. This commitment was increased to $2,000,000 based on an agreement modification entered into on December 2, 2013. Each debenture will accrue interest on the unpaid principal of each individual debenture at the rate of 8% per year from the date each debenture is issued until paid. Maturity dates of the debentures issued range from April 2014 through May 2015. As such, a majority of these notes are in default as of December 31, 2015 and 2014. As of December 31, 2015 and 2014, the principle balance owed on these debentures was $532,431 and $532,431, respectively, plus accrued interest. During the years ended December 31, 2015 and 2014, a total of $46,448 and $41,419 has been recorded as interest expense. In connection with the April 29, 2013 Agreement and as modified by the December 2, 2013 Agreement, the Company also agreed to issue and sell to the investor, from time to time and subject to certain terms and conditions set forth in the Agreement, up to $25,000,000 of the Company common stock. As of the date of these financial statements, no shares of common stock have been issued pursuant to the Agreement.
Promissory Notes
On July 25, 2012, the Company entered into an Intellectual Property Assignment Agreement. (See Note 9 to the financial statements for details concerning the Agreement). In accordance with the terms and conditions contained therein, the Company has agreed to pay the Seller $8,000 in two installments:
1. The first payment of $4,000 was due July 25, 2013, the first anniversary date of the Agreement, and is considered a current note payable.
2. The second and final payment of $4,000 was due July 25, 2014, the second anniversary date of the Agreement and is considered a current note payable.
The Company has since decided not to complete the purchase of this intellectual property and has not yet decided to make payments against this Note. The Company does not own this intellectual property and is delinquent on payment of this Note.
During the year ended December 31, 2013, the Company issued a $50,000 promissory note bearing interest at 10% and due on May 31, 2014. The note is payable in monthly payments of principal and interest. As of December 31, 2015 and 2014, the remaining principal balance of $10,606 and $10,606, respectively is past due and in default.
F-14
In June 2015, the Company received $20,000 in proceeds from convertible notes payable. The notes are convertible, only at the Company's option, for a minimum of $40,000 in common stock based upon the closing stock price on the date of conversion for a period of one year. In addition, the notes incur interest at 12% per annum and is due June 1, 2016. Since the note is only convertible at the Company's option, the accounting for such will be triggered if the option is exercised.
Debentures with Warrants Issued to Related Parties
At various times through the years ended December 31, 2014 and 2013, the Company has issued debentures with attached warrants to several related parties. These debentures bear interest at 8% and mature at various times from July 2014 through February 2015. Interest expense related to these debentures for the years ended December 31, 2015 and 2014 was $6,188 and $6,189, respectively.
The warrants issued with these debentures contain an exercise price of $0.50 per share and expire three years from the date of issuance. Based on a valuation of the warrants using the Black-Sholes method, discounts of $2,010 were attributed to the warrants during the year ended December 31, 2014. See Note 8 for inputs used in the valuation. These discounts are being amortized over the respective twelve month maturity periods of the debentures using the straight line method due to the limited amortization period. During the years ended December 31, 2015 and 2014, a total of $27,812 and $78,552, respectively, has been amortized and recorded as interest expense, leaving a balance of $0 and $27,812, respectively, in discounts related to the attached warrants as of December 31, 2015 and 2014.
Demand Notes Issued to Related Parties
The Company has various notes outstanding to related parties totaling $111,759 and $111,759 as of December 31, 2015 and 2014, respectively. These notes are due on demand and have no stated interest rate. The Company imputed interest on these notes at 8% during the years ended December 31, 2015 and 2014. Total interest expense imputed on these notes during the years ended December 31, 2015 and 2014 was $11,176 and $11,176, respectively, which has been recorded to additional paid-in capital.
Note 5 - Commitments and Contingencies
Operating Leases
The Company previously leased its office facility under an operating lease agreement that was to expire May 31, 2016. On August 29, 2014, the Company and lessor of this lease, upon mutual agreement, terminated the lease, with no additional obligation. The Company currently subleases an office on a month to month basis. Rent expense was $40,984 for the year ended December 31, 2014.
Legal
On February 6, 2013, we formed a wholly owned subsidiary, Rockstar Digital, Inc. (Rockstar), under the laws of the State of Nevada. Rockstar was organized to specialize in internet branding through social media marketing, mobile marketing and iPhone
®
app development Company. On October 31, 2013, the Company entered into a settlement agreement with certain former employees to assume responsibility for certain payroll taxes of Rockstar Digital, Inc. (Rockstar) and assign its ownership of Mobile Application and Transition Services intellectual property rights to Rockstar. In addition, the Company agreed to not assert a claim against certain computer equipment (cost of $28,307) in use at Rockstar. The Company agreed to assume liability for any payroll taxes owed on payroll paid by the Company on behalf of Rockstars employees. The Company estimated this liability at $30,000 which they have recorded in accrued liabilities at December 31, 2015 and 2014.
F-15
On July 29, 2014, a default judgment was issued against the company in Circuit Court of the 11
th
Judicial Circuit in and for Miami-Dade County, Florida. This judgment stems from a legal filing by a consulting firm, with which the Company entered into an agreement for consulting services, on February 20, 2013. On September 25, 2013, the Company cancelled the agreement because it determined that services had not been provided by consulting firm, as promised per the agreed-upon contract terms. In November 2014, we entered into a settlement agreement whereby the Company shall pay the plaintiff $13,246, in monthly installments of $1,472. In addition, the Company issued options to purchase 100,000 shares of the Company's common stock at an exercise price of $1.75 expiring in two years. The Company valued the options at $21,424 using the Black-Sholes model. The required payments on the settlement have not been made, however, the full amount of the liability has been recorded in accounts payable as of December 31, 2015 and 2014.
Note 6 - Income Taxes
For the years ended December 31, 2015 and 2014, the Company incurred net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At December 31, 2015 and 2014, the Company had approximately $5.9 and $5.2 million of federal and state net operating losses, respectively. The federal net operating loss carryforwards, if not utilized, will begin to expire in 2027. The state net operating loss carryforwards, have started to expire.
The components of the Companys deferred tax asset are as follows:
|
|
|
|
|
| |
|
|
2015
|
|
2014
|
Deferred tax asset attributable to:
|
|
|
|
|
Net operating loss carryover
|
|
$
|
2,191,606
|
|
$
|
(1,943,756)
|
Valuation allowance
|
|
|
(2,191,606)
|
|
|
1,943,756
|
Net deferred tax asset
|
|
$
|
--
|
|
$
|
--
|
In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As a result, management determined it was more likely than not the deferred tax assets would not be realized as of December 31, 2015 and 2014, and recorded a full valuation allowance.
The components of the Company's income taxes were:
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|
|
|
|
| |
|
|
2015
|
|
2014
|
Income tax benefit attributable to:
|
|
|
|
|
Net loss
|
|
$
|
(3,121,277)
|
|
$
|
(672,402)
|
Permanent differences
|
|
|
2,873,427
|
|
|
148,536
|
Valuation allowance
|
|
|
247,850
|
|
|
523,866
|
Net provision for income tax
|
|
$
|
--
|
|
$
|
--
|
The Company has identified the United States Federal tax returns as its major tax jurisdiction. The United States Federal return years 2012 through 2015 are still subject to tax examination by the United States Internal Revenue Service; however, we do not currently have any ongoing tax examinations. The Company hasn't filed the required tax returns for the year ended December 31, 2012 to December 31, 2015. The Company is subject to examination by State authorities for the years ended 2011 through 2015 and currently does not have any ongoing tax examinations.
F-16
Note 7 - Stockholders Deficit
Authorized Shares
January 7, 2013, the Board of Directors authorized and a majority of the stockholders of the Company ratified, by written consent, a resolution to increase the authorized number of shares of the Company to 400,000,000 shares of $0.001 par value common stock and 100,000,000 shares of $0.001 par value preferred stock (of which 20,000,000 have been designated as Series A Preferred Stock and 80,000,000 shares of preferred stock available for the Company to assign or designate such provisions or preferences as may be assigned by the Board of Directors). The increase in authorized capital became effective with the State of Nevada on February 7, 2013.
Series A Preferred Stock
On January 3, 2013, the Company filed a Certificate of Designation with the State of Nevada to designate up to 20,000,000 shares of preferred stock as Series A. The Series A holds no voting rights, but is automatically convertible into shares of the Companys common stock immediately upon the effectiveness of a Certificate of Change filed by the Company to increase the number of shares of common stock the Company would become authorized to issue.
Series B Preferred Stock
In May and June 2014, the Company sold 146,125 shares of the Companys Series B Convertible Preferred ("Series B") for $121,900. In July and August 2014, the Company sold 75,000 shares of the Series B for $60,000. On October 22, 2014 the Company sold 66,250 shares of Series B for $53,000. On October 24, 2014 the Company sold 31,250 shares of Series B for $25,000.
As of the date of these consolidated financial statements the designations for the Series B have not been filed with the State and thus they are reflected as a liability on the accompanying balance sheets at December 31, 2015 and 2014. The rights and preferences are not valid until the designations are filed. Once approved, the holders are expected to receive warrants to purchase two shares of common stock at $0.50 per share. In addition, each share of Series B converted the holder would receive two shares of common stock.
Common Stock - 2015 Issuances
In March 2015, the Company issued a total of 30,000,000 shares of common stock in connection with three consulting contracts, 10 million shares each, related to capital raising, strategic partnerships, etc. The Company recorded $6,600,000 in connection with these agreements based upon the closing market price of the Company's common stock on the date of agreements. The common shares issued in connection with these agreements is non-forfeitable and thus the entire value of the common shares was expensed upon issuance. In addition, there are no future performance commitments under the agreements. Under the agreements, the consultants have non-dilutive clauses which require a true up at the end of the contract based upon the percentage the 30,000,000 represented of the total issued on the date of the initial issuance, or approximately 22 %. At each quarter end, the Company determines whether or not additional common shares are required to be issued and records a liability for the value of such shares. As of December 31, 2015, the estimated value of additional shares issuable was approximately $84,600 and recorded within accrued liabilities and interest expense.
In April 2015, the Company received $20,000 in proceeds from the sale of 250,000 shares of common stock. As of the date of this filing the shares haven't been issued.
In July 2015, the Company received $10,000 in proceeds from the sale of 200,000 shares of common stock. As of the date of this filing the shares haven't been issued.
In August 2015, the Company issued 150,000 shares of common stock in connection with the settlement with a former customer. The Company recorded $30,000 in connection with this settlement based upon the closing market price of the Company's common stock on the date of agreement.
F-17
In September 2015, the Company issued 25,000 shares of common stock in connection with the settlement with a former customer. The Company recorded $5,000 in connection with this settlement based upon the closing market price of the Company's common stock on the date of agreement.
In November 2015, the Company issued 1,320,000 shares of common stock in connection with settlements with a former customers and investors. The Company recorded $264,000 in connection with this settlement based upon the closing market price of the Company's common stock on the date of agreements.
In October to December 2015, the Company entered into three consulting agreement in which required the issuance of 625,000 shares of common stock. The Company recorded $58,250 in connection with these agreements based upon the closing market price of the Company's common stock on the date of agreements. The common shares issued in connection with these agreements is non-forfeitable and thus the entire value of the common shares was expensed upon issuance. In addition, there are no future performance commitments under the agreements.
From April to November 2015, the Company extended a $20,000 convertible note payable to later dates. In connection with the extensions the Company issued a total of 719,000 shares of common stock valued at $146,573. The shares were valued based upon the closing price of the Company common stock on the date of the extensions and were expensed as interest expense. In December 2015, as discussed in Note 4, was satisfied.
In May 2015, a total of 30,178,472 shares of common stock were returned to the Company by former members of management and founding shareholders. The Company recorded the shares at their par value as the basis in the initial transaction was the par value.
See Note 4 for additional issuances of common stock.
Common Stock - 2014 Issuances
From April 1, 2013 to December 31, 2013, the Company sold 621,000 shares of its common stock for aggregate cash proceeds of $228,007. As of December 31, 2013, 282,500 shares of common stock were subscribed and paid for, but not yet issued; resultantly, the Company recorded $283 as common stock owed but not issued. During the year ended December 31, 2014, 252,500 of these shares that had been previously paid for were issued. As of December 31, 2015 and 2014, the Company still had the obligation to issue 31,000 shares of common stock. Additionally, as of December 31, 2013, 51,000 shares for proceeds of $20,400 were subscribed but not paid for. In January 2014, the Company received $20,400 as payment for these shares.
In March 2014, the Company sold 92,500 shares of common stock, at $0.40 per share, to four investors for $37,000.
On August 20, 2014, the Company issued 600,000 shares of restricted common stock for consulting services. These shares were valued at $450,000, which cost was expensed as Professional Development Consulting in May and June 2014 when the shares were authorized.
F-18
Note 8 - Warrants
A summary of warrant activity follows:
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Number
|
|
Weighted-Average
|
|
Weighted-Average
|
|
|
of Shares
|
|
Exercise Price
|
|
Expected Life
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
1,880,000
|
|
$ 0.99
|
|
0.99
|
Granted
|
|
1,270,000
|
|
0.28
|
|
4.04
|
Exercised
|
|
-
|
|
-
|
|
-
|
Canceled
|
|
-
|
|
-
|
|
-
|
Outstanding at December 31, 2014
|
|
3,150,000
|
|
0.99
|
|
0.99
|
Granted
|
|
250,000
|
|
0.10
|
|
4.95
|
Exercised
|
|
-
|
|
-
|
|
-
|
Canceled
|
|
(1,100,000)
|
|
0.33
|
|
-
|
Outstanding at December 31, 2015
|
|
2,300,000
|
|
$ 0.33
|
|
2.49
|
Warrants exercisable at December 31, 2015
|
|
1,300,000
|
|
$ 0.52
|
|
1.66
|
During the year ended December 31, 2014, the Company issued a total of 1,000,000 warrants to third party consultants in connection with consulting agreements. These warrants contained exercise prices ranging from $0.09 to $1.75 per share and expire two to three years from the date of issuance. Based on a valuation of the warrants using the Black-Sholes method, the warrants were valued at $629,175. The Company recorded compensation expense related to the warrants of $629,175 during the year ended December 31, 2014.
During the year ended December 31, 2014, the Company issued a total of 170,000 warrants in connection with the issuance of debentures, respectively. These warrants contained an exercise price of $0.50 per share and expire three years from the date of issuance. Based on a valuation of the warrants using the Black-Sholes method, discounts of $78,462, were attributed to the warrants being given in return for loans during the year ended December 31, 2014, which are being amortized over the respective twelve month maturity periods of the underlying debentures.
See Note 4 for additional discussion regarding warrants issued in connection with debenture an convertible note issuances.
During the years ended December 31, 2015 and 2014, the range of inputs used to calculate the value of the warrants were as follows:
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|
| |
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31, 2015
|
|
December 31, 2014
|
|
|
|
|
|
Exercise price per share
|
|
$0.10
|
|
$0.10
|
Expected life (years)
|
|
5.00
|
|
5.00
|
Risk-free interest rate
|
|
0.25%
|
|
1.72%
|
Expected volatility
|
|
179.00%
|
|
97.00%
|
Note 9 - Agreements
On February 28, 2014 and effective March 3, 2014, the Company entered into an agreement with a consultant to design and develop the Companys Legal 420 mobile app the purpose of which is to create share information regarding the current changes in the medical marijuana marketplace. Compensation for this project is comprised of $25,000 in cash and issuance of 300,000 shares of the Companys common stock. This agreement was terminated by mutual agreement between both parties on December 1, 2014.
F-19
On April 17, 2014 and effective May 1, 2014, the Company entered into an agreement with a consultant to design and develop the Companys RAADR mobile app, the purpose of which is to provide customers a mobile application system to allow monitoring of various forms of social media. Compensation for this project is comprised of $25,000 in cash and issuance of 300,000 shares of the Companys common stock. This agreement was terminated by mutual agreement between both parties on October 1, 2014. In connection with the termination of the agreement the consultant refunded $10,000 to Company; and 300,000 shares of the Companys common stock was forfeited.
On June 19, 2014, sole board member, Jacob DiMartino, authorized paperwork for the transfer of 10,000,000 shares of his personal Company stock (OTC: PTOO) to CEO, Richard M. Hybner, effective immediately, in accordance with the terms of Mr. Hybners Employment Agreement and Amended and Restated Employment Agreement, dated May 2, 2014 and June 26, 2014, respectively.
On July 29, 2014 (the Effective date), the Company entered into an agreement with cmdR Consulting, to develop the Companys RAADR mobile app, the purpose of which is to develop a subscriber-like mobile application to allow the monitoring of a variety of forms of social mention in social media. Contractual details call for an initial payment of $40,000, an additional payment of $30,000 in December, 2014 and five monthly payments of $10,000 commencing in January 2015. In addition, stock options of up to 1,000,000 shares, with a strike price of $0.09, were granted for achieving certain milestones including an expected launch date in Fall 2014, with pre-registration to begin early September, 2014. In addition, a user-based bonus of $0.20 per user will be paid if the platform exceeds 330,000 users by December 31, 2014. Due to cash flow restrictions and the likely hood of the deliverables being provided, the contract was cancelled subsequent to December 31, 2014.
On October 21, 2014, the Company entered into a marketing agreement with a corporation to provide brand recognition, public relations, investor relations, and marketing services on behalf of the Company. Payment is in cash, beginning with $18,000 upon signing and then $9,500 per bi-weekly period through the end of December, 2014, for total payments of $75,000. The contract was cancelled mutually in January 2015.
Note 10 - Related Party Transactions
As of December 31, 2015 and 2014, amounts included within accrued liabilities related to payroll due to Jacob DiMartino, our Chief Executive Officer, were $159,422 and $78,167, respectively. The Company accrues $8,000 per month in connection with the CEO's services.
See also Note 8 for notes payable to related parties.
Note 11 - Subsequent Events
Subsequent to year end, the Company has received $148,450 in proceeds from convertible notes payable. The notes are convertible into shares of common stock based upon discount to market.
Subsequent to year end, the Company issued 104,363,251 shares of common stock in connection with the settlement with a former customer. The Company is still determining the accounting impact of this transaction.
F-20